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Strategic Management

Summary of Subject (all weeks)
TMGT601

Dr Mo Kader
0414 653 183
[email protected]

Strategic Management

Strategic Management Basics

Background to strategic management
How managers use assets (and liabilities) to ensure the plan is implemented
Importance of Strategic Management
Why planning?
Why strategy?
Assets versus strategic planning

Strategic Management

The 21st Century Competitive Landscape

Global economy
Technology

Strategic Management

Role of a Manager

Profits
Strategic choice

Strategic Management

Business Operations Resources Tools etc�

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Levels of Strategy

Corporate level strategy: affects the whole firm, complex, expensive, long-term, high-impact, many stakeholders affected (e.g. move to a new country)
Business level strategy: affects one business unit or more, but not the whole firm. For example, closing down the air-conditioning division and leaving the heavy machinery decision or adopting a “cost leadership strategy” (low price). Less impact, less cost, less time.
Functional level strategy: the lowest-level, lowest-impact strategy. Low cost, short time-span and frequent occurrence. For example, changing distribution from the firm’s own stores to third party stores
Sometimes the lines are blurred between these levels of strategy and they may overlap

Strategic Management

Functional Level Strategies

Functional level strategies relate to the different functional areas which a strategic business unit has, such as marketing, production and operations, finance, and human resources. These strategies are formulated by the functional heads along with their teams and are aligned with the business level strategies. The strategies at the functional level involve setting up short-term functional objectives, the attainment of which will lead to the realization of the business level strategy.
For example, the marketing strategy for a coffee business which is following the differentiation strategy may translate into launching and selling a wide variety of coffee variants through company-owned retail outlets.

Strategic Management

Business Level Strategies

Business level strategies are formulated for specific strategic business units and relate to a distinct product-market area. It involves defining the competitive position of a strategic business unit. The business level strategy formulation is based upon the generic strategies of overall cost leadership, differentiation, and focus.
For example, your firm may choose overall cost leadership as a strategy to be pursued in its steel business, differentiation in its tea business, and focus in its automobile business.
Cost Leadership (cost, broad target)
Differentiation (unique, broad target)
Focused cost leadership (cost, narrow target)
Focused differentiation (unique, narrow target)

Strategic Management

Corporate Level Strategies

Corporate level strategy defines the business areas in which your firm will operate. It deals with aligning the resource deployments across a diverse set of business areas, related or unrelated.
Decisions at this level of strategy are very significant, complex, expensive and high-impact
Example: acquisition, take-over, major diversification

Strategic Management

Return on Investment Models

The I/O Model of Above Average Returns
The Resource-Based Model of Above Average Returns

Strategic Management

I/O Model of Above Average Returns

External environment
Industry attraction
Strategy formulation
Assets and skills
Strategy implementation
Superior returns

Strategic Management

Case Study- IBM in Thailand- Return on Investment

Expansion plans for IBM into Thai market in early 2000’s following the dot com boom.
High regulatory expenses at the time
Lower cost to manufacture in China and Malaysia and export, via Singapore and Hong Kong to Thailand
Stopped IBM from investing further in Thailand

Strategic Management

The Resource Based Model of Above Average Returns

Resources
Capability
Competitive advantage
Industry attraction
Strategy formulation
Superior returns

Strategic Management

Case Study-Hilton Resorts- Resources Based Model

Hilton Hotels traditionally only in hotel properties
Expanded into resort properties in 2003
Used Pacific properties in Fiji to enter new short-holiday market in AU and NZ.
This created a higher return on their assets than the original plan of longer holiday stayers

Strategic Management

Vision and Mission

Vision is a picture of what the firm wants to be and what it wants to achieve
Mission specified the business in which the firm intends to compete

Strategic Management

Stakeholders

People who are affected by a firms performance and who have claims on its performance
Include:

- Capital market stakeholders

- Product market stakeholders

- Organisational stakeholders

Strategic Management

Case Study- Chrysler and the US Government Bailout

US Government (USG) a stakeholder in Chrysler
Board representation on Chrysler BOD
Chrysler never thought that the day would come when a USG representative would sit on their board
Push by USG for more fuel efficient cars has impacted Chrysler (USG is stakeholder and regulator at the same time)

Strategic Management

Profit Pools

The job of an Strategic Manager is to create a profit pool (PP). This is the “pool” of sales that contributes to the firms profits. The bigger the PP, the more profitable the firm and the more resilient it is to changes

Strategic Management

Case Study-LVMH Profit Pool

Louis Vuitton purchased Moet Hennessy
LVMH Group largest luxury holdings in the world
Profit pools from luxury items dropped in 2008
Access to watches profit pool expanded by buying TAG Heuer
When successful, Swatch was purchased

Strategic Management

The Strategic Management Process

External environment, internal environment
Strategic intent (fight, hide, watch) + strategic mission (goals this year = mission; goals next year = next year’s mission)
Strategy formulation
Functional level strategy
Business level strategy
Corporate level strategy
Strategic competitiveness (how good the firm is at: fight, hide, watch)

Strategic Management

The Strategic Management Process

Strategic Planning involves long term planning for the direction of the organization
Organizations have a Mission
External Analysis involves analyzing the non-company factors and how they impact the mission and Strategy (e.g. the economy)
Internal Analysis involves analyzing inside-company factors (e.g. level of resources available)

Strategic Management

Case Study- Shanghai Tang

Hong Kong based clothing business
Need to expand
No capital for own stores
Partnership with airports to open stores at international airports
International strategy based on partnership

Strategic Management

Types of Strategies

Intended Strategies may sometimes be realized and sometimes unrealized
Intended strategy leads to deliberate strategy being formulated
Emergent Strategy is “new” strategy that is born through coincidence or other reasons
Some successes occur because of pure coincidence (Serendipity).

Strategic Management

External Environment

Importance
Analysing the external environment
Six segments of the general environment
Five competitive forces
Strategic groups
What firms need to know about their competitors

Strategic Management

External Environment Includes

Industry environment
Competitor environment
Economic factors
Demographic
Socio-cultural
Global
Political
Legal
Technological

Strategic Management

Components of the External Environment Analysis

Scanning –identifying early signals of change
Monitoring- detecting meaning from observation
Forecasting- developing projections
Assessing- determining the timing and importance of changes and trends

Strategic Management

Demographic Segment

Population size
Age structure
Geographic distribution
Income distribution
Ethnic mix

Strategic Management

Case Study-Panasonic Toilets

Large market segment in Japan
Based almost solely on female buyers
Only market is the Japanese market, mainly in Tokyo
Demographic marketing
High profit margins
Panasonic uses demographics for strategic planning

Strategic Management

Economic Segment

Inflation
Interest rates
Trade deficits/surpluses
Budget deficits/surpluses
Personal savings rate
Business savings rate
Gross domestic product

Strategic Management

Case Study-GE Capital

Low interest rates in 2004 created a market for car loans
GE Capital invested in this segment
Sales volumes increased 20% year on year
High interest rates in 2008 led to a reduction in market size
GE pulled out all together from Australia in 2009
GE returned in 2010

Strategic Management

Political/Legal Segment

Competition laws
Taxation laws
Labour laws
Deregulation approaches

Strategic Management

Socio/Cultural Segment

Workforce diversity
Attitudes about the quality of life

Strategic Management

Technological Segment

Product innovation
Application of knowledge
Government sponsorship of research

Strategic Management

Global Segment

Political stability and events
Critical global markets
Newly industrialised countries
Global institutions

Strategic Management

Porters Five Forces Model

The Five (5) Forces Model explains how an industry competes

-Rivalry among established firms

-Risk of threat of new entrants

-Bargaining power of buyers

-Threat of substitute products

-Bargaining power of suppliers

Strategic Management

The Five Forces Model- New Entrants

Threat of new entrants is affected by:

Barriers to entry
Brand loyalty
Absolute cost advantages
Economies of scale
Switching costs
Government regulation

Strategic Management

The Five Forces Model-Established Firms

Rivalry among established firms is affected by:

Concentration of rivalry
Industry growth and demand
Product or service differentiation
Ratio of fixed costs to variable costs
High exit barriers
Diversity of competitors
High strategic stakes

Strategic Management

The Five Forces Model-Power of Buyers

The bargaining power of buyers (is high when)

Few buyers, high purchase
Single buyer, large account
Many small or weak sellers
Standardised item
When suppliers need us to maintain their economies of scale
Buyers buy from multiple source

Strategic Management

The Five Forces Model- Power of Suppliers

Bargaining power of suppliers (is high when)

We need them
There are only a few suppliers
When they have high product differentiation
When they have lots of buyers are who weak
When we need them as part of a broader, interconnected supply chain

Strategic Management

A Sixth Force: Customer Loyalty

Customer loyalty

Same strategic managers argue that customer loyalty can change the Five Forces because customers who are loyal can defy the forces and lift the firm to success

Strategic Management

Strategic Groups

A set of firms emphasising similar strategic dimensions to use a similar strategy
This means that firms may partner to create a “strategic group” to take advantage of opportunities or address threats or shortages in their industry
Example: Airlines (OneWorld alliance)

Strategic Management

Competitor Analysis Components

Future Objectives
Current strategy
Assumptions
Capabilities

Competitor’s Response

Strategic Management

Planning Errors in Strategic Management

Ivory Tower Planning is exclusive to top management. This is a mistake.
Procedural Justice requires us to convince lower level managers that the planning process is fair and just.
The Fit Model of planning tries to achieve a fit between internal resources and the external environment. Hamel and Prahalad have criticized this model as focusing on only the “now”, not on “potential”.

Strategic Management

Case Study HIH Insurance Australia

Senior executives controlled decision making
Limited scope for debate
Lead to Ivory Tower Planning
The firm collapsed and executives penalized

Strategic Management

Looking After Stakeholders

Stakeholders are individuals or groups with an interest in the organization
Corporate Governance is the mechanism used to determine its strategic direction AND ensure it is in line with its stakeholder's interests
There are internal and external stakeholders and both have Contributions and Inducements

Strategic Management

Direction (Vision) of the Company

Vision and Mission
Abells’ Framework (1995) for defining the business (Customer groups, Customer Needs, Distinctive Competencies all overlap to create the Definition of the Business)
Abell emphasizes on Consumer Oriented, not Product Oriented organizations
Values, Goals (long term and short term)

Brownlie, D. (1995). Analytical Frameworks for Strategic Marketing Planning. In Marketing Theory and Practice (pp. 250-291). Palgrave, London.

Strategic Management

Ethics in Overseas Business

Ethics abroad
Culture
Regulatory environment
Non Government Organisations (NGO’s)
Global standards

Strategic Management

Internal Environment Components

Strategic competitiveness
Competitive advantage
Value chain analysis
Sustainable advantage (valuable, rare, costly to imitate, non-substitutable)

Strategic Management

Case Study- Kmart Outsourcing Supply Chain

Kmart outsources its supply chain management
Works with Toll Ipec Transport
Lower costs leading to lower prices
Ability to achieve “Just in Time Delivery”

Strategic Management

Internal Resources

Financial
Organisational
Physical
Technological

Strategic Management

Internal Resources

Human resources
Innovation resources
Reputational resources

Strategic Management

Internal Capabilities and Core Competencies

Capabilities exist when resources have been purposely integrated to achieve a specific task. This means that if the firm is able to use its resources (its core competencies or the things it is good at) properly and to their full potential, it has “capability”, otherwise it doesn’t
Examples of capabilities:

Distribution, HR, MIS, Marketing, Management, Manufacturing, R&D

Strategic Management

Four Criteria for Sustainable Competitive Advantage (internal or external)

Valuable capabilities
Rare capabilities
Costly-to-imitate capabilities
Non-substitutable capabilities

Strategic Management

Case Study- Rolex-Valuable Capabilities- No Rolex Service, Not a Rolex

Rolex imitations high in volume
Perceived high expense of original item
Increase in imitations between 2004-2007
Rolex policy change
Not serviced by Rolex, no longer a Rolex (if services once outside of Rolex, not allowed to be serviced again at Rolex)

Strategic Management

Internal Strategic Factors: Value Chain Analysis

Understanding the parts of the organisation that add value
Primary Activities

Service, Marketing, Logistics, Operations

Support Activities

Infrastructure, HRM, Technology, Procurement

Strategic Management

Outsourcing to increase the Competitive Advantage

The purchase of a value-creating activity from an external supplier

Strategic Management

Customer Relationships as a Factor that Changes the Five Forces

Effective CRM
Reach, richness and affiliation
Who –determining the customers to serve
Customer segmentation
What- determining which customer needs to satisfy
How- determining core competencies for CRM

Strategic Management

Types of Business Level Strategy

Cost Leadership (cost, broad target)
Differentiation (unique, broad target)
Focused cost leadership (cost, narrow target)
Focussed differentiation (unique, narrow target)

Strategic Management

Stuck in the Middle Syndrome

Stuck in the Middle: A description of companies that try to follow both cost-leadership and differentiation strategies simultaneously

Strategic Management

Examples of Value Creating Activities Associated with Cost Leadership

Infrastructure
HRM
Technology
Procurement
Inbound logistics
Operations
Outbound logistics
Marketing and sales
Service

Strategic Management

Risks of Cost Leadership

Process may become obsolete because of competitor innovation
Too much focus on cost reduction versus perceptions
Imitation can occur

Strategic Management

Risks of Differentiation Strategy

Price difference may be too high for customers
Differentiation may become less “value for money” over time
Narrowing of the perception of differentiation

Strategic Management

Integrated Cost Leadership/Differentiation Strategy

It is possible to integrate the two strategies for different products or markets for the firm

Strategic Management

A Model of Competitive Rivalry

Drivers of competitive behaviour, lead to
Competitor analysis, leads to
Action and response, leads to
Outcomes of inter-firm rivalry, leads to
Feedback, leads to
Ability for action and response, leads to
Outcomes (second cycle)

Strategic Management

Competitor Analysis

Market Commonality
Resource Similarity

Strategic Management

Drivers of Competitive Actions and Responses

Awareness
Motivation
Ability
Resource dissimilarity

Strategic Management

Competitive Rivalry

Likelihood of competitor attack depends on:

First mover incentives
Organisational size
Quality (performance, features, flexibility, durability, aesthetics, service, convenience, accuracy, timeliness)

Strategic Management

Likelihood of Response

Type of competitive action
Actor’s reputation
Market dependence (by the firm)

Strategic Management

Competitive Dynamics

Slow cycle markets (imitation slow because of slow moving market)
Standard cycle markets (imitation is moderately costly)
Fast cycle markets (imitation is rapid and inexpensive)

Strategic Management

Levels of Diversification

Low (single business-95% of revenue comes from the main business, dominant business- 75-95%)
Medium (related constrained- less than 70% of the revenue comes from the dominant business and all businesses share common linkages, related linked- as above but shares linkages)
High (less than 70% of revenue comes from the dominant business and no linkages)

Strategic Management

Reasons for Diversification

Value creating (economies of scope, market power, financial economies)
Value-neutral (antitrust regulation, tax laws, low performance, uncertain future cash flows, risk reduction, tangible resources, intangible resources)
Value-reducing (diversifying managerial employment risk, increasing managerial compensation)

Strategic Management

Value-Creating Diversification: Related Constrained and Related Linked Diversification

Operational relatedness- sharing activities
Corporate relatedness- transferring of core competencies
Market power (multi-point competition occurs when two or more diversified firms compete in the same region at the same time, Vertical integration occurs when a company produces its own inputs (backwards integ.) or output distribution (forward integ.)
Simultaneous operational relatedness and corporate relatedness

Strategic Management

Unrelated Diversification

Efficient internal capital market allocation
Restructuring of assets

Strategic Management

Value-Neutral Diversification: Incentives and Resources

Incentives to diversity

Low performance

Uncertain future cash flows

Resources and diversification

Strategic Management

Mergers and Acquisitions

Merger
Acquisition
Take Over

Strategic Management

Reasons for Acquisitions

Increased market power (horizontal acquisition- cost and revenue improvement, vertical acquisition- supply and value chain improvement, related acquisition)
Overcoming entry barriers (cross border acquisitions)
Cost of product development and increased speed to market
Lower risk

Strategic Management

Reasons for Acquisitions- Continued

Increased diversification
Reshaping the firms competitive scope
Learning and developing new capabilities

Strategic Management

Problems in Achieving Acquisition Success

Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Too much diversification
Managers overly focussed on acquisitions
Too large

Strategic Management

Review

Strategy
Ansoff Matrix and BCG Matrix
Levels of strategy
Strategic group
Types of strategies
Porters Five Forces Model
Diversification
Mergers and acquisitions

Strategic Management

Business

Operations

Resources

Tools etc