Introduction to strategic mangement

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Strategic management


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Strategic Management :

Strategic Management

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Module 1 An Introduction to Strategic Management

Case study of Boeing and Airbus:

Case study of Boeing and Airbus

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Boeing has historically been a global leader in manufacturing commercial aircraft. In 2001, Airbus had more orders than Boeing for the first time in their competitive history.

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In 1992, Boeing and Airbus agreed to a joint study on prospects for a super jumbo aircraft. The impetus for the study was the growing traffic in China and India. However, Airbus and Boeing reached different conclusions concerning the market trends, and the joint effort was disbanded.

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Boeing’s 787 Dreamliner Airbus’s A-380 Capable of transporting 250 passengers. 550-plus seats. A point-to-point system in which smaller airports are more abundant. Flying to larger airports that use the hub-and-spoke system. It can land at many more airports around the world. A-380 aircraft is currently able to land at approximately only 35 airports.

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More recently, Boeing’s strategy in regard to overall design with the 787 Dreamliner is winning the day, as far as the order battle goes. Boeing attempted to speed up the process by creating an efficient global supply chain that involves many potential customers around the world, including Japan, China, and others. Airbus is behind in its schedule to produce the A-380 and its mid-sized plane. The A-350, has also had redesign issues. The mid-sized A-350 is behind schedule and Airbus had to provide significant incentive discounts to increase future orders.

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Also, Airbus has been forced to produce more of its plane parts in European countries because governments have significant ownership and provide subsidies to Airbus. Accordingly, these governments – Spain, France, Germany and the United Kingdom – want to maintain employment levels in these countries, and thus Airbus must continue to produce primarily in European countries. Boeing outsources 85 per cent of the work for its 787 Dreamliner aircraft. The corresponding figure for Airbus’s A380 is 15 per cent. As a result of the design and development delays, Airbus’s development costs for the A-380 have risen to $14 billion versus the $8 billion invested by Boeing for the 787.

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The airlines, preferred smaller aircraft which enabled them to get to smaller airports quickly, without as many transfers on a point-to-point system. Additionally, Boeing followed up with the ultimate creditors, the leasing agents, and asked what they would prefer as far as risks were concerned. Again, the leasing agents preferred smaller Aircraft which would reduce their risks in financing versus the large super jumbo A-380. These business-level strategies have created an obvious advantage in terms of design for Boeing.

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What's the use of running if you are not on the right road

Chapter Roadmap:

What Is Strategy? Stakeholders in Business The I/O Model and Resource-Based Model The Relationship Between a Company’s Strategy and Its Business Model Vision, Mission and Purpose Why Are Crafting and Executing Strategy Important? Chapter Roadmap


Definition: “A strategy is the determination of the basic long-term goals and objectives of an enterprise and the adoption of the course of action and the allocation of the resources necessary for carrying out these goals.” “A strategy is a set of decision making rules for guidance of organizational behavior. Introduction

Thinking Strategically: The Three Big Strategic Questions:

Where are we now? Where do we want to go? Business( es ) to be in and market positions to stake out Buyer needs and groups to serve Outcomes to achieve How will we get there? A company’s answer to “how will we get there?” is its strategy Thinking Strategically: The Three Big Strategic Questions

The “Hows” That Define a Firm's Strategy :

How to please customers How to respond to changing market conditions How to outcompete rivals How to grow the business How to manage each functional piece of the business and develop needed organizational capabilities How to achieve strategic and financial objectives The “ Hows” That Define a Firm's Strategy

Basic Model of Strategic Management:

Basic Model of Strategic Management Four Basic Elements


A stakeholder is any individual or organization that is affected by the activities of a business. They may have direct or indirect interest in the business. Stakeholders

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The main stakeholders are: Shareholders Management and employees Customers and suppliers Bank and other financial organizations Government Trade unions Pressure groups

The I/O Model:

The I/O (Industrial Organization) Model adopts an external perspective. It starts with an assumption that forces external to the company represent the dominant influences on a company’s strategic actions. The I/O Model

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The I/O Model is based on the following four assumptions: The external Environment impose pressures and constraints on firms and determines strategies that will result in superior returns. Most firms competing in an industry control similar sets of strategically-relevant resources and thus pursue similar strategies. Resources used to implement strategies are highly mobile across firms. Organizational decision-makers are assumed to be rational and committed to acting only in the best interests of the firm.

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External Environment General Environment Industry Environment Competitive Environment Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Strategy Formulation Selection of a strategy linked with above-average returns in a particular industry Assets and Skills Assets and skills required to implement a chosen strategy Strategy Implementation Selection of strategic actions linked with effective implementation of the chosen strategy Superior Returns Earning of above-average returns I/O Model of Superior Returns

What Is a Business Model? :

A business model addresses “How do we make money in this business?” Is the strategy capable of delivering good bottom-line results? Do the revenue-cost-profit economics of the strategy make good business sense? Look at revenue streams the strategy is expected to produce Look at associated cost structure and potential profit margins Do resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money? What Is a Business Model?

PEST Analysis:

Definition of PEST Analysis: A framework  which describes the arrayed inter-dependence of macro-environmental factors used in the environmental scanning component of strategic management ”. PEST is the acronym for Political Economic Social Technological PEST Analysis

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Political Factors This factors include how and to what degree a government intervenes in the economy. It include areas such as Tax policy Trade restrictions Labor law Tariffs Environmental law Political stability

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Economic Factors This factors affect the purchasing power of potential customers and the firm’s cost of capital. This include: Economic growth, Interest rates, Exchange rates Inflation rate.

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Social factors This factors include the demographic and cultural aspects of the external macro environment. Such as: Health consciousness, Population growth rate, Age distribution, Career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that company operates.

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Technological factors This factors can determine barriers to entry, reduce minimum efficient production level and influence outsourcing decisions. This factors include technological aspects such as: R&D activity, Automation, Technology incentives and the rate of technological change.

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Environmental factors This factors include ecological and environmental aspects such as: Weather, C limate, and climate change. Which may especially affect industries such as tourism, farming, and insurance.

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Legal factors include: Consumer law, Antitrust law, E mployment law, H ealth and safety law. These factors can affect how a company operates.

Porter’s Five force Model:

Porter’s Five force Model

Porter’s Five force Model:

P orter's five forces Existing competitive rivalry Threat of new market entrants Bargaining power of buyers Power of suppliers Threat of substitute products Porter’s Five force Model

1. Existing competitive rivalry:

This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from: Many players of about the same size; there is no dominant firm Little differentiation between competitors products and services A mature industry with very little growth; companies can only grow by stealing customers away from competitors 1. Existing competitive rivalry

2. Threat of new market entrants:

The threat of a new organization entering the industry is high when it is easy for an organization to enter the industry i.e. entry barriers are low. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include: Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation 2. Threat of new market entrants

3. Bargaining Power of Buyers:

This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer hold substantial power. Here are a few reasons that customers might have power: Small number of buyers Purchases large volumes Switching to another (competitive) product is simple The product is not extremely important to buyers; they can do without the product for a period of time Customers are price sensitive 3. Bargaining Power of Buyers

4. Power of suppliers:

If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. Here are a few reasons that suppliers might have power: There are very few suppliers of a particular product There are no substitutes Switching to another (competitive) product is very costly The product is extremely important to buyers - can't do without it The supplying industry has a higher profitability than the buying industry . 4. Power of suppliers

5. Threat of substitute products:

Are there alternative products that customers can purchase over your product that offer the same benefit for the same or less price? The threat of substitute is high when: Price of that substitute product falls. It is easy for consumers to switch from one substitute product to another. Buyers are willing to substitute. 5. Threat of substitute products

Key Success Factors:

Definition: Key success factors are those competitive factors that most affect industry members’ ability to prosper in the marketplace. The companies that standout or excel on a particular KSF are likely to enjoy a stronger market position – being distinctively better than rivals on one or two key success factors tend to translate into competitive advantage. Key Success Factors

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Common types of industry key Success factors Technology related KSFs. Manufacturing related KSFs. Distribution related KSFs. Marketing related KSFs. Skills and Capability related KSFs. Other types of KSFs.

Driving Forces:

The driving forces in an industry are the major underlying causes of changing industry and competitive conditions. Driving forces tend to occur within the macro-environment within which a specific business functions. These are the changes and evolutions taking place within the industry around the business. In addition, driving forces are not within the control of a single company or firm. There are many influences that should be taken into account when analyzing them. Driving Forces

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Driving forces Analysis: Identifying what the driving forces are. Assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive. Determining what strategy changes are needed to prepare for the impact of the driving forces .

Some common driving forces::

Emerging new internet Capabilities and Applications Increasing Globalization. Changes in an Industry Long Term Growth Rate. Changes in who buys the Product and how they use it. Product Innovation. Technology Change & Manufacturing Process Innovation. Marketing Innovation. Some common driving forces:

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Entry or Exit of Major Firms. Diffusion of Technical Know how across more companies and more countries. Change in cost and efficiency. Growing buyer preferences for differentiated products instead of a commodity product. Reduction in uncertainty and Business Risk. Regulatory Influence and government Policy Changes. Changing Societal Concerns, attitudes and life styles.

Strategic Group Mapping:

Definition of Strategic Group “ A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions” Strategic Group Mapping is a valuable tool for understanding the similarities, differences, strength, and weaknesses inherent in market positions of rival companies. Rival in the same or nearby strategic group are close competitor, whereas rival in distinct strategic groups usually pose little or no immediate threat. Strategic Group Mapping

Purpose of strategic group Maps:

Identification of close and distinct drivers. Identification of attractive and unattractive position of the firm in industry. This attractiveness depends upon the industry driving forces, prevailing competitive pressures and profit potentials of different strategic groups. Strategic group mapping helps in identifying the strategic group a firm should consider entering. It helps in analyzing the type and level of entry barriers the firm will face. It also exam in the number and types of barriers the firm will face. Purpose of strategic group Maps

Creating a strategic group map:

1. Identify the two top competitive factors in your market . One competitive factor should be expressed in a high to low range. The other variable is more flexible, but should still reflect the most important competitive factor in your market. These two factors will be the X and Y map variables. Creating a strategic group map Brand image High Low Direct mail Online Retail stores Strategic focus differentiation Product price High Low Broad Narrow

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2. List your five nearest competitors . These can be indirect or direct competitors but should be companies that compete closely with your product or service. These are the strategic groups that you’ll plot on your map.

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3. Create groups of competitors that fall into the same strategic space. Plot the strategic groups from Step 3 on your map. A ssess each competitor’s strengths and weaknesses against the competitive factors. You should have 2-3 groups. Include your own company in one of the groups. Consider strengths that the companies have individually and strengths that they share. Consider unique characteristics of each company’s product or service as well as any feature a company’s product or service lacks. Consider market share, marketing approach, and product mix as well as any other relevant, industry-specific factors.

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4. Draw circles around each group, making circles proportional to the size of each group's share of total industry sales.

Review your new map:

Assess both the overall map and the position of each group. Are there any “empty” areas on the map that you or one of your competitors could move into by revising an existing product or launching something new? Could you improve your strategic position by moving to a different strategic group? What advantages do your competitors have that you lack? Are they significant to your position on the map or not? If there are more than two important competitive factors in your industry, you can draw additional maps to get a more complete analysis of your competitive environment. Review your new map

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Michael Porter recommends these analytical steps: Identify mobility barriers: Look at the qualities that protect each group from attack by other groups. This can help you to predict threats to the groups. Chart directions of strategic movement: Draw arrows from each group that represent the direction in which the group seems to be moving in strategic space. Predict reactions: Firms in the same group often react to an industry event in the same way.

Resource Based Model:

The resource-based model assumes that each organization is a collection of unique resources and capabilities. The uniqueness of its resources and capabilities is the basis for a firm’s strategy and its ability to earn above-average returns. Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances and talented managers. Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals. Core competencies are often visible in the form of organizational functions. Resource Based Model

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Determine the firms capabilities. Capability Identify the firm’s resources, Study its strength and weaknesses Resources Earning of above-average return Superior Returns Locate an attractive industry. Attractive Industry Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage Competitive Advantages Select a strategy that allows the firm to utilize its resources and capabilities . Strategy formulation & Implementation

Tests of a Winning Strategy:

GOODNESS OF FIT TEST How well does strategy fit the firm’s situation? COMPETITIVE ADVANTAGE TEST Does strategy lead to sustainable competitive advantage? PERFORMANCE TEST Does strategy boost firm performance? Tests of a Winning Strategy

Why Is Strategy Important?:

A compelling need exists for managers to proactively shape how a firm’s business will be conducted. A strategy-focused firm is more likely to be a strong bottom-line performer than one that views strategy as secondary. Why Is Strategy Important?

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