Strategic Management Strategic management is an ongoing process that evaluates and controls the business and the industries

in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then 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 !anagement can also be defined as "the identification of the purpose of the organi#ation and the plans and actions to achieve the purpose. $t is that set of managerial decisions and actions that determine the long term performance of a business enterprise. $t involves formulating and implementing strategies that will help in aligning the organi#ation and its environment to achieve organi#ational goals." Strategy: A detailed plan for achieving success, the bundle of decision activities that we choose to achieve our long-term goals. Strategy is the path we choose. Every organization has to figure out what it wants to achieve and then how it is going to ma e it happen, with its products, customers, and operations.
%e can brea& down strategy into three components ' (reate the strategy) what should we do* ' $mplement the strategy)+ow do we do it* ' ,valuate the strategy)+ow well are we doing in meeting our long-term goals*

!he "ow#s !hat $efine a %irm#s Strategy +ow to grow the business +ow to please customers +ow to out compete rivals +ow to manage each functional piece of the business ./01, production, mar&eting, +/, finance, and so on2 +ow to respond to changing mar&et conditions

 +ow to achieve targeted levels of performance &ey Elements of a Successful Strategy

(ompany Strategy is a combination of long term vision, direction and intended means of achieving them. 3he goal of company strategy is to help achieve a long term sustainable and competitive advantage. 3he 4ey elements of a (ompany strategy are 'ision Mission 'alue Statement 5ther ,lements are 6. ). +. .. (rganization Structure Strategic *lan ,ompany -esources %actors of success.

'ision Sets direction for the future and identifies ma7or challenges. Summari#es broad strategic focus of the 5rgani#ation. 1eals with 8uture 9ropositions. Mission 9rovides broad guidelines on how to reali#e the :ision. 3he &ey difference between :ision and mission statement is that :ision statement spells out future course of direction, whereas mission guides the organi#ation in achieving common goals. !ission statement is created more frequently than a vision statement. 'alue Statement 9rescribes the principles that company will follow to achieve its :ision and !ission. ;ll organi#ation follows a set of values that defines ethical and moral benefits. :alue statement is not explicitly stated but ta&en to be a part of :ision and !ission statements.

%actors of Success ,ssentially defines (ompanies Short term <oals. 5rgani#ation Structure influences (ompany strategy. $n a =roader perspective, organi#ation structures are classified as 8unctional, 9ro7ecti#ed and !atrix. (ompany /esources .+uman>!aterial2 also $nfluence (ompany Strategy. Strategic 8ormulation exercises helps in identifying the need for acquisition of strategic resources. ,ffective /esource ?tili#ation is important as identifying themselves. Strategic *lan 9lays a vital role in company strategy. Strategic 9lan provides with the actual proposal for using resources to achieve success factors. 3his 9lan helps reali#e :ision and !ission.

3here are few more important things to any organi#ation than the presence of a clear, intelligent and well-structured strategic plan; it aligns the entire team on the long-term goals, provides purpose and clarity to the necessary outcomes to achieve them and engages employees in execution of the actions. 8rom a 9rocess ,xcellence perspective, a solid plan with concise ob7ectives and actions can help to ensure that improvement initiatives are properly aligned to the goals, adding value in &ey priority areas and contributing to the essential long-term outcomes. @ac& of a proper strategy may potentially result in ad hoc improvements that are not meeting the critical needs of the overall organi#ation. So in terms of strategic planning, what does good loo& li&e* 3he following are elements that represent sound principles to be ta&en into consideration when developing a strategic planA ,ritical -eflection Sometimes before you go forward, you have to loo& bac&. $n Bapanese this is &nown as ChanseiD or the ability to deeply and critically reflect, typically on several frontsA Cwhere have you been*D, Cwhere are you now*D, and Ewhere are you headingD* 3his includes an honest assessment of problem areas and changes ta&ing place which need to be addressed, both internally and externally. $f there was failure, success can come as long as learning ta&es place. 5ften times, a S%53 .Strengths, %ea&nesses, 5pportunities, 3hreats2 analysis or similar tool can be helpful, but only if the output is applied in the actual formulation of the strategy and not used standalone.

!he *ower of a Simple Message ; clear vision can provide succinct clarity to where an organi#ation intends to go, and it does not have to be fancy. $ &now a retired :ice 9resident who had a very consistent and simple mantra that he repeated on almost a daily basisA C@ow (ostD. 3his made the priority very clear and concise. <eorges St-9ierre, %elterweight (hampion of the ?8(, often affixes a handwritten note to his dressing room wall, such as C5n 1ecember 66thin !ontreal, $ will destroy Bosh (rosschec&s and remain world championD, providing himself with a simple, measurable and actionable message.

Marathon !hin ing 3his may seem obvious, but the person who wants to win a marathon needs to possess a fine balance of long-term strategy and shorter-term tactics to overcome the challenge. Some people call this wal&ing with one leg and running with the other. $n any case, long-term thin&ing needs to be an essential ingredient of any solid strategy. %ithout a long hori#on, an organi#ation is doomed to an endless cycle of short-term gyrations. 3here are several points to mention hereA

/0alance the %orest and the !rees# - ; good strategy will both #oom out to the big picture and #oom in to the specifics needed to achieve it. ; strategy s&ewed too far to either side will be unbalanced. /*ace 1ourself# F the smart marathoner will sometimes slow down even when he or she has abundant energy. Got only do they not ta&e their eye or mind off the end goal, but they are also very aware of all the evenly spaced, smaller milestones that are needed to reach so they can get to the end. 3his notion is epitomi#ed in the DHI !ile !archD concept by leadership guru Bim (ollins, where he ma&es the argument that the most exceptional companies have an extraordinary amount of self-control, even in the good times.

Sense of -eality ; strategy is not worth much if it does not accurately reflect the reality of the situation F the good, the bad and the ugly. $t is also not going to help much if the strategy stretches the organi#ation well beyond its means or outlines completely unrealistic and unattainable ob7ectives. $t is 54 to develop stretch targets but they should still be realistic. 3here is an important concept related to this elementA

Avoid %luff# F :ague and Cwishy-washyD language should always be avoided. 3he strategy is not a mar&eting campaign - it is a structured plan to move the organi#ation forward. @anguage and actions identified should be crisp, concise, clear, direct and specific.

2ess is More 3his has been said many times, but a strategic plan should focus on the (ritical 8ew. ; plan should outline what the organi#ation should not do 7ust as much as it articulates what it should do. 3here are many cases where successful organi#ations have seen improved results from paring down their strategic goals. %hen Bac& <erard, (,5 of ;merican 9etroleum $nstitute, first too& the 7ob he immediately cut their number of priorities from two do#en down to 7ust six, enabling them to focus their limited time and resources on the items that would bring them the most value. C@ess is !oreD contains a very important point that needs to be called out separatelyA
%ocus on the ,ore# - $n the early IIDs, !c1onalds was floundering during a period of wild expansion, opening more than three restaurants a day in HII6. 3he new executive leadership at the time put together a bac&-to-basics strategy to focus on increasing sales at existing stores rather than opening new ones, and their results since then have been extraordinary.

0alanced Sta eholder 2istening ; great strategy reflects the voices of all the &ey sta&eholders of an organi#ation, in particular the ,mployees and the (ustomers, who often get forgotten. 3here is a famous quote that says C3he greatest tool you have is to listenD, yet many strategies are developed in a relative vacuum. 3o properly consider all the various voices, both internal and external, a great deal of listening, balancing and prioriti#ing is required. Sometimes it not clear who all the &ey sta&eholders are, and in this case a Sta&eholder 9rioriti#ation tool can be used. 8or this element, there are a few important concepts to mention hereA

,oherent Alignment# F 3he strategy should align and bind the whole organi#ation together. %hile each function or department will have to develop their own specific plans, these should receive inspiration, purpose and direction from the main strategy. 3here is no sense in having a plan that focuses on 9roduct 1evelopment but completely misses the required <o-3o-!ar&et approach, for example. $t must all tie together.

C3nstitutionalized Social -esponsibility# F %hether you call it (S/, Sustainability or Social 1evelopment, the point here is that this should be part and parcel of the strategy, not Cthat other thingD that is done on an ad hoc basis or whenever an organi#ation feels guilty or needs 9/ points. 5ne of the &ey reasons that many organi#ations have not made the transition from philanthropy to a true, wellrounded Social /esponsibility approach is because they have not incorporated the sub7ect into their overall strategic plan. 3he =ody Shop and =anyan 3ree are good examples of (S/ being institutionali#ed into their overarching business approach. $deally, the strategy will encompass all three pillars of the 3riple =ottom @ineA 9eople, 9lanet and 9rofit.

Actionable ,ontent 3his is the critical lin& to 9rocess ,xcellence. 3he strategic plan should be detailed enough to either specifically outline actions required to meet the goals, or be able to lead directly to such actions. 3he action plans identified will li&ely be high-level and not necessarily answer the ChowsD but certainly describe the CwhatsD that are needed to move the organi#ation ahead. 3hese actions often turn into pro7ects or &ey initiatives which can often times utili#e @ean and>or Six Sigma methodologies to be properly executed. %ithout actionable content, a strategy will be too stratospheric to be of much use. Energetic $eployment ; great strategy does not 7ust remain stuc& in a 9ower9oint slide, but gets effectively and passionately deployed to every level of the organi#ation. $f there is a function or team that is disengaged from the planning activity, or not involved in its execution, then the strategy is a failure. ,very single part of the organi#ation should be informed of and engaged in the strategic direction, and formulate their own specific plans in line with the greater goals. 5ne critical aspect is the following conceptA

/Avoid the 3vory !ower Syndrome# F a good friend of mine reminded me of the disastrous but not uncommon phenomenon of organi#ations &eeping their strategic planning activity entirely within their executive ran&s, ignoring the power of the their own people to help shape, validate and implement the initiatives that are required for them to reach the next level of achievement. 3he best plans are made with broad participation, contain feedbac& loops to incorporate the inputs of employees and other &ey sta&eholders and are communicated thoroughly and frequently to all parts of the organi#ation.

%anatic %ollow-through Strategies are intended to be used, not mounted on a gilded frame to be admired from time to time. Some of the best plans $ have ever seen were written on simple paper and were dirty and wrin&led from their constant use. 3his is great proof of a well-utilised plan. +ere are the &ey points related to the sub7ect of 8ollow-3hroughA

/0uilt-in %le4ibility# F Some strategies are not followed-through on because they were designed to be too rigid and>or complex. ; clear sign of this is an overly automated planning system where it becomes extremely painful to ma&e any ad7ustments to the plan. (ontrary to some popular beliefs, plans should be written in soft clay rather than etched in hard stone. $t is perfectly 54 to ad7ust the strategy during the year based on changes in organi#ational dynamics or the external environment, as long as the revisions are in support of the overall vision and purpose and are agreed to by the relevant team.

/Strong 5overnance 6 $iscipline# F %ho will review the strategy, how frequently and by which means* 3hese are basic questions to as& when designing a proper governance process. +ere are two of the common mista&es made in this regard. 5ne is to lump together Strategic /eviews with 5perational /eviews. 5rgani#ations must recogni#e there are two dynamics going on in parallelA Crunning the organi#ationD and Cimproving the organi#ationD. 3hey are related but each needs its own time slot or the operational issues could easily smother the strategic reviews. 3he other is a failure to assign an 5wner to the governance process. %hile it is undoubtedly the top leaderDs role to ultimately own the strategy, somebody needs to organi#e the reviews, ta&e charge of the planning document, and help to ensure follow-up items are managed properly.

2iving 6 0reathing the Strategy Solid follow-through is more than governance reviews and scorecard updates. $t needs the leadership to be absolutely committed to and thoroughly passionate about the strategy. @eaders should be tal&ing the ClanguageD of the strategy on a daily basis. %hen even the employees are tal&ing about it frequently, this is when the plan has become institutionali#ed and permeates every level of the organi#ation. 3he strategy should be thoroughly ba&ed into the product>service plan, the communications plan, the mar&eting plan, the people plan, the process improvement plan, the budget plan and the operational plan. 3his list of ,lements of a <reat Strategy is by no means exhaustive, but the intention was to provide a basic outline of the &ey ingredients needed to formulate an effective and useful strategic plan for any

&ind of organi#ation. ;s was mentioned, a successful strategy is not only one that is intelligently designed and well-constructed, but also inclusive of all sta&eholders, effectively deployed and governed with a nearly fanatical level of discipline and passion. 5f course, no strategy is worthwhile without execution and results F as 1onald 3rump said, Cin the end, youDre measured not by how much you underta&e but by what you finally accomplishD. 3he strategic plan is intended to be an enabler for predictably achieving these accomplishments.

0usiness Strategy Strategy is defined as the determination of the basic long-term ob7ectives of an enterprise and the adoption of courses of action and allocation of resources necessary to achieve these goals. $t states how business should be conduct to achieve the desired goals. ; method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem. 3he art and science of planning and marshaling resources for their most efficient and effective use 0usiness model ; business model describes the rationale of how an organi#ation creates, delivers, and captures value .economic, social, cultural, or other forms of value2.3he process of business model construction is part of business strategy. $n theory and practice the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organi#ational structures, trading practices, and operational processes and policies. 3he literature has provided very diverse interpretations and definitions of a business model. ; systematic review and analysis of manager responses to a survey defines business models as the design of organi#ational structures to enact a commercial opportunity. 8urther extensions to this design logic emphasi#e the use of narrative or coherence in business model descriptions as mechanisms by which entrepreneurs create extraordinarily successful growth firms.

%henever a business is established, it either explicitly or implicitly employs a particular business model that describes the architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. 3he essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profitA it thus reflects managementDs hypothesis about what customers want, how they want it, and how an enterprise can organi#e to best meet those needs, get paid for doing so, and ma&e a profit. =usiness models are used to describe and classify businesses .especially in an entrepreneurial setting2, but they are also used by managers inside companies to explore possibilities for future development. ;lso, well &nown business models operate as recipes for creative managers. =usiness models are also referred to in some instances within the context of accounting for purposes of public reporting.

Relationship Between Strategy and Business Model

Strategy . . .
Deals with a companys competitive initiatives and business approaches

Business Model . . .
Concerns whether revenues and costs flowing from the strategy demonstrate a business can be profitable and viable

t ra St

y eg

s es in el s Bu od M

1-19

7hy are ,rafting and E4ecuting Strategy 3mportant8 6. (rafting and executing strategy are top priority managerial tas&s for two very big reasonsA a. 3here is a compelling need for managers to proactively shape or craft how the companyDs business will be conducted. b. ; strategy-focused organi#ation is more li&ely to be a strong bottom-line performer.

5ood Strategy 9 5ood Strategy E4ecution : 5ood Management 6. (rafting and executing strategy are core management functions. H. ;mong all the things managers do, nothing affects a companyDs ultimate success or failure more fundamentally than how well its management team charts the companyDs direction, develops competitively effective strategic moves and business approaches, and pursues what needs to be done internally to produce good day-to-day strategy execution and operating excellence. J. <ood strategy and good strategy execution are the most trustworthy signs of good management. K. 3he better conceived a companyDs strategy and the more competently it is executed, the more li&ely it is that the company will be a standout performer in the mar&etplace.

2eading the *rocess of ,rafting and E4ecuting Strategy !he Strategy-Ma ing, Strategy-E4ecuting *rocess

$eveloping Strategic 'ision Strategic vision 3deas for the direction and activities of business development. <enerally included in a document or statement so all company managers can share the same vision for the company and ma&e decisions according to the shared principles and company mission.

; strategic vision is a broad term used to describe one of the essential elements of an overall strategic planning endeavor. ,ssentially, a vision is the identification of the ultimate aim or purpose for a business. %ithin this context, the strategic vision helps to set the parameters for the development of planning specific steps to go about ma&ing that vision come true, since it establishes the general direction that the business will pursue. ; wor&able vision clearly loo&s beyond where the company is today and determines where the owners want the company to be at some point in the future.

$n order to properly craft a strategic vision, several &ey elements must be considered in order for that vision to be truly viable. 5ne of those elements is that the vision must be realistic. 3his means that

vision must be somewhat specific rather than a vague idea about the future. 8or example, setting a vision to become the largest pencil manufacturer in the world may be a bit broad, whereas a vision to capture five percent of the pencil mar&et within a given country within the next ten years does have focus and has the potential to be wor&able.
Table 2.2: Characteristics of an Effectively orded !ision State"ent

2-8

$E'E2(*3;5 A '3S3(; +ow does a strategic leader go about developing a vision for an organi#ation* Ganus also offers a few words of advice to someone formulating a vision for an organi#ationA

2earn everything you can about the organization . 3here is no substitute for a thorough understanding of the organi#ation as a foundation for your vision. 0ring the organization<s ma=or constituencies into the visioning process . 3his is one of GanusEs imperativesA donEt try to do it alone. $f youEre going to get others to buy into your vision, if itEs going to be a wholly shared vision, involvement of at least the &ey people in the organi#ation is essential. "(onstituencies," refer to people both inside and outside the

organi#ation who can have a ma7or impact on the organi#ation, or who can be impacted by it. ;nother term to refer to constituencies is "sta&eholders"- those who have a sta&e in the organi#ation.

&eep an open mind as you e4plore the options for a new vision . 1onEt be constrained in your thin&ing by the organi#ationEs current direction - it may be right, but it may not.

Encourage input from your colleagues and subordinates . ;nother in7unction about not trying to do it aloneA those down in the organi#ation often &now it best and have a wealth of untapped ideas. 3al& with themL

>nderstand and appreciate the e4isting vision . 9rovide continuity if possible, and donEt throw out good ideas because you didnEt originate them. $n his boo& about visionary leadership, Ganus describes a seven-step process for formulating a visionA

?. >nderstand the organization . 3o formulate a vision for an organi#ation, you first must understand it. ,ssential questions to be answered include what its mission and purpose are, what value it provides to society, what the character of the industry is, what institutional framewor& the organi#ation operates in, what the organi#ationEs position is within that framewor&, what it ta&es for the organi#ation to succeed, who the critical sta&eholders are, both inside and outside the organi#ation, and what their interests and expectations are. ). ,onduct a vision audit. 3his step involves assessing the current direction and momentum of the organi#ation. 4ey questions to be answered includeA 1oes the organi#ation have a clearly stated vision* %hat is the organi#ationEs current direction* 1o the &ey leaders of the organi#ation &now where the organi#ation is headed and agree on the direction* 1o the organi#ationEs structures, processes, personnel, incentives, and information systems support the current direction* +. !arget the vision. 3his step involves starting to narrow in on a vision. 4ey questionsA %hat are the boundaries or constraints to the vision* %hat must the vision accomplish* %hat critical issues must be addressed in the vision* .. Set the vision conte4t. 3his is where you loo& to the future, and where the process of formulating a vision gets difficult. Mour vision is a desirable future for the organi#ation. 3o craft that vision you first

must thin& about what the organi#ationEs future environment might loo& li&e. 3his doesnEt mean you need to predict the future, only to ma&e some informed estimates about what future environments might loo& li&e. 8irst, categori#e future developments in the environment which might affect your vision. Second, list your expectations for the future in each category. 3hird, determine which of these expectations is most li&ely to occur. ;nd fourth, assign a probability of occurrence to each expectation. @. $evelop future scenarios. 3his step follows directly from the fourth step. +aving determined, as best you can, those expectations most li&ely to occur, and those with the most impact on your vision, combine those expectations into a few brief scenarios to include the range of possible futures you anticipate. 3he scenarios should represent, in the aggregate, the alternative "futures" the organi#ation is li&ely to operate within. A. 5enerate alternative visions. Bust as there are several alternative futures for the environment, there are several directions the organi#ation might ta&e in the future. 3he purpose of this step is to generate visions reflecting those different directions. 1o not evaluate your possible visions at this point, but use a relatively unconstrained approach. B. ,hoose the final vision. +ereEs the decision point where you select the best possible vision for your organi#ation. 3o do this, first loo& at the properties of a good vision, and what it ta&es for a vision to succeed, including consistency with the organi#ationEs culture and values. Gext, compare the visions youEve generated with the alternative scenarios, and determine which of the possible visions will apply to the broadest range of scenarios. 3he final vision should be the one which best meets the criteria of a good vision, is compatible with the organi#ationEs culture and values, and applies to a broad range of alternative scenarios .possible futures2.

Mission
1efines the fundamental purpose of an organi#ation or an enterprise, succinctly describing why it exists and what it does to achieve its vision. 8or example, the charity above might have a mission statement as "providing 7obs for the homeless and unemployed".

Strategic !ision vs. Mission

A strategic vision A companys mission

concerns a firms future business path - where we are going

ar!ets to be pursued "uture product#mar!et# customer#technology focus $ind of company management is trying to create

statement typically focuses on its present business purpose - who we are and what we do
Current product and service offerings Customer needs and customer groups being served %eographic coverage

2-1&

E4pressing the Essence of the 'ision in a Slogan: 3he tas& of effectively conveying the vision to company personnel is made easier when managementDs vision of where to head is captured in a catchy slogan. (reating a short slogan to illuminate an organi#ationDs direction and purpose and then using it repeatedly as a reminder of the where we are headed and why helps &eep organi#ation members on the chosen path.

Setting (b=ectives (b=ectives

; specific result that a person or organi#ation aims to achieve within a time frame and with available resources. $n general, ob7ectives are more specific and easier to measure than goals. 5b7ectives are basic tools that underlie all planning and strategic activities. 3hey serve as the basis for creating policy and evaluating performance. Some examples of business ob7ectives include minimi#ing expenses, expanding internationally, or ma&ing a profit.

(b=ectives and 5oal Setting Nuestions to ;s&A

$s my ob7ective broad* $s my ob7ective non-measurable* $s my ob7ective continuous, ongoing, and non-dated* 1oes my ob7ective convert my mission>vision into action* 1oes my ob7ective help to sustain my competitive advantage*

3here were numerous articles on both short and long term ob7ectives and planning. +owever, the most straightforward short reference guide was this piece from 9urdue ?niversity. $t is little more than a chec&list for long-term and short-term goal setting. %hat made it useful as a future reference guide was a simple definition of long-term and short-term planning, and a brief statement connecting the two. 5ne unusual aspect of the chec&list was the suggestion that the planner consider long-term goals in relation to family values. 3his is probably more applicable to someone in the commercial sector .as suggested by the title2, but the author submits that such comparisons are probably valid in most business situations.

$n what areas will we continue being actively involved in the future*

$n this step the firmDs mission and vision is converted into tangible actions .ob7ectives2 and later into results .goals2 to be achieved. 5b7ectives are broad categories. 3hey are non-measurable, non-dated, continuous, and ongoing. %ith ob7ectives the company moves from motive to action. 5b7ectives are the general areas in which your effort is directed to drive your mission statement. .=obb =iehl2 3o write an ob7ective as&s the questionsA

$n what J-O areas will our company continue being actively involved in the future* %hat areas do we need to be involved in to accomplish our mission statement* %hat is our company going to do about our competitive advantage categorically*

?se the following criteria in evaluating your ob7ectiveA

$s my ob7ective broad* $s my ob7ective non-measurable* $s my ob7ective continuous, ongoing, and non-dated* 1oes my ob7ective help to sustain my competitive advantage* 1oes my ob7ective convert my mission>vision into action*

; few examples of ob7ectives areA

,xpand sales to existing customers .build on a strength2 $ntroduce existing products into a new mar&et .build on a strength2 1evelop an incentive plan for research and development staff who are slow to innovate .correct a wea&ness2

5b7ectives

are

needed

for

each

&ey

area

the

company

deems

important

to

success.

8rom a company perspective, there are distinct types of ob7ectivesA 8inancial 5b7ectives 8inancial ob7ectives focus on achieving acceptable profitability in a companyDs pursuit of its mission>vision, long term , health and ultimate survival. 8inancial ob7ectives signal commitment to such outcomes as good cash flow, creditworthiness, earnings growth, an acceptable return on investment, dividend growth, and stoc& price appreciation. 3he following are examples of financial ob7ectivesA

<rowth in revenues <rowth in earnings %ider profit margins =igger cash flows +igher returns on invested capital ;ttractive economic value added .,:;2 performance ;ttractive and sustainable increases in mar&et value added .!:;2 ; more diversified revenue base

Strategic !ar&et 5b7ectives ; strategic mar&et ob7ective focuses on the companyDs intent to sustain and improve the organi#ationDs competitive strength and long-term mar&et position through creating customer value. Strategic ob7ectives focuses on winning additional mar&et share, overta&ing &ey competitors on product quality or customer service or product innovation, achieving lower overall costs than rivals, boosting the companyDs reputation with customers, winning a stronger foothold in international mar&ets, exercising technological leadership, gaining a sustainable competitive advantage, and capturing attractive growth opportunities. Strategic ob7ectives need to be competitor-focused and strengthen the companyDs long-term competitive position. ; company exhibits strategic intent when it pursues ambitious strategic ob7ectives and concentrates its competitive actions and energies on achieving that ob7ective. 3he strategic intent of a small company may be to dominate a mar&et niche. 3he strategic intent of an up-and-coming company may be to overta&e the mar&et leaders. 3he strategic intent of a technologically innovative company may be to create a new product. Small companies determined to achieve ambitious strategic ob7ectives exceeding their present reach and resources, often prove to be more formidable competitor than larger, cash-rich companies with modest strategic intents. 3he following are examples of strategic mar&et ob7ectivesA

; bigger mar&et share Nuic&er design-to-mar&et times than rivals +igher product quality than rivals @ower costs relative to &ey competitors =roader or more attractive product line than rivals ; stronger reputation with customers than rivals Superior customer service /ecognition as a leader in technology and>or product innovation

%ider geographic coverage than rivals +igher levels of customer satisfaction than rivals

$nternal 5perational 5b7ectives $nternal operational ob7ectives focus on business process that has an impact on creating customer value and satisfaction. $nternal ob7ectives focus on maintaining the firmDs core competencies. !anagement ob7ectives focus on running a ma7or functional activity or process within a business, such as, research and development, production, mar&eting, customer service, distribution, finance, human resources, and other strategy critical activities. 5perational ob7ectives focus on how a company manages frontline organi#ational units with a business .plants, sales districts, distribution centers2 and how to perform strategically significant operating tas&s .materials purchasing, inventory control, maintenance, shipping, advertising campaigns2 Small =usiness ?nit .S=?2 5b7ectives F 3he (ompanyDs mission and vision needs to be turned into detailed supporting ob7ectives for each level of management. ,ach manager should have ob7ectives and be responsible for reaching them. 5b7ective setting needs to be top-down in order to guide lower-level managers and organi#ational units toward outcomes that support the achievement of overall business and company ob7ectives. ; top-down process
6. +elps produce cohesion among ob7ectives and strategies of different parts of the organi#ation 2' +elps unify internal efforts to move the company along the chosen strategic plan.

$nnovative and @earning 5b7ectives $nnovative and learning ob7ectives focus on activities that assist to improve and build the companyDs value creating activities. $t involves increases the firmDs &nowledge base and learning best practices so the company is continually on the cutting edge.

Evaluating a ,ompany#s E4ternal Environment

#igure $.2: The Co"ponents of a Co"pany%s Macro&environ"ent

(-)

5eneral economic conditions

So"e indicators of identifying the general econo"ic conditions of a country:

'() per capita *in purchasing power standards+ Strong macroeconomic conditions are essential for growth and 7ob creation. <ross domestic product .<192 measures overall economic activity in all sectors of the economy. 3o compensate for price differences between countries, <19 is measured in purchasing power standards .99S2. 2abor productivity

9roductivity is the basis for long-term economic welfare and general economic growth. $t is important for 7obs and competitiveness F both are among the main targets in the ,? growth and 7obs strategy. 3nflation rate 3his is a performance indicator, reflecting the bac&ground economic conditions against which progress towards the goals of the ,? growth and 7ob strategy can be evaluated. *ublic balance 9ublic balance and general government debt indicate the countryEs financial position in the context of the "excessive deficit procedure".

3ndustry#s $ominant Economic !raits

!ar&et si#e and growth rate Gumber of rivals Scope of competitive rivalry =uyer needs and requirements 1egree of product differentiation 9roduct innovation Supply>demand conditions 9ace of technological change :ertical integration ,conomies of scale @earning and experience curve effects

%ive-%orces Model of ,ompetition: A &ey !ool for $iagnosing the ,ompetitive Environment, 3his model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall mar&etA (ompetitive pressures associated with the mar&et maneuvering and 7oc&eying for buyer patronage that goes on among rival sellers in the industry (ompetitive pressures associated with the threat of new entrants into the mar&et (ompetitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products (ompetitive pressures stemming from supplier bargaining power and supplier-seller collaboration (ompetitive pressures stemming from buyer bargaining power and seller-buyer collaboration 3he way one uses the five-forces model to determine what competition is li&e in a given industry is to build the picture of competition in three stepsA a. Step (ne: 3dentify the specific competitive pressures associated with each of the five forces b. Step !wo: ,valuate how strong the pressures comprising each of the five forces are .fierce, strong, and moderate to normal or wea&2
c. Step !hree: 1etermine whether the collective strength of the five competitive forces is conducive to earning attractive profits. !he -ivalry among ,ompeting Sellers

 3he strongest of the five competitive forces is nearly always the rivalry among competing sellers F the mar&eting maneuvering and 7oc&eying for buyer patronage that continually go on. $n effect, a mar&et is a competitive battlefield where it is customary and expected that rival sellers will employ whatever resources and weapons they have in their business arsenal to improve their mar&et positions and performance. (ompetitive 7oc&eying among industry rivals is ever changing, as fresh offensive and defensive moves are initiated and rivals emphasi#e first one mix of competitive weapons and tactics then another. /ivalry among competing sellers intensifies the more frequently and more aggressively that industry members underta&e fresh actions to boost their mar&et standing and performance, perhaps at the expense of rivals -ivalry can be characterized as: a. ,utthroat or brutal when competitors engage in protracted price wars or habitually employ other aggressive tactics that are mutually destructive to profitability b. %ierce to strong when the battle for mar&et share is so vigorous that the profit margins of most industry members are squee#ed to bare bones levels c. Moderate or normal when the maneuvering among industry members still allows most members to earn acceptable profits d. 7ea when most companies are relatively well satisfied with their sales growth and mar&et shares, rarely underta&e offensive maneuvers to steal customers away from one another, and have comparatively attractive earnings and returns on investments

!he *otential Entry of ;ew ,ompetitors

3he threat of entry is stronger when entry barriers are low, when there is a si#able pool of entry candidates, when industry growth is rapid and profit potentials are high, and when incumbent firms are unable or unwilling to vigorously contest a newcomerDs entry. Several factors affect the strength of the competitive threats of potential entry in a particular industry. 5ne factor relates to the si#e of the pool of li&ely entry candidates and the resources at their command. ;s a rule, competitive pressures intensify as the pool of entry candidates increases in si#e. 8requently, the strongest competitive pressures associated with potential entry come not from outsiders but from current industry participants loo&ing for growth

opportunities. ,xisting industry members are often strong candidates to enter mar&et segments or geographic areas where they currently do not have a mar&et presence. ; second factor concerns whether the li&ely entry candidates face high or low entry barriers. 3he most widely encountered barriers that entry candidates must hurdle includeA 3he presence of si#able economies of scale in production or other areas of operation F %hen incumbent companies en7oy cost advantages associated with large-scale operation, outsiders must either enter on a large scale or accept a cost disadvantage and consequently lower profitability. (ost and resource disadvantages not related to si#e F ,xisting firms may have low unit costs as a result of experience or learning-curve effects, &ey patents, and partnerships with the best and cheapest suppliers of raw materials and components, proprietary technology &now-how not readily available to newcomers, favorable locations, and low fixed costs. =rand preferences and customer loyalty F $n some industries, buyers are strongly attached to established brands. (apital requirements F 3he larger the total dollar investment needed to enter the mar&et successfully, the more limited the pool of potential entrants. ;ccess to distribution channels F $n consumer goods industries, a potential entrant may face the barrier of gaining adequate access to consumers. /egulatory policies F <overnment agencies can limit or even bar entry by requiring licenses and patents. 3ariffs and international trade restrictions F Gational governments commonly use tariffs and trade restrictions to raise entry barriers for foreign firms and protect domestic producers from outside competition. %hether an industryDs entry barriers ought to be considered high or low and how hard it is for new entrants to compete on a level playing field depend on the resources and competencies possessed by the pool of potential entrants.

,ompetitive *ressures from the Sellers of Substitute *roducts

(ompanies in one industry come under competitive pressure from the actions of companies in a closely ad7oining industry whenever buyers view the products of the two industries as good substitutes. Bust how strong the competitive pressures are from sellers of substitute products depends on three factorsA a. %hether substitutes are readily available and attractively priced

b. %hether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes c. +ow much it costs end-users to switch to substitutes 3he presence of readily available and attractively priced substitutes create competitive pressure by placing a ceiling on the prices industry members can charge without giving customers an incentive to switch to substitutes and ris&ing sales erosion. 3he availability of substitutes inevitably invites customers to compare performance, features, ease of use, and other attributes as well as price. 3he strength of competition from substitutes is significantly influenced by how difficult or costly it is for the industryDs customers to switch to a substitute. ;s a rule, the lower the price of substitutes, the higher their quality and performance, and the lower the userDs switching costs, the more intense the competitive pressures posed by substitute products. <ood indicators of the competitive strength of substitute products are the rate at which their sales and profits are growing, the mar&et inroads they are ma&ing, and their plans for expanding production capacity.

,ompetitive *ressures from the Sellers of Substitute *roducts (ompanies in one industry come under competitive pressure from the actions of companies in a closely ad7oining industry whenever buyers view the products of the two industries as good substitutes. Bust how strong the competitive pressures are from sellers of substitute products depends on three factorsA %hether substitutes are readily available and attractively priced %hether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes +ow much it costs end-users to switch to substitutes 3he presence of readily available and attractively priced substitutes create competitive pressure by placing a ceiling on the prices industry members can

charge without giving customers an incentive to switch to substitutes and ris&ing sales erosion. 3he availability of substitutes inevitably invites customers to compare performance, features, ease of use, and other attributes as well as price. 3he strength of competition from substitutes is significantly influenced by how difficult or costly it is for the industryDs customers to switch to a substitute. ;s a rule, the lower the price of substitutes, the higher their quality and performance, and the lower the userDs switching costs, the more intense the competitive pressures posed by substitute products. <ood indicators of the competitive strength of substitute products are the rate at which their sales and profits are growing, the mar&et inroads they are ma&ing, and their plans for expanding production capacity. ,ompetitive *ressures Stemming from Supplier 0argaining *ower and Supplier-Seller ,ollaboration %hether supplier-seller relationships represent a wea& or strong competitive force depends onA a. %hether the ma7or suppliers can exercise sufficient bargaining power to influence the terms and conditions of supply in their favor b. 3he nature and extent of supplier-seller collaboration "ow Supplier 0argaining *ower ,an ,reate ,ompetitive *ressures: %hen the ma7or suppliers to an industry have considerable leverage in determining the terms and conditions of the item they are supplying, they are in a position to exert competitive pressures on one or more rival sellers. 3he factors that determine whether any of the suppliers to an industry are in a position to exert substantial bargaining power or leverage are fairly clear-cutA %hether the item being supplied is a commodity that is readily available from many suppliers at the going mar&et price %hether a few large suppliers are the primary sources of a particular item %hether it is difficult or costly for industry members to switch their purchases from one supplier to another or to switch to attractive substitute inputs %hether certain needed inputs are in short supply

 %hether certain suppliers provide a differentiated input that enhances the performance or quality of the industryDs product %hether certain suppliers provide equipment or services that deliver valuable cost-saving efficiencies to industry members in operating their production processes %hether suppliers provide an item that accounts for a si#able fraction of the costs of the industryDs product %hether industry members are ma7or customers of suppliers %hether it ma&es good economic sense for industry members to integrate bac&ward and selfmanufacture items they have been buying from suppliers

"ow Seller-Supplier *artnerships ,an ,reate ,ompetitive *ressures: $n more and more industries, sellers are forging strategic partnerships with select suppliers in efforts to reduce inventory and logistics costs, speed the availability of next generation components, enhance the quality of the parts and components being supplied and reduce defect rates, and squee#e out important cost-savings for both themselves and their suppliers. 3he many benefits of effective seller-supplier collaboration can translate into competitive advantage for industry members who do the best 7ob of managing supply chain relationships. 3he more opportunities that exist for win-win efforts between a company and its suppliers, the less their relationship is characteri#ed by whom has the upper hand in bargaining with the other. ,ompetitive *ressures Stemming from 0uyer 0argaining *ower and Seller-0uyer ,ollaboration 6. %hether seller-buyer relationships represent a wea& or strong competitive force depends onA a. %hether some or many of the buyers have sufficient bargaining leverage to obtain price concessions and other favorable terms and conditions of sale b. 3he extent and competitive importance of seller-buyer strategic partnerships in the industry

"ow 0uyer 0argaining *ower ,an ,reate ,ompetitive *ressures: 3he leverage that certain types of buyers have in negotiating favorable terms can range from wea& to strong. ,ven if buyers do not purchase in large quantities or offer a seller important mar&et exposure or prestige, they gain a degree of bargaining leverage in the following circumstancesA a. $f buyersD costs of switching to competing brands or substitutes are relatively low F =uyers who can readily switch brands or source from several sellers have more negotiating leverage than buyers who have high switching costs. b. $f the number of buyers is small or if a customer is particularly important to a seller F 3he smaller the number of buyers, the less easy it is for sellers to find alternative buyers when a customer is lost to a competitor. c. $f buyer demand is wea& and sellers are scrambling to secure additional sales of their products F %ea& or declining demand creates a buyers mar&et and shifts bargaining power to buyers. d. $f buyers are well-informed about sellersD products, prices, and costs F 3he more information buyers have, the better bargaining position they are in. e. $f buyers pose a credible threat of integrating bac&ward into the business of sellers F (ompanies li&e ;nheuser-=usch, (oors, and +ein# have integrated bac&ward into metal-can manufacturing to gain bargaining power in obtaining the balance of their can requirements from otherwise powerful metal-can manufacturers. f. $f buyers have discretion in whether and when they purchase the product F $f consumers are unhappy with the present deals offered on ma7or appliances, hot tubs, home entertainment centers, or other goods for which time is not a critical purchase factor, they may be in a position to delay purchase until prices and financing terms improve.

$etermining 7hether the ,ollective Strength of the %ive ,ompetitive %orces is ,onducive to 5ood *rofitability
Scrutini#ing each competitive force one by one provides a powerful diagnosis of what competition is li&e in a given mar&et.
$oes the State of ,ompetition *romote *rofitability8

;s a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants. 3he stronger the forces of competition, the harder it becomes for industry members to earn attractive profits.

3he most extreme case of a competitively unattractive industry is when all five forces are producing strong competitive pressures. 8ierce to strong competitive pressures coming from all five directions nearly always drive industry profitability to unacceptably low levels, frequently producing losses for many industry members and forcing some out of business. $ntense competitive pressures from 7ust two or three of the five forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business. $n contrast, when the collective impact of the five competitive forces is moderate to wea&, an industry is competitively attractive in the sense that industry members can reasonably expect to earn good profits and a nice return on investment. 3he ideal competitive environment for earning superior profits is one in which both suppliers and customers are in wea& bargaining positions, there are no good substitutes, high barriers bloc& further entry, and rivalry among present sellers generates only moderate competitive pressures.

Evaluating a ,ompany#s -esources and ,ompetitive *osition

3dentifying ,ompany -esource Strengths and ,ompetitive ,apabilities ; strength is something a company is good at doing or an attribute that enhances its competitiveness. Strength can ta&e any of several formsA ; s&ill or important expertise :aluable physical assets :aluable human assets :aluable organi#ational assets :aluable intangible assets (ompetitive capabilities ;n achievement or attribute that puts the company in a position of mar&et advantage

(ompetitively valuable alliances or cooperative ventures

3a&en together, a companyDs strengths determine the complement of competitively valuable resources with which it competes F a companyDs resource strengths represent competitive assets. ; company is better positioned to succeed if it has a competitively valuable complement of resources at its command. 3dentifying ,ompany -esource 7ea nesses and ,ompetitive $eficiencies ; wea&ness or competitive deficiency is something a company lac&s or does poorly in comparison to others or a condition that puts it at a disadvantage in the mar&etplace. ; companyDs wea&nesses can relate toA $nferior or unproven s&ills or expertise or intellectual capital in competitively important areas of the business 1eficiencies in competitively important physical, organi#ational, or intangible assets !issing or competitively inferior capabilities in &ey areas

$nternal wea&nesses are shortcomings in a companyDs complement of resources and represent competitive liabilities. ; companyDs resource strengths represent competitive assets; its resource wea&nesses represent competitive liabilities.

3dentifying a ,ompany#s Mar et (pportunities

!ar&et opportunity is a big factor in shaping a companyDs strategy. !anagers cannot properly tailor strategy to the companyDs situation without first identifying its opportunities and appraising the growth and profit potential each one holds. $n evaluating a companyDs mar&et opportunities and ran&ing their attractiveness, managers have to guard against viewing every industry opportunity as a company opportunity. 5pportunities can be plentiful or scarce and can range from wildly attractive to marginally interesting to unsuitable. ; company is well advised to pass on a particular mar&et opportunity unless it has or can acquire the resources to capture it. 3he mar&et opportunities most relevant to a company are those that match up well with the companyDs financial and organi#ational resource capabilities, offer the best growth and profitability, and present the most potential for competitive advantage.

3dentifying !hreats to a ,ompany#s %uture *rofitability

(ertain factors in a companyDs external environment pose threats to its profitability and competitive well-being. ,xamples of threats includeA the emergence of cheaper or better technologies, rivalsD introduction of new or improved products, lower-cost foreign competitorsD entry into a companyDs mar&et stronghold, new regulations that are more burdensome to a company than to its competitors, vulnerability to a rise in interest rates, the potential of a hostile ta&eover, unfavorable demographic shifts, adverse changes in foreign exchange rates, political upheaval in a foreign country where the company has facilities, and so on. $t is managementDs 7ob to identify the threats to the companyDs future profitability and to evaluate what strategic actions can be ta&en to neutrali#e or lessen their impact.

!he S7(! 2istings -eveal8

S%53 analysis involves more than ma&ing four lists. 3he two most important parts of S%53 analysis areA 1rawing conclusions from the S%53 listings about the companyDs overall situation ;cting on those conclusions to better match the companyDs strategy to its resource strengths and mar&et opportunities, to correct important wea&nesses, and to defend against external threats Simply ma&ing lists of a companyDs strengths, wea&nesses, opportunities, and threats is not enough; the payoff from S%53 analysis comes from the conclusions about a companyDs situation and the implications for a strategy improvement that flow from the four lists. Bust what story the S%53 analysis tells about the companyDs overall situation can be summari#ed in a series of questionsA 1oes the company have an attractive set of resource strengths*

+ow serious are the companyDs wea&nesses and competitive deficiencies* 1o the companyDs resource strengths and competitive capabilities outweigh its resource wea&nesses and competitive deficiencies by an attractive margin*

1oes the company have attractive mar&et opportunities that are well suited to its resource strengths and competitive capabilities*

;re the threats alarming or are they something the company appears able to deal with and defend against*

+ow strong is the companyDs overall situation*

!he 'alue ,hain System for an Entire 3ndustry 6. ;ccurately assessing a companyDs competitiveness in end-use mar&ets requires that company managers understand the entire value chain system for delivering a product or service to end-users, not 7ust the companyDs own value chain. ; companyDs cost competitiveness depends not only on the costs of internally performed activities .its own value chain2 but also on costs in the value chain of its suppliers and forward channel allies. SuppliersD value chains are relevant because suppliers perform activities and incur costs in creating and delivering the purchased inputs used in a companyDs own value chain. 8orward channel and customer value chains are relevant becauseA a. 3he costs and margins of a companyDs distribution allies are part of the price the end user pays b. 3he activities that distribution allies perform affect the end userDs satisfaction ;ctual value chains vary by industry and by company. <eneric value chains li&e those in 8igures J.J and J.K are illustrative, not absolute and have to be drawn to fit the activities of a particular company or industry.

7hy the 'alue ,hains of -ival ,ompanies (ften $iffer 6. ; companyDs value chain and the manner in which it performs each activity reflect the evolution of its own particular business and internal operations, its strategy, the approaches it is using to execute its strategy, and the underlying economics of the activities themselves.

H. =ecause these factors differ from company to company, the value chain of rival companies sometimes differ substantially F a condition that complicates the tas& of assessing rivalsD relative cost positions.

!he %ive 5eneric ,ompetitive Strategies

8ive distinct competitive strategy approaches stand outA a. ; low-cost provider strategy: appealing to a broad spectrum of customers based by being the overall low-cost provider of a product or service b. ; broad differentiation strategy: see&ing to differentiate the companyDs product>service offering from rivalsD in ways that will appeal to a broad spectrum of buyers c. ; best-cost provider strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest .best2 costs and prices compared to rivals offering products with comparable attributes d. ; focused or mar et niche strategy based on lower cost: concentrating on a narrow buyer segment and out competing rivals by serving niche members at a lower cost than rivals e. ; focused or mar et niche strategy based on differentiation: concentrating on a narrow buyer segment and out competing rivals by offering niche members customi#ed attributes that meet their tastes and requirements better than rivals products

2(7-,(S! 2EA$E-S"3* S!-A!E53ES

@ow leadership strategies are based on a firmDs ability to provide a product or service at a lower cost than its rivals. 3he basic operating assumption behind a low-cost leadership strategy is to acquire a substantial cost advantage over other competitors that can be passed on to consumers to gain a large mar&et share. ; low-cost strategy then produces competitive advantage when the firm can earn a higher profit margin than results from selling products at current mar&et prices. $n many cases, firms attempting to execute low-cost strategies aim to sell a product that appeal to an average customer in a broad target mar&et. 5ftentimes; these products or services are highly standardi#ed and not customi#ed to an individual customerDs tastes, needs, or desires. ; central premise of the low-cost leadership strategy is the followingA =y ma&ing products with as few modifications as possible, the firm can exploit the cost reduction benefits that accrue from economies of scale and experience

effects. @ow-cost leadership strategies can also flourish in service businesses as well. $n these arenas, firms attempt to capture economies of scale in information systems, procurement, logistics and even mar&eting.

$3%%E-E;!3A!3(; S!-A!E53ES ;nother strategic approach to building competitive advantage is that of pursuing differentiation strategies. 1ifferentiation strategies are based on providing buyers with something that is different or unique, that ma&es the companyDs product or service distinct from that of its rivals. 3he &ey assumption behind a differentiation strategy is that customers are willing to pay a higher price for a product that is distinct .or at least perceived as such2 in some important way. Superior value is created because the product is of higher quality, is technically superior in some way, comes with superior service, or has a special appeal in some perceived way. $n effect differentiation builds competitive advantage by ma&ing customers more loyal-and less price-sensitive-to a given firmDs product. ;dditionally, consumers are less li&ely to search for other alternative products once they are satisfied. 1ifferentiation may be achieved in a number of ways. 3he product may incorporate a more innovative design, may be produced using advanced materials or quality processes, or may be sold and serviced in some special way. 5ften, customers will pay a higher price if the product or service offers a distinctive or special value or feel to it. 1ifferentiation strategies offer high profitability when the price premium exceeds the costs of
distinguishing the product or service.

%(,>S S!-A!E53ES
3he third generic strategy is &nown as a focus strategy. 8ocus strategies are assigned to help a firm target a specific niche within an industry. ?nli&e both low-cost leadership and differentiation strategies that are designed to target a broader or industry-wide mar&et, focus strategies aim at s specific and typically small niche. 3hese niches could be a particular buyer group, a narrow segment of a given product line, a geographic or regional mar&et, or a niche with distinctive, special tastes and preference. 3he basic idea behind a focus strategy is to speciali#e the firmDs activities in ways that other broader-line .low-cost or diffrentiationI firms cannot performs as well, Superior value, and thus higher profitability, are generated when other broader-line firms cannot speciali#e or conduct their activities as well as a focused firm. $f a niche or segment has characteristics that are distinctive and lasting, then a firm can develop its own set of barriers to entry in much the same way that large established firms do in broader mar&ets.

!he ,ontrasting %eatures of the %ive 5eneric ,ompetitive Strategies: A Summary 1eciding which generic competitive strategy should serve as the framewor& for hanging the rest of the companyDs strategy is not a trivial matter. ,ach of the five generic competitive strategies positions the company differently in its mar&et and competitive environment. ,ach establishes a central theme for how the company will endeavor to out compete rivals. ,ach creates some boundaries or guidelines for maneuvering as mar&et circumstances unfold and as ideas for improving the strategy are debated. ,ach points to different ways of experimenting and tin&ering with the basic strategy. 1eciding which generic strategy to employ is perhaps the most important strategic commitment a company ma&es F it tends to drive the rest of the strategic actions a company decides to underta&e. ,ach entails differences in terms of product line, production emphasis, mar&eting emphasis, and means for sustaining the strategy. 5ne of the big dangers here is that managers will opt for stuc& in the middle strategies that represent compromises between lower costs and greater differentiation and between broad and narrow mar&et appeal. 5nly if a company ma&es a strong and unwavering commitment to one of the five generic competitive strategies does it stand much chance of achieving sustainable competitive advantage that such strategies can deliver if properly executed.

Supplementing the ,hosen ,ompetitive Strategy: (ther 3mportant 0usiness Strategy ,hoices

Strategic Alliances and ,ollaborative *artnerships Strategic alliances are collaborative partnerships where two or more companies 7oin forces to achieve mutually beneficial strategic outcomes. 1uring the past decade, companies in all types of industries and in all parts of the world have elected to form strategic alliances and partnerships to complement their own strategic initiatives and strengthen their competitiveness in domestic and international mar&ets. <lobali#ation of the world economy, revolutionary advances in technology across a broad front, and untapped opportunities in national mar&ets in ;sia, @atin ;merica, and ,urope that are opening up, deregulating, and>or undergoing privati#ation have made partnerships of one &ind or another integral to competing on a broad geographic scale. !any companies now find themselves thrust in the midst of two very demanding competitive racesA

 3he global race to build a presence in many different national mar&ets 3he race to sei#e opportunities on the frontiers of advancing technology (ompanies may form strategic alliances or collaborative partnerships in which two or more companies 7oin forces to achieve mutually beneficial strategic outcomes. Strategic alliances go beyond normal company-to-company dealings but fall short of merger or full 7oint venture partnership with full ownership ties. Some strategic alliances do involve arrangements whereby one or more allies have minority ownership in certain of the other alliance members. !he *ervasive >se of Alliances Strategic alliances and collaborative partnerships have emerged as an attractive means of breaching technology and resource gaps. !ore and more enterprises, especially in fast-changing industries, are ma&ing strategic alliances a core part of their overall strategy. ;lliances have become so essential to the competitiveness of companies in many industries that they are a core element of todayDs business strategies. %hile a few companies have the resources and capabilities to pursue their strategies alone, it is becoming increasingly common for companies to pursue their strategies in collaboration with suppliers, distributors, ma&ers of complementary products, and sometimes even select competitors. 7hy and "ow Strategic Alliances are Advantageous 6. 3he value of a strategic alliance stems not from the agreement or deals itself but rather from the capacity of the partners to defuse organi#ational frictions, collaborates effectively over time, and wor& their way through the ma#e of changes that lie in front of them H. (ollaborative partnerships nearly always entail an evolving relationship whose benefits and competitive value ultimately depend on mutual learning, cooperation, and adaptation to changing industry conditions. J. 3he best alliances are highly selective, focusing on particular value chain activities and on obtaining a particular competitive benefit.

K. 3he most common reasons why companies enter into strategic alliances are to collaborate on technology or the development of promising new products, to overcome deficits in their technical and manufacturing expertise, to acquire altogether new competencies, to improve supply chain efficiency, to gain economies of scale in production and>or mar&eting, and to acquire or improve mar&et access through 7oint mar&eting agreements. P. ; company that is racing for global mar&et leadership needs alliances toA a. <et into critical country mar&ets quic&ly and accelerate the process of building a potent global mar&et presence b. <ain inside &nowledge about unfamiliar mar&ets and cultures through alliances with local partners c. ;ccess valuable s&ills and competencies that are concentrated in particular geographic locations Q. ; company that is racing to sta&e out a strong position in a technology or industry of the future needs alliances toA a. ,stablish a stronger beachhead for participating in the target technology or industry b. !aster new technologies and build new expertise and competencies faster than would be possible through internal efforts c. 5pen up broader opportunities in the target industry by melding the firmDs own capabilities with the expertise and resources of partners 3he competitive attraction of alliances is in allowing companies to bundle competencies and resources that are more valuable in a 7oint effort than when &ept within a single company. O. ;llies can learn much from one another in performing 7oint research, sharing technological &now-how, and collaborating on complementary new technologies and products F sometimes enough to enable them to pursue other new opportunities on their own. R. Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others. Merger and AcCuisition Strategies

Go company can afford to ignore the strategic and competitive benefits of acquiring or merging with another company to strengthen its mar&et position and open up avenues of new opportunity. !ergers and acquisitions are a much-used strategic plan. 3hey are especially suited for situations where alliances and partnerships do not go far enough in providing a company with access to the needed resources and capabilities. ; merger is a pooling of equals, with the newly created company often ta&ing on a new name. ;n acCuisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired. 3he difference between a merger and an acquisition relates more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage. 3he resources, competencies, and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of acquisition or merger.

Many mergers and acCuisitions are driven by strategies to achieve one of five strategic ob=ectives:
a. 3o pave the way for the acquiring company to gain more mar&et share and create a more efficient operation out of the combined companies by closing high-cost plants and eliminating surplus capacity industry wide b. 3o expand a companyDs geographic coverage c. 3o extend the companyDs business into new product categories or international mar&ets d. 3o gain quic& access to new technologies and avoid the need for a lengthy and time-consuming /01 effort e. 3o try to invent a new industry and lead the convergence of industries whose boundaries are being blurred by changing technologies and new mar&et opportunities

'ertical 3ntegration Strategies: (perating Across More Stages of the 3ndustry 'alue ,hain :ertical integration extends a firmDs competitive and operating scope within the same industry. $t involves expanding the firmDs range of activities bac&ward into sources of supply and>or forward toward end users. :ertical integration strategies can aim at full integration or partial integration. !he Strategic Advantages of 'ertical 3ntegration

6. 3he only good reason for investing company resources in vertical integration is to strengthen the firmDs competitive position. CORE CONCEPT: ; vertical integration strategy has appeal only if it significantly strengthens a firmDs competitive position. H. 3ntegrating 0ac ward to Achieve 5reater ,ompetitiveness: $ntegrating bac&ward generates cost savings when the volume needed is big enough to capture the same scale economies suppliers have and when suppliersD production efficiency can be matched or exceeded with no drop-off in quality and new product development capability. J. =ac&ward integration is most li&ely to reduce costs whenA a. Suppliers have si#able profit margins b. 3he item being supplied is a ma7or cost component c. 3he needed technological s&ills and product capability are easily mastered or can be gained by acquiring a supplier with desired expertise K. =ac&ward vertical integration can produce a differentiation-based competitive advantage when a company, by performing activities in-house that were previously outsourced, ends up with a better quality offering, improves the caliber of its customer service, or in other ways enhances the performance of its final product. P. 5ther potential advantages of bac&ward integration includeA a. 1ecreasing the companyDs dependence on suppliers of crucial components b. @essening the companyDs vulnerability to powerful suppliers inclined to raise prices at every opportunity !he Strategic $isadvantages of 'ertical 3ntegration :ertical integration has some substantial drawbac&sA a. $t boosts a firmDs capital investment in the industry b. $ncreasing business ris& c. 9erhaps denying financial resources to more worthwhile pursuits

d. @oc&s a firm into relying on its own in-house activities and sources of supply e. 9oses capacity-matching problems f. (alls for radical changes in s&ills and business capabilities 7eighing the *ros and ,ons of 'ertical 3ntegration: ; strategy of vertical integration can have both important strengths and wea&nesses. 3he tip of the scales depends onA a. %hether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, or increase differentiation b. 3he impact of vertical integration on investments costs, flexibility and response time, and administrative costs of coordinating operations across more value chain activities c. %hether the integration substantially enhances a companyDs competitiveness :ertical integration strategies have merit according to which capabilities and value chain activities truly need to be performed in-house and which can be performed better or cheaper by outsiders. ;bsent solid benefits, integrating forward or bac&ward is not li&ely to be an attractive competitive strategy option.

(utsourcing Strategies
5ver the past decade, outsourcing the performance of some value chain activities traditionally performed in-house has become increasingly popular. 3he two driving themes behind outsourcing are thatA a. 5utsiders can often perform certain activities better or cheaper b. 5utsourcing allows a firm to focus its entire energies on its core business

Advantages of (utsourcing
6. 5utsourcing pieces of the value chain to narrow the boundaries of a firmDs business ma&es strategic sense wheneverA a. ;n activity can be performed more cheaply by outside specialists b. ;n activity can be performed better by outside specialists c. ;n activity is not crucial to the firmDs ability to achieve sustainable competitive advantage and will not hollow out its core competencies, capabilities, or technical &now-how

d. $t reduces the companyDs ris& exposure to changing technology and>or changing buyer preferences e. $t streamlines company operations in ways that cut the time it ta&es to get newly developed products into the mar&etplace, lower internal coordination costs, or improve organi#ational flexibility f. $t allows a company to concentrate on strengthening and leveraging its core competencies CORE CONCEPT: ; company should generally not perform any value chain activity internally that can be performed more efficiently or effectively by its outside business partners F the chief exception is when an activity is strategically crucial and internal control over that activity is deemed essential. H. 5ften many of the advantages of performing value chain activities in-house can be captured and many of the disadvantages avoided by forging close, long-term cooperative partnerships with &ey suppliers and tapping into the important competitive capabilities that able suppliers have painsta&ingly developed. J. /elying on outside specialists to perform certain value chain activities offers a number of strategic advantagesA a. 5btaining higher quality and>or cheaper components than internal sources can provide b. $mproving the companyDs ability to innovate by allying with best-in-world suppliers who have considerable intellectual capital and innovative capabilities of their own c. ,nhancing the firmDs strategic flexibility should customer needs and mar&et conditions suddenly shift d. $ncreasing the firmDs ability to assemble diverse &inds of expertise speedily and efficiently e. ;llowing the firm to concentrate its resources on performing those activities internally that it can perform better than outsiders and>or that it needs to have under its direct control !he *itfalls of (utsourcing 3he biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities.

&ey 0enefits of a Strategic Management System 6. 3a&ing an organi#ation-wide, proactive approach to a changing global world

H. =uilding an executive team that serves as a model of cross-functional or hori#ontal teamwor& J. +aving an intense executive development and strategic orientation process

K. 1efining focused, quantifiable outcomes measures of success P. !a&ing intelligent budgeting decisions Q. (larifying your competitive advantage O. /educing conflict; empowering the organi#ation R. 9roviding clear guidelines for day-to-day decisions ma&ing S. (reating a critical mass for change (larifying and simplifying the barrage of management techniques 6I. ,mpowering middle managers 66. 8ocusing everyone in the organi#ation in the same overall framewor& 6H. (larifying and simplifying the barrage of management techniques 6J. ,mpowering middle managers 6K. 8ocusing everyone in the organi#ation in the same overall framewor& 6P. Speeding up implementation of the core strategies 6Q. 9roviding tangible tools for dealing with the stress of change

2imitations of strategic management ;lthough a sense of direction is important, it can also stifle creativity, especially if it is rigidly enforced. $n an uncertain and ambiguous world, fluidity can be more important than a finely tuned strategic

compass. %hen a strategy becomes internali#ed into a corporate culture, it can lead to group thin&. $t can also cause an organi#ation to define itself too narrowly. ;n example of this is mar&eting myopia. !any theories of strategic management tend to undergo only brief periods of popularity. ; summary of these theories thus inevitably exhibits survivorship bias .itself an area of research in strategic management2. !any theories tend either to be too narrow in focus to build a complete corporate strategy on, or too general and abstract to be applicable to specific situations. 9opulism or faddishness can have an impact on a particular theoryEs life cycle and may see application in inappropriate circumstances. See business philosophies and popular management theories for a more critical view of management theories. $n HIII, <ary +amel coined the term strategic convergence to explain the limited scope of the strategies being used by rivals in greatly differing circumstances. +e lamented that strategies converge more than they should, because the more successful ones get imitated by firms that do not understand that the strategic process involves designing a custom strategy for the specifics of each situation. /am (haran, aligning with a popular mar&eting tagline, believes that strategic planning must not dominate action. "Bust do itL while not quite what he meant, is a phrase that nevertheless comes to mind when combating analysis paralysis.