STRATEGIC MANAGEMENT & BUSINESS POLICY MBA & MS (Management Sciences) Post-Mid Semester Notes Prepared by M. Tahir

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Contents 1. Business Models and Strategies in the Internet Era .............................................................................. 4 1.1 The Internet: Technology and Participants ..................................................................................... 4 1.2 The Suppliers of Internet Technology and Services ......................................................................... 4 1.3 How Internet Technology Impacts Company and Industry Value Chains ......................................... 4 1.4 How Internet Technology Improves Supply Chain Efficiency ........................................................... 5 1.5 How Internet Technology Improves Internal Operating Efficiency .................................................. 5 1.6 How Internet Technology Improves Distribution Channel Efficiency ............................................... 5 1.7 How Internet Reshapes the Competitive Environment ................................................................... 5 1.7.1 The Impact on Competitive Rivalry .......................................................................................... 6 1.7.2 The Impact on Barriers to Entry ............................................................................................... 6 1.7.3 The Impact on Buyer Bargaining Power ................................................................................... 6 1.7.4 The Impact on Supplier Bargaining Power ............................................................................... 6 1.7.5 Overall Influence on an Industry’s Competitive Structure ........................................................ 6 2. Evaluating the Strategies of Diversified Companies .............................................................................. 7 2.1 Step 1: Identifying the Present Corporate Strategy ........................................................................ 7 2.2 Step 2: Evaluating Industry Attractiveness...................................................................................... 7 2.2.1 The attractiveness of each industry represented in the business portfolio. .............................. 7 2.2.2 Each Industry Attractiveness Relative to the Others ................................................................ 7 2.2.3 The Attractiveness of the Mix of Industries as a Whole............................................................ 7 2.3 Step 3: Evaluating the Competitive Strength of Each of the Company’s Business Units ................... 8 2.4 Step 4: Strategic Fit Analysis Value Chain Matchups ....................................................................... 8 2.5 Step 5: Resource Fit Analysis .......................................................................................................... 8 2.6 Step 6: Ranking the Business Units on the Basis of Past Performance and Future Prospects ........... 8 2.7 Step 7: Deciding on Resource Allocation Priorities and a General Strategic Direction for Each Business Unit ....................................................................................................................................... 9 3. Building Resources Strengths and Organizational Capabilities .............................................................. 9 3.1 A Framework for Executing Strategy .............................................................................................. 9 3.2 The Principal Strategy Implementing Tasks .................................................................................... 9 3.3 Leading the Strategy Implementation and Execution Process ....................................................... 10 3.4 Building a Capable Organization ................................................................................................... 10 3.5 Staffing the Organization ............................................................................................................. 10 2

3.5.1 Putting together a strong management team ........................................................................ 10 3.5.2 Recruiting and Retaining Talented Employees ....................................................................... 10 3.6 Building Core Competencies and Competitive Capabilities ........................................................... 10 3.7 Matching Organizational Structure to Strategy............................................................................. 11 3.7.1 Identifying strategy critical activities ..................................................................................... 11 3.7.2 Reasons to consider outsourcing ‘noncritical’ value chain activities ....................................... 11 3.7.3 Reasons to consider partnering with others to gain added competitive capabilities .............. 11 3.7.4 Making strategy critical activities the main building blocks .................................................... 12 3.7.5 Determining the degree of authority and independence to give each unit and each employee ...................................................................................................................................................... 12 4. Budgets and Strategy Supporting Policies and Procedures ................................................................. 12 4. 1 Linking Budgets to Strategy ......................................................................................................... 12 4.2 Creating Strategy Supportive Policies and Procedures. ................................................................. 13 4.3 Instituting Best Practices and a Commitment to Continuous Improvement .................................. 13 4.4 Installing Support Systems ........................................................................................................... 13 4.5 Designing Strategy Supportive Reward Systems ........................................................................... 13

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1. Business Models and Strategies in the Internet Era 1.1 The Internet: Technology and Participants The Internet is integrated network of users’ connected computers, banks of servers and highspeed computers, digital switches and routers, and telecommunication equipment and lines. The backbone of the internet consists of telecommunications lines criss-crossing countries and continents. These lines allow computers to transfer data in digital form at very high speed.

1.2 The Suppliers of Internet Technology and Services Internet technology has given rise to a diverse collection of firms and industries on the supply side of the ‘internet economy’. Brief details are as under. The makers of specialized Internet-related communications components and equipment e.g. Cisco Systems The providers of Internet communications services- Those firms which develop and install the internet communication related networks which enable connectivity and traffic flow e.g. AT&T and British Telecom. The suppliers of computer components, computer hardware, and wireless handheld devices- Those companies which are engaged in components manufacture, assembly, and marketing of PCs, servers, data storage devices, and related peripheral equipment’s. Example of companies in this category includes Intel, NEC, Panasonic, and Dell computer. The developers of specialized software- Software developers write the program which enable commercial transactions on the internet. These programs may belong to encryption, order and payment processing, shopping cart tracking etc. Examples of software developer firms include Microsoft, IBM, SAP and so on. E-Commerce enterprise- This category of business include business to business merchants or business to consumer merchants. Examples include Cisco, Intel, ebay, and Amazon.com

1.3 How Internet Technology Impacts Company and Industry Value Chains Internet technology applications open up a host of opportunities for reconfiguring company and industry value chain. Examples include data sharing with suppliers, build to order capabilities, 4

online dealer ordering and order processing, customer ordering capabilities at company website, and extensive online product information. Furthermore, internet can also be used for collaborating product design across company locations, online training programs, self-service benefit administration, and web-based dissemination of company information across all locations.

1.4 How Internet Technology Improves Supply Chain Efficiency Internet technology is a powerful tool for facilitating supply chain management such as procuring items from suppliers, reducing inventory requirements, expediting the design and production of new components and so on. With the help of internet, now staff can check materials inventory against incoming customer orders, check suppliers stock, check the latest prices for parts, and check delivery schedules. All these activities can enable firms to put in place the just-in-time deliveries resulting in cost savings for both suppliers and manufacturers.

1.5 How Internet Technology Improves Internal Operating Efficiency Internet technology can be used improve the internal operating efficiency of the organization. For example, manufacturers can link the orders of customers to production at their plants and to deliveries of components from suppliers. Real-time sharing of customers’ orders with suppliers helps suppliers both hold down the costs of making accurate demand forecasting thus helping both manufacturers and their suppliers adjusting their production schedules as swings in buyer demand are detected.

1.6 How Internet Technology Improves Distribution Channel Efficiency Internet technology alters the distribution of industry value chain in two basic ways. First it allows manufacturers to bypass wholesale/retail dealers and sell directly to end users. Second, it permits tighter collaboration between manufacturers and distribution channel partners to reduce distribution cost. Internet based collaboration between manufacturers and their distribution channel partners entails real-time data exchange which helps in speeding deliveries and reduces inventories.

1.7 How Internet Reshapes the Competitive Environment An important impact of internet is that it alters the strength and balance of competitive forces. The impact on competitive environment can be assessed by the following points.

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1.7.1 The Impact on Competitive Rivalry

The internet widens the geographic market, increasing the number of rivals a company faces and escalating rivalry among sellers in adjacent geographic areas to unprecedented levels. For example, a brick-and-mortar retailer competes with similar stores in nearby areas. While, on internet, the competition moves beyond the local geographical area. 1.7.2 The Impact on Barriers to Entry

Entry barriers in to the ecommerce are relatively low as it is easy for new firms to start their own online store. Existing firms also find it easier to expand into new geographical market via online selling at their websites. 1.7.3 The Impact on Buyer Bargaining Power

The internet makes it easy and convenient for buyers to gather extensive information about competing products and brands. The websites for rival sellers are only a few clicks apart giving buyers unprecedented ability to research the product offerings of rival sellers and shop the market for the best value. Furthermore, the internet has created opportunities for manufacturers, wholesalers, retailers, and sometimes individuals to join online buying groups to pool their purchasing power and approach vendors for better terms than could be gotten individually. Overall, it is clear that internet has substantially increased the bargaining power of the buyers. 1.7.4 The Impact on Supplier Bargaining Power

The internet makes it feasible for companies to reach beyond their border to find the best suppliers and collaborate closely with them to achieve efficiency gains and cost savings. Furthermore, companies can now use the internet to sort through various supplier choices. Overall, internet has given significant bargaining power to the buyers and reduced the bargaining position of the suppliers. 1.7.5 Overall Influence on an Industry’s Competitive Structure

The discussion above shows that internet technology is driving shifts in competitive forces in major industries which resulting in intensified rivalry, greater entry threats, somewhat greater bargaining power over suppliers, better bargaining position on the part of buyers, and incentives for all kinds of seller-suppliers and seller-distributors collaboration.

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2. Evaluating the Strategies of Diversified Companies In this section, we will look at how to evaluate the strategies of diversified companies. This includes different steps, detail of which is given below.

2.1 Step 1: Identifying the Present Corporate Strategy Analysis of a diversified company’s situation and prospect needs to begin with an understanding of its present strategy and business makeup. We can evaluate a diversified company’s corporate strategy by looking at the extent to which the firm is diversified, and whether the firm is pursuing related or unrelated diversification or combination of both, and whether the scope of company operations is mostly domestic, international or global, and its recent moves.

2.2 Step 2: Evaluating Industry Attractiveness Evaluation of industry attractiveness in which the organization is operating can be conducted at three levels. 2.2.1 The attractiveness of each industry represented in the business portfolio.

Industry attractiveness can be assessed by market size and projected growth rate, intensity of competition, emerging opportunities and threatens, seasonal and cyclical factors, resource requirements, industry profitability, and industry uncertainty and business risks. 2.2.2 Each Industry Attractiveness Relative to the Others

Each industry attractiveness relative to the others can be judged by different factors such as market size, projected growth, resource requirements, industry profitability and so on. Mostly, the assessment is combination of both approaches including quantitatively and qualitatively. The assessment of industries in comparison to each other is necessary because it is used by the top management to decide about steering resources in to attractive industries and withdrawing investment from those industries which are not very promising. 2.2.3 The Attractiveness of the Mix of Industries as a Whole

For a diversified company to be a strong performer, a substantial portion of its revenues and profit must come from business units judged to be in attractive industries-those with relatively high attractiveness scores.

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2.3 Step 3: Evaluating the Competitive Strength of Each of the Company’s Business Units In this step, we evaluate the competitive strength of each of the company’s business unit. The evaluation is based on relative market share, costs relative to competitor’s ability to match or beat rivals on key product attributes, ability to exercise bargaining leverages with key suppliers or customers, caliber of alliances and collaborative partnership with suppliers, and technology and innovation capabilities.

2.4 Step 4: Strategic Fit Analysis-Value Chain Matchups One essential part of evaluating a diversified company’s strategy is to check its business portfolio for the extent to which there are competitively valuable matchups among the company’s existing businesses. As part of this analysis, we check that which business units have value chain matchups that offer opportunities to combine the performance of certain activities and thus reducing cost. Potential value chain matchups typically include purchasing, common use of e-commerce systems, manufacturing or distribution.

2.5 Step 5: Resource Fit Analysis The business in a diversified company’s lineup need to exhibit good resources fit as well as good strategic fit. Resource fit exist when businesses add to a company’s resources strength either financially or strategically. Resource fit also exist when a company has the resources to adequately support its businesses as a group without spreading itself too thin. Further, competitive and managerial resource fit means that a diversified company’s competitive and managerial capabilities matches internally.

2.6 Step 6: Ranking the Business Units on the Basis of Past Performance and Future Prospects The next step is to evaluate among all diversified businesses that which businesses have the best performance prospects and which ones are the worst. The important considerations in judging performance is sales growth, profit growth, and return on capital invested in the business. Information on each business’s past performance can be gleaned from a company’s financial record. While past performance is not necessarily a good predictor of future performance, it does signal which businesses have been strong performer and which have been weak performers.

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2.7 Step 7: Deciding on Resource Allocation Priorities and a General Strategic Direction for Each Business Unit Finally, based on the analysis of previous steps, the top management can decide about resource allocation priorities means that which businesses will receive investments and which businesses will be candidate for divestiture. The analysis also gives input to overall strategic direction for the organization.

3. Building Resources Strengths and Organizational Capabilities 3.1 A Framework for Executing Strategy Implementing and executing strategy entails converting the organization’s strategic plan into action and then in to results. Strategy crafting is mostly the job of the senior management, while, strategy implementation is the responsibility of all level of managers to implement it in their respective department or team. In this sense, all managers become strategy-implementers in their area of authority and responsibility, while, all employees are participants. A key to successful implementation is that management must communicate the case for organizational change so clearly that organizational members become involved and committed towards implementing that strategy.

3.2 The Principal Strategy Implementing Tasks There are certain tasks which are important for strategy implementation and include; Building an organization with the competencies, capabilities, and resource strengths to carry out the strategy successfully. Developing budgets to steer ample resources in to value chain activities which are critical to strategic success Establishing strategy supportive policies and procedures Instituting best practices Installing information, communication, e-commerce, and operating system which enable employees to perform their strategic roles properly Tying reward and incentives to the achievement of performance objectives and good strategy execution Creating a strategy supportive work environment and corporate culture

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3.3 Leading the Strategy Implementation and Execution Process One determinant of successful strategy implementation and execution is how well management leads the process. Managers can play an active visible role or a quiet and behind-the-scene role. The decision making can be authoritatively or on the basis of consensus. Delegation can be much or little.

3.4 Building a Capable Organization Good strategy execution depends heavily on three aspects including competent personnel, competitive capabilities, and effective internal organization. Their details are as under.

3.5 Staffing the Organization 3.5.1 Putting together a strong management team

Assembling a capable management team is one of the first cornerstones of the organizationbuilding task. Strategy implementers must determine the kind of core management team they need and then find the right people to fill each slot on the team. Sometimes the existing management team is suitable; and sometimes it needs to be strengthened or expanded by promoting qualified people from within or by bringing in outsiders who is suitable. 3.5.2 Recruiting and Retaining Talented Employees

Staffing the organization with talented people must go much deeper than managerial jobs in order to assemble the human resources and knowledge base needed for effective strategy execution. Talented people in possession of superior intellectual capital are not only a resource that enables proficient strategy execution but also a prime source of competitive advantage.

3.6 Building Core Competencies and Competitive Capabilities As part of strategy implementing process is the need to build competitively valuable core competencies and organizational capabilities which gives the firm a competitive advantage over rivals in performing one or more critical value chain activities. For developing such core competencies and competitive capabilities, organizations need to take the following actions.  Developing and strengthening core competencies- core competencies can relate to any strategically relevant factors such as Honda’s core competence is its expertise in gasoline engine technology. Mostly, the core-competencies are narrow skills are bundles of skills and know-how growing out of the combined efforts of cross-functional work groups and departments. 10

 Developing and strengthening organizational capabilities- the essence of good strategy execution is building and strengthening the company’s competencies and capabilities. Capability building is a time consuming, hard to replicate exercise. Capabilities are difficult to purchase and difficult to acquire just by watching others.  Updating and reshaping competencies and capabilities- Even after core competencies and competitive capabilities are in place and functioning, company manages can’t relax. Competencies and capabilities need to be refreshed and modified with some even being phased out and replaced with altogether new ones.  The strategic role of employee training- training are important when a company shifts to a strategy requiring different skills, competitive capabilities, managerial approaches and operating methods. Training is also a strategically important in organizational efforts to build skills-based competencies.

3.7 Matching Organizational Structure to Strategy Organization need to match its organizational structure with organizational strategy. 3.7.1 Identifying strategy critical activities

In any business, some activities in the value chain are always more critical to strategic success and competitive advantage than others. From strategic point of view, those activities which are supportive and less important can be outsourced thus making organization structure more focused towards its core functions. 3.7.2 Reasons to consider outsourcing ‘noncritical’ value chain activities

Outsourcing non-critical value chain activities can produce many advantage such as lower costs, less internal bureaucracy, speedier decision making, more flexibility, and heightened strategic focus. 3.7.3 Reasons to consider partnering with others to gain added competitive capabilities

Partnerships with outside firms can add to a company’s capabilities and contribute to better strategy execution. By building, continually improving, and then leveraging collaborative partnerships, a company enhances its overall organizational capabilities and builds resource strengths which deliver superior value to the customers.

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3.7.4 Making strategy critical activities the main building blocks

The rationale for making strategy critical activities as the main building blocks in structuring a business is that it is crucial to strategic success. 3.7.5 Determining the degree of authority and independence to give each unit and each employee

Companies must decide how much authority to give managers of each organization unit and how much decision making latitude to give individual employees in performing their job. Top management can choose level of centralization which can be between high to low. High centralization means that all major decision making authority remains with the top management; while, low centralization means that decision making authority is shifted to lower level management and employees. Decentralization of authority is an appropriate response to today’s dynamic environment and related challenges.

4. Budgets and Strategy Supporting Policies and Procedures 4. 1 Linking Budgets to Strategy Implementing and executing strategy forces managers to consider how the firm’s resources are being allocated. Organizational units need sufficient budgets and resources to carry out their parts of the strategic plan effectively and efficiently. How well budget allocations are linked to the needs of strategy can either promote or impede the implementation process. Too little funding slows progress and impedes the ability of organizational units to execute their pieces of the strategic plan proficiently. Too much funding wastes organizational resources and reduces financial performance. Further, a change in strategy nearly always calls for budget reallocations. Units that have a bigger and more critical strategic role in new strategy may need more people, new equipment, additional facilities, and above average increases in their operating budgets. Strategy implementers need to be active and forceful in shifting resources, downsizing some areas and upsizing others. Such forceful actions to reallocate operating funds and move people into new organizational units signal a determined commitment to strategic change and are frequently needed to catalyze the implementation process and give it credibility.

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4.2 Creating Strategy Supportive Policies and Procedures Changes in strategy generally call for some change in work practices and internal operations. The new work practices and internal procedures provide top-down guidance to managers, supervisors, and employees about how certain things need to be done. It also align actions and behavior with strategy throughout the organization, placing limits on independent action, and channeling individual and group efforts along the intended path. The new policies and standardized operating procedures also helps in enforcing needed consistency in how particular strategy-critical activities are performed in geographically scattered operating units.

4.3 Instituting Best Practices and a Commitment to Continuous Improvement The innovative manner in which activities or processes are performed by companies considered ‘best-in-industry or world’ are commonly termed as best practice. Organization need to benchmark how it performs specific activities against best-in-industry or best-in-world performers. Such benchmarking provides valuable yardsticks for gauging how well a company is executing pieces of its strategy and represents a solid methodology for identifying areas in which to improve. It can also be useful to look at ‘best in company’ performers of an activity.

4.4 Installing Support Systems Innovative, state of the art support systems can be a basis for competitive advantage if they give firm capabilities that rivals can’t match. Well-conceived, state-of-the-art support systems not only facilitate better strategy execution but also can strengthen organizational capabilities enough to provide a competitive edge over rivals. The support system can relate to information systems means a system which can gather and store data, track key performance indicators, identify and diagnose problems, and report strategy-critical information.

4.5 Designing Strategy Supportive Reward Systems The role of the reward system is to align the well-being of organization members with realizing the company’ vision, so that organization members benefit by helping the company execute its strategy competency and fully satisfied customers. Company managers typically try to enlist organization wide commitment to carrying out the strategic plan by motivating people and 13

rewarding them for good performance. Thus, to get employees sustained energetic commitment, management has to be resourceful in designing and using motivational incentives for both monetary and non-monetary types.

(The End- Thank You)

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