Strategic Management Unit I&II

2
MEANING & DEFINITION
 Strategic Management can be defined as “the
art and science of formulating, implementing
and evaluating cross-functional decisions that
enable an organization to achieve its objective.”
 Definition:
“The on-going process of formulating,
implementing and controlling broad plans guide
the organization in achieving the strategic
goods given its internal and external
environment”.

COMPARISON
STRATEGIC TACTICAL OPERATIONAL
Long range Intermediate Short range
3 or more yrs 2-3 yrs One yr
Top mgt Middle Lower
Broad objectives Integration of departments Day to day working
Focus on planning &
forecasting
On co-ordination On control

Levels of Strategy
 Corporate –Level
 Business-Level
 Functional -Level

BUSINESS POLICY
Business policy provides a basic
framework defining fundamental issues of a
company, its purpose, mission and broad
business objectives and a set of guideline
governing the company's conduct of
business within its total perspective.
 Overall Guide
 Focus on strategic allocation of scarce resources

Types of Policies
MAJOR POLICIES:
 Lines of business
 Code of ethics
SECONDARY POLICIES:
 Selection of geographic area
 Identification of major customers
 Major products

Types of Policies
FUNCTIONAL POLICIES:
 Production
 Marketing
 Finance
 Personnel
 Research
RULES:
 Salary & wage Adm.
 Discipline& discharge
 Welfare Adm
 Safety & health

Strategy Vs Policy
STRATEGY POLICY
Strategic decisions Guidelines
Putting a policy into
effect
General course of action
Deals with crucial
decisions, requires top
mgt involvement.
Once formulated can be
delegated to lower levels

STRATEGIC MANAGEMENT PROCESS
SMP
1. Vision formulation which leads to the
statement of the Mission.
2. The mission is then converted into
performance Objectives
3. To achieve objectives you develop
Strategies
4. Strategy Implementation
5. Evaluation of performance

Purpose of SMP
 CORE COMPETENCE
 SYNERGY
 VALUE Creation

CORE COMPETENCE
 An organization’s core competence
is something it does exceptionally
well in comparison to its
competitors. It reflects a distinct
competitive advantage like superior
research, development etc..

SYNERGY
 Two or more sub systems working
together to produce more than the
total of what might they produce
working alone.
 Ex:1+1=3

VALUE CREATION
 Exploiting core competencies and
achieving synergy help organizations
create value for customers. Value is
the sum total of benefits received and
cost paid by the customer.

Steps in SMP
 Vision, Mission, Objectives
 External Analysis
 Internal analysis

STRATEGIC INTENT
Vision,Mission,Objectives

 Strategic intent is about clarity, focus
and inspiration.
VISION
MISSION
OBJECTIVES
GOALS
PLANS

VISION
 Corporate vision is a short and inspiring
statement of what the organization intends
to become and to achieve at some point in
the future, often stated in competitive terms.
 Vision refers to the category of intentions
that are broad, all-inclusive and forward-
thinking. It is the image that a business
must have of its goals before it sets out to
reach them.
 It describes aspirations for the future,
without specifying the means that will be
used to achieve those desired ends .

Mission
 Mission Statement describes what business you’re
in and who your customer is. As such, it captures
the very essence of your enterprise - its
relationship with its customer.
 Developing mission statement is the step which
moves your strategic planning process from the
present to the future.
 It depicts the mission statement connects “today”
with the “future.” Your mission statement must
“work” not only today but for the intended life of
your strategic plan of which your mission statement
is a part.
 If you’re developing a five year strategic plan, for
example, you develop a mission statement which
you believe will “work” for the next five years.

Values
 For any statement, whether mission or
vision, to be embraced and acted upon, it
must reflect the values of your organization.
 Values describe what your management
team really cares about. How would your
managers respond to a trade-off between
product quality and profit? That’s really a
question of value.

Corporate Goals & Objectives
Role of Objectives:
1. Legitimacy
2. Direction
3. Coordination
4. Benchmarks for success
5. Motivation

Characteristics of obj;
 Obj. form a HIRERACY
 Network
 Multiplicity of Obj
 Long and short-range obj

 Environment may be defined as the set of external
factors such as economic, socio cultural, Govt. &
legal, demographic, which are uncontrollable in
nature & affect the business decisions of a firm or
company.
1) Micro Environment
2) Macro Environment
 Micro Environment-
1) Supplier
2) Customers-industrial, retailers, wholesalers, Govt.,
foreigners
3) Market intermediates- middlemen, physical
distribution firms, marketing service agencies, and
financial intermediaries

4. Competitors-
 Desire competitions – limited disposable income many
unsatisfied desires T.V./washing machine/ investment
 Generic competition-among alternatives which satisfied
particular category of desire- Investment in
U.T.I./P.O./Bank/Any other.
 Product form competition- Washing machine, semi/
automotive
 Brand competition- Videocon/godrej
5. Public –
 media
 citizen action public
 local public

 Macro Environment -uncontrollable
1. Economic Environment
 Eco. Conditions- business cycle, growth of economy, size
of domestic Market & its dynamic effect
 Eco. Policies- budgets, industrial regulations, eco
planning, import & export regulations, business laws, ,
industrial policy, control on price & wages, trade &
transport policy, size of national income, demand &
supply of various goods
 Economic System—of a country
 free enterprise i.e. capitalist
 socialist
 communist
 mixed

2. Political & Govt. Environment. -
 Legislature- decide particularly
course of action
 Executive -implementation
 Judiciary -to see above both
working public interest.

3. Socio Cultural Environment-
people attitude to work & health, role
of family, marriage, religion &
education, ethical issues, social
responsibilities of business
4. Natural Environment- geographical
& ecological factors- natural
resources endowments, weather &
climatic conditions, topographical
factors, locational aspects, port
facilities

5. Demographic Environment. - Size
growth age composition of
population, family size, economic
stratification of population,
educational level, caste religion etc.
6. Technological Environment-
marketing, innovation, R & D
7. International Environment-
liberation force of view global
perspectives

Environmental Scanning:
 It helps every mgt in attaining maximum
profits and growth and the same time helps
in minimization of future threats.
Environment analysis has 3 basic objectives
 Under taking of current & potential changes
 Should provide inputs for strategic decision
making
 Rich source of idea & understanding of the
context, bring fresh views

Environmental Analysis-
Scanning
general supervision of all env. Factors & their
interaction in order
1. to identify early signals of change,
2. Detect env. Changes underway
Monitoring
tracking the env. Trends sequences of events or
stream of activities. Study of Indicators,
assemble data to discern emerging patterns.
Three outcomes emerges in monitoring
1. A specific description of env. trends
2. Identification of trends
3. Identification of areas of further scans

Forecasting - scanning & monitoring
provide a picture of what is
happening strategic decision
Making requires future orientation.
Forecasting is developing future
projections of changes
Assessment - outputs of above 3 steps
are assessed to determine
implementation. Assessment
involves identifying & evaluate how
& why current & projected env.
Changes affect strategic Mgt. Of the
organization

Techniques of Environment Analysis
 SWOT Analysis, strengths, weakness, opportunities, & threats.
 Forecasting methods
 Time services analysis & projection-moving averages, exponential
smoothing book Jenkins, trend projection.
 Casual Methods- regression model, econometric model, anticipation
surveys, input output model, diffusion index, leading indicators, life
cycle analysis.
 Qualitative Method-Delphi method, market research, panel
consensus, visionary forecast, historical analogy.
 Scenario technique- preparation of background, selection of critical
indicators, establishing past behavior of indicators, verification of
potential future events, forecasting the indicators, writing of scenario.
 Preparation of ETOP-environmental threat & opportunity profile is a
summary of environmental factors. It is a structured way. Assessing
Importance of environmental factors, assessing impact factor
combining importance & impact factor.

Environmental Scanning &
Monitoring
•Environmental scanning is a concept from
business management by which
businesses gather information from the
environment, to better achieve a
sustainable competitive advantage.
•To sustain competitive advantage the
company must also respond to the
information gathered from environmental
scanning by altering its strategies and
plans when the need arises.

Environmental Scanning &
Monitoring- Techniques
SWOT
Industry Analysis
Techniques
Competitor
Analysis
PEST QUEST

SWOT
(Strength-Weakness-Opportunity-Threat)
Identification of threats and
Opportunities in the environment
(External) and strengths and
Weaknesses of the firm (Internal) is the
cornerstone of business policy
formulation; these factors which
determine the course of action to
ensure the survival and growth of the
firm.

PEST Analysis – The Meaning
 A PEST analysis is an analysis of the external macro-
environment that affects all firms.
 P.E.S.T. is an acronym for the Political, Economic,
Social, and Technological factors of the external
macro-environment.
 Such external factors usually are beyond the firm's
control and sometimes present themselves as threats.
 However, changes in the external environment also
create new opportunities.

A. Industry Life Cycle Analysis
B. Study of the structure and
characteristics of an Industry
C. Profit Potential of Industry (Porter
Model)
Industry Analysis: Three sections

A. Industry Life Cycle Analysis
Four Stages:
 Pioneering Stage
 Rapid Growth Stage
 Maturity and Stabilization Stage
 Decline Stage

B. Study of the structure and
characteristics of an Industry
1. Structure of the Industry and nature of
Competition
2. Nature and Prospectus of the demand
3. Cost, Efficiency and Profitability
4. Technology and Research

Michael Porter has argued that the profit
potential of an industry depends on the
combined strength of the:
1. Threat of new entrant
2. Rivalry among existing firms
3. Pressure from substitute products
4. Bargaining power of buyers
5. Bargaining power of sellers
3. Profit Potential of Industry (Porter
Model)

 SWOT analysis
 Value chain Analysis
 Financial Analysis
 Key factor rating
 Functional area profile
 Strategic advantage profile

Internal Analysis
Resource-Based View
 Firms have heterogeneous resources and capabilities.
 By exploiting core competencies, firms can develop value-creating
strategies superior to their competitors.
 Four criteria must be met for a sustained competitive advantage.
Valuable
Costly to imitate
Rare
Non-substitutable

Internal Analysis
Resources
• Tangible
• Intangible
• Brand Equity
Capabilities
Core
Competencies
Competitive
Advantage
Above-Average
Returns
Components of the Resource- Based
View

Internal Analysis
Resources and Capabilities:
 Resources
• Represent what the firm has to work with.
• Resources must be combined to establish a capability.
• Types:
• Tangible
• Intangible
• Brand Equity

Internal Analysis
Tangible Resources – Assets that can be seen, touched or quantified.
- Financial resources (borrowing capacity)
- Physical Resources (facilities, locations)
- Organizational structure (reporting structures)
- Technological (patents)
Intangible Resources
- Human resources (experience, training)
- Resources for innovation (technical employees, facilities)
- Reputation
Brand Equity
- Brand name
- maintaining brand equity (Mercedes example – value/performance
and Japanese automakers)

Portfolio Analysis
And
BCG Matrix

The Growth Share Matrix
 It evaluates the strength of a firm from the portfolio
of businesses or products the firm has in different
stages of PLC, which are required for future growth.
 It analyses the impact of investing resources in
different SBUs on the corporate’s future earnings
and cash flow.

SBUs are evaluated from two ways
1. Industry attractiveness
(market growth)
And
2. Competitive strength
(relative market share)

A Matrix is created considering the market
growth and relative market share of all the
businesses in their respective industries
and businesses are placed in that matrix for
analysis and evaluation.

 The market growth rate on the vertical axis is
the proxy measure for the industry
Attractiveness.
 The relative market share is proxy for its
competitive strength in the industry.

BCG Growth-Share Matrix
In BCG approach, the company classifies
all its SBUs into 4 types as
“star”,
“cash cow”,
“question mark”
and
“dog”
according to their market growth and
relative market share.

The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio,” Adapted by permission from The Boston Consulting Group, Inc., 1970.
Relative market share
Cash cows Dogs
High
Low
Question
marks
Stars
Marketgrowthrate
Cash cows Dogs
High
High Low
Question
marks
Stars
High
Low
Low

$
?
Stars
Cash Cows Dogs
Problem Child
MarketgrowthrateMarketgrowthrate
Marketgrowthrate
BCG Matrix

Stars
Cash Cows Dogs
Problem Child
MarketgrowthrateMarketgrowthrate
Marketgrowthrate
BCG Matrix
Revenue ++++
Expenses _ _ _
Net +
Revenue +
Expenses _ _ _ _
Net _ _ _
Revenue + + + + +
Expenses _
Net + + + +
Revenue + +
Expenses _ _ _ _
Net _ _ _

Strategic Management Unit I&II

BCG Market Share/Market Growth Matrix

BCG Matrix
 Dogs are businesses that have a very small
share of a market that is not expected to
grow.
 Cash cows are businesses that have a
large share of a market that is not expected
to grow substantially.
 Question marks are businesses that have
only a small share of a quickly growing
market.
 Stars are businesses that have the largest
share of a rapidly growing market.

Stars
are high-growth, high-share businesses or
products. They often need heavy
investment to finance their rapid growth.
Therefore, they may not be producing a
positive cash flow. The business strategy
will generally be for growth fueled by
externally acquired capital. Eventually,
their growth will slow, and they will turn into
cash cows.

Cash cows
are low-growth, high-share businesses or
products. These established and successful
SBUs need less investment to keep their
market share. They produce a lot of cash to
be used for other business units of the
company. They are either milked for
investment in stars or question marks or
harvested if there is little optimism for a
stable future.

Question marks
sometimes called problem children, are low-
share business units in high-growth markets.
They need a lot of cash to keep and increase
their share; they can not generate enough
cash themselves. Management must decide
which question mark it should build into stars
and which should phase out.

Dogs
are low-growth, low-share businesses and
products. They often have poor
profitability. Therefore, the business
strategy for a dog is most often to divest,
but occasionally to hold for possible
strategic repositioning as a question mark
or cash cow.

Portfolio Strategies
Four
Portfolio
Strategies
BUILD
Does the SBU have the potential to be a star?
HOLD
Can you maintain and preserve market share?
DIVEST
Is it appropriate to dump SBU’s
with low-growth potential?
.HARVEST
Increase the short-term return without
impacting long-run prospects.

Limitations of the BCG Matrix
1. Market Growth rate is an inadequate descriptor of
overall industry attractiveness.
2. Relative market share is inadequate as a descriptor of
overall competitive strength.
3. The analysis is highly sensitive to how growth and
share are measured.
4. It provide little guidance on how best to implement the
investment strategies.
5. The model implicitly assumes that business units are
independent or one another except for the flow of cash.

How to Identify SBUs?
 It is the basic competitive unit of a company.
 It has a specific and identifiable group of
customers.
 It has specific and identifiable competitors.
 It can be measured as an independent entity in
terms of profit and loss.
 Therefore, it may require a separate marketing
strategy.

GE / McKinsey Matrix
 In consulting engagements with General
Electric in the 1970's, McKinsey &
Company developed a nine-cell portfolio
matrix as a tool for screening GE's large
portfolio of strategic business units (SBU).
This business screen became known as the
GE/McKinsey Matrix and is shown below:
 The GE matrix has nine cells vs. four cells
in the BCG matrix. 

 The GE / McKinsey matrix is similar to the BCG
growth-share matrix in that it maps strategic
business units on a grid of the industry and the
SBU's position in the industry. The GE matrix
however, attempts to improve upon the BCG
matrix in the following two ways:
  The GE matrix generalizes the axes as
"Industry Attractiveness" and "Business Unit
Strength" whereas the BCG matrix uses the
market growth rate as a proxy for industry
attractiveness and relative market share as a
proxy for the strength of the business unit.

 The vertical axis of the GE / McKinsey matrix is
industry attractiveness, which is determined by
factors such as the following:
 Market growth rate
 Market size
 Demand variability
 Industry profitability
 Industry rivalry
 Global opportunities
 Macroenvironmental factors (PEST)
Industry Attractiveness

Each factor is assigned a weighting
that is appropriate for the industry.
The industry attractiveness then is
calculated as follows:

The horizontal axis of the GE / McKinsey matrix is the strength of
the business unit. Some factors that can be used to determine
business unit strength include:
Market share
Growth in market share
Brand equity
Distribution channel access
Production capacity
Profit margins relative to competitors
The business unit strength index can be calculated by multiplying the estimated
value of each factor by the factor's weighting, as done for industry attractiveness.
Business Unit Strength

Industry attractiveness and business unit strength
are calculated by first identifying criteria for each,
determining the value of each parameter in the
criteria, and multiplying that value by a weighting
factor. The result is a quantitative measure of
industry attractiveness and the business unit's
relative performance in that industry
Industry attractiveness =
factor value1 x factor weighting1
+ factor value2 x factor weighting2+…
GE MATRIX contd..

Each business unit can be portrayed as a circle
plotted on the matrix, with the information
conveyed as follows:
Market size is represented by the size of the
circle.
Market share is shown by using the circle as a pie
chart.
The expected future position of the circle is
portrayed by means of an arrow.
Plotting the Information

The shading of the above circle indicates a 38%
market share for the strategic business unit. The
arrow in the upward left direction indicates that
the business unit is projected to gain strength
relative to competitors, and that the business unit
is in an industry that is projected to become more
attractive. The tip of the arrow indicates the future
position of the center point of the circle.
The following is an example of such a representation:

Resource allocation recommendations can be made to grow,
hold, or harvest a strategic business unit based on its position
on the matrix as follows:
 Grow strong business units in attractive industries,
average business units in attractive industries, and strong
business units in average industries.
 Hold average businesses in average industries, strong
businesses in weak industries, and weak business in
attractive industries.
Strategic Implications

 Harvest weak business units in unattractive
industries, average business units in unattractive
industries, and weak business units in average
industries.
There are strategy variations within these three
groups. For example, within the harvest group
the firm would be inclined to quickly divest itself
of a weak business in an unattractive industry,
whereas it might perform a phased harvest of an
average business unit in the same industry.

LIMITATION GE
 While the GE business screen represents
an improvement over the more simple BCG
growth-share matrix, it still presents a
somewhat limited view by not considering
interactions among the business units and
by neglecting to address the core
competencies leading to value creation.
Rather than serving as the primary tool for
resource allocation, portfolio matrices are
better suited to displaying a quick synopsis
of the strategic business units.

GE Mckinsey Matrix
HOLDLow
AVERAGE
High
WEAKAVERA
GE
STR
- ONG
Bus Str
Ind at
GROW
HOLD
HARVEST

Strategic Management Unit I&II

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Strategic Management Unit I&II