STRATEGIC MANAGEMENT AND COMPANY COMPETITIVENESS

Transcription

1 STRATEGIC MANAGEMENT AND COMPANY COMPETITIVENESS Project Joint Degree Study programme Technology and Innovation Management No. VP1-2.2-ŠMM-07-K

2 The nature of strategic management Strategy is about two things: deciding where you want your business to go, and deciding how to get there.

3 The nature of strategic management The Five Tasks of Strategic Management: 1. Forming a strategic vision of what the company s future business makeup will be and where the organization is headed so as to provide long-term direction, delineate what kind of enterprise the company is trying to become, and infuse the organization with a sense of purposeful action.

4 The nature of strategic management The Five Tasks of Strategic Management: 2. Setting objectives converting the strategic vision into specific performance outcomes for the company to achieve. 3. Crafting a strategy to achieve the desired outcomes.

5 The nature of strategic management The Five Tasks of Strategic Management: 4. Implementing and executing the chosen strategy efficiently and effectively. 5. Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or implementation in light of actual experience, changing conditions, new ideas, and new opportunities.

6 The nature of strategic management Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable and organisation to achieve its objectives.

7 The nature of strategic management Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

8 The nature of strategic management The term strategic planning originated in the 1950s and was very popular between the mid 1960s and the mid 1970s. During these years, strategic planning was widely believed to be the answer for all problems.

9 The nature of strategic management At the time, much of corporate America was obsessed with strategic planning. Following that boom, however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world.

10 The nature of strategic management A strategic plan is, in essence, a organisations game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully.

11 The nature of strategic management A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, less desirable courses of action.

12 Stages of Strategic Management The strategic management process consists of three stages: formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organisations external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue.

13 Stages of Strategic Management Strategy formulation issues include deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversify, whether to enter international markets, to merge or form a joint venture, and how to avoid a hostile takeover.

14 Stages of Strategic Management Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages.

15 Stages of Strategic Management Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed.

16 Stages of Strategic Management Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensation to organizational performance

17 Stages of Strategic Management Strategy implementation often is called the action stage of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action.

18 Stages of Strategic Management Interpersonal skills are especially critical for successful strategy implementation. Strategy implementation activities affect all employees and managers in an organization.

19 Stages of Strategic Management Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information.

20 Stages of Strategic Management Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional.

21 Stages of Strategic Management By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels.

22 Competitive Advantage Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as anything that a firm does especially well compared to rival firms.

23 Competitive Advantage Normally, a firm can sustain a competitive advantage for only a certain period due to rival firms imitating and undermining that advantage. Thus it is not adequate to simply obtain competitive advantage.

24 Competitive Advantage Strategists are the individuals who are most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur.

25 Competitive Advantage Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans.

26 Competitive Advantage Strategists differ as much as organizations themselves, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies.

27 Competitive Advantage Strategists differ in their attitudes, values, ethics willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style.

28 Vision and Mission Statements Many vision statements are a single sentence. Mission statements are enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm s operations in product and market terms.

29 Vision and Mission Statements Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization.

30 External Opportunities and Threats External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future.

31 External Opportunities and Threats Opportunities and threats are largely beyond the control of a single organization thus the word external. The wireless revolution, biotechnology, population shifts, very high gas prices, changing work values and attitudes, illegal immigration issues, and increased competition from foreign companies are examples of opportunities or threats for companies.

32 External Opportunities and Threats These types of changes are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe external threat of online sales capturing increasing market share in their industry.

33 External Opportunities and Threats Other opportunities and threats may include the passage of a law, the introduction of a new product by a competitor, a national catastrophe, or the declining value of the dollar. A competitor s strength could be a threat.

34 External Opportunities and Threats A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success.

35 External Opportunities and Threats This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations utilize to influence external opportunities and threats.

36 Internal Strengths and Weaknesses Internal strengths and internal weaknesses are an organization s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and development, and management information systems activities of a business.

37 Internal Strengths and Weaknesses Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategicmanagement activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.

38 Internal Strengths and Weaknesses Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality.

39 Internal Strengths and Weaknesses Strengths and weaknesses may be determined relative to a firm s own objectives. For example, high levels of inventory turnover may not be a strength to a firm that seeks never to stock-out. Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages.

40 Internal Strengths and Weaknesses Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

41 Long-Term Objectives Objectives can be defined as specific results that an organisation seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essential for organizational success because they state directions; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and controlling activities.

42 Long-Term Objectives Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall company and for each division.

43 Strategies Strategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures.

44 Strategies Strategies are potential actions that require top management decisions and large amounts of the firm s resources. In addition, strategies affect an organization s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm.

45 Annual Objectives Annual objectives are short-tem milestones that organizations must achieve to reach long-term objectives. Like long-term objectives, annual objectives should be measureable, quantitative, challenging, realistic, consistent, and prioritized.

46 Annual Objectives Annual objectives represent the basis for allocating resources. Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations.

47 The Strategic-Management Model The strategic-management process can best be studied and applied using a model. Every model represents some kind of process. Identifying an organization s existing vision, mission, objectives, and strategies is the logical starting point for strategic management because a firm s present situation and condition may preclude certain strategies and may even dictate a particular course of action.

48 The Strategic-Management Model Every organization has a vision, mission, communicated. The strategic management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components.

49 The Strategic-Management Model The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is give-andtake among hierarchical levels of an organization.

50 The Strategic-Management Model Greater formality in applying the strategicmanagement process is usually positively associated with the cost, comprehensiveness, accuracy, and success of planning across all types and sizes of organizations.

51 Benefits of Strategic Management Strategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activities---and thus to exert control over its own destiny.

52 Benefits of Strategic Management Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice.

53 Benefits of Strategic Management The manner in which strategic management is carried out is thus exceptionally important. A major aim of the process is to achieve the understanding of and commitment from all managers and employees. Understanding may be the most important benefit of strategic management, followed by commitment.

54 Benefits of Strategic Management Managers and employees become surprisingly creative and innovative when they understand and support the firm s mission, objectives, and strategies. A great benefit of strategic management, then, is the opportunity that the process provides to empower individuals.

55 The Five Generic Competitive Strengths When one strips away the details to get at the real substance the biggest and most important differences among competitive strategies boil down to (1) whether a company s market target is broad or narrow and (2) whether it is pursuing a competitive advantage linked to low costs or product differentiation.

56 The Five Generic Competitive Strengths Five distinct approaches stand out: 1. A low-cost leadership strategy Appealing to a broad spectrum of customers based on being the overall low cost provider of a product or service.

57 The Five Generic Competitive Strengths Five distinct approaches stand out: 2. A broad differentiation strategy Seeking to differentiate the company s product offering from rivals in ways that will appeal to a broad spectrum of buyers. 3. A best-cost provider strategy Giving customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiation;

58 The Five Generic Competitive Strengths Five distinct approaches stand out: 4. A focused or market niche strategy based on lower cost Concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals. 5. A focused or market niche strategy based on differentiation Concentrating on a narrow buyer segment and outcompeting rivals by offering niche members a customized product or service that meets their tastes.

59 Low Cost Provider Strategies Striving to be the industry s overall low-cost provider is a powerful competitive approach in markets where many buyers are price sensitive. The aim is to operate the business in a highly cost-effective manner and open up a sustainable cost advantage over rivals.

60 Low Cost Provider Strategies A low cost leader has two options for achieving superior profit performance: 1. Use the lower cost edge to underprice competitors and attract price sensitive buyers in great enough numbers to increase total profits. 2. Refrain from price cutting altogether, be content with the present market share, and use the lower cost edge to earn a higher profit margin on each unit sold.

61 Differentiation Strategies Differentiation strategies are an attractive competitive approach when buyer preferences are too diverse to be fully satisfied by a standardized product or when buyer requirements are too diverse to be fully satisfied by sellers with identical capabilities.

62 Differentiation Strategies To be successful with a differentiation strategy, a company has to study buyers needs and behavior carefully to learn what they consider important, what they think as value, and what they are willing to pay for. Competitive advantage results once a sufficient number of buyers become strongly attached to the differentiated attributes, features or capabilities.

63 Differentiation Strategies Successful differentiation allows a firm to: Command a premium price for its product Increase unit sales Gain buyer loyalty to its brand

64 Differentiation Strategies Differentiation enhances profitability whenever the extra price the product commands outweighs the added costs of achieving differentiation. The most appealing approaches to differentiation are those that are hard or expensive for rivals to duplicate.

65 Matching Strategy to a Company s Situation The most important drivers shaping a company s best strategic options fall into two broad categories: The nature of industry and competitive conditions The firm s own resources and competitive capabilities, market position, and best opportunities

66 Matching Strategy to a Company s Situation The dominant strategy shaping industry and competitive conditions revolve around what stage in the life cycle the industry is in (emerging, rapid growth, mature, declining), the industry s structure (fragmented versus concentrated), the relative strength of the five competitive forces, the impact of industry driving forces, and the scope of competitive rivalry (particularly whether the company s market is globally competitive).

67 Matching Strategy to a Company s Situation The pivotal company specific considerations are: Whether the company is an industry leader, and up and coming challenger, a content runner up, or an also ran struggling to survive The company s set of resource strengths and weaknesses, competitive capabilities, and market opportunities and threats

68 Matching Strategy to a Company s Situation The two critical strategic issues confronting firms in an emerging industry are (1) how to finance start up and initial operations until sales take off and (2) what market segments and competitive advantages to go after in trying to secure a leading position.

69 Matching Strategy to a Company s Situation Some companies find themselves in markets characterized by rapid-fire technological change, short product lifecycles entry of important new rivals, frequent launches of new competitive moves by rivals, and rapidly evolving customer requirements and expectations all at once.

70 Matching Strategy to a Company s Situation When a fast evolving market environment entails many technological areas and product categories, competitors have little choice but to employ some type of focus strategy and concentrate on being the leader in a particular category.

71 Matching Strategy to a Company s Situation There are several strategic moves that firms can initiate to strengthen their positions: Pruning the Product Line More emphasis on Process Innovations A stronger focus on cost reduction Increasing sales to present customers Purchasing rival firms at bargain prices Expanding internationally Building new or more flexible capabilities

72 Strategic Pitfalls Perhaps the greatest strategic mistake a company can make as an industry matures is steering a middle course between low cost, differentiation, and focusing. Such strategic compromises typically result in a firm ending up stuck in the middle.

73 Strategic Pitfalls Other strategic pitfalls include being slow to adapt to changing customer expectations, concentrating more on short term profitability than on building or maintaining long term competitive position, waiting too long to respond to price cutting, getting caught with too much capacity as growth slows, overspending on marketing efforts to boost sales growth, and failing to pursue cost reduction soon enough and aggressively enough.

74 Strategies for Firms in Stagnant or Declining Industries Companies that succeed in stagnant industries employ one of three strategic themes: 1. Pursue a focused strategy by identifying, creating, and exploiting the growth segments within the industry. 2. Stress differentiation based on quality improvement and product innovation 3. Work diligently and persistently to drive costs down

75 Strategies for Firms in Stagnant or Declining Industries The most common strategic mistakes companies make in stagnating or declining markets are: 1. Getting trapped in a profitless war of attrition 2. Diverting too much cash out of the business too quickly 3. Being overly optimistic about the industry s future and spending too much on improvements in anticipation that things will get better

76 Strategies for Firms in Stagnant or Declining Industries Any of several reasons can account for why the supply side of an industry is fragmented: Low entry barriers allow small firms to enter quickly and cheaply The technologies embodied in the value chain are exploding into so many new areas and along so many different paths that specialization is essential just to keep abreast on any one area of expertise

77 Strategies for Firms in Stagnant or Declining Industries Any of several reasons can account for why the supply side of an industry is fragmented: An absence of large scale production economies Buyers require relatively small quantities of customized products The market for the industry s product/service is becoming more global, allowing competitors in more and more countries to be drawn into the same competitive market arena

78 Strategies for Firms in Stagnant or Declining Industries Any of several reasons can account for why the supply side of an industry is fragmented: Market demand is so large and so diverse that it take very large numbers of firms to accommodate buyer requirements The industry is so new that no firms have yet developed their resource base and competitive capabilities to command a significant market share

79 Strategies for Firms in Stagnant or Declining Industries Competitive strategies based either on low cost or product differentiation are viable unless the industry s product is highly standardized or a commodity. Focusing on a well defined market niche or buyer segment usually offers more competitive advantage potential than striving for broad market appeal.

80 Strategies for Firms in Stagnant or Declining Industries Suitable options in a fragmented industry include: Constructing and operating formula factories Becoming a low cost operator Increasing customer value through integration Specializing by product type Specialization by customer type Focusing on a limited geographic area

81 Strategies for Competing in International Markets Multicountry (or multidomestic) competition exists when competition in one national market is independent of competition in another national market there is not international market, just a collection of self-contained country markets.

82 Strategies for Competing in International Markets Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head to head in many different countries.

83 Strategies for Competing in International Markets In multicountry competition, rival firms vie for national market leadership. In globally competitive industries, rival firms vie for worldwide leadership. A global competitor s market strength is directly proportional to its portfolio of country based competitive advantages.

84 Strategies for Competing in International Markets Types of International Strategies: 1. License foreign firms to use the company s technology or produce and distribute the company s products 2. Maintain a national (one-country) production base and export goods to foreign markets 3. Follow a multicountry strategy, varying the company s strategic approach from country to country in accordance with the same basic competitive theme

85 Strategies for Competing in International Markets Types of International Strategies: 4. Follow a global low cost strategy 5. Follow a global differentiation strategy 6. Follow a global focus strategy, serving the same identifiable niche in each country market 7. Follow a global best cost provider strategy

86 Strategies for Competing in International Markets Licensing makes sense when a firm with valuable technical know how or a unique patented product has neither the internal capability nor the resources to compete effectively in foreign markets.

87 Strategies for Industry Leaders Three contrasting strategic positions are open to industry leaders and dominant firms: 1. Stay on the offensive strategy The theme of a stay on the offensive strategy is relentless pursuit of continuous improvement and innovation. 2. Follow the leader strategy The leader uses its competitive muscle to encourage runner up firms to be content followers rather than aggressive challengers.

88 Strategies for Industry Leaders 3. Fortify and defend strategy Make it harder for new firms to enter and for challengers to gain ground: Attempting to raise the competitive ante by increasing spending for advertising, higher levels of customer service, and bigger R&D outlays Introducing more product versions or brands Adding personalized services and other extras that boost customer loyalty

89 Strategies for Industry Leaders Keeping prices reasonable and quality attractive Building new capacity ahead of market demand Investing enough to remain cost competitive and technologically progressive Patenting the feasible alternative technologies Signing exclusive contracts with the best suppliers, distributors, and dealers

90 Strategies for Runner Up Firms Runner up firms have smaller market shares than the industry leader(s). A challenger firm interested in improving its market standing needs a strategy aimed at building a competitive advantage of its own. Rarely can a runner up firm improve its competitive position by imitating the strategies of leading firms.

91 Strategies for Runner Up Firms In industries where large size yields significantly lower unit costs and gives large-share competitors an important cost advantage, small share firms only have two viable strategic options: 1. Initiate offensive moves to gain sales and market share 2. Withdraw from the business

92 Strategies for Weak Businesses Harvesting is a phasing down or endgame strategy that involves sacrificing market position in return for bigger near term cash flows or profits. The overriding financial objective is to reap the greatest possible harvest of cash to use in other business endeavors.

93 Strategies for Weak Businesses Harvesting is a reasonable strategic option for a weak business in the following circumstances: When the industry s long term prospects are unattractive When rejuvenating the business would be too costly or at best marginally profitable When the firm s market share is becoming more costly to maintain or defend

94 Turnaround Strategies for Businesses in Crisis Turnaround strategies are needed when a business worth rescuing goes into crisis; the objective is to arrest the reverse the sources of competitive and financial weaknesses as quickly as possible. Management s first task to is to diagnose what lies at the root of poor performance.

95 Turnaround Strategies for Businesses in Crisis Curing these kinds of problems and turning the firm around can involve any of the following actions: Selling off assets to raise cash to save the remaining part of the business Revising the existing strategy Launching efforts to boost revenues Pursuing cost reduction Using a combination of these efforts

96 Turnaround Strategies for Businesses in Crisis Thirteen Commandments for Crafting Successful Business Strategies: Place top priority on crafting and executing strategic moves that enhance the company s competitive position for the long term Understand that a clear, consistent competitive strategy, when well crafted and well executed, builds reputation and recognizable industry position;

97 Turnaround Strategies for Businesses in Crisis Avoid stuck in the middle strategies that represent compromises between lower costs and greater differentiation and between broad and narrow market appeal Invest in creating sustainable competitive advantage Play aggressive offense to build competitive advantage and aggressive defense to protect it

98 Turnaround Strategies for Businesses in Crisis Avoid strategies capable of succeeding only in the most optimistic circumstances Be cautious in pursuing a rigid or inflexible strategy that locks the company in for the long term with little room to maneuver inflexible strategies can be made obsolete by changing market conditions Don t underestimate the reactions and the commitment of rival firms

99 Turnaround Strategies for Businesses in Crisis Avoid attacking capable, resourceful rivals without solid competitive advantage and financial strength Consider that attacking competitive weakness is usually more profitable and less risky than attacking competitive strength

100 Turnaround Strategies for Businesses in Crisis Be judicious in cutting prices without an established cost advantage Be aware that aggressive moves to wrest market share away from rivals often provoke retaliation in the form of a marketing arms race and/or price wars Strive to open up vary meaningful gaps in quality or service or performance features when pursuing a differentiation strategy