Part 2

Topics included for Internal Examination (Slide no. 2 to 25) Scheduled on 14th July

Identifying SBUs
Strategic Business unit or SBU is understood as a business unit within the overall corporate identity which is distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to own products and markets.
The unique small business unit of a large corporate can benefit from its unique structure, which helps it to aggressively focus on its business in a consistent matter.

When companies become really large they are best thought of being composed of a number of business units.

Strategy Definitions-by Management Experts

Objective Inclusive Definitions:- Includes objective settings as mentioned by
Chandler: Strategy is the definition of the basic long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals.

Andrews: Strategy is the pattern of objectives, purpose or goals and major policies and plans for achieving these goals, stated in such a way so as to define what business the company is in or is to be.

Definition by Experts
Objective Exclusive Definition-A forward looking endeavour
to gain future advantage by relating its effort with the environment.

Michael Porter
Strategically positioned company is the one which performs different activities from competitors or performs similar activities in a different way to create value for the organization.

Ansoff
Strategy defines the essential nature of business the organization is presently in and is planning to be in future

Glueck
A strategy is a unified, comprehensive and integrated plan relating the strategic advantages of the firm of challenges of the environment. It is designed to ensure that the basic objectives of the firm are achieved.

Strategy Operating at different Levels of Organizations

Typical example of a large organization with Corporate and Business level operations
Corporate Strategy

SBU 1 Strategy Operation Strategy

SBU Strategy 2 Mktg. Strategy

SBU Strategy 3 Financial Strategy

Corporate Strategy is the responsibility of the Corporate Management SBU Strategies are the responsibility of the SBU Top Management Functional level strategies are the responsibilities of the functional heads within the broad parameters set by the Corporate and SBU heads

Characteristics of Strategic Decisions

Different levels requires different level of skills and behavior. Impacts of such strategies on the future of the business are also different.
Dimensions Types of Decision Impact Time horizon Risk Involved Profit Potential Flexibility Level Corporate Conceptual Critical Long range Very high High High Of SBU Mixed Major Medium range Medium Medium Medium Strategy Functional Operational Minor Short range Low Low Low

Organization as an Open System

Companies consists of interrelated interdependent parts that function as a whole. Takes inputs from various sources, process it, and produce output--tangible or intangible, and also produce waste and pollution. As an open system, a company is affected by its environment and also impacts that environment. The various studies of organizational environments can be summarized from two different perspectives:
The environment as a source of resources, and The environment as a source of information

Managing Resources and Information from Environment

A Strategic Challenge

Resources--Organization depends on resources from the environment, which are generally scarce and sought by competing organizations.
MEASURE-The level of dependency is determined by difficulty of obtaining and controlling resources. To manage environmental resources it is necessary to know about the environment before attempting to change or influence it.

Information--A key aspect of the environment from the information perspective is the environmental uncertainty.
MEASURE- The amount of change ( dynamic or stable) and the number of components in the environment (complex or simple) measure uncertainty. The more complex and dynamic the environment, the more uncertain it is.

Managing Resources and Information from Environment - Management role

Managements ability to recognize and anticipate environmental changes plays a key role in shaping the companys future because it limits or opens up strategic options.
As a result , understanding the external environment can help improve a companys competitive position, buffer the company from environmental impacts and build bridges to stakeholders of the company.

The Components of External Environment

General Environment
External analysis efforts should be focused on segments that are most important to the companys strategic competitiveness to identify environmental changes, trends, opportunities and threats that can be matched successfully with the companys resources , capabilities and core competencies so that it can achieve strategic competitiveness and earn above-average returns.

Any analysis of the general environment and its segments should recognize global elements that may have an impact on the company
In addition to increasing a companys awareness and understanding of an increasingly turbulent, complex, and global general environment, External Environment Analysis is also necessary to enable the companys management to interpret information to identify opportunities and threats.

 Industry Environment

The component of External Environment- contd.

An industry is a group of companies producing products that are close substitutes for each other. As they compete for market share, the strategies implemented by these companies influence each other and include a broad mix of competitive strategies , which push the industry competitiveness and result in above-average returns.

Unlike the general environment, which has an indirect effect on strategic competitiveness and company profitability, the effect of the industry environment is direct. Industry and individual company profitability and the intensity of competition in an industry are a function of five competitive forces of Porters Five Forces Model of Competition.

Porters model indicates that these five forces interact to determine the intensity or strength of competition, which ultimately determines the profitability of the industry.

Porters Five Forces

According to Porter these are Micro Environment

The purpose of Five-Forces Analysis

The five forces are environmental forces that impact on a companys ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is. Competition may be viewed differently. An analysis of competitive forces in an industry must expand beyond the traditional practice of concentrating on direct competitors to include potential competitors. e.g.
Supplier by integrating forward or Customer by integrating backward etc.

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale

Government Policy Expected Retaliation

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Suppliers are likely to be powerful if: Supplier industry is dominated by a few firms Suppliers products have few substitutes

Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Buyer is not an important customer to supplier Suppliers product is an important input to buyers product Suppliers products are differentiated Suppliers products have high switching costs

Supplier poses credible threat of forward integration

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Buyer has full information

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Threat of Substitute Products

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improved price/performance tradeoffs relative to present industry products (cost to value)

When competition provides additional product features and services with same or alternative products that customers cant do without. Example:

Mobile phones with camera options over only telecom facilities. Fax machines in place of overnight mail delivery Aluminium as a substitute to steel

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles

Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry

High fixed costs High storage costs

Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes

High exit barriers

Case Study
Q.- What strategic factors must be considered in the situation where
barriers to entry are low but where suppliers have high power? Ans. : Keys. 1. Barriers to entry Product Differentiation Economics of scale Access to large distribution channel -- 2. Suppliers have high power Supplier industry is dominated by a few firms Supplier industry has high switching costs Supplier poses credible threat of forward integration Strategy:Ways to overcome the possible restrictions , e.g. Reducing the switching costs, finding alternative resources. Issues pertaining to Industry attractiveness should also be discussed

Analyzing Internal Environment

External Environment
Analyzing the external environment enables a company to identify what it might do by identifying what opportunities exist.

Internal Environment
Analyzing the internal environments enables a company to identify what it can do or is capable of doing.

The challenge is for companies to achieve a match between what the company might do and what it can do.
This match allows the companys strategic intent and strategic mission, as well as the subsequent implementation of value creating strategies that will result in strategic competitiveness and above-average returns. This make the external and internal environment analysis complementary to each other.

Focus on Internal Characteristics

Internal Analysis considers each company as a bundle of heterogeneous resources and capabilities, which provide the company its ability to achieve and retain strategic competitiveness.
The importance of Internal characteristics, represented by its Resources and Capabilities(which is the source of its core competencies ) highlights a shift in the priorities and prescriptions of Strategic Management Research.

To sustain a competitive advantage, companies must be able to manage current core competencies while simultaneously developing new competencies.
The sustainability of any competitive advantage achieved will be determined by how successfully and quickly other companies can imitate a companys strategies.

Strategic Role of Organizational resources & Capabilities

Performance Results Competitive Advantage Distinctive Organizational Capabilities Organizational Resources
Financial Assets Physical Assets Human Resources Intangible Assets Organizational assets

Organizational Capabilities
Organizational Processes and routines Accumulated Knowledge Actual Work processes

Core Competencies

 Resources represent inputs into a companys production process, such as

raw material, capital equipments, its people, its brand, patents, trademarks etc., physical resources including its land and locations, financial resources such as borrowing capacity etc.

Understanding Internal Environment

By themselves or individually, resources generally will not enable a company to achieve a competitive advantage. They must be combined or integrated with other company resources to establish a capability.
Capabilities develop over time as a result of complex interactions that take advantage of the inter-relationships between a companys tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by its human resources

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to strategic advantage.
Should be Valuable, rare, Costly to Imitate, Non-substitutable

Shifting the Focus of Strategy Analysis: From the External to the Internal Environment

THE FIRM
Goals and Values Resources and Capabilities Structure and Systems

THE INDUSTRY ENVIRONMENT

STRATEGY
STRATEGY

Competitors Customers Suppliers

The Firm-Strategy Interface

The Environment-Strategy Interface

Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team Performance in European Soccer
WINNING TEAMS 19982003 Valencia (Sp) Real Madrid (Sp) Deportivo La Coruna (Sp) Juventus (It) AC Milan (It) Parma (It) Manchester United (Eng) Arsenal (Eng) Liverpool (Eng) EXPENDITURES ON KEY PLAYERS, 1998-2003

Pablo Aimar ($20.4m), Ruben Baraja ($12m)

Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m), Nicolas Anelka ($36m), David Beckham ($26m), Sergio Gonzales ($16m), Alberto Luque ($15m) Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram ($33m), David Trezeguet ($21m), Marco de Viao ($10m) Rui Costa ($42m), Alessandro Nesta ($30m), Andriy Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m) Hidetoshi Nakata ($30m), Sdrian Mutu ($9m) Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez ($12m), Diego Forlan ($10m), Kleberson ($9m), Mikael Silvestre ($6m) Sylvain Wiltord ($20m), Thierry Henry ($16m), Dennis Bergkamp ($12m), Nwankwo Kanu ($7m), Gilberto Silva ($7m), Patrick Vieira ($6m) Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann ($12m), Chris Kerkland ($8m), Harry Kewell ($8m), Salif Diao ($8m)

HIGHEST EXPENDITURES ON NEW PLAYERS (Top 3 in Spain, Italy & England) 1. 2. 3. 4. 5. 6. 7. 8. 9. Barcelona Chelsea Lazio Manchester United Inter Milan Juventus AC Milan Arsenal Real Betis

Note: Spain, Italy & England only).

The Architecture of Organizational Capability

ORGANIZATIONAL CAPABILITY

SKILLS & Organization Management KNOWLEDGE Structure Systems VALUES TECHNICAL & NORMS RESOURCES MANAGERIAL Human skills & know-how SYSTEMS SYSTEMS Technology
Culture (values, norms)

Dorothy Leonard Core Capabilities & Core Rigidities

A modified view