• “…the determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resource necessary for carrying out these goals…” Alfred Chandler in ‘Exploring Strategy’, Johnson et al. (2011), p11.
• To reduce uncertainty: a strategy can make the business anticipate change and develop appropriate responses.
• To project themselves in the future: a strategy gives a future direction to the business.
• To clarify and unify purpose: a strategy sets the objectives at each level of the organisation.
• To enable control: a strategy provides standards against which to measure performance.
• Steps in the strategic management process:
1. Identify the organisation’s current mission and goals.
2. Analyse the environment:
• Internal analysis: SWOT; Resources and capabilities.
• External analysis: SWOT; Competitive Environment – 5 Forces.
3. Use the results of the analysis to make choices
4. Formulate the strategy
5. Implement the strategy.
6. Evaluate results.
• The ‘planning view’ is prescriptive, based on the idea that strategic decisions require a formal approach to guide managers through the process.
• Mission statements provide focus…
• A mission statement expresses the underlying beliefs and values held within the organisation.
• Mission statements clarify the principal activities of the organisation, the key goals and objectives, the key beliefs and values and the main stakeholders of the organisation.
• Draws out strategic implications
• S = Strengths
W = Weaknesses
O = Opportunities
T = Threats
• Internal Factors: S & W (compare with competition)
• External Factors: O & T (Five Forces and PESTEL).
• The analysis of the external competitive environment is an analysis of the structure of an industry.
• Competitive strategy develops through an understanding of the rules of competition in an industry.
• The rules of competition are embodied in 5 competitive forces:
1. The entry of new competitors.
2. The threat of substitutes.
3. The bargaining power of buyers.
4. The bargaining power of suppliers.
5. The rivalry among existing competitors.
• Higher barriers to entry means fewer new entrants = more profit (in theory).
• Affected by entry barriers such as:
• high costs of equipment and facilities, e.g. aircraft manufacturing
• lack of distribution facilities, e.g. grocery retailing,
• customers loyal to established brands, e.g. sport brands
• small companies lack economies of scale to drive down market price, e.g. motor manufacturing
• subsidies/regulations favour existing firms, e.g. patent-protected drugs
• Greater power of buyers (customers) = less profit to seller (in theory)
• The classic example of buyer power are the major supermarkets like Wal-Mart, Tesco in relation to farm suppliers.
• Power of buyer increases if:
• Supermarket buyer takes high percentage of farmer supplier’s sales.
• Many alternative products or farmer suppliers available.
• Product is a high percentage of supermarket buyer’s costs, creating incentive to seek alternatives e.g. milk.
• Cost of switching to other suppliers is low.
• High power of supplier = less profit to buyer (in theory)
• The classic example of supplier power are luxury brands.
• Power of suppliers is high if:
• Product a low percentage of buyer’s costs (e.g. fixed costs of retail outlets is biggest cost), little incentive to seek alternatives.
• Few alternative products or suppliers (distinctive product keeps buyers loyal) available.
• Cost of switching suppliers high (search time, scarcity).
• Easy to substitute = less profit to supplier (in theory)
• Recent examples of substitutes are smartphones replacing digital cameras for taking pictures.
• Substitution becomes easier if:
• Technological developments enable new products and services e.g. introduction of mobile phone as a substitute for fixed line.
• Buyers willing to change buying habits e.g. use a mobile instead of a fixed line.
• Transport costs fall e.g. international substitutes become available, for example in foodstuffs, source fresh vegetables from Kenya.
• New suppliers enter the market e.g. TV company (Sky) enters broadband telephony market.
• Greater rivalry = less profit (in theory)
• The classic example of intensity of rivalry is the airline industry.
• Rivalry increases when:
• many firms, but none dominant.
• market growing slowly, so firms fight for share.
• high fixed costs encourage overproduction e.g. buy new planes in bulk every five years.
• loyalties (family businesses or political support – flag carriers maintain jobs even though loss-making) prolong overcapacity.
• Analysing the internal environment aims to identify the organisation’s strengths and weaknesses.
• The organisation needs to assess its strategic capability: its ability to perform at the level required to survive and prosper.
• The ability to compete effectively depends on:
• Resources: physical, human, financial, intangible.
• Competences: enable the organisation to deploy resources to gain competitive advantage.
• The value chain: how the firms organises its activities - a tool for diagnosing competitive advantage.
• Primary activities: they transform inputs into outputs:
• Inbound logistics - supply chain
• Operations - what the organisation does
• Outbound logistics - distribution
•Marketing and sales- communication
• Service - enhancing the product
• Support activities: they support the primary activities:
• Organisational structure - planning, financial controls, quality systems
•Human Resource- recruitment/training etc
• Management Technology - IT systems etc.
• Procurement - purchasing policy
• Look Forward, Reason Back
• Build Platforms and Ecosystems
• Make Big Bets Without Betting the Company
• Exploit Leverage and Power
• Shape the Company Around Your “Personal Anchor”
• Analysing the firm’s environment is a key step in the strategic management process.
• Analysis strategic options strategy formulation
• The value chain enables the manager to know which are the activities that create value and make the firm gain competitive advantage.
• The value chain model is useful to define a firm’s core competences.
• There is a need to understand the linkages between activities and how the costs of one activity affects the other.
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