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Strategic Management Module 1

Strategic Management Module 1,MBA notes,2009 Scheme based

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Strategic Management Module 1

  1. 1. 1 MOD I: Strategy Management Basic Concepts of Strategic Management In its broadest sense, strategy is the means by which individuals or organizations achieve their objectives. Strategy: a plan, method or series of actions designed to achieve a specific goal or effect. Strategy is the pattern or plan that integrates an organizations major goals, policies and action sequences into a cohesive whole. Strategic Management is a set of manegerial decisions and actions that determines the long run performance of a corporation. It includes enviornmental scanning (external & Internal), strategy formulation , strategy implementation and evaluation & control. Phases of Strategic Management 4 Phases  Phase 1 – Basic Financial Planning : Managers initiate serious planning when they are asked to propose the following year’s budget. Very little external environmentt scanning happens; scanning is limited to internal environment. Financial planning usually is for one year  Phase 2 – Forecast Based Planning : As annual budgets become less useful at simulating long term planning, managers attempt to propose five year plans, by extrapolation. Internal and external environmental scanning is done. However, the scanning process is adhoc and time consuming. Time horizon is 3 to 5 years  Phase 3 – Externally oriented strategic planning : In this phase, top management takes control of the strategic planning process. They engage external consultants to help them develop with the plan, and avoid low level managers in the strategic management process. Consultants ofetn provide sophisticated and innovative techniques that the planning staff uses to gather information and forecast trends. Top management typically develps 5 year plans, with minimal input from lowel level management. Upper level managers meet once in a year, along with planning staff, to evaluate and update the current strategic plan. Such top down planning emphasizes formal startegy formulation and leaves the implementation issues to lower management levels.  Phase 4 – Strategic Mangement : Top management creates planning group consisting of managers and employees from different departments and from all levels to create work groups. Plans are detailed, to include implementation, evaluation
  2. 2. 2 and control issues. The sophisticated 5 year plan is replaced with strategic thinking at all levels of the organization throughout the year. Planning is interactive and people at all levels are involved. Benefits of strategic planning  Clearer sense of strategic vision for the firm  Sharper focus on what is strategically important  Improved understanding of a rapidly changing environment  Emphasizes long term performance. To be successful in the long run companies must not only be able to execute currenta ctivities to satisfy an existing market, but they must also adapt those activities to satisfy new and changing markets.  Research reveals that organizations that engage in strategic management generally outperform those that do not. Challenges to Strategic Management  Impact of globalization  Environmental sustainability o Regulatory risks o Supply chain risks o Products and technology risk o Litigation risk o Reputational risk o Physical risk Basic Model of Stratgic Management 4 basic components  Environmental Scanning  Strategy formulation  Strategy Implementation  Evaluation & Control Environmental Scanning  Monitoring,evaluting and dissemenating of information from the external and inetrnal envirnment to key people within the corporation.  Purpose is to identify strategic factors – those external and internal elements that will determine the future of the organization
  3. 3. 3  SWOT Analysis  External Environment  Opportunities and threats  Internal environment  Strengths and weakness  External Analysis o SWOT o PESTLE o Porters 5 forces model o Task Environment o Industry Matrix  Strategy Formulation o Development of long range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses. o Defining corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines  Strategy Implementation o Strategy implementation is the process by which strategies and policies are put into action through the development of programs, budgets and procedures. o Sometimes referred as operational planning, strategy implementation often involves day-to-day decisions in resource allocation  Evaluation & Control o Process in which corporate activities and performance results
  4. 4. 4 are monitored, so that actual performance can be compared with desired performance. Environmental Variables Strategy Formulation  Mission o Purpose or Reason for organization’s existence o It tells what the company is giving to the society as a service or a product o Defines the fundamental, unique purpose that sets a company apart from other firms of its type and identifies the scope or domain of the company’s operation in terms of products offered and markets served. o May also include a firms values and philosophy about how it does business and treats its employees. o It includes what the company is now, and also the management’s strategic vision of the firm’s future.
  5. 5. 5 o E.g.: Google  To organize the world’s information and make it universally accessible and useful.  Objectives o End results of the planned activity o What is to be accomplished, by when and quantified if possible o Achievement of objectives should result in the fulfillment of the mission o E.g.: Increase sales by 4-6% each year; Increase profit margins by 10% next year  Goal o Is an open ended statement of what one wants to accomplish, with no qualification of what is to be achieved and no time criteria for completion o E.g.: Increase profitability  Strategy o Forms a comprehensive master plan that states how the corporation will achieve its mission and objectives o Maximizes competitive advantage and minimize competitive disadvantage o Levels of Strategy  3 levels – Corporate strategy, business strategy and functional strategy  Corporate Strategy o Describes a company’s overall direction in terms of its general attitude towards growth and the management of its various businesses and product lines o Fit in 3 main categories of stability, growth and retrenchment  Diversification management - acquisitions and divestitures  Stability strategies  Retrenchment Strategies  Market penetration, market expansion, product expansion  Business Strategy o Usually at the business unit level or product level o Emphasizes improvement of the competitive position of a corporations products or services in the specific industry or market segment served by that business unit o Fits in two categories – Competitive and corporative strategies
  6. 6. 6  Generate sustainable competitive advantages  Develop and nurture valuable capabilities  Respond to environmental changes  Approval of functional level strategies o Competitive Strategy --  Low cost , Cost leadership  Differentiation  Direct competition  Focus on niche o E.g. : Kingfisher airlines, strategic alliance with PayMate , introducing FlyBuySMSTM, enabling sms based flight booking  Functional Strategy o Approach taken by functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity o Concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. o E.g.: technological leadership – pioneering an innovation  Marketing To attract and retain customers  Production To produce products at lowest cost  Finance To keep within budgets  Accounting To standardize financial reports  Purchasing To purchase products at lowest cost  R&D To develop newest technologies  Engineering To design product specifications
  7. 7. 7  Marketing Strategy o Deals with pricing, selling and distributing a product o Market development strategy - Capture a larger share of an existing market for current products through market saturation and market penetration; develop new uses and/or markets for current products o Product Development Strategy - Develop new products for existing markets; Develop new products for new markets o Distribution Strategy o Pricing Strategy - Skimming, penetration pricing, dynamic pricing  Financial Strategy  Examines the financial implications of corporate & business level strategic options and identifies the best financial course of action  Provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support business strategy  Attempts to maximize the financial value of the firm
  8. 8. 8  Key issue - Trade off between achieving the desired debt-to- equity ratio and relying on internal long-term financing via cash flow  Financial ratio analysis plays a key role; Debt-equity ratio, leveraged vs unleveraged analysis  Research & Development Strategy  Deals with product and process innovation and improvement  Deals with appropriate mix of different types of R&D and with the question of how new technology should be accessed - through internal development, external acquisitions or strategic alliances  Can be a technology leader by pioneering an innovation, or a technology follower imitating the products of the competitor o New concept of open innovation - where firms uses alliances and connections with corporate, government, academic labs, and even consumers to develop new products and processes  Operations Strategy  Determines how and where a product or service is to be manufactures, the level of vertical integration in the production process, the deployment of physical resources, and relationships with suppliers  Deal with the optimum level of technology the firm should use in its operations process o JIT, Flexible manufacturing systems etc.  Purchasing Strategy o Deals with obtaining the raw materials, parts and supplies needed to perform the operations function o Multiple sourcing - purchasing company orders a particular part from multiple vendors; and choice based on best bid o Sole Sourcing - from a single vendor o Parallel Sourcing - Two suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other’s parts  Logistics Strategy o Deals with the flow of products into and out of the manufacturing process o Trends - Centralization, Outsourcing, and Internet based
  9. 9. 9  Human Resource Management Strategy o Addresses the issue of whether a company or business unit should hire a large number of low skilled employees who receive low pay, perform repetitive jobs, and are most likely to quit after a short time, or hire skilled employees who receive relatively high pay and are cross trained to participate in self managing work teams o Appraisal, training, getting diverse work force etc  Information Technology Strategy o IT strategy for competitive advantage Strategy Implementation  Process by which strategies and policies are put into action through the development of programs, budgets and procedures  Might involve changes within the overall culture, structure and/or management system of the entire organization  Programs o A program is a statement of the activities or steps needed to accomplish a single use plan o Makes a strategy action oriented o May involve restructuring the corporation, changing the company’s internal culture, or beginning a new research effort. o E.g.: Boeing’s Strategy – to increase efficiency, they decided to cut costs: Implemented a program to outsource approximately 70% of manufacturing activities.  Budgets o A budget is a statement of corporations programs in terms of dollars o Lists the detailed cost of each program o Serves as a detailed plan of the new strategy in action, and it specifies through pro forma financial statement the expected impact on firm’s financial future o E.g.: GM budgeted $4.3 billion to update and expand its Cadillac Line of Automobiles  Procedures o Also known as standard operating procedures (SOP)
  10. 10. 10 o Typically details the various activities that must be carried out to complete the corporate’s program Strategic Decision Making Process  Evaluate current performance results  Review corporate governance  Scan and assess external environment  Scan and assess internal environment  Analyze SWOT factors to pin point problem areas, and review and revise the corporate mission, objectives etc  Generate, evaluate and select the best alternative strategy  Implement selected strategies via programs, budgets and procedures  Evaluate implemented strategies via feedback systems and the control of activities to ensure minimum deviation from plans Strategic Audit: provides a checklist of questions, that enables a systematic analysis to be made of various corporate functions and activities.
  11. 11. 11 Constitution of Board  Every incorporated company must have directors, who are collectively referred as board of directors or board  Directors fall under different categories o Executive & Non executive o Independent or not, or nominees or appointees   Executive directors o Managing directors, functional directors and other such persons, who hold a full time appointment in their company fall into this category o Shareholders elected by shareholders to manage the business of the company. o Manage the company on behalf of shareholders o Get involved in day-to-day running of the business
  12. 12. 12 o Executive directors perform operational and strategic business functions such as managing people, looking after assets, hiring and firing and entering into contracts o Work full time; and receive a salary o Director must be an individual; any person competent to contract  Appointment: First set of directors, usually founders, are mentioned in AOA. Subsequent directors are appointed by shareholders in AGM  Non Executive Directors o All board members who are not employed full time by the company o Includes independent or not, nominees, ex-officio and constituency directors o As responsible for the company’s progress and success as their executive colleagues o Appointed for a specific term o Do not get involved in day-to-day matters o Use their experience and expertise to provide independent advice and objectivity; and they usually have a role in monitoring executive management o Work part time, attending meetings and spending time on specific projects o  Nominee and Ex-Officio Directors o Form a distinct sub group of the non executive director category o Nominated by third party, such as Govt, foreign collaborators, holding companies, financial institutions etc , in order to ensure safety of their interest  Constituency Directors /Representative Directors o Appointed to the board by a particular constituency, such as workmen, or small shareholders of the company o His responsibility extends to all the shareholders and not limited to the particular constituency he represents  Shadow Director /Deemed Director o A person who is not named or appointed as a director, but gives instructions to the board o Remains in the background and exercise powers over the board decisions  Associate Director o Title given to senior managers even though they are not on the board. o Sometimes this designation is given as a sign of
  13. 13. 13 appreciation and recognition for the work done  Inside Directors are officers or executives employed by the board’s corporation  Outside Directors are executives of other firms but are not employees of the board’s corporation  Affiliated directors- not employed by the corporation, handle legal or insurance work  Retired executive directors- used to work for the corporation, partly responsible for past decisions affecting current strategy  Family directors- descendents of the founder and own significant blocks of stock Responsibilities of the Board of Directors • Sets corporate strategy, overall direction, mission, or vision • Hires and fires the CEO and top management • Controls, monitors, or supervises top management • Reviews and approves the use of resources • Cares for shareholders’ interests • Assures that the corporation is managed in accordance with state laws, security regulations and conflict of interest situations Role of Board in Strategic Management 3 basic tasks  Monitor: developments inside and outside the corporation, bringing to managements attention developments it might have overlooked  Evaluate & influence: A board can examine management’s proposals, decisions and actions; agree or disagree with them; give advice and offer suggestions; and outline alternatives.  Initiate & determine : A board can delineate a corporations mission and specify strategic options to the management.
  14. 14. 14 Responsibilities of Top Management  Executive leadership & Strategic Vision o Executive leadership is the directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation o Strategic vision- description of what the company is capable of becoming o Transformational Leaders provide change and movement in an organization by providing a vision for that change. o CEO articulates a strategic vision for the corporation  CEO envisions how the company can become  The new perspective that the CEO’s vision brings to activities gives a new renewed meaning to everyone’s working and enables employees to see beyond the details of their own jobs to the functioning of the total corporation o CEO presents a role for others to identify with and to follow  The leader empathizes with followers and sets an example in terms of behavior, dress and actions. The CEO’s attitude and values concerning the corporation’s purpose and activities are clear cut and constantly communicated in words and deeds  Researches indicate that business in which the top management is trusted by its employees, generate more sales and profits o CEO communicates high performance standards and also show confidence in the followers’ abilities to meet these standards  The leader empowers followers by raising their beliefs in their own capabilities.
  15. 15. 15  Communicating high expectations to others often can lead to better performance  Managing the strategic planning process o Top management initiates and manages the strategic planning process; so that the plans for all units and functional areas fit together into an overall corporate plan o Many large orgs have planning staff charged with supporting top management and the business units in strategic planning process o Major responsibility of planning staff includes  Identify and analyze company wide strategic issues, and suggest corporate strategic alternatives to top management  Work as facilitators with business units to guide them through the strategic planning process Contents of Strategic Plan  Introduction – Cover letter  Executive summary  Mission & vision statement  Organizational Profile & History  Critical Issues & Strategies  Program goals and objectives  Management goals & objectives  Appendices