Introduction to Strategic Management

Rev: Feb, 2012 Euiho (David) Suh, Ph.D.

POSTECH Strategic Management of Information and Technology Laboratory (POSMIT: http://posmit.postech.ac.kr)

Dept. of Industrial & Management Engineering POSTECH

Contents

※

Discussion Questions 1 2 3 Introduction of Strategic Management Strategic Management Process

1) Understand Company Mission 2) 3) 4) 5) 6) Analyze External Environment Analyze Internal Environment Set Long Term Objectives Craft the Strategy Implement the Strategy 7) Evaluate the Strategy

Case Study

Discussion Questions (1/2)

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What are three levels of strategies? How does the hierarchy of the strategy work?

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What is strategic management? Why is it named that way?

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Which environmental factor is believed to be most important and why?

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What is the model used for the external environment analysis? What external force is do you think most important?

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Name one portfolio analysis and explain it. What are the advantages and disadvantages of the portfolio analysis?

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In the case study, what were strengths, weaknesses, opportunities, and threats of Megastudy to strengthen its position as an educational institute? From the analysis, what strategies were driven for further improvements? Explain them for each part of the analysis (S-O, S-T, W-O, W-T)

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Discussion Questions (2/2)

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– Case 1 in textbook (pp. 45~46, Chapter 2) What are the business and political challenges that are likely to occur as a result of the transformation of IT from a support activity to a partner role? Use examples from the case to illustrate your answer.

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– – Discussion Questions in textbook (p. 67, Chapter 2) Suppose your are a manager being asked to develop computer-based applications to gain a competitive advantage in an important market for your company. What reservations might you have about doing so? Why?

How can Internet technologies help a business form strategic alliances with its customers, suppliers, and others?

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Strategy (1/2)

1. Introduction of Strategic Management

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– Strategy The means or general actions to be taken to achieve long term objectives

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– Levels of Strategy • Corporate strategy Overarching strategy of the diversified firm   “Which businesses should we be in?” “How does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?” – • • • Business strategy Aggregated strategy of single business firm or a strategic business unit (SBU) in a diversified corporation Incorporating either cost leadership, differentiation, or focus to achieve a sustainable competitive advantage and long-term success [Michael Porter]

Blue Ocean Strategy

[W. Chan Kim and Renée Mauborgne]: Breaking the previous value-cost trade off by simultaneously pursuing both differentiation and low cost  “How do we complete?” – • Functional strategy Short and medium term strategy limited to the domain of each department’s functional responsibility  “What should our organization do to synchronize with the business level strategy?”

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Strategy (2/2)

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Hierarchy of Strategy

Corporate strategy

Business strategy (decision level) Functional strategy

1. Introduction of Strategic Management

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Strategic Management

1. Introduction of Strategic Management

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– Definition of Strategic Management [Lamb, 1984] • • Ongoing process that evaluates and controls the business and the industries in which the company is involved assesses its competitors • • sets goals and strategies to meet all existing and potential competitors reassesses each strategy annually or quarterly (i.e. regularly to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment, or a new social, financial, or political environment)

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– – Strategic management for type of organization • Global/transnational organization: employing more structured strategic management model, due to its size, scope of operations, and need to encompass stakeholder views and requirements SME (Small and Medium Enterprise): employing an entrepreneurial approach, due to its comparatively smaller size and scope of operations, as well as possessing fewer resources SME's CEO (or general top management) may simply outline a mission, and pursue all activities under that mission.

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Strategic Management Process

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Basic Elements of the Strategic Management Process

Environmental scanning Strategic formulation Strategy implement

2. Strategic Management Process

Evaluation control

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Strategic Management Process

Opportunity & Threat 1 2 Analyze External Environment Today’s Coverage Understand Company Mission 3 Analyze Internal Environment Strength & Weakness 4 Set Long term Objectives 5 Craft the Strategy 6 Implement the Strategy

Feedback

7 Evaluate & Control the Strategy 8

Company Mission

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– Mission The reason for which the firm exists, and what it will do – • • • Describing The products/services to be supplied, The markets to be served, The technology applied

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– – – – – – What is our Business?

Basic Product or Service Primary markets Principal technology used (if relevant) Customer Satisfaction, Quality, and Societal Goals Company philosophy Self-concept (identity)

2. Strategic Management Process 1) Understand Company Mission

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Environmental Variables

2. Strategic Management Process 2) Analyze External Environment

Remote environment

Economic forces Sociocultural forces shareholders

Task environment (industry)

suppliers governments Special interest groups Internal Environment Structures Culture resources Customers Creditors Communities Employees Labor unions competitors Trade associations Technological forces Political-legal forces 10

Remote (Macro) Environmental Factors

2. Strategic Management Process 2) Analyze External Environment

Economic

GDP trends / Inflation rates Interest rates / money supply Disposable and Discretionary income Unemployment level Wage/price control Devaluation/revaluation

Technological

Total government Spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace

Sociocultural

Lifestyle changes Career expectations

Political-legal

Antitrust regulations Consumer activism Environmental protection laws Rate of family Formation Growth rate of Population Age distribution of Population Regional shifts in Population Life expectancies Birth rates Tax laws Special incentives Foreign trade regulations Attitudes toward Foreign companies Laws on hiring and Promotion

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Task (Immediate, Operating) Environmental Factors

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2. Strategic Management Process 2) Analyze External Environment

All persons, groups, or entities that have an interest in the company

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– – – – – – – – – – Stakeholders

Stockholders

Customers Suppliers Financial Institutions Competitors Trade Associations Activist Groups Federal, State, and Local Government Agencies Media Representatives Unions

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Defining an Industry

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Products

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Competitors

2. Strategic Management Process 2) Analyze External Environment

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– Structure Number, size, relative strength, market share of competitors, product differentiation

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Economic Traits

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Critical Success Factors (CSF)

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Entry barriers

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Mapping strategic Groups

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U.S restaurant chain industry high

2. Strategic Management Process 2) Analyze External Environment

Red lobster Olive Garden Chichi’s Perkins

Price

low limited menu

Ponderosa bonanza KFC Pizza hut Burger King McDonald’s Shoney’s Denny’s Country kitchen

Product-line breadth

Full menu

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Industry matrix

2. Strategic Management Process 2) Analyze External Environment

Strategic factors

1

Weight

2

Company A rating

3

Company A weighed score

4

Company B rating

5

Company B weighted score

6

Total 1.00

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Issues priority matrix

2. Strategic Management Process 2) Analyze External Environment

Probability of Occurrence High Medium low Probable impact on corporation high High priority High priority Medium priority medium High priority Medium priority Low priority Low Medium priority Low priority Low priority 16

Porter’s 5-Force Model

2. Strategic Management Process 2) Analyze External Environment

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– – – – –

Nature

forces and

intensity

of competition in an industry is a composite of five competitive Rivalry among

competitors in the industry

The bargaining power of

buyers

The bargaining power of

suppliers

The potential

entry of new competitors

The power of firms with

substitute products

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– Industry driving forces Increase incentive for the industry to change – – Industry growth rate Product innovation – – Customer preferences Firms entering and leaving the industry – Cost and productivity – Increasing globalization

Suppliers Threat of new entrants Rivalry among existing firms Substitutive Products Buyers Other Stakeholders 17

Opportunity & Threat

2. Strategic Management Process 2) Analyze External Environment

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– Opportunity • • • A combinations of events or circumstances that arise, which, if acted upon at a certain time, will result in profit, gain, or victory Product and market extensions through mergers, failure of competitors, and legal change Advances in technology A misfortune befalls a major competitor who then shuts down, liquidates, or goes bankrupt • • • A competing company is put up for sale at a good price A chance occurs for you to hire a noted expert that you need A breakthrough in your product or process that makes possible a gain in market share

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– Threat • • • • • • An event, as defined by its impact on your company and the probability of its occurrence, that will result in harm to your company Support of stakeholder groups Resources: human, financial Customer base Capabilities such as technology, products, processes, management, and functional Artificial barriers to competition: laws, regulations, patents, and licenses Social changes and customer preferences

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Scanning the external environment

2. Strategic Management Process 2) Analyze External Environment

Analysis of societal environment Economic, sociocultural, technological, political-legal factors Market analysis Competitor analysis Interest Group analysis Community analysis Selection of Strategic factors Opportunities threats Supplier analysis Governmental analysis 19

Situation Analysis

2. Strategic Management Process 3) Analyze Internal Environment

How well is the company’s strategy working?

What are the company’s strengths and weaknesses?

What are its core products and competencies?

What benchmarks are being used for measuring its situation?

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Internal Scanning and Analysis (1/2)

2. Strategic Management Process 3) Analyze Internal Environment

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– Value Chain Analysis Identifying the primary and support activities that create value – Analyzing and reducing business costs and compare one business’ value chain with those of competing companies Support Activity Primary Activity Firm infrastructure Human Resource Management Technology Development Procurement Inbound Logistics Operation Outbound Logistics Marketing And Sales After Sales Service Competitive Advantage

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Internal Scanning and Analysis (2/2)

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– Match of strategy and structure Culture – – Images Identity – – Leadership Mission, Goals, Objectives, and Organizational Structure

2. Strategic Management Process 3) Analyze Internal Environment

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– – – PIMS Analysis (Profit Impact of Marketing Strategy) Offered by the Strategic Planning Institute Based on a database of about 3,000 businesses Directed at identifying principles that will guide companies in establishing successful strategies, or evaluating their own

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Strength & Weakness (1/2)

2. Strategic Management Process 3) Analyze Internal Environment

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– Strength • • • • • • Company’s resource or capability that can be used for developing a competitive advantage Patents Strong brand names Good reputation among customers Cost advantages from proprietary know-how Exclusive access to natural resources Good access to distribution networks

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– Weakness • • • • • The absence of certain strengths Lack of patent protection A weak brand name Poor reputation among customers High cost structure Lack of access to best natural resources • Lack of access to key distribution channels

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Strength & Weakness (2/2)

2. Strategic Management Process 3) Analyze Internal Environment

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– Functional Analysis of

Strengths

and

Weaknesses

of the firm • Establish a table with column heading: Factors, Strengths/Weaknesses, Standards and Comparison For each factor to be evaluated, the question must be asked, “Compared to what?” – • • • • • Standards or criteria may be: The industry average for the factors being evaluated The best firm’s values The best value of any firm on each criterion A previously set objective A previous forecast – • • • • • • Functional factors should be selected from the following functional areas: Marketing Operations/Production Finance and accounting Information Systems Human resources, especially management and organization Quality of all transactions, relationships, and outputs

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Portfolio Analysis (1/6)

2. Strategic Management Process 3) Analyze Internal Environment

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– Definition of Business Portfolio A business portfolio is the collection of Strategic Business Units that make up a corporation. – The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets

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– – – – Aim of a portfolio analysis Analyze its current business portfolio and decide which SBU's should receive more or less investment Develop growth strategies for adding new products and businesses to the portfolio Decide which businesses or products should no longer be retained The BCG Matrix is the best-known portfolio planning framework.

And the GE / McKinsey Matrix is a later and more advanced form of the BCG Matrix

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Portfolio Analysis (2/6)

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SWOT Analysis

2. Strategic Management Process 3) Analyze Internal Environment

Internal Factors

Strength

Aggressive Strategy

Weakness

Defensive Strategy Turn-around Strategy

Opportunity

Diversification Strategy

Threat

External Factors – – Tying together strengths, weaknesses, opportunities, and threats vs. competitive position Development of the idea of matching the organization’s internal factors with external environmental circumstances [Philip Selznick, 1957]

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Portfolio Analysis (3/6)

2. Strategic Management Process 3) Analyze Internal Environment

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BCG Matrix

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Stars

(=high growth, high market share) use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.

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Cash Cows

(=low growth, high market share) profits and cash generation should be high, and because of the low growth, investments needed should be low. Keep profits high ■ – –

Dogs

(=low growth, low market share) avoid and minimize the number of dogs in a company.

deliver cash, otherwise liquidate ■ – –

Question Marks

(= high growth, low market share) have the worst cash characteristics of all, because high demands and low returns due to low market share either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash ■ – – – Limitations of BCG Matrix The link between market share and profitability is questionable since increasing market share can be very expensive The approach may overemphasize high growth, since it ignores the potential of declining markets The model considers market growth rate to be a given. In practice the firm may be able to grow the market

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Portfolio Analysis (4/6)

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GE/Mckinsey Matrix

High

Competitive Strength

Medium Low

2. Strategic Management Process 3) Analyze Internal Environment

 Invest aggressively  Invest selectively  Harvest or divest

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– – – GE/Mckinsey matrix attempt to improve upon the BCG Matrix

Market (Industry) attractiveness

replaces market growth as the dimension of industry attractiveness

Competitive strength

replaces market share as the dimension by which the competitive position of each SBU is assessed

GE / McKinsey Matrix

works with a

3 x 3 grid

, while the BCG Matrix has only 2 x 2.

This also allows for more sophistication

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Portfolio Analysis (5/6)

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GE/Mckinsey Matrix (Cont’d) Market Attractiveness

- Market size - Market growth rate - Pricing trends - Competitive intensity / rivalry - Overall risk of returns in the industry - Demand variability - Segmentation

2. Strategic Management Process 3) Analyze Internal Environment

Competitive Strength

- Strength of assets and competencies - Relative brand strength - Market share - Market share growth - Customer loyalty - Record of technological or other innovation

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– Strategic Business Units are portrayed as a circle plotted in the GE McKinsey Matrix The size of the circles represent the Market Size – – The size of the pies represent the Market Share of the SBU's Arrows represent the direction and the movement of the SBU's in the future

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– – Limitations of GE/Mckinsey Matrix Core competencies are not represented Interactions between Strategic Business Units are not considered

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Portfolio Analysis (6/6)

2. Strategic Management Process 3) Analyze Internal Environment

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Advantages and limitation of Portfolio analysis

• Portfolio offers certain advantages It encourages top management to evaluate each of the corporation’s businesses individually and to set objectives and allocate resources for each • • • It stimulates the use of externally oriented data to supplement management’s judgment It raises the issue of cash flow availability for use in expansion and growth Its graphic depiction facilitates communication – • • • • Portfolio have some very real limitations Matrix It is not easy to define market segments It suggests the use of standard strategies that can miss opportunities or be impractical It provides an illusion of scientific rigor when in reality positions are based on subjective judgments It is not always clear what makes an industry attractive or what stage a product is at in its lifecycle

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Case Study

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Reference

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Euiho Suh, “Strategic management 1 (PPT Slide)”, POSMIT Lab. (POSTECH Strategic Management of Information and Technology Laboratory)

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Euiho Suh, “Strategic management 2 (PPT Slide)”, POSMIT Lab. (POSTECH Strategic Management of Information and Technology Laboratory)

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O’Brien & Marakas, “Introduction to Information Systems – Fifteenth Edition”, McGraw – Hill, Chapter 2, pp. 43~71

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Dr. Kevin Lance Jones, “SWOT (Strengths, Weaknesses, Opportunities & Threats) Analysis”, page 7-8

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