BA 5302

STRATEGIC MANAGEMENT
Dr.C.THIRUMAL AZHAGAN
ASSISTANT PROFESSOR
MANAGEMENT STUDIES
ANNA UNIVERSITY BIT CAMPUS
TIRUCHIRAPPALLI
 STRATEGIC MANAGEMENT MODEL

• SCANNING
• Where are we now?
• Macro analysis (STEP, PESTLE)
• Industry analysis – competitive intelligence
• SWOT analysis
• Internal versus

External elements and

Internal elements
 WHY SCAN?

• To know your position in the environment

• To respond effectively to constant change
• To see the organization as a whole
• To avoid surprises
• To survive
• To lay the foundation for strategic issues
 SCANNING:
KEY ENVIRONMENTAL VARIABLES
• Macro environment: PESTLE
• Task environment: Industry Analysis
• Internal environment: focal organization
 POLITICAL-LEGAL VARIABLES

• Education reform
• Environmental protection laws
• Taxation at local, state, federal levels
• Hiring and promotion laws
 ECONOMIC VARIABLES

• GDP trends
• Interest rates
• Money supply
• Inflation rates
• Unemployment levels
• Wage/price controls
• Energy availability & cost
• Disposable & discretionary income
SOCIO-CULTURAL VARIABLES

• Lifestyle changes
• Career expectations
• Regional shifts in population
• Life expectations
• More women in workforce
• Greater concern for fitness
• Postponement of family formation
• Increase in temporary workers
TECHNOLOGICAL VARIABLES

• Total federal spending for R&D

• Total industry spending for R&D
• Focus of technological efforts
• Patent protection
• Wireless communications
• Nanotechnology
• Productivity improvements
• Genetic engineering
 DEMOGRAPHIC VARIABLES
• Aging population
• Rising wealth
• Changes in traditional composition
• Geographic distribution of population
• Disparities in income levels
 GLOBAL VARIABLES
• Increasing global trade
• Currency exchange rates
• Emergence of Indian and Chinese economies
• Trade agreements (NAFTA, EU, ASEAN)
• Creation WTO
 STEP EXERCISE
• Socio-cultural
• Technological
• Economic
• Politico-legal
 INDUSTRY ANALYSIS
• 6 forces analysis
• Industry competitors
• Suppliers/vendors
• Customers/clients
• Potential new entrants
• Substitutes
• Other stakeholders
• Role of complementors
 OTHER STAKEHOLDERS
• Employees
• Unions
• Government
• Trade and professional associations
• Other direct influencers
 ROLE OF COMPLEMENTORS
• Number of complements
• Relative value added
• Difficulty of engaging complements
• Buyer perception of complements
• Complement exclusivity
• Tend to increase profits by increasing demand for an
industry’s products
 INTERNAL ENVIRONMENT
• Internal profile analysis
• SWOT analysis
 INTERNAL PROFILE ANALYSIS
• Identify key core functions
• Identify key measures for core functions
• Build matrix
• BCG MATRIX
• Https://www.Youtube.Com/watch?V=q4a5xqplwma
 SWOT ANALYSIS
• Internal environment
• Strengths
• Weaknesses
• External environment
• Opportunities
• Threats
PORTER FIVE FORCES MODEL

https://www.youtube.com/watch?v=ZGxUpQaM1VA&t=14s
THREAT OF NEW ENTRANTS AND ENTRY
BARRIERS
• Absolute cost advantages
• Access to inputs
• Government policy
• Economies of scale
• Capital requirements
• Brand identity
• Switching costs
• Access to distribution
• Proprietary products
 THREAT OF SUBSTITUTES
• Switching costs
• Buyer inclination to substitute
• Variety of substitutes
• Price-performance tradeoff of substitutes
• Necessity for product or service
BARGAINING POWER OF BUYERS

• Buyer volume and information

• Brand identity
• Price sensitivity
• Threat of backward integration
• Product differentiation
• Substitutes
BARGAINING POWER OF SUPPLIERS
• Supplier concentration
• Differentiation of inputs
• Switching costs
• Threat of forward integration
• Cost relative to total purchases in industry
 RIVALRY OF COMPETETORS
• Exit barriers
• Industry concentration
• Fixed costs
• Industry growth
• Intermittent overcapacity
• Switching costs
• Brand identity
• Diversity of rivals
• Corporate stakes
 THEORY OF NATIONAL COMPETITIVE
ADVANTAGE

 The theory attempts to analyze the reasons for a nation’s

success in a particular industry
 Porter studied 100 industries in 10 Nations
Postulated determinants of competitive advantage of a nation were
based on four major attributes
 Factor endowments or Factor conditions
 Demand conditions
 Related and supporting industries
 Firm strategy, structure and rivalry
 PORTER’S DIAMOND

Success occurs where these attributes exist

 More/greater the attribute, the higher chance of success

 The diamond is mutually reinforcing

 FACTOR
ENDOWMENTS

 Factorendowments: A nation’s position in factors of

production such as skilled labor or infrastructure
necessary to compete in a given industry
Basic factor endowments
Advanced factor endowments
 BASIC FACTOR
ENDOWMENTS

 Basic factors: Factors present in a country

Natural resources
Climate

Geographic location
Demographics

 While basic factors can provide an initial advantage they

must be supported by advanced factors to maintain
success(Advanced Factors enable a speedier transformation
of Basic Factors??)
 ADVANCED FACTOR
ENDOWMENTS

 Advanced factors: The result of investment by people,

companies, and government are more likely to lead to
competitive advantage
If a country has no basic factors, it must invest in advanced factors
 Communications

Skilled labor
 Research

 Technology
 DEMAND CONDITIONS

 Demand:
creates capabilities
creates
sophisticated and
demanding consumers

 Demand impacts quality

and innovation
 RELATED AND SUPPORTING
INDUSTRIES

 Creates clusters of supporting industries that are

internationally competitive

 Must also meet requirements of other parts of

the Diamond
 FIRM STRATEGY, STRUCTURE AND
RIVALRY

• Long term corporate vision is a determinant of success

•  Management ‘ideology’ and structure of the firm can
either help or hurt you
•  Presence of domestic rivalry improves a
company’s competitiveness
 PORTER’S THEORY-
PREDICTIONS
 Porter’s theory should predict the pattern of
international trade that we observe in the real
world.

 Countries should be exporting products from those

industries where all four components of the diamond
are favorable, while importing in those areas where the
components are not favourable.
 IMPLICATIONS FOR
BUSINESS

Location implications:
Disperse production activities to countries where they can be
performed most efficiently
First-mover implications:
Invest substantial financial resources in building a first- mover, or
early-mover advantage
Policy implications:
Promoting free trade is in the best interests of the home country, not
always in the best interests of the firm, even though many firms
promote open markets
 DISTINCTIVE COMPETENCIES, COMPETITIVE
ADVANTAGE, AND PROFITABILITY
• Identifying the strengths and weaknesses of the company
• Managers must understand
• The role of resources, capabilities, and distinctive competencies in the
process by which companies create value and profit
• The importance of superior efficiency, innovation, quality, and
responsiveness to customers
• The sources of their company’s competitive advantage (strengths and
weaknesses)
 COMPETITIVE ADVANTAGE
• Competitive advantage
• A firm’s profitability is greater than the average
profitability for all firms in its industry
• Sustained competitive advantage
• A firm maintains competitive advantage for a number of
years
 DISTINCTIVE COMPETENCES AND
COMPETITIVE ADVANTAGE
• Distinctive competencies
• Firm-specific strengths that allow a company to gain competitive
advantage by differentiating its products and/or achieving lower costs
than its rivals
• Arise from resources and capabilities
 THE ROLE OF RESOURCES
• Resources
• Capital or financial, physical, social or human, technological, and
organizational factor endowments
• Tangible and intangible

• A firm-specific and difficult to imitate resource is likely to lead to

distinctive competency
• A valuable resource that creates strong demand for a firm’s
products may lead to distinctive competency
 THE ROLE OF CAPABILITIES
• Capabilities
• A company’s skills at coordinating and using its resources

• Capabilities are the product of organizational

structure, processes, and control systems
STRATEGY, RESOURCES, CAPABILITIES, AND
COMPETENCIES
THE GENERIC BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
 EFFICIENCY
• The quantity of inputs it takes to produce a given output
• Productivity leads to greater efficiency and lower costs
• Employee productivity
• Capital productivity
QUALITY
• Superior quality = customer perception of greater value in a specific product’s
attributes
• Form, features, performance, durability, reliability, style, design

• Quality products = goods and services that are reliable and that are differentiated
by attributes that customers perceive to have higher value
 INNOVATION
• The act of creating new products or processes
• Product innovation
• Creates products that customers perceive as more valuable, increasing the company’s pricing options
• Process innovation
• Creates value by lowering production costs

• Perhaps the most important building block of competitive advantage

RESPONSIVENESS TO CUSTOMERS
• Doing a better job than competitors of identifying and satisfying customers’ needs
• Superior quality and innovation are integral to superior responsiveness to customers
• Customizing goods and services to the unique demands of individual customers or customer groups

• Sources of enhanced customer responsiveness

• Customer response time, design, service, after-sales service and support

• Differentiates a company/its products; leads to brand loyalty and premium pricing

 THE DURABILITY OF COMPETITIVE
ADVANTAGE
• Barriers to imitation
• Imitating resources
• Imitating capabilities

• Capability of competitors
• Strategic commitment
• Absorptive capacity

• Industry dynamism
 WHY COMPANIES FAIL
• Inertia
• Companies find it difficult to change their strategies and structures

• Prior strategic commitments

• Limit a company’s ability to imitate and cause competitive disadvantage

• The Icarus paradox

• A company can become so specialized based on past success that it loses
sight of market realities
 AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
• Focus on the building blocks of competitive advantage
• Institute continuous improvement in learning
• Track best industrial practice in use benchmarking
• Overcome inertia
• Luck
 GENERIC STRATEGIES
• According to Michael E. Porter strategies allow organizations to gain competitive
advantage from three different bases.
 Overall cost leadership - overall cost leadership emphasizes producing
standardized products at a very low per-unit for consumers who are price – sensitive.
 Differentiation - differentiation is a strategy aimed at producing products and
services considered unique industry wide and directed at consumers who are
relatively price insensitive.
 Focus - focus means producing products and services that fulfill the needs of
small groups of consumers.
GENERIC STRATEGIES AT A GLANCE

Low cost Differentiation Focus

Low cost culture Adding value Niche markets
Economies of scale through Targeting
Eliminate -product features Limited territory
unnecessary costs -product quality Focus on a specific
Enjoy high profits -distinctive offering group of customers
through cost Offer something Either cost leader
advantage new or different or differentiation
High costs but with in the segment
charge premium
price
 COST LEADERSHIP
• This strategy concentrates on aiming to become the lowest cost
producer in the industry through economies of scale
• In this way the firm can compete on price with every other
producers in the industry and earn higher unit profits
• Cost reduction provides the focus of the organisation’s strategy
• Competitive advantage is achieved by driving down costs
 COST LEADERSHIP
• Cost leadership is based on
• Efficiency to drive down costs
• Effectiveness- knowing what is and what is not important to customers and
saving on the latter
• But there is room for only one cost leader
• A successful cost leadership strategy requires that the firm is the cost
leader and is unchallenged in this position
• Cost leadership is especially beneficial in markets where customers
are price sensitive
 SOURCES OF COST LEADERSHIP
• Size - economies of scale
• Greater labour efficiency and effectiveness
• Control of overheads
• Superior management
• Greater operating efficiency and effectiveness
• Low cost production
• Low cost labour
• Design for low cost production
• Use the latest technology to reduce costs and or enhance productivity
• Relocation to low cost site
• Favourable access to low cost sources of supply
• Reduction in waste
 DIFFERENTIATION
• A differentiation strategy calls for the development of a product or service that
offers attributes that are both unique and are valued by customers
• Customers perceive the product to be different and better than that of rivals
• As a result the value added by the uniqueness of the product may allow the firm
to charge a premium price for it.
• Success in a differentiation strategy means
• Gaining a competitive advantage by making their product different from competitors
• Competing on the basis of value added to customers
• Persuading customers that the firm’s product is superior to that offered by rivals
• Customers being willing to pay a premium price to cover higher costs
• Differentiation can be based on product image or durability, after-sales, quality,
additional features.
• And it requires talent, research capability and strong marketing
 SOURCES OF DIFFERENTIATION
• Creation of strong brand
• Superior performance
• High quality
• Additional features offered
• Innovation in packaging
• Speed of distribution
• Higher service levels
• Greater flexibility
• Delivery
• Quality of the materials
 FOCUS STRATEGY
• In a focus strategy the firm concentrates on one (or at most a limited
number of) segments of the market
• The premise behind this strategy is that the needs of the group can
be bettered served by focussing entirely on it
• The firm might feel more secure in the niche with greater insulation
from competition
• A focus strategy means that the firm’s efforts are not spread too
thinly
• Focus strategies are
• Cost focus: cost leader in a particular segment
• Focus differentiation: differentiation in the chosen segment
 REQUIREMENTS OF A FOCUS STRATEGY
• A focus strategy requires…
• The identification of a suitable target customer group
• Identification of the specific needs of that group
• Confirmation that the market is sufficiently large to sustain the business
• Estimation of the extent of competition within the segment
• Production of products to meet the specific needs of that group
• A decision on whether to opt for cost leadership or differentiation within the
segment