Chapter Outline
· Define strategic management and explain why it’s important.
· Explain what managers do during the six steps of the strategic management process.
· Describe the three types of corporate strategies.
· Describe competitive advantage and the competitive strategies organizations use to get it.
· Discuss current strategic management issue.
It is what managers do to develop the organization’ strategies.
It includes all the four management functions i-e. Planning, Organizing, Leading and Controlling.
What is Organization’s Strategy?
It is about to plan, how organization will perform its tasks to satisfy the core purpose of its existence.
How it will compete with its competitors.
And how it will meet customer needs to achieve organizational goals.
Business Model:
It simply and purely means, how company will make money. It focuses on two things,
· First is, whether customer will value, what company is providing him.
· And second, do company is making money doing that.
Example:
Dell started selling its computers online, and Dell is pioneer in this business model.
If we see in this case, do the customer value its products and strategies, answer is Yes.
Second question: do company made money by using this strategy, answer is Yes.
Why Is Strategic Management Important?
There are three main reasons, i.e.
· Strategic management plays important role, how well any organization will perform. Two organizations start at the same time, but one fails and other one succeeds. So, it can be concluded that there is direct relationship of strategic planning with performance.
· 2nd, to cope with changing situations, managers in organizations need to make strategies. For example, selling products in store as well as online.
· At last, it is important, because, organizational culture is complex and diverse. So, everyone needs to work together to achieve organizational goals and to satisfy customer needs.
It is a six-step process.
First four steps involve planning, then implementing and then Evaluating.
Step 1: Identifying the Organization’ Current Mission, Goals and Strategies
Mission statement describes the purpose of any company or organization.
Components of mission statement:
§ Customer
§ Markets (Geo-graphical market)
§ Concern for survival, growth and profitability
§ Philosophy (beliefs, values and ethical priorities)
§ Concern for public image
§ Product or services
§ Technology (current, old, advance or use of no technology)
§ Self-concept (Competitive advantage, core competencies)
§ Concern for employees
Step 2: Doing an External Analysis
To know the doings of competitors, how intense is the competition in the market.
Legislation at government end, taxes, import or export duties etc.
Labor availability
Managers should keep following changes in mind while performing external analysis i.e., economic, demographic, technological and global components etc.
Managers should pinpoint opportunities to which they could exploit and threats to be aware off.
Opportunities are positive trends and threats are negative trends in the market.
Step 3: Doing an Internal Analysis
While doing internal analysis, managers get to know the organization’ Resources i.e., financial, human, and intangible to which company or organizations use to develop, manufacture and deliver product or service to its customer.
Then become Capabilities, including skills or abilities of doing work needed to achieve targets or goals. Major capabilities are known as Core competencies.
Mix match of or combination of resources and core competencies determine company’ Competitive weapon.
After successful internal analysis, managers get to know the strengths and weaknesses of his company,
Anything that company is good at is its strength.
Anything that can company cannot do well is its weakness.
External and internal analysis combined is call as SWOT analysis. i.e., analysis of company’ strengths, weaknesses, opportunities and threats.
By doing successful SWOT analysis managers are able to formulate strategies that may
o Exploit company’s strengths and external opportunities.
o Protecting companies from external threats
o Overcome major and critical weaknesses.
Step 4: Formulating Strategies
While formulating strategies, managers should keep the realities in the external environment and organization’ resources and capabilities in mind.
Three main types of strategies that managers formulate are:
o Corporate strategies
o Competitive strategies
o Functional strategies
Step 5: Implementing Strategies
After going through the above steps’ managers should implement the strategies.
No matter, whether strategies are effective or not.
Organizations’ performance will suffer, if strategies are not implemented.
Step 6: Evaluating Results
After implementing of strategies, now, it’s time to assess, whether strategy worked or not.
What changes and adjustment are required? to achieve organizational goal
Top-level managers are responsible for corporate strategies.
A corporate defines, what type of businesses company is doing and want to do in coming times and what it wants to do with these businesses in the future.
It is based on the goals and mission of organization and the roles that each organizational unit will be responsible to perform.
What are types of Corporate Strategy?
· Growth
While adopting growth strategy, companies try to capture maximum number of markets or through the product they offer, either by staying in the same business or through different businesses.
When companies grow, they increase revenues, provide more employment and grab more market share.
Companies expand by using
o Concentration
o Vertical integration
o Horizontal integration
o Diversification
Companies adopt Concentration Strategy to grow focus on their primary business and put their all efforts to increase the number of products for the same markets.
For example, Beckman Coulter inc. this company make diagnostic and research equipment.
Companies adopt Vertical Integration Strategy; it may be forward or backward.
In backward integration, companies become its own suppliers, for example, Savor food, in Islamabad, Pakistan. Is a famous for its delicious rice. Have its own rice crops, poultry for chicken. Tehzeeb Bakers, Islamabad, have its own its own ketchup brand i.e., Kanaas.
In forward integration, become its own distributers. For example, eBay itself deals with its distribution and is able to control its outputs.
Companies adopt Horizontal Integration buy or combine with other competitors.
For example: acquisition of Polka ice-cream with Walls ice-cream in Pakistan.
Finally, company grow through Diversification Strategy, it may be related or unrelated diversification.
In related diversification company diversify in different but related industry. For example, Samsung phones, Samsung hand frees, Samsung LEDs, etc. same goes for Apple. There is strategic fit in the business.
In unrelated diversification, company diversify with different products and for different markets. For example, ENGRO Corporation, Engro Foods, Engro Fertilizers, Engro Chemicals etc. There is no strategic fit in the business.
· Stability
While using stability strategy, companies don’t grow but don’t fell behind.
Companies maintain their market share and retain their customers.
· Renewal
This strategy is adopted when companies face financial loss.,
Managers need to develop new strategies that’s Renewal Strategy, which address the declining performance.
Two types of renewal strategies are used.
o Retrenchment strategy
o Turnaround strategy
Retrenchment strategy is used to recover the minor performance loss, to bring back company to stability, revitalize organizational resources and prepare it to compete in the market again.
When organizations suffer drastic loss, then companies adopt Turnaround Strategy.
Managers do two things in both strategies, cut costs and restructure organizations operations. These measures are of intense nature in turnaround strategy.
How are corporate strategies managed?
When company have more than one business then companies can use corporate portfolio mix.
This matrix helps managers to understand diverse businesses and to set priorities for allocating resources.
The BCG Matrix (Boston Consulting Group)
It is to identify which business have potential to grow and which one is draining.
The horizontal axis represents market share and vertical axis represents the anticipated growth rate.
The dogs should be sold as they have low market share and low potential to grow.
Managers should “milk” cash cows as much as they can, and limit new investments. And use that generated cash in stars and question marks as they have, they have strong potential to improve market share.
Heavy investment in stars will help to grow and grab much market share, eventually they will become cash cows, as they reached mature markets and growth slow.
The tough thing is to do with question marks, after careful analysis, some will be sold off and some will be turned strategically to stars
A competitive strategy defines, how organizations will compete in its business.
Different businesses have different competitive strategies, e.g., the products or services it will offer, how to attract the customers. Etc.
When an organization is in different business, those single and independent businesses have own competitive strategies are referred as Strategic Business Units (SBUs)
The role of competitive Advantage:
Coca cola has become the most powerful brand through its specialized marketing and merchandizing capabilities,
The Ritz Carlton hotels satisfy their customers through personalized customer services.
Before developing effective competitive strategy, one need to have understanding of Competitive Advantage. the advantage that makes them stand high in the market.
Competitive Advantage can come from organizations core competencies, good at something that other competitors are not. e.g., marketing skill that coca cola have.
Or competitive advantage can come from its resources, because it has something that other companies don’t have.
For example, Walmart’ have efficient information system that enable them to have full control on inventories and supplier relationships. This provides them cost advantage over other competitors.
Quality as Competitive Advantage:
If company start providing quality products and services, and maintain its quality, it can become its competitive advantage.
For example, we see many bakeries around, but some perfume outstanding and customers trust them, it is due to its quality products. And others fail and so bear loss.
Quality products offered by Kellogg’ Corn Flakes for more than a century
Sustaining Competitive Advantage:
Every organization has resources (assets) and capabilities to do work, but still,
Why just few organizations perform and generate revenues,
Why just few colleges experience continuous increase in enrollments.
The answer is they have some competitive advantage that others don’t have.
Just developing the competitive advantage is not enough, but to sustain it is a big challenge.
Time changes day by day, technology changes, customer interests changes and growing number of competitors in the market. So, to cater all these managers have tough job to sustain the competitive advantage through strategic management.
How managers can create sustainable competitive advantage is well explained by Michael Porter in his five forces model,
Five Forces Model:
These five forces model determine the attractiveness and profitability
o Threat of new entrants.
o Threat of substitutes.
o Bargaining power of buyers.
o Bargaining power of suppliers.
o Current rivalry
Choosing a Competitive Strategy:
Once managers are done with five forces assessment and SWOT analysis, now it’s time to select the best competitive strategy for their business.
Porter says, no company can apply same strategy for all people.
Some companies may develop a strategy to compete with lower costs than in the industry, or other company may come to industry with different products than their competitors.
When an organization compete with lowest costs (costs or expenses not prices) in the industry, it is following Cost Leadership Strategy.
Overheads are kept to minimum, no extra expenses, no interior décor, etc.
A company that competes with different and unique product, it is following Differentiation Strategy.
It may include high quality products, innovative design, specialized customer services etc.
Then become the Focus Strategy, it is made for specific niche or a narrow segment, it may be cost advantage based or differentiation advantage based, depending upon customer type, weather, geographical location etc.
As per Porter, if company couldn’t decide between cost and differentiation base strategy, then it is in Stuck in the Middle. And porter warned, this is not the place to be. It may be due to its over expenses and not having the different product. But company should develop this strategy at earliest to compete in the market.
If company can afford both, the cost and differentiation base strategies, it should go with both and take advantage out of it. FedEx, Intel and Coca Cola are among its examples.
Functional strategies: these are the strategies developed by different departments of an organization, to support the organizational competitive strategy.
With the change in technology, managers job is becoming so tough as they are supposed to make the strategies for business.
Which business to start, how to pursue that business, short term planning, long term goals etc.
· The Need for Strategic Leadership:
Strategic Leadership; is the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in the organization to initiate changes that will create a viable and valuable future for the organization.
There are eight key dimensions that how top managers provide effective strategic leadership.
Each part encompasses an important part of the strategic management process.
· The Need for Strategic Flexibility:
With the rapid change in technology, time and techniques in today’s world strategic flexibility is needed.
Even, when managers choose the strategy through proper strategic management process, there is no surety, whether it will work or not.
Strategic flexibility is the ability to recognize that the chosen strategy is not working and to recognize the changes occurred in external environment.
Given below are some suggestions for developing strategic flexibility:
· Important Organizational Strategies for Today’s Environment:
e-Business Strategies:
Managers use e-Business strategies to take some competitive edge over their rivals.
Cost-Leader can use this strategy to cut number of costs, for example, online order taking, no need of an employee to note the order from customer, Web based inventory to reduce the storage cost, online biddings to reduce the sales force costs, etc.
A differentiator may offer online distinctive services or products that customers may prefer,
For example, I personally like HBL’ mobile app the most among others, it allows me to fast money transfers, bill payments, other bank credit card payments, easy access, ease of use, user friendly, Etc.
Finally, the focuser targets a narrow market and develop strategies accordingly. It may provide chat rooms for the people having same tastes.
Then comes the Clicks and Bricks Strategy, in this firms operate both online and with physical presence. For example, Daraz shopping mall, it provides excellent services online to their customers and also enable their customers to visit their physical stores for pick-ups, deliveries and claims, etc.
Customer Service Strategies:
“Giving customers what they want” it is often the major aspect of organizations marketing strategy. For example, Some Telecom companies enabling customers to make their own bundles for calls and internet.
Effective customer communication system is another important customer service strategy.
To know what customers feel about their products or services and about their experience with customer services representative is very valuable for managers, as it enable managers to think about their products and services. For example, getting customer feedback through “report cards”.
Finally, organization’ culture plays vital role in providing excellent customer services. For this, employees need “soft skills” trainings regularly.
Innovation Strategies:
Two types of strategic decisions reflect the innovation philosophy of organizations and its managers. i.e., Innovation emphasis and innovation timings.
To Emphasis the Innovation it is required to know whether the organization is going to focus on basic scientific research, product development or process development,
Companies dealing in Genetics engineering, Pharmaceuticals, information technology or in cosmetics needs to be basic scientific researcher. It requires resource commitment.
In product development strategy, it doesn’t need so much resource commitment in comparison with the previous strategy. It may work with technology shift, that means using technology in new ways.
Then comes process development, it includes to improve the working environment, processes of product development to lower the costs, employee safety etc.
The next strategic decision is about Innovation Timings, whether company will innovate a product and will take the First Mover Advantage or will mimic the new innovation made by competitor. It depends upon top management’s decision.
