Introduction to Strategic Management

1. Introduction to Strategic Management Rev: Feb, 2012 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. Discussion Questions (1/2) What are three levels of strategies? How does the hierarchy of the strategy work? What is strategic management? Why is it named that way? Which environmental factor is believed to be most important and why? What is the model used for the external environment analysis? What external force is do you think most important? Name one portfolio analysis and explain it. What are the advantages and disadvantages of the portfolio analysis? In the case study, what were strengths, weaknesses, opportunities, and threats of Megastudy to strengthen its positionas an educational institute? From the analysis, what strategies were driven for further improvements? Explain them for each part of the analysis (S-O, S-T, W-O, W-T)

4. Discussion Questions (2/2) • Case 1 in textbook (pp. 45~46, Chapter 2) • What are the business and political challenges that are likely to occur as a result of the transformation of IT from a support activity to a partner role? Use examples from the case to illustrate your answer. • Discussion Questions in textbook (p. 67, Chapter 2) • Suppose your are a manager being asked to develop computer-based applications to gain a competitive advantage in an important market for your company. What reservations might you have about doing so? Why? • How can Internet technologies help a business form strategic alliances with its customers, suppliers, and others?

5. 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?”

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

7. Strategic Management 1. Introduction of Strategic Management • Definition of Strategic Management [Lamb, 1984] • Ongoing process that • evaluates and controls the business and the industries in which the company is involved • assesses its competitors • sets goals and strategies to meet all existing and potential competitors • reassesses each strategy annually or quarterly(i.e. regularly to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment,or a new social, financial, or political environment) • Strategic management for type of organization • Global/transnational organization: employing more structured strategic management model, due to its size, scope of operations, and need to encompass stakeholder views and requirements • SME (Small and Medium Enterprise): employing an entrepreneurial approach, due to its comparatively smaller size and scope of operations, as well as possessing fewer resources • SME's CEO (or general top management) may simply outline a mission, and pursue all activities under that mission.

8. Strategic Management Process 2. Strategic Management Process Environmentalscanning Strategicformulation Strategyimplement Evaluationcontrol Today’s Coverage 1 UnderstandCompany Mission 2 3 Opportunity& Threat AnalyzeExternal Environment AnalyzeInternal Environment Strength& Weakness 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

9. 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 Societal Goals • Company philosophy • Self-concept (identity)

10. 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

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

12. 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

13. 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

14. 2. Strategic Management Process 2) Analyze External Environment Mapping strategic Groups • U.S restaurant chain industry high Red lobster Olive Garden Chichi’s Perkins Ponderosa bonanza Shoney’s Denny’s Country kitchen Price KFC Pizza hut Burger King McDonald’s low limited menu Full menu Product-line breadth

15. 2. Strategic Management Process 2) Analyze External Environment Industry matrix 2 3 4 5 6 1

16. 2. Strategic Management Process 2) Analyze External Environment Issues priority matrix

17. 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

18. 2. Strategic Management Process 2) Analyze External Environment Opportunity & Threat • Opportunity • A combinations of events or circumstances that arise, which, if acted upon at a certain time, will result in profit, gain, or victory • Product and market extensions through mergers, failure of competitors, and legal change • Advances in technology • A misfortune befalls a major competitor who then shuts down, liquidates, or goes bankrupt • A competing company is put up for sale at a good price • A chance occurs for you to hire a noted expert that you need • A breakthrough in your product or process that makes possible a gain in market share • Threat • An event, as defined by its impact on your company and the probability of its occurrence, that will result in harm to your company • Support of stakeholder groups • Resources: human, financial • Customer base • Capabilities such as technology, products, processes, management, and functional • Artificial barriers to competition: laws, regulations, patents, and licenses • Social changes and customer preferences

19. 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

20. 2. Strategic Management Process 3) Analyze Internal Environment Situation Analysis How well is the company’s strategy working? What are the company’s strengths and weaknesses? What are its core products and competencies? What benchmarks are being usedfor measuring its situation?

21. 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

22. 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 • PIMS Analysis (Profit Impact of Marketing Strategy) • Offered by the Strategic Planning Institute • Based on a database of about 3,000 businesses • Directed at identifying principles that will guide companies in establishing successful strategies, or evaluating their own

23. 2. Strategic Management Process 3) Analyze Internal Environment Strength & Weakness (1/2) • Strength • Company’s resource or capability that can be used for developing a competitive advantage • Patents • Strong brand names • Good reputation among customers • Cost advantages from proprietary know-how • Exclusive access to natural resources • Good access to distribution networks • Weakness • The absence of certain strengths • Lack of patent protection • A weak brand name • Poor reputation among customers • High cost structure • Lack of access to best natural resources • Lack of access to key distribution channels

24. 2. Strategic Management Process 3) Analyze Internal Environment Strength & Weakness (2/2) • Functional Analysis of Strengths and Weaknesses of the firm • Establish a table with column heading: Factors, Strengths/Weaknesses, Standards and Comparison • For each factor to be evaluated, the question must be asked, “Compared to what?” • Standards or criteria may be: • The industry average for the factors being evaluated • The best firm’s values • The best value of any firm on each criterion • A previously set objective • A previous forecast • Functional factors should be selected from the following functional areas: • Marketing • Operations/Production • Finance and accounting • Information Systems • Human resources, especially management and organization • Quality of all transactions, relationships, and outputs

25. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (1/6) • 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

26. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (2/6) Internal Factors Strength Weakness Aggressive Strategy Defensive Strategy Opportunity Threat Turn-around Strategy DiversificationStrategy External Factors • SWOT Analysis • Tying together strengths, weaknesses, opportunities, and threats vs. competitive position • Development of the idea of matching the organization’s internal factors with external environmental circumstances [Philip Selznick, 1957]

27. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (3/6) • 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

28. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (4/6) • GE/Mckinsey Matrix Competitive Strength High Low Medium • Invest aggressively • Invest selectively • Harvest or divest Low Market Attractiveness Medium High • 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

29. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (5/6) • 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

30. 2. Strategic Management Process 3) Analyze Internal Environment Portfolio Analysis (6/6) • 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

31. Case Study

32. 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 – Fifteenth Edition”, McGraw – Hill, Chapter 2, pp. 43~71 Dr. Kevin Lance Jones, “SWOT (Strengths, Weaknesses, Opportunities & Threats) Analysis”, page 7-8