Summary Fundamentals of Strategy - fundamentals of strategic management PDF

Preview

Summary

Summary of book and notes from the course Fundamentals of Strategic Management....

Description

1 . I N T R O D U C I N G S T R AT E G Y Strategy matters to almost all organizations, and it is important that everyone in the organization’s chain knows about the firms strategy. Strategy is about key issues for the future of the organization. 1.2 W HAT I S STRATE GY?

Strategy is the long-term direction of an organization. This gives a more comprehensive view of strategy than some influential definitions (Chandler, Porter, Mintzberg). Three horizons framework: Organizations should think of themselves as comprising three types of business or activity, defined by their ‘horizons’ in terms of years. ! Horizon 1: current core activities (original Vice Magazine). Are currently defending and extending but in the long term they will decline. ! Horizon 2: emerging activities (Vice new China business). ! Horizon 3: nothing is sure, risky research and development projects, start ups/test-pilots. (Vice gaming and sports activities). Depending on the pace of the organization’s market, horizon 3 might be in a few years or decades. For horizon 3 projects, short term issues shouldn’t be focused on. Strategy is pushing out Horizon 1 as far as possible and at the same time evolve Horizon 2 and 3. Strategic direction: Over time strategies tend to follow some long term direction. (Vice from print to diversified youth media services). Sometimes this only becomes clear over time. But many managers try to set a long term directive such as increased revenue for shareholders. Today organizations and their strategy are highly effected by both their internal and external environment. Levels of Strategy: ! Corporate level: concerned with the overall scope of an organization and how value is added to the constituent business of the organizational whole. Geographical scope, diversity of products/services, acquisition of new businesses, resource allocation. ! Business level: (competitive strategy) how the individual business should compete in their particular markets. Innovation, appropriate scale, response to competitor’s moves. 1  of 17

! Operational level: how the components of an organization deliver effectively the corporate- and business-level strategies in terms of resources, processes, and people. Operational decisions need to be closely linked to business-level strategy because the operational decisions are made in large part on choices made on the business level. Strategy is typically complex and the need for integration between the different levels is important. Strategy Statements: Three main themes: the fundamental goals (mission, vision, or objectives), the scope or domain of the organization’s activities, and the particular advantages or capabilities it has to deliver all of these. • Mission: what business are we in? • Vision: what do we want to acheive? • Objectives: what do we have to achieve in the coming period? (more quantifiable goals) • Scope: customers or clients, geographical location, extent of internal activities. • Advantage: competitive or other advantage over other players. Suggestion: no longer than 35 words. 1.3 THE E XPLO RI N G STRATE GY M O DE L

The exploring strategy model is understanding the strategic position of an organization, assessing strategic choices for the future, and managing strategy in action. Position, choices and action do not necessarily need to be in any particular order but act interact fluently and without borders. Strategic Position: the impact on strategy of the external environment (opportunities and threats), the organization’s strategic capability (resources & competences - advantage/disadvantage), purpose and culture (what does the firm strive to achieve?). Strategic Choices: the options for strategy in terms of the directions of, and the methods by, which strategy may be pursued. Strategy in Action: how are chosen strategies put into action?

1.4 STRATE GY DE VE LO PM E N T PRO CE SS

Rational Analytical View: conventional view, strategies are developed through rational and analytical process. Emergent Strategy View: strategies don’t always evolve as planned or intended, but emerge over time. SU M M A RY

* Strategy is the long-term direction of an organization. A strategy statement should cover the goals of an organization, the scope of the organization’s activities and the advantages or capabilities the organization brings to these goals and activities.

2  of 17

* Corporate-level strategy is concerned with an organization’s overall scope; business-level strategy is concerned with how to compete; and operational strategy is concerned with how corporate- and business-level strategies are actually delivered. * The Exploring Strategy Model has three major elements: understanding the strategic position, making strategic choices for the future and managing strategy in action. * Strategy develops through rational-analytic process and through emergence.

2. THE ENVIRONMENT Macro environment: broad environmental factors, here PESTEL can be used. Industry: organizations producing the same sorts of products/services. Five forces can be used. Competitors and markets: closest to the organization. 2.2 THE M ACRO E N VI RO N M E N T

PESTEL Framework categorizes environmental factors into key types. Six in particular: political, economic, social, technological, ecological, and legal. This highlights that there is also an important non-market environment. Key Drivers for Change: the environmental factors likely to have a high impact on the future success or failure of strategy. Scenario analysis: 1. Defining scenario scope - subject of the scenario analysis and the time span. 2. Identifying key drivers for change - they need to be uncertain and have mutual independence 3. Developing scenario ‘stories’ 4. Identifying impacts - important to carry out robustness check in the face of each scenario, and to develop contingency plans in case they happen. 5. Establishing early warning signs - and set up systems to monitor these. 2.3 I N DU STRI E S A N D SE CTO RS

Porter’s Five Forces Framework - helps identify the attractiveness of an industry in term of five competitive forces. 1. Threat of entry 2. Threat of substitutes 3. Power of buyers 4. Power of suppliers 5. Extent of rivalry between competitors (Porter) where the five forces are high, industries are not attractive. An organization is your complementor if: (i) customers value your product more when they have the other organization’s product than when they have the product alone, (ii) it’s more attractive for suppliers to provide resources to you when it’s also supplying the other organization than when it’s supplying you alone.

3  of 17

2.4 CO M PE TI TO RS A N D M A RK E TS

Strategic groups - are organizations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. These strategies are different from those in other strategic groups in the same industry e.g. grocery vs corner shops. One method for choosing key dimensions is comparing top performers with low performers. Characteristics shared by top performers but not by low performers are likely particularly relevant. Critical success factors (CSFs): factors that either are particularly valued by customers or provide a significant advantage in terms of cost. Value curves: a graphic depiction of how customers perceive competitors’ relative performance across the critical success factors. Value innovation: the creation of new market space by excelling on established critical success factors representing previously unrecognized customer wants. Blue oceans - are new market spaces where competition is minimized. They are strategic gaps in the marketplace. Two important principles: focus and divergence. Red seas - industries are already well defined and rivalry is intense - competing here would require major investment and create tense rivalry.

3 . S T R AT E G I C C A PA B I L I T I E S Resource based view (RBV): the competitive advantage and superior performance of an organization are explained by the distinctiveness of its capabilities. 1) Organizations are not identical, but have different capabilities 2) It is difficult for one organization to obtain or copy the capabilities of another Strategic capabilities: the capabilities of an organization that contribute to its long-term survival or competitive advantage. ! Resources: the assets the organization have ! Competence: the ways those assets are deployed Dynamic capabilities: an organization’s ability to renew and recreate its strategic capabilities to meet the needs of changing environments. If capabilities are to be effective over time they need to change and cannot be static, otherwise they are subject to copying by competitors. ! Sensing: organizations must constantly scan, search, and explore opportunities across various markets and technologies. ! Seizing: once an opportunity is sensed it must be seized through new products/services, processes etc. ! Reconfiguring: to seize an opportunity may require renewal and reconfiguration of organizational capabilities.

4  of 17

Threshold capabilities: those needed for an organization to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market. These could be changing — thus important to keep track of. VRIO: value, rarity, immutability, organizational support V - Value of strategic capabilities: Do capabilities exist that are valued by customers and enable the organization to respond to environmental opportunities or threats? ! - Taking advantage of opportunities and neutralizing threats ! - Value to customers (not to managers or because its distinctive) ! - Cost - must allow organization to make profit R - Rare Capabilities: those possessed uniquely by on organization or by a few others. I - Inimitability: those capabilities that competitors fins difficult and costly to imitate or obtain or substitute. ! - Complexity, the capabilities may be difficult to imitate because they are complex and include internal linkage or external interconnectedness with customers or partners. ! - Casual ambiguity, competitors may find it difficult to discern the causes and effects underpinning an organization’s advantage. ! - Culture and history, complex social interactions and interpersonal relations. O - Organizational Support: the organization must be suitably organised to support the capabilities. Value Chain (M. Porter): the categories of activities within an organization which, together create a product or service. ! -Primary activities are directly connected with the creation or delivery of a product or service. ! -Support activities help improve the effectiveness or efficiency of primary activities.

5  of 17

Value system: the set of inter-organizational links and relationships that are necessary to create a product or service.

Activity system: what are the activities, why are they valuable to customers, how do they fit together and how are they different from competitors’. SWOT: provides a general summary of the strengths and weaknesses explored in an analysis of strategic capabilities and the opportunities and threats explored in an analysis of the environment.

4 . S T R AT E G I C P U R P O S E Stakeholders - those individuals or groups that depend on an organization to fulfil their own goals and on whom, in turn, the organization depends. 4.2 M I SSI O N , VI SI O N , VA LU E S A N D O BJ E CTI VE S

Mission Statement - provide employees and stakeholders with clarity about what the organization is fundamentally there to do. ! - What business are we in? - What would be lost if the organization did not ! exist? - How do we make a difference? - Why do we do this? Vision Statement - concerned with the future the organization seeks to create. ! - What do we want to achieve? Statements of corporate values - communicate the underlying core ‘principles’ that guide an organization’s strategy and define the way that the organization should operate. ! - “Would these values change with circumstances?” If yes, not core and not ! enduring. -

6  of 17

Objectives - statements of specific outcomes that are to be achieved. Often expressed in financial terms. Three guidelines can help make statements meaningful: (1) Focus, (2) Motivational and (3) Clear. 4.3 O W N E RS A N D M A N AGE RS

Firms range from wholly personal to wholly professional. There ar public companies, state-owned enterprises, entrepreneurial business and family businesses. As well as not-for-profit organizations, partnership, employee-owned firms and mutual firms. Corporate governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organization. Governance chain shows the roles and relationships of different groups involved in the governance of an organization. Shareholder model prioritizes shareholder interests and is dominant in public companies, especially in the USA and UK. Potential disadvantages: 1) diluted monitoring, 2) vulnerable minority shareholders, 3) short-termism. Stakeholder model recognizes the wider set of interests that have a stake in an organization’s success such as employees, local communities, local governments, major suppliers and customers and banks. Potential disadvantages: 1) weaker decision making, 2) uneconomic investments and 3) reduced innovation and entrepreneurship. Four types: 1) economic, 2) social/political, 3) technological and 4) community. Stakeholder mapping identifies stakeholder interest and power and helps in understanding political priorities. Organizations adopt different stances on corporate responsibility (CSR) depending on how they perceive their role in society. 4.6 CU LTU RA L I N FLU E N CE S

Organizational culture is the taken for granted assumptions and behaviours that make sense of people’s organizational context. Four different layers: ! Values - may be different from formal statements. ! Beliefs - more easily discerned ! Behaviors - the ways in which organizations operate. ! Taken-for-granted assumptions - the core of of an organization’s culture. Organizational paradigm is the set of assumptions held in common and taken for granted in an organization. 7  of 17

Two potential benefits of a culture: (1) cultural glue coherence makes the firm easier to manage, (2) basis for competitive advantage since it is difficult to imitate what is taken for granted. Potential problems with culture are: (1) captured by culture, (2) cultural barriers to change because culture is difficult to change it may hinder strategic changes, (3) managing culture Cultural web is a means of analysing culture, it shows the behavioral, physical and symbolic manifestations of a culture.

5 . B U S I N E S S S T R AT E G Y Strategic business unit (SBU) supplies goods or services for a distinct domain of activity. 5.2 GE N E RI C CO M PE TI TI VE STRATE GI E S

Competitive strategy is concerned with how an SBU achieves competitive advantage in its domain of activity. In defining competitive strategies, organizations can choose a narrow segment or a broad scope. Competitive advantage is how an SBU creates value for its users both greater than the costs of supplying them and superior to that of rival SBUs. To have advantage the SBU must be able to create grater value than competitors. Porter states to ways of achieving this: (1) an SBU can have structurally lower cost than competitors or (2) products and services can be differentiated from competitors products in ways that are so valued by customers that it can charge higher prices.

Cost, differentiation and scope are generic strategies. Cost leadership: Becoming the lowest-cost organization in a domain of activity. Four key cost drivers: (1) input costs, (2) economies of scale, (3) experience, (4) product/ 8  of 17

process design. Two important requirements: (1) a business’s costs structure needs to be lowest cost and (2) cost-leader has to be able to meet market standards. Differentiation: involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Two key factors: (1) clear definition of the strategic customer on whose needs the differentiation is based and (2) identify key competitors, not too tightly drawn. It is easy to pile on additional costs of differentiation that are not valued enough by the customer, keep eye on cost as well. Focus Strategies: targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others. There are cost focusers (where broad cost-based strategies fail) and differentiation focusers (specific needs that aren’t served). Three key factors: (1) distinct segment needs, (2) distinct segment value chains and (3) viable segment economics. Porter claims that it is important to choose either cost leadership, differentiation, or, focus strategies in order to avoid being stuck in the middle - not doing either strategy particularly well. The Strategy clock gives scope for hybrid strategies. It focuses on price to the consumer instead of cost to the producer. 5.3 I N TE RA CTI VE STRATE GI E S

Generic strategies need to be chosen and adjusted to competitors’. Cooperative strategy - sometimes it becomes hurtful to all competitors to compete against each other, then advantage may be achieved through cooperating with one another. Cooperation can increase their power towards suppliers, buyers, rivals, entrants and substitutes.

6 . C O R P O R AT E S T R AT E G Y A N D D I V E R S I F I C AT I O N Scope is concerned with how far an organization should be diversified in terms of products and markets. ! Vertical Integration is when an organization acts as an internal supplier or a customer to itself. ! Outsourcing may increase efficiency of the firm. Diversification involves increasing the range of products or markets served by an organization. Related diversification involves expanding into products or services 9  of 17

with relationships to the existing business. Conglomerate (unrelated) diversification involves diversifying into products or services with no relationship to existing businesses. Market penetration implies increasing share of current markets with the current product range. Scope is the same. May create retaliation (hämnd) from competitors with eg. price war, and legal constraints because of excessive market power. May also not be an option when economic constraints are severe. - Builds on existing strategic capabilities - Unchanged scope - Greater share and increased power - Greater economies of scale and curve benefits Product development is where organizations deliver modified or new products (or services) to existing markets. - can be expensive and high risk - may require new strategic capabilities - typically involves project management risk Market development involves offering existing products to new markets. - new users - new geographies - new strategic capabilities - meeting critical success factors of the market Mergers and acquisitions (M&A) Acquisition transfer to control of assets, operations and managements into one firm. - Increased market power - Overcomes entry barriers Merger the combination of assets, operations and managements of two firms.

Greater success occur to firms who select the ‘right’ target. Avoid paying a high premium. Effectively integrate the operations.

10  of 17

6.3 DI VE RSI FI CATI O N DRI VE RS

4 potential value-creating drivers for diversification: 1) Exploiting economies of scope. Economies of scope refer to efficiency gains through applying the organization’s existing resources or competences to new markets or service. 2) Stretching corporate management competences (‘dominant logics’). Dominant logic is the set of corporate-level managerial competences applied across the portfolio of businesses. 3) Exploiting superior internal processes 4) Increasing market power Synergy refers to the benefits gai...