Strategic Management: School of Business & Management Jaipur National University
Strategic Management: School of Business & Management Jaipur National University
Strategic Management: School of Business & Management Jaipur National University
STRATEGIC MANAGEMENT
UNIT I INTRODUCTION
- Concept
- Meaning of Strategic Management
- Need for Strategic Management
- Role of Strategic Management in Business and Non-business
Organisations
- Organizational Mission, Vision, Objectives, Goals & Ethics
- Strategic Planning Process
- Single Strategic Business Unit
- Multiple Strategic Business Unit
Introduction
We observe from the above definitions that different authors have defined strategic
management in different ways. Note that the definition of Chandler that we have
quoted above is from the early 1960s, the period when strategic management was
being recognized as a separate discipline.
Though this definition is simple, it does not consist of all the elements and does not
capture the Notes essence of strategic management.
The definitions of Fred R. David, Pearce and Robinson, Johnson and Sholes and
Dell, Lumpkin and Taylor are some of the definitions of recent origin. Taken together,
these definitions capture three main elements that go to the heart of strategic
management. The three on-going processes are strategic analysis, strategic
formulation and strategic implementation. These three components parallel the
processes of analysis, decisions and actions. That is, strategic management is
basically concerned with:
l. Analysis of strategic goals (vision, mission and objectives) along with the analysis
of the external and internal environment of the organisation.
2. Decisions about two basic questions: (a) What businesses should we compete in?
(b) How should we compete in those businesses to implement strategies?
Strategic management involves elements geared toward a firm's long term survival
and achievement of management goals. The components of the content of a
strategy making process include a desirable future, resource allocation,
management of the firm-environment and a competitive business ethics. However,
some conflicts may result in defining the content of strategy such as differences in
interaction patterns among associates, inadequacy of available resources and
conflicts between the firm's objectives and its environment.
An increasing number of firms are using strategic management Notes for the
following reasons:
1. It helps the firm to be more proactive than reactive in shaping its own future.
2. It provides the roadmap for the firm. It helps the firm utilize its resources in the
best possible manner.
Case Study
Star Struck
I ridium is named after the 77th element to signify the 77 satellites that were
supposed to beam signals around the world, creating a worldwide mobile satellite
telephone service (MSS). However, things did not work out as planned. Motorola,
Iridium's chief sponsor, has vowed not to invest any more than the $1.6 billions it has
already invested in the venture, unless other investors do so too. Iridium was
chasing a very modest goal in terms of number of subscribers - 27,000 by end of
July, from 10,000 at the end of March. These two events are symptoms of deeper
problems within the Iridium network, as people try to work out what went wrong.
Were its estimates of MSS market (between 32 millions and 45 millions subscribers
within ten years) unrealistic? Or, are Iridium's problems due to poor vision and poor
planning? Mobile telephony, in general, has been a growth market, with subscribers
expected to reach 600 millions within the next two years. MSS providers plan to
capture 2.5% of the market by offering handsets that operate as a land-based
cellular phone and a satellite telephone when cellular service is unavailable. Apart
from business executives, other specialized users include truckers, civil engineers,
field scientists, disaster-relief agencies, news organisations, extractive industries,
and geologists. Shipping and aviation, as well as operations in less developed
countries, which lack traditional telephone infrastructure, are also potential markets.
Yet Iridium has not been able to sign up many subscribers. The technology is quite
sound - the problem has been poor forecasting, marketing, production glitches, and
some unexpected competitive moves. Iridium's market size forecast and value did
not materialize. This may be due to several marketing problems. Iridium's handsets
cost more than $3,000, and call charges range from $2 to $7 a minute. Iridium's
handset is large (7 inches), and weighs 1 pound, limiting its portability. Manufacturing
delays at Motorala and Kyocera left customers waiting to get their telephones. In any
case, its marketing partners, Sprint, and Telecom Italia were not prepared to sell the
telephones. Its generic. "schmoozy" and "generic life-style marketing" (according to
John Richardson, Iridium's new CEO) was not suitable for its specialized target
market. Competitive entry also hurt Iridium's already weak network. Two new
entrants to the MSS market, Global star and ICO have been able to promise the
same service at a lower cost. At a volume of 1 billion minutes per year, for instance,
the cost of a minute using Iridium's system is $1.28, compared to 51 cents a minute
for Global star, and 35 cents for ICO. The difference arises mainly because of
Iridium's numerous satellites and their use of more power to maintain their low earth
orbit. This also shortens their life span to 5 - 7 years. ICO's satellites, on the other
hand, fly about 6000 miles higher in medium-earth orbit and have a life span of 12
years. With Iridium being forced to charge prices far lower than it had planned, and
two low cost operators about to enter the market, Iridium's future is uncertain.
Questions
2. What steps do you think should have been collectively taken by Motorola,
Kyocera, Sprint and Telecom Italia to save Iridium?
The above quotation sums up why today’s decision-makers must plan and manage
strategically. In developing as well as in industrialized countries, the increasingly
rapid nature of change as well as a greater openness in the political and economic
environments, requires a different set of perspective from that needed during more
stable times.
Today, all top companies are involved in strategic management. They are finding
ways to respond to competitors, cope with difficult environmental changes, meet
changing customer needs and effectively use available resources. At a time when
the business environment is changing rapidly, even established firms are paying
more attention to strategy because they may face new competitors who threaten
their core business. Should a firm compete in all areas or concentrate on one area?
Should a company try to extend the brand to even more diverse areas of activity, or
would it gain more by building profits in the existing areas, and achieving more
synergies across the group? Should the company continue the current strategy as it
is now, or would it initiate a radical review of its strategy? These are just a few
examples of the strategic part of the management tasks.
It is important to note that strategic planning goes far beyond the planning process.
Unlike traditional planning, strategic planning involves a long-range planning under
conditions of uncertainty and complexity Such a planning involves:
l. Strategic thinking
2. Strategic decision-making
3. Strategic approach
2. It provides a link between long and short terms: Planning establishes a means of
coordination between strategic objectives and the operational activities that support
the objectives.
(f) Increased interaction among managers at all divisional and functional levels
2. A negative effect may arise due to the non-fulfillment of the expectations of the
participating managers, leading to frustration and disappointment.
As quoted by Fred R. David, some pitfalls to watch for and avoid in strategic
planning are:
4. Failing to communicate the strategic plan to the employees, who continue working
in the dark
5. Top managers making many intuitive decisions that conflict with the formal plan
13. Being so formal in planning that flexibility and creativity are stifled.
CASESTUDY
Formulating a Strategy: Following Apple Turnaround
The firm's most important resources and capabilities are those which are durable,
difficult to identify and understand, imperfect transferable, not easily replicated, and
in which the firm possesses clear ownership. These are the company's 'most
important assets' and need to be protected; and they play a pivotal role in the
competitive strategy which the company pursues. The essence of strategy
formulation, then, is to design a strategy that makes the most effective use of these
core resources and capabilities. Consider, for example, the remarkable turnaround of
Apple, the computer company behind the Macintosh computers, between 2000 to
date. Fundamental was Steve Job's recognition that the company's sole durable,
non-transferable, irreplicable asset was Apple image and the loyalty that
accompanied that image. In virtually every other area of competitive
performance-production cost, quality, product and process technology, and global
market scope-Apple was greatly inferior to its other rivals, such as IBM. Apple's only
opportunity for survival was to pursue a strategy founded upon Apple's image
advantage, while simultaneously minimising Apple' disadvantages in other
capabilities. Apple' new marketing strategy involved extending the appeal of the
Apple image of individuality from its traditional customer group (tech savvy, graphic
designers) to more a general, young professional types. Protection of the Apple
name by means of tougher controls over dealers was matched by wider exploitation
of the Apple name through entry in other industries such as the portable music
business. Apple's share of the computer market went from 15% in 1985 to 4% in
2005 and lost around $700 million in only three months in 1997. However, thanks to
the iPod and to the Apple's iTunes music stores, its shares grew 90% between 2001
up until today, i.e. from a mere $7/share. Apple is today the premier provider of MP3
players. Designing strategy around the most critically important resources and
capabilities may imply that the firm limits its strategic scope to those activities where
it possesses a clear competitive advantage. The principal capabilities of Apple, are in
design and new products development; it lacked both the manufacturing capabilities
to compete effectively in the world's computer market. Apple's turnaround from year
2000 followed it decision to specialise upon design and new product development.
The ability of a firm's resources and capabilities to support a sustainable competitive
advantage is essential to the time frame of a firm's strategic planning process. If a
company's resources and capabilities lack durability or are easily transferred or
replicated, then the company must either adopt a strategy of short-term harvesting or
it must invest in developing new sources of competitive advantage. These
considerations are critical for small technological start-ups where the speed of
technological change may mean that innovations offer only temporary competitive
advantage. The company must seek either to exploit its initial innovation before it is
challenged by stronger, established rivals or other start-ups, or it must establish the
technological capability for a continuing stream of innovations. The main issue for
Apple is to make sure that it takes advantage of this window of opportunity. Because
there are tougher competitors down the road and the more money it makes, the
more companies will enter the market making harder for Apple to sustain this new
found competitive advantage. In industries where competitive advantages based
upon differentiation and innovation can be imitated (such as financial services,
retailing, fashion clothing, toys), firms have a brief window of opportunity during
which to exploit their advantage before imitators erode it away. Under such
circumstances firms must be concerned not with sustaining the existing advantages,
but with creating the flexibility and responsiveness that permits them to create new
advantages at a faster rate than the old advantages are being eroded by
competition.
* source
:http://www.bestcxo.com/strategic-management/formulating-a-strategy-following-appl
e-turnaround/
Mission
“A mission statement is an enduring statement of purpose”. A clear mission
statement is essential for effectively establishing objectives and formulating
strategies.
Defining Mission
Example:
3. ONGC: To stimulate, continue and accelerate efforts to develop and maximize the
contribution of the energy sector to the economy of the country.
6. McDonald: To offer the customer fast food prepared in the same high quality
worldwide, tasty and reasonably priced, delivered in a consistent low key décor and
friendly manner.
Most of the above mission statements set the direction of the business organisation
by identifying the key markets which they plan to serve.
Missions have one or more of the five distinct and identifiable components:
1. Customers
2. Products or services
3. Markets
5. Philosophy
4. It serves as a focal point for individuals to identify with the organisation’s purpose
and direction.
6. It specifies organisational purpose and then helps to translate this purpose into
objectives in such a way that cost, time and performance parameters can be
assessed and controlled.
2. They promote a sense of shared expectations among all levels and generations of
employees.
3. They consolidate values over time and across individuals and interest groups.
4. They project a sense of worth and intent that can be identified and assimilated by
company outsiders.
3. Broad, but not too general: A mission statement should achieve a fine balance
between specificity and generality.
5. It should arouse positive feelings and emotions of both employees and outsiders
about the organisation.
6. Reflect the firm’s worth: A mission statement should generate the impression that
the firm is successful, has direction and is worthy of support and investment.
8. Current: A mission statement may become obsolete after some time. As Peter
Drucker points out, “Very few mission statements have anything like a life
expectancy of thirty, let alone, fifty years. To be good enough for ten years is
probably all one can normally expect”. Changes in environmental factors and
organisational factors may necessitate modification of the mission statement.
10. Enduring: A mission statement should continually guide and inspire the pursuit of
organisational goals. It may not be fully achieved, but it should be challenging for
managers and employees of the organisation.
12. Basis for guidance: Mission statement should provide useful criteria for selecting
a basis for generating and screening strategic options.
13. Customer orientation: A good mission statement identifies the utility of a firm’s
products or services to its customers, and attracts customers to the firm
14. A declaration of social policy: A mission statement should contain its philosophy
about Notes social responsibility including its obligations to the stakeholders and the
society at large.
15. Values, beliefs and philosophy: The mission statement should lay emphasis on
the values the firm stands for; company philosophy, known as “company creed”,
generally accompanies or appears within the mission statement.
1. Basic product or service: What are the firm’s major products or services?
5. Concern for survival, growth and profitability: Is the firm committed to growth and
financial soundness?
6. Company philosophy: What are the basic beliefs, values, aspirations and ethical
priorities of the firm?
8. Concern for public image: Is the firm responsive to social, community and
environmental concerns?
9. Concern for employees: Are employers considered a valuable asset of the firm?
Company Self-concept Both individuals and companies have a crucial need to know
themselves. The ability of a company to survive in a highly competitive environment
depends on its realistic evaluation of its strengths and weaknesses. Description of
the firm’s self-concept provides a strong impression of the firm’s self-image. Public
Image Mission statements should reflect the public expectations of the firm since this
makes achievement of the firm’s goals more likely.
Example:
“Johnson & Johnson make safe products” reflects the customer expectations of the
company in making safe products. Sometimes, a negative public image can be
corrected by emphasizing the beneficial aspects in the mission statements.
Concern for Employees Mission statements should also emphasize their concern for
improvement of quality of work life, equal opportunity for all, measures for employee
welfare etc. Customers “The customer is our top priority” is a slogan that would be
claimed by most of the businesses the world over. A focus on customer satisfaction
causes managers to realize the importance of providing an excellent customer
service. So, many companies have made customer service a key component of their
mission statement. Quality The emphasis on quality has received added importance
in many corporate philosophies.
Example:
1. In many cases, the mission is inherited i.e. the founder establishes the mission
which may remain unchanged down the years or may be modified as the conditions
change.
2. In some cases, the mission statement is drawn up by the CEO and board of
directors or a committee of strategists constituted for the purpose.
For example
● Mahindra and Mahindra, workshops were conducted at two levels within the
organisation with corporate planning group acting as facilitators.
● The State Bank of India went one step ahead by inviting labour unions to
partake in the exercise.
● Satyam Computers went one more step ahead by involving their joint venture
companies and overseas clients in the process.
! Caution Although many organisations have mission statements, their value has
sometimes been questioned. Kay (1996) asserts that visions or missions are
indicative of a 'wish - driven strategy' that fails to recognize the limits to what
might be possible, given finite organisational resources. He cites the case of
Groupe Bull, a French computer company, which for many years sought to
challenge the supremacy of IBM, particularly in the large US market. After several
attempts, Bull finally conceded that its mission was faulty. Kay's analysis was that
for 30 years Groupe Bull was: Driven not by an assessment of what it was, but by
a vision of what it would like to be. Throughout, it lacked the distinctive
capabilities that would enable it to realize that vision. Bull epitomizes wish-driven
strategy, based on aspiration, not capability (Kay, 1996). In a study of some
organisations, Leach (1996) found that mission statements and strategic vision
had become fashionable. While in some organisations, mission statements had
made a real impact in clarifying organisational values and culture, others
regarded them only as symbolic public relations documents that had little effect
as a management tool. The dangers are not just that missions are unrealistic and
fail to recognize an organisation's capabilities (as in the case of Groupe Bull), but
also that management fails to develop a belief in the mission statement
throughout the organisation. People come to believe in and act upon the mission
statement only when they see others doing so, especially senior management
and other influential players. The ideas of the mission statement need to be
cascaded through the structure to ensure a link between mission and day-to-day
actions.
1. The mission statement is clear and understandable to all parties involved. The
organisation can articulate and relate to it.
3. The mission statement clearly specifies the purpose of the organisation. This
includes a clear statement about:
(a) What needs the organisation is attempting to fill (not what products or services
are offered)?
(c) How the organisation plans to go about its business; that is, what its primary
technologies are?
4. The mission statement should have a primary focus on a single strategic thrust.
7. The mission statement should serve as a template and be the same means by
which the organisation can make decisions.
8. The mission statement must reflect the values, beliefs and philosophy of
operations of the organisation.
Task : Find out the mission statement of any one service company. Do they really
work the way their mission says?
Vision Mission
1. A mental image of a possible and 1. Enduring statement of philosophy, a
desirable future state of the organization.
creed statement.
2. A dream. 2. The purpose or reason for a firm’s
existence.
3. Broad. 3. More specific than vision
4. Answers the question “what we want 4. Answers the question “what is our
to become?” business”
Goals
The terms “goals and objectives” are used in a variety of ways, sometimes in a
conflicting sense. The term “goal” is often used interchangeably with the term
“Objective”. But some authors prefer to differentiate the two terms. A goal is
considered to be an open-ended statement of what one wants to accomplish with no
quantification of what is to be achieved and no time criteria for its completion. For
example, a simple statement of “increased profitability” is thus a goal, not an
objective, because it does not state how much profit the firm wants to make.
Objectives are the end results of planned activity. They state what is to be
accomplished by when and should be quantified. For example, “increase profits by
10% over the last year” is an objective. As may be seen from the above, “goals”
denote what an organisation hopes to accomplish in a future period of time. They
represent a future state or outcome of the effort put in now. “Objectives” are the ends
that state specifically how the goals shall be achieved. In this sense, objectives make
the goals operational. Objectives are concrete and specific in contrast to goals which
are generalized. While goals may be qualitative, objectives tend to be mainly
quantitative, measurable and comparable.
Goals Objectives
General Specific
Qualitative Quantative
Broad organization–wide target Narrow targets set by operating divisions
Long term results Immediate, short term results
Some of the areas in which a company might establish its goals and objectives are:
According to Charles Perrow, the following are the important operational goals:
2. Output Goals: Output goals are related to the identification of customer needs.
Issues like what markets should we serve, which product lines should be followed,
etc. are examples of output goals.
3. System Goals: These goals relate to the maintenance of the organisation itself.
Goals like growth, profitability, stability etc. are examples.
5. Derived Goals: These goals relate to derived or secondary areas like contribution
to political Notes activities, promoting social service institutions etc.
Objectives
Objectives are the results or outcomes an organisation wants to achieve in pursuing
its basic mission. The basic purpose of setting objectives is to convert the strategic
vision and mission into specific performance targets.
1. Specific
2. Quantifiable
3. Measurable
4. Clear
5. Consistent
6. Reasonable
7. Challenging
Nature of Objectives
The following are the characteristics of objectives: Hierarchy of Objectives In a multi
– divisional firm, objectives should be established for the overall company as well as
for each division. Objectives are generally established at the corporate, divisional
and functional levels, and as such, they form a hierarchy. The zenith of the hierarchy
is the mission of the organisation. The objectives at each level contribute to the
objectives at the next higher level. Long-range and Short-range Objectives
Organisations need to establish both long-range and short-range objectives
(Long–range means more than one year, and short–range means one year and
less.) Short-range objectives spell out the near – term results to be achieved. By
doing so, they indicate the speed and the level of performance aimed at each
succeeding period. Short – range objectives can be identical to long– range
objectives if an organisation is performing at the targeted long-term level (for
example, 20% growth - rate every year). The most important situation where
short-range objectives differ from the long-range objectives occurs when managers
cannot reach the long-range target in just one year, and are trying to elevate
organisational performance. Short–range objectives (one – year goals) are the
means for achieving long range objectives. A company that has an objective of
doubling its sales within five years can’t wait until the third or fourth year of its
five-year strategic plan. Short range objectives then serve as stepping-stones or
milestones. Multiplicity of Objectives Organisations pursue a number of objectives.
At every level in the hierarchy, objectives are likely to be multiple.
Example: The marketing division may have the objective of sales and distribution of
products. This objective can be broken down into a group of objectives for the
product, distribution, research and promotion activities. To describe a single, specific
goal of an organisation is to say very little about it. It turns out that there are several
goals involved. This may be due to the fact that the enterprise has to meet internal
as well as external challenges effectively. Moreover, no single objective can place
the organisation on a path of prosperity and progress in the long run. However, an
organisation should not set too many objectives. If it does, it will lose focus. Too
many objectives have a number of problems.
(b) Minor objectives get highlighted to the detriment of major objectives There is no
agreement to the number of objectives that a manager can effectively handle. But, if
there are so many that none receives adequate attention, the execution of objectives
becomes ineffective; there is a need to be cautious. It will be wise to identify the
relative importance of each objective, in case the list is not manageable.
Business Vision
The first task in the process of strategic management is to formulate the
organisation’s vision and mission statements. These statements define the
organisational purpose of a firm. Together with objectives, they form a “hierarchy of
goals.”
Hierarchy of Goals
- Vision
- Mission
- Goals
- Objectives
- Plans
Vision can be defined as “a mental image of a possible and desirable future state of
the organisation” (Bennis and Nanus). It is “a vividly descriptive image of what a
company wants to become in future”. Vision represents top management’s
aspirations about the company’s direction and focus. Every organisation needs to
develop a vision of the future. A clearly articulated vision moulds organisational
identity, stimulates managers in a positive way and prepares the company for the
future.
“The critical point is that a vision articulates a view of a realistic, credible, attractive
future for the organisation, a condition that is better in some important ways than
what now exists.” Vision, therefore, not only serves as a backdrop for the
development of the purpose and strategy of a firm, but also motivates the firm’s
employees to achieve it.
1. Core ideology
2. Envisioned future
Core ideology is based on the enduring values of the organisation (“what we stand
for and why we exists”), which remain unaffected by environmental changes.
Envisioned future consists of a long-term goal (what we aspire to become, to
achieve, to create”) which demands significant change and progress.
Defining Vision
Vision has been defined in several different ways. Richard Lynch defines vision as “
a challenging and imaginative picture of the future role and objectives of an
organisation, significantly going beyond its current environment and competitive
position.” E1-Namaki defines it as “a mental perception of the kind of environment
that an organisation aspires to create within a broad time horizon and the underlying
conditions for the actualization of this perception”. Kotter defines it as “a description
of something (an organisation, corporate culture, a business , a technology, an
activity) in the future.” sets out a range of definitions of organisational vision. Most
refer to a future or ideal to which organisational efforts should be directed. The vision
itself is presented as a picture or image that serves as a guide or goal. Depending on
the definition, it is referred to as inspiring, motivating, emotional and analytical. For
Boal and Hooijberg, effective visions have two components:
Johnson: Vision is "clear mental picture of a future goal created jointly by a group
for the benefit of other people, which is capable of inspiring and motivating those
whose support is necessary for its achievement".
Kirkpatrick et al: Vision is "an ideal that represents or reflects the shared values to
which the organisation should aspire".
Thornberry: Vision is "a picture or view of the future. Something not yet real, but
imagined. What the organisation could and should look like. Part analytical and part
emotional".
Shoemaker: Vision is "the shared understanding of what the firm should be and how
it must change".
Kanter et al: Vision is "a picture of a destination aspired to, an end state to be
achieved via the change. It reflects the larger goal needed to keep in mind while
concentrating on concrete daily activities".
Stace and Dunphy: Vision is "an ambition about the future, articulated today, it is a
process of managing the present from a stretching view of the future".
Nature of Vision
A vision represents an animating dream about the future of the firm. By its nature, it
is hazy and vague. That is why Collins describes it as a “Big hairy audacious goal”
(BHAG). Yet it is a powerful motivator to action. It captures both the minds and
hearts of people. It articulates a view of a realistic, credible, attractive future for the
organisation, which is better than what nowexists. Developing and implementing a
vision is one of the leader’s central roles. He should not only have a “strong sense of
vision”, but also a “plan” to implement it.
Example:
1. Henry Ford’s vision of a “car in every garage” had power. It captured the
imagination of others and aided internal efforts to mobilize resources and make it a
reality. A good vision always needs to be a bit beyond a company’s reach, but
progress towards the vision is what unifies the efforts of company personnel.
2. One of the most famous examples of a vision is that of Disneyland “To be the
happiest place on earth”. Other examples are:
(a) Hindustan Lever: Our vision is to meet the everyday needs of people everywhere.
(b) Microsoft: Empower people through great software any time, any place and on
any device.
3. Actionability means the ability of people to see in the vision, actions that
they can take that are relevant to them.
4. Articulation means that the vision has imagery that is powerful enough to
communicate clearly a picture of where the organisation is headed.
2. It must be graphic: It must paint a picture of the kind of company the management
is trying to create.
3. It must be directional: It must say something about the company’s journey or
destination.
7. It must be flexible: It must allow company’s future path to change as events unfold
and circumstances change.
Importance of Vision
Having a strategic vision is linked to competitive advantage, enhancing
organisational performance, and achieving sustained organisational growth. Clear
vision enable firms to determine how well organisational leaders are performing and
to identify gaps between the vision and current practices. Organisations preparing for
transformational change regularly undertake “envisioning” exercises to help guide
them into the future. The visioning process itself can enhance the self-esteem of the
people who participate in it because they can see the potential fruits of their labours.
4. A desirable challenge: A vision provides a desirable challenge for both senior and
junior managers.
3. It serves as a tool for maximizing the support of organisation members for internal
changes.
Vision poses a challenge and addresses the human need for something to strive for.
It can depict an image of the future that is both attractive and worthwhile.
Although the idea of vision is widely accepted as a useful backdrop for the
development of purpose and strategy, there is a problem. Vision has little meaning
unless it can be successfully communicated to those working in the organisation,
since these are the people who will have to realize it.
Advantages of Vision
6. A good vision is competitive, original and unique. It makes sense in the market
place.
7. A good vision represents integrity. It is truly genuine and can be used for the
benefit of people.
A.D. Jick observes that a vision is also likely to fail when leaders spend 90 percent
of their time articulating it to their staff and only 10 percent of their time in
implementing it. There are two other reasons for vision failure:
Nutt and Backoff identify three different processes for crafting a vision:
1. Leader-dominated Approach: The CEO provides the strategic vision for the
organisation. This approach is criticized because it is against the philosophy of
empowerment, which maintains that people across the organisation should be
involved in processes and decisions that affect them.
2. Pump-priming Approach: The CEO provides visionary ideas and selects people
and groups within the organisation to further develop those ideas within the broad
parameters set out by the CEO.
Table 1.1 summarizes the steps involved in each of the above elements of strategic
management.
The above steps can also be depicted as a series of processes involved in strategic
management.
The seven steps in the above model of strategy process fall into three broad phases
– formulation, implementation and evaluation – though in practice the three phases
interact closely.
Caselet
- Telecom Growth and Tata Strategic
*Source: tsmg.com
Responding to what Microsoft perceives as serious threats, the company changed its
"PCcentric" vision statement to one that embraces the impact of the Internet on
technology. Specifically the shift is from "a computer on every desk and in every
home" to "empower people through great software any time, any place and on any
device". The most serious threat is the decreased need for windows' software and
PCs as developers create programmes accessible via web browsers. While the
number of developers writing for Windows is currently stable, the percentage
targeting the web have increased from21% to 38% in the past year. Microsoft has
also introduced a pop-up notes feature in their online MSN, that is compatible with
and competes with AOl:s instant messaging (IM) feature (Wall Street Journal, July
29, 19990). AOL has blocked Microsoft's "hacking" into their IM feature, as this
technology is currently" closed". Microsoft and other Internet service providers such
as Yahoo and Prodigy are pursuing AOL to work with them and create interoperable
systems (Wall Street Joumal, July 26, 1999b). However, Microsoft continues to adapt
its software to enable its Hotmail subscribers to continue instant communication over
the Internet-in line with its new vision. The new corporate vision also indicates
Microsoft's intentions to take advantage of new opportunities. Consumers are using
their PCs and the Internet to share photography and sample new music. The
Windows operating system will integrate digital photography and music, technology,
and online services into Windows (Wall Street Journal, July 26, 1999c.) While the
company is still under anti-trust scrutiny, they hope to position product integration as
a competitive response to changing industries and markets. Clearly, their new vision
demands such actions.
KEYWORDS
Generative Decisions: decisions that are taken infrequently but promptly when
needed at any point of time
Plan: A set of intended actions, through which one expects to achieve a goal.
Strategic Choice: choice of course of action given the environment, mission and
capabilities
6. The first step in the strategic management process is to develop the corporate
......................... and .........................
10. When a strategy becomes internalized into a corporate culture, it can lead to
.........................
13. The real strategic goals are realized only along with the analysis of the
......................... and ......................... environment of the organisation.
17. The most wonderful strategy in the history of the world is useless if not
..................... successfully.
20. Corporate vision is a short, succinct, and inspiring statement of what the
organisation intends to ................. and to .................
Review Questions
8. Have you ever challenged, shaken old work methods? What problems did you
encounter? Did you overcome them? How? If no, what were the reasons for their
being insurmountable?
9. With reference to a day's work, what steps do you take to organise and
prioritize your tasks?
10. Describe a specific instance, in a group situation, where you made your views
known about an issue important to yourself. What was the issue, and why was it
crucial?
11. Outline in very broad terms how you would create a strategy for say, a public
interest campaign.
UNIT II
THE EXTERNAL AND INTERNAL ENVIRONMENT
Concept of Environment
Environment literally means the surroundings, external objects, influences or
circumstances under which someone or something exists. The environment of any
organisation is “the aggregate of all conditions, events and influences that surround
and affect it.” Davis, K, The Challenge of Business, (New York: McGraw Hill, 1975),
p. 43.
Environment refers to all external forces which have a bearing on the functioning of
business. Jauch and Gluecke has defined environment as “The environment
includes factors outside the firm which can lead to opportunities or a threat to the
firm. Although there are many factors the most important of the sectors are
socio-economic, technological, supplier, competitor and govt.” The recent changes in
tariff rates have changed the toy industry of India with the market now being
dominated by Chinese products. A slight change in the Reserve Bank of India’s
monetary policy can increase or decrease interest rates in the market. A slight shift
in the government’s fiscal policy can shift the whole demand curve towards the right
or the left.
Example: Hindustan Lever Limited (HLL) took advantage of the new takeover and
merger codes and acquired brands like Kissan from the UB group, TOMCO (Tata Oil
Mills Company) and Lakme from Tata and Modern Foods from the government,
besides many other small takeovers and mergers. The new moguls of the Indian
business are those who predicted the changes in the environment and reacted
accordingly. Azim Premji of Wipro, Narayana Murthy of Infosys, Subhash Goyal of
ZEE, the Ambanis of Reliance, L.N. Mittal of Mittal Steel, Sunil Mittal of Bharti
Telecom are some of them.
Even a small businessman who plans to open a small shop as a general merchant in
his town needs to study the environment before deciding where he wants to open his
shop, the products he intend to sell and what brands he wants to stock. The relation
between a business and an environment is not a one way affair. The business also
equally influences the external environment and can bring about changes in it.
Powerful business lobbies for instance, actively work towards changing government
policies. The business environment is not all about the economic environment but
also about the social and political environment. Politically, after the Congress
government came to power at the center with the support of the CPI in May 2004,
the whole process of disinvestments took a Uturn. Similarly, a new sociological order
in India today has created a market for fast foods, packaged foods, multiplexes,
designer names, Valentine day gifts and presents, and gymnasiums and clubs etc.
3. Environment is multi -faceted: The same environmental trend can have different
effects on different industries. For instance, GATS is an opportunity for some
companies but a threat for others.
5. Its impact on different firms with in the same industry differs: A change in
environment may have different bearings on various firms operating in the same
industry. In the pharmaceutical industry in India, for instance, the impact of the new
IPR (Intellectual Property Rights) law will different for research-based pharmacy
companies such as Ranbaxy and Dr. Reddy’s Lab and will be different for smaller
pharmacy companies.
6. It may be an opportunity as well as a threat to expansion: Developments in
the general environment often provide opportunities for expansion in terms of both
products and markets.
The word ‘personnel’ refers to ‘the human resource’ of an organization, i.e., the
employees. Thus Human Resource Management is often referred to as Personnel
Management (though there are conceptual differences between the two). To define
it, “Personnel management is concerned with all aspects of managing the human
resources of an organization. More specifically, personnel management involves
determining the organization’s need of human resources, recruiting and selecting the
best available employees, developing, counselling and rewarding employees, acting
as a liaison with unions and government organizations and handling other matters
related to the well being of employees.” Each of these functions is necessary to
some degree irrespective of nature and size of the organization. That is why, in most
of the organizations, a separate department known as Personnel/ Human Resources
Department is created for the effective performance of these functions.
Human Resource Management is also concerned with the human and social
implications of change in internal organization and methods of working and of
economic and social changes in the community”.
Management must have the support of all employees. In an informative society,
human resources are at the cutting edge. And it means that human resource
professionals are becoming much more important in their organization.
Currently, many companies recognize the growing importance of their human
resources, but a large number are conceptualizing them in strategic terms-in ways to
gain a competitive advantage. But, many companies forego the opportunity to seize
competitive advantage through human resource practice initiatives.
Jucius Michael calls these resources, ‘human factors’, which refer to “a whole
consisting of inter-related, interdependent and interacting physiological,
psychological, sociological and ethical components.” Thus, human resources are
multi-dimensional in nature. People working in the organization have different needs
at different times. These needs may be physiological (water, food, ventilation, etc),
social (sense of affiliation, belongingness etc.) and psychological (motivation,
counselling, guidance, supervision, etc).
This definition reveals that personnel or human resource (HR) management is that
aspect of management, which deals with the planning, organizing, directing and
controlling the personnel functions of the enterprise.
This definition is a comprehensive one and covers both the management functions
and the operative functions. The purpose of all these functions is to assist in the
achievement of basic organizational, individual and societal goals.
DIFFERENCE BETWEEN PERSONNEL MANAGEMENT AND HRM
As in any other discipline, there is a problem of semantics with HRM too. First, we
have two terms, namely personnel management (PM) and HRM. Between these two
terms there is a basic difference, and it is important to understand what it is.
(v) Continuous Process: Personnel management is not a ‘one shot’ function. It must
be performed continuously if the organizational objectives are to be achieved
smoothly. To quote G.R. Terry. “The personnel function cannot be turned on and off
like water from a faucet; it cannot be practiced only one hour each day or one day a
week. Personnel management requires a constant alertness and awareness of
human relations and their importance in everyday operations”.
(i) Uncertain Future: The future of an enterprise in any country is uncertain, i.e.,
political, cultural, technological changes takes place every day. This affects the
employment situation. Accordingly the company may have to appoint or remove
people. Therefore, HRM can only be a guiding factor. One cannot totally rely on it
and perform every action according to it.
(iii) Problem of Surplus Staff: HRM gives a clear cut solution for the excess staff, i.e.,
termination, laying off and VRS. However when certain employees are laid off it
affects the psyche of the existing employees, and they start feeling insecure,
stressed out and lose faith in the company. This is a limitation of HRM, i.e., it does
not provide alternative solutions like re-training so that employees need not be laid
off by the company.
(iv) Time Consuming: HRM collects information from all departments, regarding
demand and supply of personnel. This information is collected in detail and each and
every job is considered. Therefore, the activity takes up a lot of time.
(v) Expensive Process: The solution provided by the process adopted by the HRM
incurs expenses like VRS, overtime, etc. Company has to spend a lot of money in
carrying out these procedures. Hence, we can say the process is expensive.
ROLE OF PERSONNEL MANAGER IN AN ORGANIZATION
In most of the big enterprises, personnel department is set up under the leadership
of personnel manager who has specialised knowledge and skills. The personnel
manager performs managerial as well as operative functions. Since he is a manager,
he performs the basic functions of management, like planning, organising, directing
and controlling in order to manage his department. He has to also perform certain
operative functions of recruitment, selection, training, placement, etc., which the
other line managers may entrust him with. He has to play multiple roles in the
effective management of human resources and in improving human relations in the
organization. Ideally, the personnel manager should concentrate on drawing
managerial attention to human problems. Just as finance assesses costs, marketing
emphasizes customers, personnel is people-centered. Success of a
Internal Resources
The Five Forces model developed by Michnal E. Porter has been the most
commonly used analytical tool for examining competitive environment. According to
this model, the intensity of competition in an industry depends on five basic forces.
Each of these forces affects a firm’s ability to compete in a given market. Together,
they determine the profit potential for a particular industry. To understand industry
competition and profitability, one must analyze the industry’s underlying structure in
terms of the five forces.
Porter argues that the stronger each of these forces are, the more limited is the
ability of established companies to raise prices and earn greater profits. With Porter’s
framework, a strong competitive force can be regarded as a threat because it
depresses profits. A weak competitive force can be viewed as an opportunity
because it allows a company to earn greater profits. The strength of the five forces
may change with time as industry conditions change. For example, in industries such
as airlines, textiles and hotels, where these forces are intense, almost no company
earns attractive returns on investment. In pharmaceuticals and toiletries, where
these forces are benign, many companies earn attractive profits.
*** Understanding the competitive forces, and their underlying causes, reveals the
roots of an industry’s current profitability, while providing a framework for anticipating
and influencing competition and profitability over time. Understanding industry
structure is also essential to effective strategic positioning. Defending against the
competitive forces and shaping them in a company’s favour are crucial to strategy.
Case Study
IKEA: Earning through Five Forces National Competitive Advantage of IKEA IKEA
Group, a Swedish company founded in 1943 with its headquarters in Denmark, is a
multinational operator of a chain of stores for home furnishing and furniture. It is the
world's largest furniture retailer, which specializes, in stylish but inexpensive
Scandinavian designed furniture. At the end of 2005, the IKEA Group of Companies
had a total of 175 stores in 31 countries. In addition, there are 19 IKEA stores owned
and run by franchisees, outside the IKEA Group, in 12 countries. During the IKEA
financial year 2004-2005, 323 million people visited our IKEA stores around the
world. In Sweden, nature and the home both play a big part in people's lives. In fact,
one of the best ways to describe the Swedish home furnishing style is to describe
nature – full of light and fresh air, yet restrained and unpretentious. To match up, the
artists Carl and Karin Larsson combined classical influences with warmer Swedish
folk styles. They created a model of Swedish home furnishing design that today
enjoys world-wide renown. In the 1950s the styles of modernism and functionalism
developed at the same time as Sweden established a society founded on social
equality. The IKEA product range – modern but not trendy, functional yet attractive,
human-centered and child-friendly – carries on these various Swedish home
furnishing traditions. The IKEA Concept, like its founder, was born in Småland. This
is a part of southern Sweden where the soil is thin and poor. The people are famous
for working hard, living on small means and using their heads to make the best
possible use of the limited resources they have. This way of doing things is at the
heart of the IKEA approach to keeping prices low. IKEA was founded when Sweden
was fast becoming an example of the caring society, where rich and poor alike were
well looked after. This is also a theme that fits well with the IKEA vision. In order to
give the many people a better everyday life, IKEA asks the customer to work as a
partner. The product range is child-friendly and covers the needs of the whole family,
young and old. So together we can create a better everyday life for everyone. In
addition to working with around 1,800 different suppliers across the world, IKEA
produces many of its own products through sawmills and factories in the IKEA
industrial group, Swedwood. Swedwood also has a duty to transfer knowledge to
other suppliers, for example by educating them in issues such as efficiency, quality
and environmental work. Swedwood has 35 industrial units in 11 countries.
Purchasing: IKEA has 42 Trading Service Offices (TSO's) in 33 countries. Proximity
to their suppliers is the key to rational, long-term co-operation. That's why TSO
co-workers visit suppliers regularly to monitor production, test new ideas, negotiate
prices and carry out quality audits and inspections. Distribution: The route from
supplier to customer must be as direct, cost-effective and environmentally friendly as
possible. Flat packs are an important aspect of this work: eliminating wasted space
means we can transport and store goods more efficiently. Since efficient distribution
plays a key role in the work of creating the low price, goods routing and logistics are
a focus for constant development. The IKEA business idea is to offer a wide range
of home furnishings with good design and function at prices so low that as many
people as possible will be able to afford them. And still have money left! The
company targets the customer who is looking for value and is willing to do a little bit
of work serving themselves, transporting the items home and assembling the
furniture for a better price. The typical IKEA customer is young low to middle income
family. The Competition Advantage: The Competition Advantage Strategy of IKEA's
product is reflected through IKEA's success in the retail industry. It can be attributed
to its vast experience in the retail market, product differentiation, and cost leadership.
IKEA Product Differentiation: A Wide Product Range The IKEA product range is wide
and versatile in several ways. First, it's versatile in function. Because IKEA think
customers shouldn't have to run from one small specialty shop to another to furnish
their home, IKEA gather plants, living room furnishings, toys, frying pans, whole
kitchens – i.e., everything which in a functional way helps to build a home – in one
place, at IKEA stores. Second, it's wide in style. The romantic at heart will find
choices just as many as the minimalist at IKEA. But there is one thing IKEA don't
have, and that is, the far-out or the over-decorated. They only have what helps build
a home that has room for good living. Third, by being coordinated, the range is wide
in function and style at the same time. No matter which style you prefer, there's an
armchair that goes with the bookcase that goes with the new extending table that
goes with the armchair. So their range is wide in a variety of ways. Cost Leadership:
A wide range with good form and function is only half the story. Affordability has a
part to play – the largest part. A wide range with good form and function is only half
the story. Affordability has a part to play – the largest part. And the joy of being able
to own it without having to forsake everything else. And the customers help, too, by
choosing the furniture, getting it at the warehouse, transporting it home and
assembling it themselves, to keep the price low. Questions 1. Do you think that IKEA
has been successful to utilize Porter's Five force analysis? Give reasons. 2. Where
do you think can IKEA improve?
SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis
is a widely used framework to summaries a company’s situation or current position.
Any company undertaking strategic planning will have to carry out SWOT analysis:
establishing its current position in the light of its strengths, weaknesses,
opportunities and threats. Environmental and industry analyses provide information
needed to identify opportunities and threats, while internal analysis provides
information needed to identify strengths and weaknesses. These are the
fundamental areas of focus in SWOT analysis. SWOT analysis stands at the core of
strategic management. It is important to note that strengths and weaknesses are
intrinsic (potential) value creating skills or assets or the lack thereof, relative to
competitive forces. Opportunities and threats, however, are external factors that are
not created by the company, but emerge as a result of the competitive dynamics
caused by ‘gaps’ or ‘crunches’ in the market. We had briefly mentioned about the
meaning of the terms opportunities, threats, strengths and weaknesses. We revisit
the same for purposes of SWOT analysis.
1. Identification
a) Identify company resource strengths and competitive capabilities (b) Identify
company resource weaknesses and competitive deficiencies (c) Identify company’s
opportunities (d) Identify external threats
2. Conclusion
3. Translation .
SWOT Analysis
2. Conclusion: (a) Draw conclusions about the company’s overall situation 3. Translation: Translate
the conclusions into strategic actions by acting on them: (a) Match the company’s strategy to its
strengths and opportunities (b) Correct important weaknesses (c) Defend against external threats In
devising a SWOT analysis, there are several factors that will enhance the quality of the material: 1.
Keep it brief, pages of analysis are usually not required. 2. Relate strengths and weaknesses,
wherever possible, to industry key factors for success. 3. Strengths and weaknesses should also be
stated in competitive terms, that is, in comparison with competitors. 4. Statements should be specific
and avoid blandness. 5. Analysis should reflect the gap, that is, where the company wishes to be and
where it is now. 6. It is important to be realistic about the strengths and weaknesses of one’s own
and competitive organisations. Probably the biggest mistake that is commonly made in SWOT
analysis is to provide a long list of points but little logic, argument and evidence. A short list with
each point well argued is more likely to be convincing.
TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats,
opportunities, weaknesses and strengths. This matrix was proposed by Heinz
Weihrich as a strategy formulation – matching tool. TOWS analysis poses a number
of questions: What actions should a company take? Should it focus on using
company’s strengths to capitalize on opportunities, or acquire strengths in order to
be able to capture opportunities? Or should it actively try to minimize weaknesses
and avoid threats? TOWS matrix illustrates how internal strengths and weaknesses
can be matched with external opportunities and threats to generate four sets of
possible alternative strategies. This matrix can be used to generate corporate as well
as business strategies. An example of TOWS matrix is shown below: Internal
factors/ External factors Strengths(S) Weaknesses(W) Opportunities(O) SO
strategies: strategies that use strengths to take advantage of opportunities. WO
strategies: strategies that take advantage of opportunities by over -coming
weaknesses Threats(T) ST strategies: strategies that use strengths to avoid threats.
WT strategies: strategies that minimize weaknesses and avoid threats. To generate
a TOWS matrix, the following steps are to be followed: 1. List external opportunities
available in the company’s current and future environment, in the ‘opportunities
block’ on the left side of the matrix. 2. List external threats facing the company now
and in future in the “threats block” on the left side of the matrix. 3. List the specific
areas of current and future strengths for the company, in the “strengths block” across
the top of the matrix. 4. List the specific areas of current and future weaknesses for
the company in the “weaknesses box” across the top of the matrix. 5. Generate a
series of possible alternative strategies for the company based on particular
combinations of the four sets of factors. The four sets of strategies that emerge are:
SO Strategies SO strategies are generated by thinking of ways in which a company
can use its strengths to take advantage of opportunities. This is the most desirable
and advantageous strategy as it seeks to mass up the firm’s strengths to exploit
opportunities. For example, Hindustan Lever has been augmenting its strengths by
taking over businesses in the food industry, to exploit the growing potential of the
food business. ST Strategies ST strategies use a company’s strengths as a way to
avoid threats. A company may use its technological, financial and marketing
strengths to combat a new competition. For example, Hindustan Lever has been
employing this strategy to fight the increasing competition fromcompanies like Nirma,
Procter & Gamble etc.
2. The company has a strategy in place for the next stage of its expansion. Not only
is it focusing upon new products and acquisitions, but it also has a programme of
intensive management development in place in order to establish its leaders for
tomorrow. 3. The company has had a successful alliance with Italian mass producer
Fiat since 2006. This has enhanced the product portfolio for Tata and Fiat in terms of
production and knowledge exchange. For example, the Fiat Palio Style was
launched by Tata in 2007, and the companies have an agreement to build a pick-up
targeted at Central and South America.
Weaknesses 1. The company's passenger car products are based upon 3rd and 4th
generation platforms, which put Tata Motors Limited at a disadvantage with
competing car manufacturers.
2. Despite buying the Jaguar and Land Rover brands (see opportunities below); Tat
has not got a foothold in the luxury car segment in its domestic, Indian market. Is the
brand associated with commercial vehicles and low-cost passenger cars to the
extent that it has isolated itself from lucrative segments in a more aspiring India? 3.
One weakness which is often not recognised is that in English the word 'tat' means
rubbish. Would the brand sensitive British consumer ever buy into such a brand?
Maybe not, but they would buy into Fiat, Jaguar and Land Rover (see opportunities
and strengths).
4. The new global track platform is about to be launched from its Korean (previously
Daewoo) plant. Again, at a time when the World is looking for environmentally
friendly transport alternatives, is now the right time to move into this segment? The
answer to this question (and the one above) is that new and emerging industrial
nations such as India, South Korea and China will have a thirst for low-cost
passenger and commercial vehicles. These are the opportunities. However the
company has put in place a very proactive Corporate Social Responsibility (CSR)
committee to address potential strategies that will make is operations more
sustainable.
5. The range of Super Milo fuel efficient buses are powered by super-efficient,
ecofriendly engines. The bus has optional organic clutch with booster assist and
better air intakes that will reduce fuel consumption by up to 10%.
Threats 1. Other competing car manufacturers have been in the passenger car
business for 40, 50 or more years. Therefore Tata Motors Limited has to catch up in
terms of quality and lean production.
2. Sustainability and environmentalism could mean extra costs for this low-cost
producer. This could impact its underpinning competitive advantage. Obviously, as
Tata globalises and buys into other brands this problem could be alleviated.
3. Since the company has focused upon the commercial and small vehicle
segments, it has left itself open to competition from overseas companies for the
emerging Indian luxury segments. For example ICICI bank and DaimlerChrysler
have invested in a new Pune-based plant which will build 5000 new Mercedes-Benz
per annum. 1 players developing luxury cars targeted at the Indian market include
Ford, Honda Notes and Toyota. In fact the entire Indian market has become a target
for other global competitors including Maruti Udyog, General Motors, Ford and
others.
4. Rising prices in the global economy could pose a threat to Tata Motors Limited on
a couple of fronts. The price of steel and aluminium is increasing putting pressure on
the costs of production. Many of Tata's products run on Diesel fuel which is
becoming expensive globally and within its traditional home market. Source:
www.marketingteacher.com
SWOT analysis is one of the most basic techniques for analyzing firm and ind
industry conditions. It provides the “raw material” for analyzing internal conditions as
well as external conditions of a firm. SWOT analysis can be used in many ways to
aid strategic analysis. For example, it can be used for a systematic discussion of a
firm’s resources and basic alternatives that emerge from such an analysis. Such a
discussion is necessary because a strength to one firm may be a weakness for
another firm, and vice-versa. For example, increased health consciousness of
people is a threat to some firms (e.g. tobacco) while it is an opportunity to others
(e.g. health clubs). According to Johnson and Sholes (2002), a SWOT analysis
summarises the key issues from the business environment and the strategic
capability of an organisation that impacts strategy development. This can also be
useful as a basis for judging future courses of action. The aim is to identify the extent
to which the current strengths and weaknesses are relevant to, and capable of,
dealing with the changes taking place in the business environment. It can also be
used to assess whether there are opportunities to exploit further the unique
resources or core competencies of the organisation. Overall, SWOT analysis helps
focus discussion on future choices and the extent to which the company is capable
of supporting its strategies. 5.2.4 Advantages and Limitations Advantages 1. It is
simple. 2. It portrays the essence of strategy formulation: matching a firm’s internal
strengths and weaknesses with its external opportunities and threats. 3. Together
with other techniques like Value Chain Analysis and RBV, SWOT analysis improves
the quality of internal analysis.
Limitations
1. It gives a static perspective, and does not reveal the dynamics of competitive
environment.
3. A firm’s strengths do not necessarily help the firm create value or competitive
advantage.
5. Hill and Westbrook criticize SWOT analysis by saying that it is not a panacea.
According to them, some of the criticisms against SWOT analysis are: (a) It
generates lengthy lists (b) It uses no weights to reflect priorities (c) It uses
ambiguous words and phrases (d) The same factor can be placed in two categories
(e.g. an opportunity may also be a threat). (e) There is no obligation to verify
opinions with data or analysis. (f) It is only a simple level of analysis. There is no
logical link to strategy implementation. (g) SWOT helps only as a starting point. By
itself, SWOT analysis rarely helps a firm develop competitive advantage that it can
sustain over time. In spite of the above criticism and its limitations, SWOT analysis is
still a popular analytical tool used by most organisations. It is definitely a useful aid in
generating alternative strategies, through what is called TOWS matrix
1. the added value that each part of the organisation contributes to the whole
organisation; and
2. the contribution that each part makes to the competitive advantage of the whole
organisation. In a company with more than one product area, the analysis should be
conducted at the level of product groups, not at corporate strategy level. Value Chain
thus views the organisation as a chain of value-creating activities. Value is the
amount that buyers are willing to pay for what a product provides them. A firm is
profitable to the extent the value it receives exceeds the total cost involved in
creating its products. Creating value for buyers that exceeds the cost of production
(i.e. margin) is a key concept used in analyzing a firm’s competitive position.
Notes The concept of value chain analysis was introduced by Michael Porter in 1985
in his seminal book “Competitive Advantage”. This concept is derived from an
established accounting practice that calculates the value added to a product by
individual stages in a manufacturing or service process. Porter has applied this idea
to the activities of an organisation as a whole, arguing that it is necessary to examine
activities separately in order to identify sources of competitive advantage. According
to Porter, customer value is derived from three basic sources.
3. Activities that meet the customer’s need quickly. Competitive advantage, argues
Michael Porter (1985), can be understood only by looking at a firm as a whole, and
cost advantages and successful differentiation are found in the chain of activities that
a firm performs to deliver value to its customers.
Value chain analysis involves the following steps. Identify Activities The first step in
value chain analysis is to divide a company’s operations into specific activities and
group them into primary and secondary activities. Within each category, a firm
typically performs a number of discrete activities that may reflect its key strengths
and weaknesses. Allocate Costs The next step is to allocate costs to each activity.
Each activity in the value chain incurs costs and ties up time and assets. Value chain
analysis requires managers to assign costs and assets to each activity. It views costs
in a way different from traditional cost accounting methods. The different method is
called activity-based costing. Identify the Activities that Differentiate the Firm
Scrutinizing the firm’s value chain not only reveals cost advantages or
disadvantages, but also identifies the sources of differentiation advantages relative
to competitors. Examine the Value Chain Once the value chain has been
determined, managers need to identify the activities that are critical to buyer
satisfaction and market success. This is essential at this stage of the value chain
analysis for the following reasons:
2. The nature of value chain and the relative importance of each activity within it,
vary from Notes industry to industry.
3. The relative importance of value chain can also vary by a company’s position in a
broader value system that includes value chains of upstream suppliers and
downstream distributors and retailers.
Therefore, in assessing the value chains there are two levels that must be
addressed.
2. Relationships among the activities within the firm and with other organisations that
are a part of the firm’s expanded value chain.
The value chain analysis is useful to recognize that individual activities in the overall
production process play an important role in determining the cost, quality and image
of the end-product or service. That is, each activity in the value chain can contribute
to a firm’s relative cost position and create a basis for differentiation, which are the
two main sources of competitive advantage. While a basic level of competence is
necessary in all value chain activities, management needs to identify the core
competences that the organisation has or needs to have to compete effectively.
Analyzing the separate activities in the value chain helps management to address
the following issues:
1. Which activities are the most critical in reducing cost or adding value? If quality is
a key consumer value, then ensuring quality of supplies would be a critical success
factor.
2. What are the key cost or value drivers in the value chain?
4. How do these linkages relate to the cost and value drivers? Porter identified the
following as the most important cost and value drivers:
Cost Drivers
1. Economies of scale
3. Linkages between activities (for example, timing of deliveries affect storage costs,
just-in time system minimizes inventory costs)
4. Interrelationships (for example, joint purchasing by two units reduces input costs)
6. Policy choices (such as the choices on the product mix, the number of suppliers
used, wage costs, skills requirements and other human resource policies affect
costs)
7. Institutional factors (which include political and legal factors, each of which can
have a significant impact on costs).
Core Competence
Superior performance does not merely come from resources alone because they can
be imitated or traded. Superior performance comes by the way in which the
resources are deployed to create competences in the organisation’s activities. For
example, the knowledge of an individual will not improve an organisation’s
performance unless he or she is allowed to work on particular tasks which exploit
that knowledge. Although an organisation will need to achieve a threshold level of
competence in all of the activities and processes, only some will become core
competences. Core competence refers to that set of distinctive competencies that
provide a firm with a sustainable source of competitive advantage. Core
competencies emerge over time, and reflect the firm’s ability to deploy different
resources and capabilities in a variety of contexts to gain and sustain competitive
advantage.
4. Organisation: Is the firm organised to exploit the resource? If the answer to these
questions is “yes” for a particular resource, that resource is considered a strength
and a distinctive competence.
1. Identify and classify the firm’s resources in terms of strengths and weaknesses.
4. Select the strategy that best exploits the firm’s resources and capabilities relative
to external opportunities.