03. Introduction to Strategic Management

1. 03. Introduction to Strategic Management Rev: Mar, 2014 Euiho (David) Suh, Ph.D. POSTECH Strategic Management of Information and Technology Laboratory (POSMIT: http://posmit.postech.ac.kr) Dept. of Industrial & Management EngineeringPOSTECH

2. Contents

3. Strategy (1/2) 1. Introduction of Strategic Management • Strategy • The means or general actions to be taken to achieve long term objectives • Levels of Strategy • Corporate strategy • Overarching strategy of the diversified firm • “Which businesses should we be in?” • “How does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?” • Business strategy • Aggregated strategy of single business firm or a strategic business unit (SBU) in a diversified corporation • Incorporating either cost leadership, differentiation, or focusto achieve a sustainable competitive advantage and long-term success [Michael Porter] • Blue Ocean Strategy [W. Chan Kim and Renée Mauborgne]:Breaking the previous value-cost trade off by simultaneously pursuing both differentiation and low cost • “How do we complete?” • Functional strategy • Short and medium term strategy limited to the domain of each department’s functional responsibility • “What should our organization do to synchronize with the business level strategy?”

4. Strategy (2/2) 1. Introduction of Strategic Management Corporate strategy Business strategy (decision level) Functional strategy Hierarchy of Strategy

5. Strategic Management Process 2. Strategic Management Process Environmentalscanning Strategicformulation Strategyimplement Evaluationcontrol Today’s Coverage 1 UnderstandCompany Mission 2 3 AnalyzeExternal Environment AnalyzeInternal Environment 4 Set Long term Objectives 5 Craft the Strategy 6 Implementthe Strategy Feedback 7 Evaluate & Control the Strategy • Basic Elements of the Strategic Management Process • Strategic Management Process

6. 2. Strategic Management Process 1) Understand Company Mission Company Mission • Mission • The reason for which the firm exists, and what it will do • Describing • The products/services to be supplied, • The markets to be served, • The technology applied • What is our Business? • Basic Product or Service • Primary markets • Principal technology used (if relevant) • Customer Satisfaction, Quality, and Social Goals • Company philosophy • Self-concept (identity)

7. 2. Strategic Management Process 2) Analyze External Environment Environmental Variables Remote environment Technological forces Economic forces Task environment (industry) suppliers shareholders Internal Environment Structures Culture resources Employees Labor unions governments competitors Special interest groups Customers Creditors Trade associations Communities Political-legal forces Sociocultural forces

8. 2. Strategic Management Process 2) Analyze External Environment Remote (Macro) Environmental Factors

9. 2. Strategic Management Process 2) Analyze External Environment Scanning the external environment Analysis of societal environment Economic, sociocultural, technological, political-legal factors Competitor analysis Market analysis Community analysis Supplier analysis Selection of Strategic factors Opportunities threats Interest Group analysis Governmental analysis

10. 2. Strategic Management Process 2) Analyze External Environment Task (Immediate, Operating) Environmental Factors • All persons, groups, or entities that have an interest in the company • Stakeholders • Stockholders • Customers • Suppliers • Financial Institutions • Competitors • Trade Associations • Activist Groups • Federal, State, and Local Government Agencies • Media Representatives • Unions

11. 2. Strategic Management Process 2) Analyze External Environment Defining an Industry • Products • Competitors • Structure • Number, size, relative strength, market share of competitors, product differentiation • Economic Traits • Critical Success Factors (CSF) • Entry barriers

12. 2. Strategic Management Process 2) Analyze External Environment Porter’s 5-Force Model • Natureand intensity of competition in an industry is a composite of five competitive forces • Rivalry among competitors in the industry • The bargaining power of buyers • The bargaining power of suppliers • The potential entry of new competitors • The power of firms with substitute products • Industry driving forces • Increase incentive for the industry to change • Industry growth rate • Product innovation • Customer preferences • Firms entering and leaving the industry • Cost and productivity • Increasing globalization Threat of new entrants Buyers Rivalry among existing firms Suppliers OtherStakeholders Substitutive Products

13. 2. Strategic Management Process 3) Analyze Internal Environment Internal Scanning and Analysis (1/2) • Value Chain Analysis • Identifying the primary and support activities that create value • Analyzing and reducing business costs and compare one business’ value chain with those of competing companies Firm infrastructure Human Resource Management Support Activity Technology Development Procurement Competitive Advantage Marketing And Sales After Sales Service Inbound Logistics Outbound Logistics Operation Primary Activity

14. 2. Strategic Management Process 3) Analyze Internal Environment Internal Scanning and Analysis (2/2) • Match of strategy and structure • Culture • Images • Identity • Leadership • Mission, Goals, Objectives, and Organizational Structure

15. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (1/7) • Definition of Business Portfolio • A business portfolio is the collection of Strategic Business Units that make up a corporation. • The optimal business portfolio is one that fits perfectly to the company's strengths andhelps to exploit the most attractive industries or markets • Aim of a portfolio analysis • Analyze its current business portfolio and decidewhich SBU's should receive more or less investment • Develop growth strategies for adding new products and businesses to the portfolio • Decide which businesses or products should no longer be retained • The BCG Matrix is the best-known portfolio planning framework.And the GE/McKinsey Matrix is a later and more advanced form of the BCG Matrix

16. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (2/7) • Stars (=high growth, high market share) • Use large amounts of cash and are leaders in the business so they should also generate large amounts of cash. • Cash Cows (=low growth, high market share) • Profits and cash generation should be high, and because of the low growth, investments needed should be low. Keep profits high • Dogs (=low growth, low market share) • Avoid and minimize the number of dogs in a company. • Deliver cash, otherwise liquidate • Question Marks (=high growth, low market share) • Have the worst cash characteristics of all, because high demands and low returns due to low market share • Either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash • BCG Matrix • Limitations of BCG Matrix • The link between market share and profitability is questionable since increasing market share can be very expensive • The approach may overemphasize high growth, since it ignores the potential of declining markets • The model considers market growth rate to be a given. In practice the firm may be able to grow the market

17. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (3/7) • GE/Mckinsey Matrix • GE/Mckinseymatrix attempt to improve upon the BCG Matrix • Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness • Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed • GE/McKinsey Matrix works with a 3 x 3 grid, while the BCG Matrix has only 2 x 2.This also allows for more sophistication

18. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (4/7) • GE/MckinseyMatrix (Cont’d) • Strategic Business Units are portrayed as a circle plotted in the GE McKinsey Matrix • The size of the circles represent the Market Size • The size of the pies represent the Market Share of the SBU's • Arrows represent the direction and the movement of the SBU's in the future • Limitations of GE/Mckinsey Matrix • Core competencies are not represented • Interactions between Strategic Business Units are not considered Market Attractiveness - Market size- Market growth rate- Pricing trends - Competitive intensity/rivalry - Overall risk of returns in the industry - Demand variability- Segmentation Competitive Strength - Strength of assets and competencies- Relative brand strength- Market share - Market share growth- Customer loyalty- Record of technological or other innovation

19. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (5/7) SWOT Analysis Weaknesses Strengths Opportunities Threats • SWOT analysis • Development of the idea of matching the organization’s internal factors with external environmental circumstances • TOWS Matrix • To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed • The SWOT matrix, can be changed into what is known as the TOWS Matrix

20. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (6/7) • Supporting of the foundation • Brilliant students • Staffs of superior ability • High quality facilities for research • POVIS system • Hard-studying campus environment • Hard to attract students and faculty • Lack of Globalization • Poor External Advertisement • Small scale of Alumni Association • Lack of Leadership • Globalization and knowledge society • Increasing expectation of high quality human resource • Increasing attention to specialized graduate school (ex. Steel graduate course) • S-O strategies • Caring system for better human source • W-O strategies • Advertise POSTECH through external cooperation • Produce high quality human resource through a select few education. • W-T strategies • Increasing the number of foreign exchange students • Provide privilege to top notch students • Increasing the number of students evading science and engineering department • Competitive universities’ advance. • Increasing competition in receiving large-scale project. • S-T strategies • Advertise POSTECH by showing POSTECH has better research outcomes than other competitive universities • Foundation of a branch school abroad • SWOT analysis (cont’d) • Example) SWOT Analysis of POSTECH

21. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (7/7) • Advantages and limitation of Portfolio analysis • Portfolio offers certain advantages • It encourages top management to evaluate each of the corporation’s businesses individually and to set objectives and allocate resources for each • It stimulates the use of externally oriented data to supplement management’s judgment • It raises the issue of cash flow availability for use in expansion and growth • Its graphic depiction facilitates communication • Portfolio have some very real limitations Matrix • It is not easy to define market segments • It suggests the use of standard strategies that can miss opportunities or be impractical • It provides an illusion of scientific rigor when in reality positions are based on subjective judgments • It is not always clear what makes an industry attractive or what stage a product is at in its lifecycle

22. Reference Euiho Suh, “Strategic management 1 (PPT Slide)”, POSMIT Lab. (POSTECH Strategic Management of Information and Technology Laboratory) Euiho Suh, “Strategic management 2 (PPT Slide)”, POSMIT Lab. (POSTECH Strategic Management of Information and Technology Laboratory) O’Brien & Marakas, “Introduction to Information Systems – Sixteenth Edition”, McGraw – Hill, Chapter 2 Dr. Kevin Lance Jones, “SWOT (Strengths, Weaknesses, Opportunities & Threats) Analysis”, page 7-8