BMAL-590 Foundations of Business
Integration and Strategic Management
with Complete Solutions
The purpose of strategy - ANSWER-to create and sustain competitive advantage - the
ability to do better than competition. At the heart of achieving competitive advantage is
the development of one or more core competencies.
The five-step approach to strategy - ANSWER-developing a mission, setting objectives,
formulating a strategy, implementing the strategy, and evaluating performance.
Constant feedback and corrective action completes the system.
Step 1: Developing a Vision and Mission - ANSWER-Vision is usually the overarching
goal that the founder or entrepreneur has for the business. It is embedded in the values,
beliefs, and aspiration of the promoter.
Mission, in contrast, is a team exercise carried out by executives from different
functions. The idea is to provide a road map to realize the vision.
Sometimes, vision and mission are combined to form a single statement - this might
well translate into the organization's value proposition - what do we have to offer to
different stakeholders - customers, suppliers, employees, society, and even
competitors, and how do we preserve and protect the environment?
Step 2: Setting Objectives - ANSWER-The vision, mission, and value proposition are
made operational by setting out specific objectives.
Both short-term and long-term strategic and financial objectives are set and
communicated across the organization.
While we have to be realistic in what is achievable and what is not, the strategy scholar
Gary Hamel suggests that objectives must "stretch" every individual, function,
department, and division.
Example: In 1990, Sam Walton (WalMart) announced that the firm's objective was to be
a $125 billion company by revenues by the year 2000. When he said this, the
company's revenues were yet to touch $50 billion. Everyone (and most notably, the
competition) thought the idea was a joke. WalMart silenced its critics by achieving the
target in 1996, 4 years ahead of schedule. This example illustrates the concept of
stretch- motivating and inspiring everyone to do better than their best
,Step 3: Crafting a Strategy - ANSWER-In his work on competitive strategy, Michael
Porter suggested two approaches to achieving competitive advantage - cost leadership
and differentiation.
In subsequent work, Michael Porter has added a second dimension - the size of the
target market - large or small (focused or niche or micro market) yielding four strategy
alternatives - cost leadership, differentiation (that address large markets), focused cost
leadershipand focused differentiation (that address small markets or a market segment
or a part of a segment called a niche).
Porter's generic strategies are depicted graphically in the next slide. The horizontal axis
shows the source of competitive advantage. The vertical axis shows the scope (market
size) of competitive advantage.
Cost leadership examples: - ANSWER-Cost leadership is the ability of an organization
to improve operational efficiency and reduce unit cost to a level that is lower than that of
competitors.
Assuming that the organization can charge the same price or even a lower price than
competitors, cost leadership provides above-industry-average returns and is a valuable
strategy to follow.
Example: Southwest Airlines, founded by Herb Kelleher and Rollin King, has
consistently followed the cost leadership strategy since 1971. The airline uses only one
type of aircraft, the Boeing 737, reducing maintenance costs, provides courteous but
"no-frills" service, has done away with intermediaries, operates on select routes within
the USA and has not attempted to go international, has the quickest turnaround time for
aircraft (thus enabling more flights per aircraft), and offers some of the lowest fares in
the industry. Yet, the airline has outperformed its rivals even during times of economic
recession.
Cost leadership: differentiation - ANSWER-Differentiation is the ability of a firm to
provide unique features, characteristics, service, brand image, and exclusivity, all of
which combine to enable the firm to charge a premium price and thus earn above-
industry-average returns. The important aspect of differentiation is the perceived
uniqueness of the product or service.
Example: Apple in the computer and mobile phone industry; Mercedes Benz, BMW, and
Tesla in automobiles; Rolex and Omega in watches; Givenchy in fashion and apparel;
Four Seasons in hotels, and Mont Blanc in writing instruments.
Step 4: Implementing a Strategy - ANSWER-Implementing a strategy involves creating
a fit between the way things are done and the way things ought to be done. Thus, fit can
go astray along several dimensions.
,Resources and Capabilities: Some of the well-publicized PR nightmares faced by
United, Wells Fargo, Uber, Yahoo, and Equifax have nothing to do with resources. Each
one of them has to do with the lack of some capability. Invariably, fit or the lack of it
boils down to leadership and culture. Leadership that is based on integrity and ethics
never compromises on customer information even if it hurts the bottom line. Similarly,
an organization that fosters a "performance at any cost" culture faces the danger of
getting into a hole from which there is no escape.
Internal and External factors: Many firms suffer from internal strife, petty politics,
favoritism, and nepotism.
growth can be through: - ANSWER-market penetration, market development, product
development, and diversification
Diversification - ANSWER-can be related or unrelated, and involves vertical and
horizontal integration, as well as greenfield ventures, acquisitions, and mergers.
Strategy is not a static process - ANSWER-it needs constant review and change when
necessary.
Strategy - ANSWER-a business approach to frame a set of competitive choices that
lead to a desired outcome.
Unless these are addressed through a combination of support structures and reward
mechanisms, no strategy will work. Similarly, the external environment is beyond any
firm's control. Political, Economic, Social, and Technological changes take a heavy toll
on what a firm can do. Rapid adaptation without compromising the core values is the
key success factor.
Step 5: Evaluating Performance - ANSWER-Strategic management is not a one-off
exercise.
Continuous evaluation and changing direction, if required, are necessary because:
The business environment changes - on political, economic, social, or technological
dimensions.
Customer expectations change - customer satisfaction may no longer be sufficient;
customer delight and an occasional (positive) surprise may be necessary.
Changes in key positions bring in new ideas and never-before-tested solutions.
Given that change is the only constant, organizations should develop agility,
adaptability, and flexibility.
Also, they need to reduce complexity and ambiguity, enhance simplicity and
transparency, measure performance, compare with expectations, alter direction as
necessary, and in extreme cases, re-visit strategy and question assumptions made.
, The two generic strategies: - ANSWER-cost leadership and differentiation
Based on the target market, two additional strategies emerge - focus cost leadership
and focus differentiation.
A hybrid strategy is possible but a "stuck-in-the-middle" strategy must be avoided.
Strategic groups - ANSWER-help firms to determine where and how to compete with
other firms.
Specifically, strategy is an organization's game plan to:
Create satisfied customers (Peter Drucker)
Be ahead of competition (Michael Porter)
Achieve performance targets (ROI, RONA)
Develop an eco-system that satisfies all stakeholders (Shared Value, Shared Purpose)
(Porter and Kramer)
Mission - ANSWER-a statement that provides the rationale for an organization's
existence.
Organizations tend to define their business in terms of products or services. This is a
narrow view and precludes an examination of alternatives and goals.
Abell provided an excellent framework for defining a business in 1980. It is still valid and
is reproduced in the next slide.
Goals vs. Objectives - ANSWER-Goals are generic or qualitative (Example: We want to
make profits) while objectives are specific and measurable.
(Example: We want to ensure a revenue growth of 10% per year and a net profit
increase of 10% per year over the next 3 years).
Objectives are of two types: - ANSWER-strategic and financial
Strategic Objectives - ANSWER-facilitate the achievement of a competitive position and
superior performance.
Abell's framework - ANSWER-shifts the focus from the company to customers. In other
words, customer focus is the critical factor in organizational success (this will further be
explored in the customer focus section).
Examples:
