Management - II

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Unit 5

Introduction to Strategic Management

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Course Contents

1. Management by Objective (MBO) 2. How Strategic and Operational plans differ 3. The evaluation of concept of Strategy 4. Levels of Strategy: Some key distinctions 5. The Contents of a corporate Strategy

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Strategy – The broad program for defining and achieving an organization’s objective; the organization’s response to its environment over time.

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Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competencies for fulfilling stakeholders’ expectations.

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Strategy is about:

 Where is the business trying to get to in the long-term (direction)  Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope)  How can the business perform better than the competition in those markets? (advantage)?  What resources (skills, assets, finance, technical competence, facilities) are required in order to be able to compete ? (resources)?

 What external, environmental factors affect the businesses' ability to compete? (environment)?  What are the expectations of those who have power in and around the business? (stakeholders)

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Management by Objectives (MBO)

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A formal set of procedures that establishes and reviews progress towards common goals for managers and subordinates.

 The term "management by objectives" was first popularized by Peter Drucker Practice of Management’ in his 1954 book 'The  Drucker insisted that managers and staff members set their own objectives or at least be actively involved in the objective-setting process, otherwise people might refuse to cooperate or make only half-hearted efforts to implement “someone else’s” objectives

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Elements of the MBO System

 MBO System can vary widely, some are designed for subunit, some in the organization as a whole, some emphasis corporate planning, some stress individual motivation, But the mainly shared the following six elements.

1. Commitment to Program

At every organizational level it involves managers’ commitment to achieve personal and organizational objectives

2. Top level goal setting

This gives a clear idea to both managers and staff members of what top managements hope to accomplish and show them how their own work directly relates to achieving the organization's goal

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Elements of the MBO System

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Individual Goals

Each manager and staff members should have clearly defined job responsibilities and objective in order to know the what they are expected to accomplish.

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Participation

The participation of both managers and employees in the setting goal, goals is more likely to be achieved

5. Autonomy in implementation of Plans

An individual should have liberty to choose the means for achieving the objectives

6. Performance Review

Managers and Employees periodically meet to review progress toward the objectives

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Advantages of Management by Objective

 MBO ensures Goal Clarity.

 MBO integrates the efforts of everybody.

 MBO Involves continuous communication resulting in to co - ordinated efforts and cohesive environment.

 The participative approach in goal setting motivates the employees  Enhance the commitment towards activities.

 MBO practice eliminates the overlaps in the efforts and plugs the gaps in the assignment.

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Disadvantages of Management by Objective

 MBO undermines environment the importance of external on the outcomes.

 MBO ignores the overall organization culture.

 It compares the actual outcome with the ideal objections. Corporate team tends to chart out higher goals which the average performance tend to be lower. Such situation results in to frustration and dissatisfaction among employees.

 High targets through whatever means necessary including the scarifies of quality.

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Disadvantages of Management by Objective

 despite the participative goal setting, the actual performance tends to be closure to mediocre level.

 It considers goals as a basis for outcomes but there is no limit to outcomes of the excellent personnel.

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How Strategic and Operational Plans Differ

Basis

Definition Time Horizon Scope

Strategic Plan Operation Plan

Strategic Plan is a document approved by higher management about programmes that the organization will undertake along with allocation of resources over 7 to 8 years. Operation plan is an annual budget formulated by the operating managers in line with the expectations outlined in the strategic plan.

Are long term plan and prepared for several years like 8 to 10 years or even ahead of decades Are broad and which become the basis of all the activities of the organization Are short term and usually prepared on yearly basis Developed on the basis of Strategic Plan.

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How Strategic and Operational Plans Differ

Basis

Degree of details Analytical frame work Management functions relationship

Strategic Plan

Strategic Plan are general and generic. They do not involve more details.

Are general tendencies of the expectations of the higher level management Focuses on Planning, Organizing & Directing

Operation Plan

Operation plan are more detailed Are more clear in terms of output numbers, cost standards, close monitoring etc.

More emphasis on Controlling function of management.

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How Strategic and Operational Plans Differ

Basis

Statement of Plans Formulation

Strategic Plan

Are stated in terms of long term Mission and Objectives Are formulated by the corporate Managers

Operation Plan

Are Stated in terms of short term budget targets Are prepared by the operating managers

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The Evolution of the Concept of Strategy

 The term Strategy has been derived from the Greek work “ Strategia ” , which means generalship or art and science of directing military forces.  The Greeks knew that the strategy was not about only fighting battles its beyond that (directing, controlling, motivating, managing etc. )  Without strategy the organization is ship without rudder, going around in circles  A firm without strategy is like a Columbus, when he went to discover America

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Strategic Management

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The management process that involves an organization’s engaging in strategic planning and then acting on those planning

 The Strategic management process mainly focuses upon two things 1.

Strategic planning 2.

Strategy implementation

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Strategic Management Process

Strategic Planning Strategic Implementation Goal Setting Strategy Formulation Administration Administration

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Levels of Strategies

Corporate level Strategy Business Unit Strategy Functional level Strategy

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Corporate level Strategy

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Strategy formulated by top management to oversee the interest and operation of the multiple corporation

 What kind of business should the company be engaged in ?

 What are the goals and expectations for each businesses ?

 How should resources be allocated to reach these goals ?

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Corporate level Strategy

 Corporate strategies would guide to the organization about in what kind of business should it enter or not enter (boundary maker).

 E.g.

Reliance Group, Tata Group, BGKV

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Business unit level Strategy

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Strategy formulated to meet the goals of particular business; also called line of business strategy.

 How would business compete within its market ?

 What product/services should it offer ?

 Which customer does it seek to serve ?

 How will resources be distributed within the business ?

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Types of Business unit level Strategy

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Functional level Strategy

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Strategy formulated by a specific functional area in an effort to carry out business unit strategy.

 What should be the marketing plans ?

 How many persons should be hired ?

 How much should we spend upon R&D  How much production should we do in the next quarter ?

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The Content of a Corporate Strategy

 Corporate strategy decides organization’s place in the future.

 It is also an time.

idea

about how people at an organization will interact with people at other organization over time, so it guides people in their day-to-day work over an extended period of

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Product Life Cycle

Sales and Profits ($) Sales Profits Product Develop ment Losses/ Investments ($) Introduction Growth Maturity Time Decline

Introduction Stage of the PLC

Sales Costs Profits Marketing Objectives Product Price Distribution Advertising Low sales High cost per customer Negative Create product awareness and trial Offer a basic product Use cost-plus Build selective distribution Build product awareness among early adopters and dealers

Growth Stage of the PLC

Sales Costs Profits Marketing Objectives Product Price Distribution Advertising Rapidly rising sales Average cost per customer Rising profits Maximize market share Offer product extensions, service, warranty Price to penetrate market Build intensive distribution Build awareness and interest in the mass market

Maturity Stage of the PLC

Sales Costs Profits Marketing Objectives Product Price Distribution Advertising Peak sales Low cost per customer High profits Maximize profit while defending market share Diversify brand and models Price to match or best competitors Build more intensive distribution Stress brand differences and benefits

Decline Stage of the PLC

Sales Costs Profits Marketing Objectives Product Price Distribution Advertising Declining sales Low cost per customer Declining profits Reduce expenditure and milk the brand Phase out weak items Cut price Go selective: phase out unprofitable outlets Reduce to level needed to retain hard-core loyal customers

The Corporate Portfolio Approach

 Evaluation of the each business unit of an organization  Appropriate strategic role is developed for each unit with the goal of improving the overall performance of the organization  One of the best known example of corporate portfolio is the

Portfolio framework

advocated by

Boston Consulting Group (BCG)

its also know as BCG matrix  BCG matrix mainly focuses upon 2 thing

Market Share

and

Market Growth

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The BCG Matrix

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The BCG Matrix

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Question Marks

 It is a Business unit with a small market share but in rapidly growing market.

 Could be uncertain and expensive venture  Require more cash in-flow to grab the market share  E.g. Honda Brio

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The BCG Matrix

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Star

 It’s a business unit with high growth & high market share  Need to go on investing in order to keep up with market’s rapid growth  E.g. Chevrolet Beat, Maruti Suzuki Swift

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The BCG Matrix

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Cash Cows

 It’s a business unit with low growth but with high market share  It's profitable and doesn't require much cash inflow  E.g

. Maruti Suzuki WagonR

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The BCG Matrix

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Dog

 Here the business unit is having low growth and low market share  It’s slowly growing or stagnant market.

 E.g. Maruti Suzuki 800

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“Five Forces” Corporate Strategy

 It’s a well known approach to corporate strategy is Michael Porter’s “five forces” model.

 According to Porter an organization’s ability to compete in a given market is determined by that organization’s technical and economic resources, as well as by five environmental “forces”, each of which threaten organization’s venture in new market.

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Threats of New Entrants

 Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example:  Cost advantages (economies of scale, economies of scope) Access to production inputs and financing,  Government policies and taxation  Production cycle and learning curve  Capital requirements  Access to distribution channels  Patents, branding, and image also fall into this category.

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Threat Of Substitutes

 Every top decision maker has to ask: How easy can our product or service be substituted? The following needs to be analyzed:  How much does it cost the customer to switch to competing products or services?

 How likely are customers to switch?

 What is the price-performance trade-off of substitutes?

 If a product can be easily substituted, then it is a threat to the company because it can compete with price only.

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Bargaining Power Of Buyers

 Now the question is how strong the position of buyers is. For example, can customers work together to order large volumes to squeeze your profit margins? The following is a list of other examples:  Buyer volume and concentration  What information buyers have  Competitive price  How loyal are customers to your brand  Price sensitivity  Threat of backward integration  How well differentiated your product is  Availability of substitutes

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Bargaining Power Of Suppliers

• This relates to what your suppliers can do in relationship with you.

• How strong is the position of sellers?

• Are there many or only few potential suppliers?

• Is there a monopoly?

• Do you take inputs from a single supplier or from a group? (concentration) • How much do you take from each of your suppliers?

• Can you easily switch from one supplier to another one? (switching costs) • If you switch to another supplier, will it affect the cost and differentiation of your product?

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Competitive Rivalry

 In this, we have to analyze the level of competition between existing players in the industry.

 Is one player very dominant or all equal in strength/size?

 How fast does the industry grow?

 How is the industry concentrated?

 How do customers identify themselves with your brand?

 Is the product differentiated?

 How well are rivals diversified?

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Thank You

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