Integrated Management

The basis of strategic management

The nature of strategic management

Prepared by Praveen M
 The history of ‘Strategy’
 The concept of strategy has been borrowed from the military and adopted for business
 Strategy is a term that comes from the Greek strategia, meaning "generalship”
 9 years of war Greeks finally came up with an effective strategy to destroy the city of Troy

Strategy
Policies /
Tactics
resources Bridging the gap

How we need to do it.. How we do it..

Eg: war  no use of nuclear Eg: war  Surprise attack
warfare Business  Promotions
Business  Responsible and End objective
ethical
The link between war and business

War Business

Objective Capturing a territory or defending Capturing consumers or

one defending own base
Reason Power , control and resources Profit, economies of scale and
sustainability
It is all about.. ..the need to defeat the enemy .. being ahead of competition and
and to win the war win market share

Strategy is the path that one selects to achieve a particular goal or a set of
objectives
Formal definitions of strategy
 ‘A course of action, including the specification of resources required, to achieve a
specific objective’ – CIMA

 “The art of distributing and applying business means to fulfil the ends of policy." -
Liddell Hart

 "Strategy is the direction and scope of an organisation over the long-term”

 An effective strategy achieves advantage for the organisation through its

configuration of resources within a challenging environment, to meet the needs of
markets and to fulfill stakeholder expectations

 A strategy is a long term plan of action designed to achieve a particular goal, most
often "winning”

Strategy is differentiated from tactics with resources at hand by its nature of being
extensively premeditated, and often practically rehearsed  Strategies are used to
make the problem or problems easier to understand and solve.
Elements of strategy

Competitive
strategy

Provides Provides
How the business
resources earnings and
competes cash flow
Eg: Walmart, Honda,
Dialog, Fonterra

Investment and
resources Financial strategy
strategy Provides finance

How the business should How the business

invest in future revenue funds its business,
streams and allocation of manage its profits
resources Eg: Shareholder
Eg: New business, expectations,
resource allocations investments, cash flow
(BCG) management
Levels of strategy
 Corporate strategy
 Setting the overall purpose of the and scope of the organisation  Why? Direction,
Consistency, achieving a single goal
 Why is strategy at this level limited to only the purpose and scope?  Since strategy
was not always relevant in all end markets (lack of flexibility)  Strategic planning
(Western) vs Strategic intent (Japanese)
 Eg: BAT, IBM, GE, Nokia, Dialog, Philip Morris

 Business strategy
 Management of the SBU which will be responsible for generating profits by winning
customers and beating competitors in its market  Competitive strategy is generally
formulated at this level
 Eg: CTC, Mc Donald's, KFC, Hilton
 Definition of SBU  “A section usually a division, within a larger organisation, that has a
significant degree of autonomy, typically being responsible for developing and marketing
its own products or services” – CIMA

 Functional strategy (operational)

 Intended to ensure that the fictional area plays its part in achieving the business strategy
 Marketing, Finance, HR, IT
 Approaches to strategy formulation
 Rational strategy approach
 A strategic approach that follows a rational process

Review and
Position audit
control

Strategy
Mission and Corporate Strategy
Strategic options evaluation and
objectives appraisal implementation
choice

Environmental
analysis

 Emergent strategy approach

 Is a strategy that is realised despite a planned strategy
 “A patterns or consistencies realised despite, or in the absence of, intentions” – Minitzberg

Intended Deliberate Realised

strategy strategy strategy

Unrealised Emergent
strategy strategy
Mission and objectives

 A strategic plan starts with a clearly defined business mission

 An organizations mission is its basic function or purpose in the society. The fundamental
reason for company’s to existence beyond just making money

 Disney :Use our imagination to make millions of people happy

 Ford (In early 1900s) :Make automobile affordable to ordinary folks
 Marriott Hotels: To make people away from home feel that they are among friends
and really wanted
 Wal-Mart : Make the lives of our customers better by providing lower prices and
greater selection
 Motorola : Honorably serve the community by providing products of superior quality
at a fair price to the consumers
 CTC: To be the inspiration for corporate excellence in Sri Lanka
A Mission Statement helps the company in the
following

 Define long term vision  Where we want to go / be

 Providing clarity of Purpose  what business are we in..
 Guild lines for resource allocation
 Influence management philosophy and company climate
 Identify business domain  Where do we compete
 Motivation of personnel

 Mission of ‘McDonalds’
 “To provide quality food products; efficient , friendly service; and
restaurants renowned for cleanliness and value”
Mission and objectives..
Count..
 Objectives are the specific aims of an organisation
 Objectives would generally have the following characteristics
 S pecific
 M easurable
 A ttainable
 R esults oriented
 T ime bounded

 Examples:
 To increase bottom line by 20% within the next year.
 To reduce customer complains by 50% within the next 3 months
 To collect 90% of the debts on time by the end of the year.
 To provide a 20% increase in salaries to employees by the end of next year.
 Roles of Mission
statements
 To provide a basis for consistent planning
 To assist in translating purpose and direction into objectives suitable for assessment and control
 To provide a consistent purpose between different interested groups connected to the
organisation
 To establish organisational goals and ethics
 To improve understanding and support from key groups outside the organisation

Mission statement
Goal structure
Strategic objectives

Tactical objectives

Operational objectives

Individual performance targets

The need for objectives
 Planning
 Provides a framework and highlight targets which the plan is supposed to meet

 Responsibility and accountability

 Managers of divisions, departments and operations know what is required from them

 Integration
 Helps senior management coordinate the firm
 Objectives that are handed down are internally consistent  Goal congruence

 Motivation
 Being rewarded when objectives are achieved  Financially, recognition etc.

 Evaluation
 Senior management control the business by evaluating the performance of the
organisation based on set objectives
Need for financial and non financial objectives

 Financial objectives are not useful for start up businesses

 Profit or positive cash flows will not be achieved in the first year

 Short term view only

 If the objectives are only limited to measures such as return on capital
employed (ROCE) and Earning per share (EPS) investments for the long term
will be compromised

 No control over strategic behaviour

 Profit is only a measure of its economic activity in a given period and not its
entire goal structure

 Financial objectives can be manipulated by creative accounting

 Having non financial objectives will ensure that managers follow the expected
strategy and not only profit generation by unethical means
Environmental analysis

 A scan of the external macro-environment in which the firm operates can

be expressed in terms of the following factors
 Political
 Economic
 Social
 Technological
Environmental analysis -
PEST
 Political factors include government regulations and legal issues and
define both formal and informal rules under which the firm must operate.

 Tax policy  Different tax on nature of products (Raw material vs finished

goods)
 Employment laws  Malaysia quotas for locals
 Environmental regulations  Import and export of agricultural goods to from
Australia
 Trade restrictions and tariffs  India’s trade policies to protect the local
industries
 Political stability  Sri Lanka’s instability impacting tourism
Environmental analysis -
PEST
 Economic factors affect the purchasing power of potential customers and
the firm’s cost of capital.

 Economic growth  GDP, GNP  Impact on business growth

 Interest rates  Impact on investments
 Exchange rates  Impact on export and / or import decisions and profits
 Inflation rate  Sri Lanka CPI (Consumer price index), CCPI  Impact on
consumer disposable income
Environmental analysis -
PEST

 Social / Cultural factors include the demographic and cultural aspects of the
external macro environment. These factors affect customer needs and the
size of potential markets.

 Health consciousness
 Population growth rate  Japan’s population lower that 1%  impact on future
labour force
 Age distribution  Sri Lanka has an aging population  opportunity for health
services, insurance etc.
 Career attitudes
 Emphasis on safety
 Values and believes can vary from country to country  Alcohol can not be sold in
the middle East, Barbie needed to change in China and middle east, Rejection of
western values in middle east (Coke boycott), McDonald's in India
Environmental analysis -
PEST
 Technological factors can lower barriers to entry, reduce minimum
efficient production levels, and influence outsourcing decisions.

 R&D activity
 Automation
 Technology incentives  India’s boom in the outsourcing operations
 Rate of technological change  Telecom industry, banking etc.
 Competitor analysis
Five Forces Model

 Porter explains that there are five forces that determine industry attractiveness
and long-run industry profitability. These five "competitive forces" are

 The threat of entry of new entrants

 The threat of substitutes
 The bargaining power of buyers
 The bargaining power of suppliers
 The degree of rivalry between existing competitors
Porter’s Five Forces Model to understand Competitive
Environment

New Entrants

Threat

Bargaining Industry Bargaining

Suppliers Industry Buyers
Rivalry
Rivalry Power
Power

Threat

Substitutes
 Competitor analysis
Five Forces Model

 The threat of new entrants largely depends on the barriers to entry which
include

 Economies of scale
 Capital / investment requirements
 Customer switching costs
 Access to industry distribution channels
 The likelihood of retaliation from existing industry players.
 Competitor analysis
Five Forces Model

 The presence of substitute products can lower industry attractiveness and

profitability because they limit price levels. The threat of substitute products
depends on:

 Buyers' willingness to substitute  Branded salt vs unbranded

 The relative price and performance of substitutes  British rail
 The costs of switching to substitutes  Switching banks  Better interest rates
but loss of relationships, convenience
Competitor analysis
Five Forces Model

 Suppliers are the businesses that supply materials & other products into
the industry. The bargaining power of suppliers will be high when;

 There are many buyers and few dominant suppliers  Oil (OPEC)
 There are undifferentiated, highly valued products  Ceylon tea
 The industry is not a key customer to the suppliers
Competitor analysis
Five Forces Model

 The bargaining power of buyers is greater when;

 There are few dominant buyers and many sellers  Sri Lanka CTC, designer
cloths (MAS)
 Products are not differentiated  Cloths costs of production key differentiator
not the finished goods
 The industry is not a key supplier to buyers
Competitor analysis
Five Forces Model

 The intensity of rivalry between competitors in an industry will depend

on:

 The structure of competition,

 The structure of industry costs
 The Degree of differentiation between competitors
Position audit

 Position audit is done to understand ‘ Where are we now?’

 Money  Financials, shareholders
 Materials  Product
 Machines  Production & Processes
 Markets  Markets & Customers
 Men & Women  Human Resources

 Value Chain Analysis describes the activities that take place in a

business and relates them to an analysis of the competitive strength of the
business. Influential work by Michael Porter suggested that the activities of
a business could be grouped under two headings:

 Primary Activities - those that are directly concerned with creating and
delivering a product (e.g. component assembly)

 Support Activities, which whilst they are not directly involved in production,
may increase effectiveness or efficiency (e.g. human resource management).
It is rare for a business to undertake all primary and support activities.
Position audit - Value Chain
Analysis
Support Activities

Firm Infrastructure
M
Human Resource Management ar
gi
n s
Technology Development
Procurement

Inbound Operations Outbound Marketing Services s

i n
arg
Logistics Logistics and
sales M

Primary Activities
Corporate appraisal –
SWOT analysis

 The SWOT analysis provides information that is helpful in matching the firm’s
resources and capabilities to the competitive environment in which it operates.
As such, it is instrumental in strategy formulation and selection.

Strengths Weaknesses
Internal
Matching

Conversion

External
Opportunities Threats
Conversion
Corporate appraisal –
SWOT analysis

 A firm’s strengths are its resources and capabilities that can be used as a
basis for developing a competitive advantage. Examples of such
strengths include:

 Patents
 Strong brand names
 Good reputation among customers
 Cost advantages from proprietary know-how
 Exclusive access to high grade natural resources
 Favorable access to distribution networks
Corporate appraisal –
SWOT analysis

 The absence of certain strengths may be viewed as a weakness. For

example, each of the following may be considered weaknesses:

 Lack of patent protection

 A weak brand name
 Poor reputation among customers
 High cost structure
 Lack of access to the best natural resources
 Lack of access to key distribution channels
Corporate appraisal –
SWOT analysis

 The external environmental analysis may reveal certain new opportunities

for profit and growth. Some examples of such opportunities include:

 An unfulfilled customer need

 Arrival of new technologies
 Loosening of regulations
 Removal of international trade barriers
Corporate appraisal –
SWOT analysis

 Changes in the external environmental also may present threats to the

firm. Some examples of such threats include:

 Shifts in consumer tastes away from the firm’s products

 Emergence of substitute products
 New regulations
 Increased trade barriers
Corporate appraisal –
Gap analysis

 Ultimate objectives compared with extrapolated existing performance to identify

the gap
Profits
Target

Gap
How do we
bridge the
gap?

Forecast

Time

Identify the Gap

Competitive strategies

 Michael Porter suggested that for an organisation to achieve a sustainable

competitive advantage they should follow either one of three generic
strategies.

 Cost leadership
 Differentiation
 Focus
Competitive strategies

 Cost Leadership strategy

 This strategy involves the organisation aiming to be the lowest cost producer within their
industry. The organisation aims to drive cost down through all the elements of the
production of the product from sourcing, to labour costs.

 Differentiation strategy.
 To be different, is what organisations strive for. Having a competitive advantage which
allows the company and its products ranges to stand out is crucial for their success. With
a differentiation strategy the organisation aims to focus its effort on particular segments
and charge for the added differentiated value.

 Focus strategy.
 Here the organization focuses its effort on one particular segment and becomes well
known for providing products/services within the segment. They form a competitive
advantage for this niche market and either succeed by being a low cost producer or
differentiator within that particular segment.
Competitive strategies –
Approaches to developing competitive
advantage
 Positioning view
 Competitive advantage streams from the organisation’s position in
relation to its competitors, customers or stakeholders  External view
in developing competitive advantage  ‘Fit’ the ‘Environment’
(Generic strategies)

 Resource based view

 Competitive advantage stream from some unique asset or
competence possessed by the firm  Internal view  Change the
‘Environment’
Criticism of position and resource based views

Positioning view Resource view

Competitive advantages are not sustainable Conflict with conventional product / market-based
views of strategy (IBM)

Environments are too dynamic to enable Challenges the rational model of strategy  RBT
positioning to be effective stats with the corporate appraisal limited or no
emphasis of the environment

It is easier to change the environment than RBT can lead to different conclusions  Focus
change the organisation only on core competency could lead to key
elements of success being outsourced (IBM 
Intel and Microsoft)
Strategy Implementation

 Tactical programmes and decisions

 Medium term policies to implement some key elements of strategy
 Eg: New products, variants (Elephant House ice creams), recruitment or
downsizing

 Operational programmes and decisions

 Day to day operations of an organisation
Critical Success Factors (CSF)
 Definition: ‘ The limited number of areas in which results, if there are satisfactory,
will enable successful competitive performance’ – Rockart & Hoffman, 1992.

Methodology of CSF analysis

Identify CSF for the specific strategy (6 or less)

Identify underpinning competencies essential to

gain competitive advantage in each CSF

Ensure that the list of competences is sufficient to

give competitive advantage

Identify performance standards that need to be

achieved to out perform competition  KPI

Ensure competitors will not be able to imitate or

better perform

Monitor own and competition of on KPIs

Criticism of the rational approach to strategy
 Organisations are incapable of having objectives
 People decide on organisational direction  Conflict within the group and external stakeholders 
Objectives are based on satisficing all

 Senior management should not be the only people involved in strategy

 Lack of understanding of tactical and operational challenges
 Understanding of the diversity of the culture within divisions

 Strategy formulation is not a step by step process

 Generally the strategy formulation is a jumbled process that consists of revisiting assumptions made
which would lead to change in strategy

 The strategy followed is not what is planned

 The external context could change significantly effecting the planned strategy

 Strategy is not something that is decided in advance

 Strategy is emergent

 Strategy should not be a rational process

 Strategy will change as people and context changes to meet objectives successfully
Approaches to formulating business strategy
Formal top – down strategy process

• Permanent team
Designated team responsible for • Cross-functional teams (CTC, Apple)
strategy development • Consultants

• External and internal information needed

Collection of information
for business strategy planning

Collective decisions by senior

management

Communication and • Co-plan cascading process

implementation • Tactical and operational plans (CSF and
KPIs)

• Review KPIs with the use of a dashboard

Review and control • Variance reports
Benefits and drawbacks of business strategy
Benefits Drawbacks
Avoids short term behaviour It is too infrequent to allow the business be
dynamic

Helps identify strategic issues It forbids the development of radical or innovative

strategy (Microsoft, Apple, Intel, Body shop)

Goal congruence  Coordination of business It suffers from difficulties of implementation 

units, divisions and departments Involvement of only the senior team

Improves stakeholder perceptions of the business The loss of entrepreneurial spirit

 Build confidence amongst internal and external
stakeholders

Provides a basis for strategic control It is impossible in uncertain business environment

Develops future management potential and It is complicated and expensive for small
continuity business
Stakeholders
 Definition : “ Those persons and organisations that have an interest in the
strategy of an organisation” – CIMA

 Different types of stakeholders

 Internal – Employees
 Connected stakeholders – Suppliers, shareholders
 External – Customer, local community, government

 Why are stakeholders important for business success?

 Stakeholders can effect business success by supporting or opposing business
strategy (Nike, Shell)
 Expectation of business to be ‘good citizens’ as it is the society that permits
business to exist  Power
 Identifying and segmenting stakeholders
 Why do we need to segment stakeholders?
 Organisations have limited resources  Can not focus on all stakeholders  Need to identify those that
matter the most so that they could be managed
 Mendelow (1991) proposed a model that helps in identifying and segmenting stakeholders based on ‘Level
of interest’ and ‘ Power’

• Where their interest

Level of interest rest
- Employees  Pay, job
Low High security, working
• Status of the
conditions
stakeholder -Customers  fair price,
Keep reliability etc
• Claim on Low Minimal informed - Government  Jobs,
resources effort  contribution etc.
Monitor
Power

• Formal  How interested they

representation are
in DM process Keep Key players
High
satisfied  Manage
closely
Competing objectives
 Reasons for the arising of competing objectives
 Conflict between profit and social responsibility
 Difference in the goals of particular managers
 Conflicts between the goals of influential stakeholder groups

Implications of competing objectives

 Development of consistent strategies
 Deciding between strategic options
 Development of appropriate performance measures
Resolving competing objectives
 Prioritising
 Satisfying one or more specific objectives

 Weighting and scoring

 Giving a weight age for objectives based on its relative importance

 Creation of composite measures

 Balance Score Card approach
Corporate governance
 Definition: ‘ Corporate governance is the system by which companies are
directed and controlled’ – Cadbury report

 History
 In the late 1980’s many companies were using creative accounting methods
and misleading the shareholders and crashing
 Treadway and COSO report highlighted some changes to the Securities and
Exchange Commission
 May 1991 Cadbury report highlighted a core of conduct based on
 Openness
 Integrity
 Accountability
 In July 1995 Greenbury report was published

 Today a combined code was published in 1998 and reviewed in 2003

based on both Cadbury and Greenbury reports
Benefits of corporate governance
 Reduces risks

 Stimulates performance

 Improves access to capital markets

 Enhances the marketability of goods and service

 Improves leadership

 Demonstrates transparency and social accountability

Key points to remember
 Definition of strategy
 Stages in the rational strategy model
 The benefits and drawbacks of formal strategies
 Approaches to strategy
 Positioning
 Resources based theory (RBT)
 The importance of stakeholders and Mendelow matrix
 The possible conflicting objectives of an organisation
 The principles of corporate governance
 The analysis tools of Value chain, PEST and SWOT