Understanding Strategies

Faculty of Economics and Business – Undergraduate Program

Part I Introduction

Faculty of Economics and Business – Undergraduate Program

 MCS and Strategy

• MCS are tool to implement strategies

• Strategy is plan to achieve organization goals
• MCS should be tailored to the requirements of specific
strategies

Faculty of Economics and Business – Undergraduate Program

Part II Goals

Faculty of Economics and Business – Undergraduate Program

 General goals of Business Organization

Profitability
• Indicators : ROI, Profit Margin Percentage, Investment turnover

Maximizing Shareholder Value

• Indicators: Earning Per Share, Stock Price

Faculty of Economics and Business – Undergraduate Program

 Risk and Business Goals

• An organization’s pursuit of profitability is affected by

management’s willingness to take risks
• Primary responsibility management is to preserve the
company’s assets, with profitability considered a
secondary goal

Faculty of Economics and Business – Undergraduate Program

 Multiple Stakeholder, MCS and Goals

Shareholders • Earning Per Share and Stock Price

• Remuneration, working Each stakeholders

Employees environment, recognation have own main
goals, MCS should
be designed fit with
Suppliers • Good relationships
those goals

Communities • Product Quality, Affordable Price

Faculty of Economics and Business – Undergraduate Program

Part III The concept of Strategy

Faculty of Economics and Business – Undergraduate Program

 Strategy: The concept

• Strategy is the general direction in which an

organization plans to move to attain its goals

• A firm develops its strategies by matching its core

competencies with industry opportunities

Faculty of Economics and Business – Undergraduate Program

 Strategy Formulation: Definition

“ Strategy formulation is a process that senior executives use

to evaluate a company’s strengths and weakness in light of
opportunities and threats present in environment and then to
decide on strategies that fit the company’s core competencies
with environmental opportunities “

Faculty of Economics and Business – Undergraduate Program

 Environmental Internal Analysis
Analysis
Technology Know How
Strategy
Competitor
Customer
Manufacturing know how
Marketing know How
Formulation
Regulator Distribution know how
Social Politik Logistic Know How

Opportunities and Strengths and

Threat Weaknesses

Identify Opportunities Identify core

competencies

Fix internal
competencies
With external
opportunities

Firm’s Strategies

Source: Anthony & Govindarajan, 2007 Faculty of Economics and Business – Undergraduate Program
 Two levels of Strategy

• Strategy developed in headquater office for

Corporate level various business unit managed
strategy

• Strategy mainly developed by Business unit

Business Unit level managers and also involvement of corporate
strategy office for strategic issues

Faculty of Economics and Business – Undergraduate Program

 Two levels of Strategy
Strategy level Key Strategic Issues Generic Strategic Organizational Levels
Options
Corporate Level • Are we in the right mix of • Single industry Corporate office
industries? • Related
• What industries or diversification
subindustries should we • Unrelated
be in? diversification
Business Unit What should be the mission • Build Corporate office and
Level of the business unit? • Hold business unit general
• Harvest manager
• Divest
How should the business • Low cost business unit general
unit compete to realize its • differentiation manager
mission?

Faculty of Economics and Business – Undergraduate Program

Part III Corporate Level Strategy

Faculty of Economics and Business – Undergraduate Program

 Corporate Level Strategy

• Corporate strategy is about being in the right mix of business

• Concerned more with the question of where to compete than how
to compete in particular industry
• The issues are:
1. The definition of business in which the firm will participate
2. The deployment of resources among those business

Faculty of Economics and Business – Undergraduate Program

 Corporate Level Strategy – Generic Corporate Strategies

• Firm operates in one line of business

Single Industri • Using its core competencies to pursue growth within that
industry

Related • Firms that operate in a number of industries and their

business are connected to each other through operating
Diversification synergies

Unrelated • Firm operates in business that are not related to one

another ( conglomerates)
Diversification

Faculty of Economics and Business – Undergraduate Program

 Corporate Level Strategies

Single Industry
High
• ( McDonald’s )

Related Diversification
Degree of
Relatedness • ( P&G )

Unrelated
Diversification
• (Astra )

Low
Extent of Diversification High
Faculty of Economics and Business – Undergraduate Program
 Core competence and Corporate Diversification

• Research has shown that, on average:

1. Related diversified firms perform the best
2. Single indutry firms perform next best
3. Unrelated diversified firms do not perform well over the long term

• Corporate headquaters, in a related diversified firms, has the ability to transfer

core competencies from one business unit to another
• A core competency is what a firm excels at and what adds significant value for
customers
• Unrelated diversified firms, do not posseses operating synergies

Faculty of Economics and Business – Undergraduate Program

 Corporate level strategy & three generic strategies

Single Industry Related diversified Unrelated diversified

Compete in only
one industry

Sharing of core Totatlly Autonomous

competencies across businesses in very
business different markets

Faculty of Economics and Business – Undergraduate Program

Part IV Business Unit Strategy

Faculty of Economics and Business – Undergraduate Program

 Business Unit Strategy: Concept

• Business unit strategies deal with how to create and maintain

competitive advantage in each of the industries

• The strategy of business unit depends on two interrelated aspects:

1. Its mission ( What are its overall objectives)
2. Its competitive advantage ( how should the business unit
compete in its industry to accomplish its mission?

Faculty of Economics and Business – Undergraduate Program

 Planning Models for Diversified Firms

• In a diversified firm one of the important tasks of senior management

is resource deployment - the use of the cash generated from some
business units to finance in other business units

• There are two models widely used to help corporate level managers of
diversified firms to effectively allocate resources:
• Boston Consulting Group (BCG) – Growth Share Matrix
• General Electric – Attractiveness business strength matrix

Faculty of Economics and Business – Undergraduate Program

 Boston Consulting Group (BCG) – Growth Share Matrix – SBU Mission

Question • Mission : To develop a business growth

Mark

• Mission : To maintain a business growth

Hold Build Star

• Mission: Generating revenue and stoping

Cash expansion
Cow

Divest • Mission: To shut down the business

Harvest Dog
 General Electric Planning Model

Portfolio Matrix
Winners Winners Question
High Marks
attractiveness
Winners Average Losers
Industry

Average
Business
Low
Profit Producers Losers Losers

strong Average Weak

Business Strength
 General Electric Planning Model

Recommended Business Strategies

Invest/ Grow Strongly Invest/ Grow Dominate/

( Build) Strongly Delay
High
( Build) Divest
attractiveness
Industry

Invest/ Grow Earn/ Protect Harvest/ Divest

Average Selectively ( Build) ( Hold)

Earn/ Protect Harvest/ Divest Harvest/ Divest

Low
( Hold)
Strong Average Weak
Business Strength
 Business unit competitive advantage

Three interrelated questions have to be considered in developing

the business unit’s competitive advantage:
1. What is the structure of the industry in which the business
unit operates?
2. How should the business unit exploit the industry’s structure?
3. What will the basis of the business unit’s competitive
advantage?

Faculty of Economics and Business – Undergraduate Program

 Porter’s Five Forces Model

Five Forces Factors

New Entrants
The intensity of rivalry Industry growth, product
among existing differentiability, number and
competitor diversity of competitor
Bargaining power of Number of buyers, buyer’s
Suppliers Industry Customers customers switching cost, buyer’s ability to
Competitors integrate backward
The bargaining power of Number of suppliers, supplier
suppliers ability to integrate forward

Substitutes Threat from substitutes Relative price/performance of

substitute, buyer’s switching costs
The threat of new entry Number of seller, Number of
product available in the market

Faculty of Economics and Business – Undergraduate Program

 Industry Analysis of Porter’s Five Forces Model

• The more powerful the five forces are, the less profitable an
industry is likely to be

• The key strategic issues facing the business unit will differ from
one industry to another

• Understanding the nature of each force, helps the firm to

formulate effective strategies

Faculty of Economics and Business – Undergraduate Program

 Porter’s Generic Competitive Advantage

Low cost
• Economies of scale
• Experience curve
• Cost control
• Cost efficiency

Differentiation
• Brand loyalty
• Superior customer service
• Product design and product feature
• technology

Faculty of Economics and Business – Undergraduate Program

 Value Chain Analysis

Marketing and Service /

Product development manufacturing
sales logistics

Support Activities: Finance, Human Resources, Information Technology

1. Can we reduce costs in this activity?

2. Can we increase value (revenue) in this activity?
3. Can we reduce assets in this activity?
4. Can we do (1), (2), and (3) simultaneously?

Faculty of Economics and Business – Undergraduate Program