Week 1 â Introduction to Strategic Management
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Week 1 – Introduction to Strategic Management Define strategy Strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage It is also an outline of how a business intends to achieve its goals, it “sets the route” on how goals/objectives will be reached. Strategic Management Process Environmental scanning → strategy formulation → strategy implementation → evaluation & control Environmental scanning: • A process of collecting, analysing, and providing information for strategic purposes. • It helps in analysing the internal and external factors influencing an organisation • To better understand and cope with their environments • After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it. Strategy formulation: • The process of deciding best course of action for accomplishing organisational objectives and hence achieving organisational purpose. Strategy implementation: • Making the strategy work as intended, putting the chosen strategy into action. • It includes designing the organisation’s structure, distributing resources, developing decision making process, and managing HR. Strategy evaluation: • Assessing internal and external factors that are the root of present strategies • Measuring performance • Taking remedial/corrective actions. • Evaluation makes sure that the organisational strategy and its implementation meets the organisational objectives. Tasks: 1. Develop a strategic vision, mission and core values 2. Setting objectives 3. Crafting a strategy to achieve the objectives and the company vision 4. Executing the strategy 5. Monitoring developments, evaluation performance, and initiating corrective adjustments Competitive advantage Is when a firm implements a strategy that creates superior value for customers and that its competitors are unable to duplicate, or find it too costly to imitate. It is essential to earn above-‐average returns → it is the returns in excess of what an investor expects to earn from other investments.
2 Resource-‐Based View • Views each organisation as a collection of unique resources and capabilities that provides the basis for its strategy and its ability to earn above-‐average returns. • It is concerned with the firm’s INTERNAL ENVIRONMENT • Criteria for resources and capabilities to achieve competitive advantage: o Valuable o Rare o Inimitable o Non-‐substitutable Strategic Vision • A picture of what firm wants to be in the future and what it wants to achieve • Short and concise, making it easy to remember • Lasting over an extended period of time Strategic Mission • The business in which a firm intends to compete and the customers it intends to serve • Can change with new environmental conditions • An effective strategic mission portrays what firm does at present and establishes a firm’s uniqueness.
Week 2 -‐ External Environment External environment is made up of 3 parts: 1. The general environment Dimensions in the broader society that influence an industry and the firms within it. 2. The industry environment 3. The competitor environment 7 segments of the general environment • Demographic o Characteristics and features of a population o Population size, age structure, geographic distribution, ethnic, income distribution • Economic o Nature and direction of the economy in which a firm competes or may compete o Inflation rates, interest rates, trade deficits or surpluses, personal savings rate, GDP • Political/legal o The body of laws/regulations guiding interactions among nations as well as between firms and local government agencies o Antitrust laws, taxation laws, deregulation, labour training laws, minimum working hours • Sociocultural o Society’s attitudes and cultural values o Women in the workforce, workforce diversity, attitudes about the quality of work life, shifts in work & career preferences, shifts in preferences regarding product & service characteristics. • Technological o Institutions and activities involved in creating new knowledge and translating the new knowledge into new outputs, products, processes, and materials. o Product innovations, new communication technologies, R&D • Global
3 o Relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. o Important political events, critical global market, newly industrialised countries • Physical o Potential and actual changes in the natural environment and business practices that are intended to positively respond to and deal with those changes. o Energy consumption, renewable energy efforts, minimising a firm’s environmental footprint, environmentally friendly products, 3R Industry Environment Analysis Industry environment has a more direct impact on a firm’s strategic competitiveness and ability to earn above-‐ average returns than general environment. Porter’s 5 Forces Model explains whether an industry is profit potential and attractive. 5 competitive forces that influence the firm’s strategy: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products 5. Intensity of rivalry among competitors The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because; • they shape the prices which can be charged, • the costs which can be borne, and • the investment required to compete in the industry Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of an industry.
Threat of new entrants How easy it is for a firm to enter an industry?
Profitable when there is high entry barriers ; Ø increase returns for existing firms in an industry & allow industry domination Ø discourage potential competitors from entering the industry Barriers to entry such as: Economies of scale, capital requirements, access to distribution channels. Government policy It is preferable that the threat of new entrants is high so that the firm has less competitors. The more difficult it is to enter an industry, the more profitable to the firms who are already in it.
Bargaining power of suppliers How does the power of suppliers affect the firm?
Suppliers power is high in negotiating when; Ø suppliers are large-‐powerful and few in number Ø substitute products are not available
4 Ø the firm is not the significant customer for the suppliers (meaning that the suppliers have many customers, not only 1 customer that they can rely on) Ø suppliers’ goods are critical to buyers’ marketplace success Ø suppliers’ products creates high switching costs (high loyalty) Ø Supplier pose a threat of able to go foward into the buyer’s industry (they can be your competitor). From suppliers → manufacturers Firms prefer it when suppliers have little bargaining power over them.
Bargaining power of buyers How much power the buyer has when negotiating with us as a firm?
Buyers power is high in negotiating when; Ø buyers purchase a large portion of an industry’s total output Ø buyers’ purchases are a significant portion of a seller’s annual revenues Ø low switching costs Ø the firm’s products are undifferentiated (similar with competitors) = substitute Ø integrate backwards, that they can make whatever the firm makes Buyers does not necessarily mean the end consumers. It can be any party such as other businesses.
Threat of substitute products Is there any substitution to your products?
Goods or services with similar performance and functions The threat increases when; Ø buyers low switching costs Ø substitute’s product price is lower Ø substitute’s quality and performance are equal or higher How to handle this threat? Differentiated industry products
What do competing firms compete on? Price, innovation, after-‐sale service Intensity of rivalry among competitors Intensity is high when; Ø numerous or equally balanced competitors How strong is the competition within the industry? Ø slow industry growth Ø high fixed/storage costs Ø lack of differentiation Ø low switching costs Hence,
5 Driving Force Analysis Definition: driving forces are the major underlying causes of change in industry and competitive conditions. Common types of driving forces; Increasing globalisation of industry
New regulatory policies/government legislation
Changes in cost & efficiency
Changing societal concerns, attitudes and lifestyles
Shift from standardised → differentiated products
Changes in degree of uncertainty and risk
The analysis consists of 3 steps: 1. Identify the driving forces 2. Assess whether the driving forces make the industry more or less attractive 3. Determine the strategy changes needed to prepare the impact of the driving forces. Key Success Factors (KSFs) Definition: the strategy elements, product & service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry. Bare min. requirements for a firm to compete in an industry. Common KSFs: Technology, manufacturing, distribution, marketing, skills, organisational capability, reputation, locations. Industry Life Cycle
Strategic Groups Definition: a set of firms emphasising similar strategic dimensions and using similar strategies. Firms that exhibit a roughly similar products and strategic actions belong to a strategic group. Ø Greater competition within a strategic group than between a strategic group Ø More heterogeneity in the performance of firms within strategic groups Ø Offer similar products to same customers – intense competition Ø Strengths of the 5 industry forces (Porter) differ across strategic groups Competitor Analysis Gathering competitor intelligence – definition: ethical gathering of needed information and data that provides insight into competitors’….. Basically, competitor • Future objectives – what drives the competitors? analysis is comparing a ll • Currents strategy – what the competitor is doing and can do? of the subjects above of • Assumptions – what the competitor believes about its own firm and the industry? the firm’s and the • Capabilities – what are the competitors’ capabilities, strengths and weaknesses? competitors.
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Week 3 – The Internal Environment
Resources
Capabilities
Core Competencies
Resources Definition: source of a firm’s capabilities that represents inputs into a firm’s production process. • Tangible o Can be observed and quantified o Limited value – because hard to leverage e.g. plane cannot be flown on 5 different routes at the same time o Examples: § Financial resources (internal funds, borrowing capacity) § Organisational resources (formal reporting structure) § Physical resources (raw materials, plant, equipment) § Technological resources (patents, trademarks, copyrights, trade secrets) • Intangible o Cannot be observed or quantified o Difficult for competitors to analyse and imitate o A superior source of capabilities o Can be leveraged e.g. a brand’s reputation can be used by many people at once. o Examples: § HR (knowledge, trust, managerial capabilities, organisational routines) § Innovation resources (ideas, scientific capabilities, capacity to innovate) § Reputational resources (brand name, perceptions of product quality, good relationships with both customers and suppliers) Capabilities Characteristics: • From a combination of tangible and intangible resources • Foundation of core competencies • Used to complete organisational tasks (produce, distribute, and service the goods/services of the firm) • Activities that a firm perform well compared to its competitors • Arises from employee’s unique skills, knowledge and functional expertise Examples: • Distribution (effective logistics management techniques) • HR (motivating, empowering and retaining employees) • Management information systems (effective & efficient control of inventories) • Marketing (effective promotion and customer service) • Manufacturing (design & production skills, quality management) • R&D (innovative technology, digital technology) Core competencies Characteristics: • Capabilities that serve as a source of competitive advantage for a firm over its rivals • Unique identity • Activities that firm perform well compared to its competitors
7 For capabilities to be core competencies, it has to fulfil the VRIN framework, in turn could be a potential source of competitive advantage. Valuable Rare Inimitable Non-‐substitutable
Helps a firm to neutralise threats or exploit opportunities Not possessed by others Unique and valuable, costly to imitate What they do cannot be done in another way.
Value chain analysis Allows the firm to understand the parts of its operations that create value and those that do not.
→ Firm can earn above-‐average returns only when the value created is > than the costs incurred.
Made up of 2 parts that produces customer value: • Primary activities o Involves product’s physical creation, its sale and distribution to buyers, and its after-‐sale service Supply chain management Activities where the firm receive raw materials e.g. sourcing, logistics management, procurement
Operations
Distribution
Activities where raw materials → finished products e.g. developing employee work schedules, design production processes
Getting the final product to customers e.g. handling customer orders, choosing delivery channel, working w/ finance to arrange customer payments
Marketing and sales Segmenting target customers based on their unique needs, satisfy their needs, retain customers, and locating potential customers. e.g. advertising, pricing strategies, train sales staff
Service Activities taken to increase a product’s value for customers. e.g. customer satisfaction surveys, technical support, warranty
• Support activities o Provide the necessary support for primary activities to take place Managing information systems Obtain & manage information throughout the firm e.g. identifying/utilising sophisticated technology
HRM Managing the firm’s human capital e.g. training, selecting, retaining and compensating HR
SWOT analysis – allows firms to determine its: Internal Strength the basis for strategy Internal Weaknesses deficient capabilities External Opportunities strategic objectives External Threats strategic defences
Finance Effectively acquiring & managing financial resources e.g. securing financial capital, and manage relationships w/ financial providers
Week 1 – Introduction to Strategic Management Define strategy Strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage It is also an outline of how a business intends to achieve its goals, it “sets the route” on how goals/objectives will be reached. Strategic Management Process Environmental scanning → strategy formulation → strategy implementation → evaluation & control Environmental scanning: • A process of collecting, analysing, and providing information for strategic purposes. • It helps in analysing the internal and external factors influencing an organisation • To better understand and cope with their environments • After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it. Strategy formulation: • The process of deciding best course of action for accomplishing organisational objectives and hence achieving organisational purpose. Strategy implementation: • Making the strategy work as intended, putting the chosen strategy into action. • It includes designing the organisation’s structure, distributing resources, developing decision making process, and managing HR. Strategy evaluation: • Assessing internal and external factors that are the root of present strategies • Measuring performance • Taking remedial/corrective actions. • Evaluation makes sure that the organisational strategy and its implementation meets the organisational objectives. Tasks: 1. Develop a strategic vision, mission and core values 2. Setting objectives 3. Crafting a strategy to achieve the objectives and the company vision 4. Executing the strategy 5. Monitoring developments, evaluation performance, and initiating corrective adjustments Competitive advantage Is when a firm implements a strategy that creates superior value for customers and that its competitors are unable to duplicate, or find it too costly to imitate. It is essential to earn above-‐average returns → it is the returns in excess of what an investor expects to earn from other investments.
2 Resource-‐Based View • Views each organisation as a collection of unique resources and capabilities that provides the basis for its strategy and its ability to earn above-‐average returns. • It is concerned with the firm’s INTERNAL ENVIRONMENT • Criteria for resources and capabilities to achieve competitive advantage: o Valuable o Rare o Inimitable o Non-‐substitutable Strategic Vision • A picture of what firm wants to be in the future and what it wants to achieve • Short and concise, making it easy to remember • Lasting over an extended period of time Strategic Mission • The business in which a firm intends to compete and the customers it intends to serve • Can change with new environmental conditions • An effective strategic mission portrays what firm does at present and establishes a firm’s uniqueness.
Week 2 -‐ External Environment External environment is made up of 3 parts: 1. The general environment Dimensions in the broader society that influence an industry and the firms within it. 2. The industry environment 3. The competitor environment 7 segments of the general environment • Demographic o Characteristics and features of a population o Population size, age structure, geographic distribution, ethnic, income distribution • Economic o Nature and direction of the economy in which a firm competes or may compete o Inflation rates, interest rates, trade deficits or surpluses, personal savings rate, GDP • Political/legal o The body of laws/regulations guiding interactions among nations as well as between firms and local government agencies o Antitrust laws, taxation laws, deregulation, labour training laws, minimum working hours • Sociocultural o Society’s attitudes and cultural values o Women in the workforce, workforce diversity, attitudes about the quality of work life, shifts in work & career preferences, shifts in preferences regarding product & service characteristics. • Technological o Institutions and activities involved in creating new knowledge and translating the new knowledge into new outputs, products, processes, and materials. o Product innovations, new communication technologies, R&D • Global
3 o Relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. o Important political events, critical global market, newly industrialised countries • Physical o Potential and actual changes in the natural environment and business practices that are intended to positively respond to and deal with those changes. o Energy consumption, renewable energy efforts, minimising a firm’s environmental footprint, environmentally friendly products, 3R Industry Environment Analysis Industry environment has a more direct impact on a firm’s strategic competitiveness and ability to earn above-‐ average returns than general environment. Porter’s 5 Forces Model explains whether an industry is profit potential and attractive. 5 competitive forces that influence the firm’s strategy: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products 5. Intensity of rivalry among competitors The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because; • they shape the prices which can be charged, • the costs which can be borne, and • the investment required to compete in the industry Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of an industry.
Threat of new entrants How easy it is for a firm to enter an industry?
Profitable when there is high entry barriers ; Ø increase returns for existing firms in an industry & allow industry domination Ø discourage potential competitors from entering the industry Barriers to entry such as: Economies of scale, capital requirements, access to distribution channels. Government policy It is preferable that the threat of new entrants is high so that the firm has less competitors. The more difficult it is to enter an industry, the more profitable to the firms who are already in it.
Bargaining power of suppliers How does the power of suppliers affect the firm?
Suppliers power is high in negotiating when; Ø suppliers are large-‐powerful and few in number Ø substitute products are not available
4 Ø the firm is not the significant customer for the suppliers (meaning that the suppliers have many customers, not only 1 customer that they can rely on) Ø suppliers’ goods are critical to buyers’ marketplace success Ø suppliers’ products creates high switching costs (high loyalty) Ø Supplier pose a threat of able to go foward into the buyer’s industry (they can be your competitor). From suppliers → manufacturers Firms prefer it when suppliers have little bargaining power over them.
Bargaining power of buyers How much power the buyer has when negotiating with us as a firm?
Buyers power is high in negotiating when; Ø buyers purchase a large portion of an industry’s total output Ø buyers’ purchases are a significant portion of a seller’s annual revenues Ø low switching costs Ø the firm’s products are undifferentiated (similar with competitors) = substitute Ø integrate backwards, that they can make whatever the firm makes Buyers does not necessarily mean the end consumers. It can be any party such as other businesses.
Threat of substitute products Is there any substitution to your products?
Goods or services with similar performance and functions The threat increases when; Ø buyers low switching costs Ø substitute’s product price is lower Ø substitute’s quality and performance are equal or higher How to handle this threat? Differentiated industry products
What do competing firms compete on? Price, innovation, after-‐sale service Intensity of rivalry among competitors Intensity is high when; Ø numerous or equally balanced competitors How strong is the competition within the industry? Ø slow industry growth Ø high fixed/storage costs Ø lack of differentiation Ø low switching costs Hence,
5 Driving Force Analysis Definition: driving forces are the major underlying causes of change in industry and competitive conditions. Common types of driving forces; Increasing globalisation of industry
New regulatory policies/government legislation
Changes in cost & efficiency
Changing societal concerns, attitudes and lifestyles
Shift from standardised → differentiated products
Changes in degree of uncertainty and risk
The analysis consists of 3 steps: 1. Identify the driving forces 2. Assess whether the driving forces make the industry more or less attractive 3. Determine the strategy changes needed to prepare the impact of the driving forces. Key Success Factors (KSFs) Definition: the strategy elements, product & service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry. Bare min. requirements for a firm to compete in an industry. Common KSFs: Technology, manufacturing, distribution, marketing, skills, organisational capability, reputation, locations. Industry Life Cycle
Strategic Groups Definition: a set of firms emphasising similar strategic dimensions and using similar strategies. Firms that exhibit a roughly similar products and strategic actions belong to a strategic group. Ø Greater competition within a strategic group than between a strategic group Ø More heterogeneity in the performance of firms within strategic groups Ø Offer similar products to same customers – intense competition Ø Strengths of the 5 industry forces (Porter) differ across strategic groups Competitor Analysis Gathering competitor intelligence – definition: ethical gathering of needed information and data that provides insight into competitors’….. Basically, competitor • Future objectives – what drives the competitors? analysis is comparing a ll • Currents strategy – what the competitor is doing and can do? of the subjects above of • Assumptions – what the competitor believes about its own firm and the industry? the firm’s and the • Capabilities – what are the competitors’ capabilities, strengths and weaknesses? competitors.
6
Week 3 – The Internal Environment
Resources
Capabilities
Core Competencies
Resources Definition: source of a firm’s capabilities that represents inputs into a firm’s production process. • Tangible o Can be observed and quantified o Limited value – because hard to leverage e.g. plane cannot be flown on 5 different routes at the same time o Examples: § Financial resources (internal funds, borrowing capacity) § Organisational resources (formal reporting structure) § Physical resources (raw materials, plant, equipment) § Technological resources (patents, trademarks, copyrights, trade secrets) • Intangible o Cannot be observed or quantified o Difficult for competitors to analyse and imitate o A superior source of capabilities o Can be leveraged e.g. a brand’s reputation can be used by many people at once. o Examples: § HR (knowledge, trust, managerial capabilities, organisational routines) § Innovation resources (ideas, scientific capabilities, capacity to innovate) § Reputational resources (brand name, perceptions of product quality, good relationships with both customers and suppliers) Capabilities Characteristics: • From a combination of tangible and intangible resources • Foundation of core competencies • Used to complete organisational tasks (produce, distribute, and service the goods/services of the firm) • Activities that a firm perform well compared to its competitors • Arises from employee’s unique skills, knowledge and functional expertise Examples: • Distribution (effective logistics management techniques) • HR (motivating, empowering and retaining employees) • Management information systems (effective & efficient control of inventories) • Marketing (effective promotion and customer service) • Manufacturing (design & production skills, quality management) • R&D (innovative technology, digital technology) Core competencies Characteristics: • Capabilities that serve as a source of competitive advantage for a firm over its rivals • Unique identity • Activities that firm perform well compared to its competitors
7 For capabilities to be core competencies, it has to fulfil the VRIN framework, in turn could be a potential source of competitive advantage. Valuable Rare Inimitable Non-‐substitutable
Helps a firm to neutralise threats or exploit opportunities Not possessed by others Unique and valuable, costly to imitate What they do cannot be done in another way.
Value chain analysis Allows the firm to understand the parts of its operations that create value and those that do not.
→ Firm can earn above-‐average returns only when the value created is > than the costs incurred.
Made up of 2 parts that produces customer value: • Primary activities o Involves product’s physical creation, its sale and distribution to buyers, and its after-‐sale service Supply chain management Activities where the firm receive raw materials e.g. sourcing, logistics management, procurement
Operations
Distribution
Activities where raw materials → finished products e.g. developing employee work schedules, design production processes
Getting the final product to customers e.g. handling customer orders, choosing delivery channel, working w/ finance to arrange customer payments
Marketing and sales Segmenting target customers based on their unique needs, satisfy their needs, retain customers, and locating potential customers. e.g. advertising, pricing strategies, train sales staff
Service Activities taken to increase a product’s value for customers. e.g. customer satisfaction surveys, technical support, warranty
• Support activities o Provide the necessary support for primary activities to take place Managing information systems Obtain & manage information throughout the firm e.g. identifying/utilising sophisticated technology
HRM Managing the firm’s human capital e.g. training, selecting, retaining and compensating HR
SWOT analysis – allows firms to determine its: Internal Strength the basis for strategy Internal Weaknesses deficient capabilities External Opportunities strategic objectives External Threats strategic defences
Finance Effectively acquiring & managing financial resources e.g. securing financial capital, and manage relationships w/ financial providers
