SM 2

STRATEGIC MANAGEMENT
G K Suresh
Department of Management Studies
1
Evaluating a Company’s External Environment
G K Suresh
2
From Thinking Strategically about the Company’s Situation to Choosing a Strategy
Thinking
strategically
about a firm’s
external
environment Form a
Identify Select the
strategic
promising best strategy
vision of
strategic and business
where the
options model for
firm needs
for the firm the firm
Thinking to head
strategically
about a firm’s
internal
environment
The Components of a Company’s Macro-Environment
3–4
Last Class
• What is PESTEL ?
Read the Bi Cycle

manufacturer example
Michael Porter’s 5-force

Industry analysis
Michael Porter’s 5-force Industry analysis
1st Force - Rivalry Among Competing Sellers
Usually the Strongest of the Five forces

Key factor in determining Strength of Rivalry:
 How aggressively are Rivals using various Weapons of Competition to improve
market position, higher market share and competitive advantage?
Competitive Rivalry is a combative contest

involving:
 Aggressive actions
 Defensive countermoves
 e.g. Vodafone – Idea merger, Rel Jio’s aggressive advertising and customer
oriented plans, Patanjali – Colgate – HUL-Dabur, 9
What are the Typical ‘Weapons’ for Competing?
Lower prices Better dealer network

More or different features Low interest rate financing
Better product performance Higher levels of advertising
Higher quality Stronger product innovation capabilities
Stronger brand image and appeal Better customer service
Wider selection of models and styles Stronger capabilities to provide buyers
with custom-made products
10
2nd Force - Entry Barriers
Consider the example of Airlines industry:

Significant Economies of Scale
Brand preferences and Customer Loyalty
High capital requirements or other specialized resource
requirements
Regulatory policies
Tariffs and International trade restrictions
Ability of industry members to launch dynamic initiatives
to block a newcomer’s entry
11
3rd Force - Firms in Other Industries offering Substitute Products
 Substitutes matter when customers have options from other industries

For example:
 Sugar v/s Artificial sweeteners
 Spectacles v/s Contact lens v/s Laser surgery
 Newspapers v/s Television v/s Internet
 When is the competition from Substitutes stronger?

• Many good substitutes are readily available
• Substitutes are suitably priced
• Better quality of substitutes
• Consumer switching costs are lower
• Consumers grow more comfortable with using substitutes
12
4th Force - When is the Bargaining Power of Suppliers Stronger?
 Industry members incur high costs in switching their purchases

to alternative suppliers
 E.g. Automobile Engines – Fiat engines preferred by manufacturers
 Raw materials are in short supply
 E.g. Precious metals for jewellery
 Supplier provides a differentiated component that increases the
quality of performance of sellers’ products
 E.g. Intel’s micro-processors
 There are only a few suppliers of a specific component
 E.g. Aircraft Engines - GE and Rolls-Royce
 Some suppliers threaten to forward integrate and could become a powerful rival
 E.g. In Hollywood, major film studios like MGM, Warner Brothers & Paramount
not only made films but also started distribution and operated movie theaters
as part of forward integration
13
5th Force – Buyers
Whether Seller-Buyer relationships represent a

Weak or Strong competitive force depends on:
 Whether Buyers have sufficient bargaining leverage to

influence terms of sale in their favor
 e.g. Large Retail Buyers like Wal-Mart & Big-Bazaar can

negotiate better because of their large volume purchases and
‘Prestige’ status
14
The Industry Environment
Nature of Each Aspect  Industry Profitability
Element of Industry Structure Status Status
HI LO
Entry Barriers
LO HI
Buyer Bargaining Power
Supplier Bargaining Power LO HI
Threat of Substitutes HI
LO
Level of Rivalry LO HI
Profitable Unprofitable
Industry Industry
G K Suresh
1
Thinking
strategically
about a firm’s
external
environment
Form a
Identify Select the
strategic
vision of
where the
options model for
firm needs
to head
Thinking
strategically
about a firm’s
internal
environment
Distinctive Competencies
Distinctive Competencies
Resources
Distinctive Competitive
Competencies Advantage
Capabilities
Resources
• Tangible
physical entities such as land, buildings, plant, equipment, production
facilities, real estates, money
• Intangible
• Nonphysical entities created by people such as brand names,
reputation of company, IPR, patents, copyrights, trademarks,
knowledge and experience of employees etc
Tangible Resources
• BHEL -
• Manufacturing Plants
• Infosys –
• Cash Reserves
• Jet Airways –
• Fleet
• CCD –
• Shop Locations
• Coca Cola –
• Concentrate Formula
• Reliance –
• Gas Reserves
Intangible Resources
• Lakme, Surf, Samsung, Maruti –

• Brand Name
• Lipitor Pfizer –
• Patented Drug
• Big Bazaar –
• Best Price Perception
• Amul –
• Quality
Capabilities
• These are skills – the ability and way of combining

assets, people and processes – that the company
uses to transform inputs into outputs
• Financial capability
• Marketing capability
• Operations capability
• Personnel capability
• IT capability
• General Management capability
Capabilities
• Unilever/India Post –
• Distribution network
• Walmart –
• Purchasing and Logistics
• Toyota –
• Lean Production concepts
• 3M –
• Innovative Processes
• Apple –
• Product Development
• Indigo Airlines – Supply Chain
• L&T – EPC
• IRCTC - Reservation system
Competitive Advantage - WalMart
Industry Avg.Cost – Walmart Cost

Resource (% of Sales)
Tangible
Intangible
Capabilities
Total Advantage – 4.5%

Each percentage point = 500 MUSD in net income
Ravi Bajaj
G K Suresh
1
How do you figure out if u really

have a competitive advantage ?
VRIO – Valuable, Rare,

Inimitable and Organised
Resource - Valuable
• Critical and able to meet customers need better than

competition –
• WalMart (store locations, brand recognition, employee
loyalty and advanced inbound logistics) Indigo Airlines (
efficient turnaround of fleet)
• Drive a key portion of your overall profits
• KPMG, PriceWaterhouse – Tax Consulting
• Sustainable over time – does not depreciate rapidly
• Coco cola concentrate value stable and Computer
technologies depreciates fast
Resource - Rare
• Scarcity – DeBeers diamonds, Middle East countries

and oil
• Difficult Skills – Chefs, Watchmakers, Diamond
cutters, Weavers
• Individual Genius – Steve Jobs, Sergei Brin, Edison,
Elon Musk
• People commitment – Loyalty, alignment with
vision
Resource - Inimitable
Resource - Organised
• Leadership
• Management processes – distribution, supply
chain, marketing, R&D…
• People knowledge and skills
• Control systems
• Reward systems
VRIO
G K Suresh
1
SWOT ANALYSIS
SWOT
IDENTIFYING A COMPANY’S INTERNAL STRENGTHS
• A Competence
• Is an activity that a firm has learned to perform with
proficiency—a capability.
• A Core Competence
• Is a proficiently performed internal activity that is central
to a firm’s strategy and competitiveness.
• A Distinctive Competence
• Is a competitively valuable activity that a firm performs
better than its rivals.
4–4
IDENTIFYING A COMPANY’S MARKET OPPORTUNITIES
• Characteristics of Market Opportunities:

• An absolute “must pursue” market
• Represents much potential but is hidden
in “fog of the future.”
• A marginally interesting market
• Presents high risk and questionable profit potential.
• An unsuitable\mismatched market
• Is best avoided as the firm’s strengths are not
matched to market factors.
4–5
IDENTIFYING THE THREATS TO A FIRM’S FUTURE PROFITABILITY
• Types of Threats:
• Normal course-of-business threats
• Sudden-death (survival) threats
• Considering Threats:
• Identify the threats to the firm’s future prospects.
• Evaluate what strategic actions can be taken to
neutralize or lessen their impact.
4–6
SWOT for Gold as a

commodity
SWOT
Exercise – SWOT analysis for

Dream 11
G K Suresh
1
VALUE CHAIN ANALYSIS

PORTER’S GENERIC VALUE CHAIN
PRIMARY VALUE CHAIN ACTIVITIES
• Inbound Logistics:
• the receiving and warehousing of raw materials and their
distribution to manufacturing as they are required.
• Operations:
• the processes of transforming inputs into finished products and
services.
• Outbound Logistics:
• the warehousing and distribution of finished goods.
• Marketing & Sales:
• the identification of customer needs and the generation of sales.
• Service:
• the support of customers after the products and services are sold
to them.
SUPPORT ACTIVITIES
• The infrastructure of the firm:

Offices, R&D labs, Control systems, company culture, etc.
• Human resource management:
employee recruiting, hiring, training, development, and compensation.
• Technology development:
technologies to support value-creating activities.
• Procurement:
purchasing inputs such as materials, supplies, and equipment.
Any Others ?
• Finance, Legal, Secretarial, Strategy, Corporate Communications,
Housekeeping, Admin
Let’s look at how all the
concepts we’ve learnt so far -
Porter’s 5-forces, distinctive
competencies and value chain
all come together in a case
The PC Industry in 1980s
High Entry Barriers

Potential * Access to distribution channels
Entrants * Access to Technology
* Capital and Brand Name
Threat of new entrants (LOW*)Scale Economies in Manufacturing
Rivalry
(MODERATE)
Bargaining * Few players Bargaining
Suppliers power of *Competition on power of Buyers
suppliers Features buyers
* Low market
* Vertical Integration * Less Knowledgeable
(MODERATE) penetration (LOW)
by some PC players * Small and fragmented
* Small and fragmented * High switching costs
* Non-standardization of Threat of substitute products or * Limited alternatives
parts services (LOW)
* Alternatives did not offer the same price-

Substitutes performance relationship
* Lesser number of alternatives.
Apple’s Business System and
Competitive Position
R&D Purchasing Operations Sales/Marketing
-Heavy - Selective -Vertical -Innovative

investment in purchases from Integration Prod. Features
R&D world-class -In-house -Distinctive
-Focus on suppliers Manufacturing Advertising
innovation -Higher Prices
Differentiation Advantage
Competitive Advantage
Apple’s Resources and Capabilities:
Source of Competitive Advantage
VALUABLE!!
Ease of Use for

Tangible Proprietary Op. System Customers!
Resource
Customer Loyalty
Brand/Reputation High Switching Costs
Intangible
Resource Innovative products
Leadership & Culture
Superior Products
Product Development First-to-Market
Capabilities
Customer Loyalty
Marketing Creation of New Mkts
Apple 1984
Drivers of Apple’s Performance
Why was Apple Successful till 1991?
• “Attractive”
Industry Structure
of the PC Business
in 1980s
Apple’s Success
& Profitability
• The Company’s
Differentiation Strategy
• The Company’s
Resources/Capabilities
Apple: Performance upto 1991
Apple upto 1991

A “Good Performer” in a
“Relatively Attractive” Industry
Economy wide Industry Competitive Firm

Average Structure Position Profitability
& Resources
Industry Evolution and Life cycle
PC Industry in 1980s PC Industry in 1990s

(Attractive) (Not Very Attractive)
Sales MATURE
growth
GROWTH
EMERGING
DECLINING
Time
Key factors: Place your Determine your Defend your Manage the
strategic bets competitive competitive “endgame”
advantage advantage
Video – Early Jobs
The PC Industry in mid 1990s
Lower Entry Barriers
Potential * Many distribution channels
Entrants * Standard components
* Easy access to Technology
Threat of new entrants (HIGH)* Availability of low-cost manufacturing
Rivalry
(HIGH)
Bargaining Bargaining
Suppliers power of
*Many players
power of Buyers
*Declining
suppliers differentiation buyers
* Some suppliers *Slower mkt growth * More Knowledgeable
(HIGH) (HIGH)
monopolize key inputs * Low switching costs as
(Intel and Microsoft) PCs are commoditized
* High switching costs for PC Threat of substitute products or * Large volume purchases
players for some inputs services (HIGH) by corporate buyers
* Standardization of components
-low power for such suppliers
* Emergence of alternatives with better or
Substitutes comparable price performance reln..
The PC Industry Structure: Significant Change across two periods
Five Force Element Status in 1980s Status in late 1990s
Entry Barriers HIGH LOW
Bargaining Power of LOW HIGH

Buyers
Bargaining Power of MODERATE HIGH

Suppliers
Threat of Substitutes LOW VERY HIGH
Rivalry MODERATE HIGH

among
Networks Profitable/Attractive Less Profitable/Attractive
Industry Industry
Apple’s Resources and Capabilities in 1990s:
Not “Unique” or “Difficult-to-Imitate”
Resource Valuable Rare/Unique Difficult- Non-
Capability to- Imitate Substitutable
Proprietary ✓ (?) X X
OS
Leadership ✓ ✓ X x
Brand Name ✓ ✓ ✓ ✓
Product & ✓ X X
Technical
Capabilities
Marketing ✓ X X
Capabilities
 .
Apple’s Inferior Competitive
Position
• Apple even lost its Differentiation edge. In response, it
decided to compete on Price. Was this a good decision?
• It did not have the right cost structure!!

– High R&D costs: Vertical integration, etc
– It is unable to lower costs given its small market size/scale of operations.
– Apple got caught in the middle?
• It had to compete against a much stronger “network”:

– Apple and Motorola v/s the “Wintel network” (Intel, MS, Compaq, Dell, etc.)
– The Network had lower R&D costs; greater expertise; enjoyed network
externalities.
• Just laying off people or closing some factories did not help?
Drivers of Apple’s Performance
Why was Apple unable to sustain its success post-1991?
• “Changes” in
Industry Structure in
1990s
• Emergence of
Competitive Network
Decline in Advantage
and Performance
•Loss of “Differentiation”
Advantage
• Inferior
Competitive
Position
Apple: Change in Performance over time
Apple upto 1991 Apple: 1991-1997

A “Good Performer” in a A “Poor Performer” in a
“Relatively Attractive” Industry “Less Attractive Industry
Economy wide Industry Competitive Firm Economy wide Industry Competitive Firm
Average Structure Position Profitability Average Structure Position Profitability
& Resources & Resources
The Steve Jobs
Era – 1997-2002
• Good financial performance
Differentiation
• Profits, inventory, etc
•Introduce new products (iMac, iPod, etc)
•Stopped cloning
• Stability in Share Price
•New OS (OS-X)
•Start “Apple Retail stores”
• Improvement in morale
•Increase R&D Spending
• Employees, developers
•“Think Different” Campaign
Video – Jobs on his return
Determinants of Firm Performance
Industry/Environmental
Factors
• Industry structure
• Industry success drivers
• Macro-environment
Change
•Industry Transformation
Performance
- Competitive Actions
- Change in Macro-Envt
•Competitive Position Firm-specific Factors
• Competitive position
Apple Case • Nature of Business System
• Resources & Capabilities
G K Suresh
1
Thinking
strategically
about a firm’s
external
environment
Form a
Identify Select the
strategic
vision of
where the
options model for
firm needs
to head
Thinking
strategically
about a firm’s
internal
environment
THE FIVE GENERIC COMPETITIVE STRATEGIES
Striving to achieve lower overall costs than rivals on products

Low-Cost Provider
that attract a broad spectrum of buyers.
Broad Differentiating the firm’s product offering from rivals’ with

Differentiation attributes that appeal to a broad spectrum of buyers.
Focused Concentrating on a narrow price-sensitive buyer segment and

Low-Cost on costs to offer a lower-priced product.
Focused Concentrating on a narrow buyer segment by meeting

Differentiation specific tastes and requirements of niche members
Giving customers more value for the money by offering

Best-Cost Provider
upscale product attributes at a lower cost than rivals
5–3
The Five Generic Competitive Strategies
5–4
Cost Drivers: The Keys to Driving Down Company Costs
5–5
WHEN A LOW-COST PROVIDER STRATEGY WORKS BEST
1. Price competition among rival sellers is vigorous.

2. Identical products are available from many sellers.
3. There are few ways to differentiate industry products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among sellers.
6. The majority of industry sales are made to a few, large volume
buyers.
7. New entrants can use introductory low prices to attract buyers and
build a customer base.
5–6
Low Cost Examples
• Walmart
• Indigo airlines
• Big Bazaar
• Xiaomi
• Bata
• Hero Honda
Walmart Case
WHEN A DIFFERENTIATION STRATEGY WORKS BEST
Market Circumstances
Favoring Differentiation
Diversity of Few rival firms Rapid change

Many ways to
buyer needs follow a similar in technology and
and uses for
differentiate differentiation product
the product approach features
5–9
Differentiation Strategy Examples
• Apple
• BMW
• Godrej Nature’s Basket
• Fab India
• Nike
• Jet airways
Samsung Case
Shareholder Value Measure

Strategy Advantage Shareholder Value
Shareholder Value = Return on Capital (orAssets)
Return on Capital/Assets = Profit

Capital (Assets)
Profit x Sales
Sales Capital (Assets)
Margins x Velocity of Capital (Asset) Turnover
Profitability x Productivity of Capital (Asset) Usage
Strategy can generate value for shareholders not only by achieving higher profitability
but also through more productive utilization of its capital/assets to achieve those profits
Cost Leadership vs. Differentiation: Key Levers of ‘Return on Capital’
Return on Assets (Return on Capital)
Margins X Productivity in Asset Utilization
Cost-Leadership Strategy Differentiation Strategy
Thin Margins x High Productivity Thick Margins x Lower Productivity

Samsung vs Walmart in 2004/5
• Samsung • Walmart
• Sales - $79.5 Bn • Sales - $256 Bn
• Profit – $7.5 Bn • Profit - $9 Bn
• Assets - $ 35 Bn • Assets - $43 BN
• Profit/Sales – 9.5 % • Profit/Sales – 3.5%
• Sales/Assets – 2.24 • Sales/Assets – 6
• ROA - 21 • ROA - 21
G K Suresh
1
Efficiency (CL) Quality – Reliability

• Economies of Scale (CL)
• Learning and Experience
Innovation – Product
Effect • Shorter Production Run (CL/D) Customer
• Flexible Manufacturing • Tracing Defects back to
Source • Customer Driven Responsiveness (D)
System • Faster to Market
• OEE • Design for Manufacturing/
Construction • Lower Development Cost • Customization
• Procurement /Conversion • Continuous Improvement
Cost • Mean time Between failures • Faster to Market
• Output guarantee • Ease of Manufacture
• ROCE • Delivery Time
• Reliable Suppliers
• Cash to Cash Conversion •
Cycle
• Innovation Process Reduced Downtime
• Cycle Time – Mfg Time Quality Excellence (D) (CL/D) • Incentive for loyal
• Turnover Ratios • Performance • Lean/ Six Sigma customers
• JIT • Features/ Durability • Strategy Deployment and • Technical support
• Mass Production • Style Miniaturization Control
• Economic Value Added • After Sales • Quality Systems/ Process
• Ownership Pride Improvements
• Customer Responsiveness
FOCUSED (OR MARKET NICHE) STRATEGIES
Focused Strategy
Approaches
Focused
Low-Cost Focused Market
Strategy Niche Strategy
5–3
WHEN A FOCUSED LOW-COST OR FOCUSED DIFFERENTIATION STRATEGY IS ATTRACTIVE
• The target market niche is big enough to be

profitable and offers good growth potential.
• Industry leaders chose not to compete in the niche
• It is costly or difficult for multi-segment
competitors to meet the specialized needs of niche
buyers.
• The industry has many different niches and
segments.
• Rivals have little or no interest in the target
segment.
5–4
Focussed Low Cost Examples
• Aravind Eye Care

• Narayana Hrudayalaya
• Hopcoms
• Pharmeasy
• Brand Factory
Focussed Market Niche Examples
• Rolex watches
• Bentley Cars
• Sports medicine
• Detective Agency
BEST-COST PROVIDER STRATEGIES
Differentiation: Low Cost Provider:

Providing desired quality/ Charging a lower price
features/performance/ than rivals with similar
service attributes caliber product offerings
Best-Cost Provider
Hybrid Approach
Value-Conscious Buyer
5–7
WHEN A BEST-COST PROVIDER STRATEGY WORKS BEST
• Product differentiation is the market norm.

• There are a large number of value-conscious
buyers who prefer midrange products.
• There is competitive space near the middle of the
market for a competitor with either a medium-
quality product at a below-average price or a
high-quality product at an average or slightly
higher price.
• Economic conditions have caused more buyers to
become value-conscious.
5–8
Best Cost provider examples
• Target Supermarket Chain – low prices also

designer clothes
• Vistara Airlines – low prices but also leg space
• Chipotle – regular price but organic
• One Plus
• Yippee Noodles
THE BIG RISK OF A BEST-COST PROVIDER STRATEGY—GETTING SQUEEZED ON BOTH SIDES
Best-Cost
Low-Cost High-End
Provider
Providers Differentiators
Strategy
Three Strategic Groups in the Global Automobile Industry
THANK YOU
G K Suresh
[email protected]
12

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STRATEGIC MANAGEMENT

Evaluating a Company’s External Environment

Read the Bi Cycle

Michael Porter’s 5-force

Usually the Strongest of the Five forces

Competitive Rivalry is a combative contest

Lower prices Better dealer network

Consider the example of Airlines industry:

 Substitutes matter when customers have options from other industries

 When is the competition from Substitutes stronger?

 Industry members incur high costs in switching their purchases

Whether Seller-Buyer relationships represent a

 Whether Buyers have sufficient bargaining leverage to

 e.g. Large Retail Buyers like Wal-Mart & Big-Bazaar can

Supplier Bargaining Power LO HI

• Lakme, Surf, Samsung, Maruti –

• These are skills – the ability and way of combining

Industry Avg.Cost – Walmart Cost

Total Advantage – 4.5%

How do you figure out if u really

VRIO – Valuable, Rare,

• Critical and able to meet customers need better than

• Scarcity – DeBeers diamonds, Middle East countries

• Characteristics of Market Opportunities:

SWOT for Gold as a

Exercise – SWOT analysis for

VALUE CHAIN ANALYSIS

• The infrastructure of the firm:

High Entry Barriers

* Alternatives did not offer the same price-

-Heavy - Selective -Vertical -Innovative

Ease of Use for

Why was Apple Successful till 1991?

Apple upto 1991

Economy wide Industry Competitive Firm

PC Industry in 1980s PC Industry in 1990s

Five Force Element Status in 1980s Status in late 1990s

Entry Barriers HIGH LOW

Bargaining Power of LOW HIGH

Bargaining Power of MODERATE HIGH

Threat of Substitutes LOW VERY HIGH

Rivalry MODERATE HIGH

• It did not have the right cost structure!!

• It had to compete against a much stronger “network”:

Why was Apple unable to sustain its success post-1991?

Apple upto 1991 Apple: 1991-1997

Striving to achieve lower overall costs than rivals on products

Broad Differentiating the firm’s product offering from rivals’ with

Focused Concentrating on a narrow price-sensitive buyer segment and

Focused Concentrating on a narrow buyer segment by meeting

Giving customers more value for the money by offering

1. Price competition among rival sellers is vigorous.

Diversity of Few rival firms Rapid change

Shareholder Value Measure

Shareholder Value = Return on Capital (orAssets)

Return on Capital/Assets = Profit

Profitability x Productivity of Capital (Asset) Usage

Return on Assets (Return on Capital)

Margins X Productivity in Asset Utilization