The Capital Market Line

Posted by Muhammad Atif Saeed | Saturday, 31 December 2011 | Posted in feature, Strategic Management

As seen previously, adjusting for the risk of an asset using the risk-free rate, an investor can easily alter his risk profile. Keeping that in mind, in the context of the capital market line (CML), the market portfolio consists of the combination of all risky assets and the risk-free asset, using market value of the assets to determine the weights. The CML line is derived by the CAPM, solving for expected return at various levels of risk.

Markowitz' idea of the efficient frontier, however, did not take into account the risk-free asset. The CML does and, as such, the frontier is extended to the risk-free rate as illustrated below:

Systematic and Unsystematic RiskTotal risk to a stock not only is a function of the risk inherent within the stock itself, but is also a function of the risk in the overall market. Systematic risk is the risk associated with the market. When analyzing the risk of an investment, the systematic risk is the risk that cannot be diversified away.

Unsystematic riskis the risk inherent to a stock. This risk is the aspect of total risk that can be diversified away when building a portfolio.

Formula 17.10

Total risk = Systematic risk + Unsystematic risk

When building a portfolio, a key concept is to gain the greatest return with the least amount of risk. However, it is important to note, that additional return is not guaranteed for an increased level of risk. With risk, reward can come, but losses can be magnified as well.

The Role of the Business Model and Strategy for Business

Posted by Muhammad Atif Saeed | Wednesday, 28 December 2011 | Posted in Strategic Management

People will always stress that having a well researched business plan is key before you start your business. Although creating a business plan is often an important step in the evolution of a business, particularly if you need financing or you are not experienced at running a business, it is not necessarily the essential first step. There are two key elements that should be completed prior to the business plan:

The business model
The strategy

What is a Business Model?

While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model:

Articulate the value proposition – the value created to users by using the product
Identify the market segment – to whom and for what purpose is the product useful; specify how revenue is generated by the firm.
Define the value chain – the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service.
Estimate the cost structure and profit potential – using the value chain and value proposition identified.
Describe the position of the firm with the value network – link suppliers, customers, complementors and competitors.
Formulate the competitive strategy – how will you gain and hold your competitive advantage over competitors or potential new entrants.

Joan Magretta in her article Why Business Models Matter took the concept of the business model a little further. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, who is the customer, what do they value and how a company can deliver value to the customer. The numbers test means your profit and loss assumptions must add up. At the most basic level, if your model doesn’t work, then your model has failed one of the two tests.

To begin the modeling process you need to articulate a value proposition on the product or service being provided. The model must then describe the target market. The customer will then value the product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how the customer will pay.

Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed onto one page consisting of: a diagram outlining how the business generates revenue, how cash flows through the business and how the product flows through the business and; a narrative describing the product/ service components, financial projections or other important elements not captured in the diagram.

Business Models and Strategy

It is important to note that completing a business model does not constitute strategic planning. Strategic planning factors in the one thing a business model doesn’t; competition.

What is strategy?

According to the Collins English Dictionary, strategy is “a particular long-term plan for success". For our purposes, we will consider the essence of strategy as a formula for coping with the competition. Competitive strategy is about being different and the goal for a corporate strategy is to find a position in the industry where the company is unique and can defend itself against market forces. To do this the company must choose a set of activities that can deliver a unique mix of value.

Market Forces and Strategy

The determination of a strategy is rooted in determining how a company stacks up against basic market forces, how it can defend itself against these forces and how it can influence these forces. Fortunately, Michael E. Porter in his article How Competitive Forces Shape Strategy defined these market forces for us. Known as Porter’s 5 forces they consist of:

The industry – this is the jockeying for position among current competitors, this can consists of price competition, new product introduction or advertising slugfests.
The threat of new entrants - the seriousness of the threat of entry depends on the barriers to entry and reaction from existing companies. There are 6 major barriers to entry: 1) economies of scale 2) product differentiation 3) capital requirements 4) cost disadvantages independent of size 5) access to distribution channels 6) government policy. A new company will generally have second thoughts about entering an industry if the incumbent has substantial resources to fight back, the incumbent seems likely to cut prices or industry growth is slow.
The threat of substitute products/services - substitutes can place a ceiling on prices that are charged and limit the potential of an industry.
The bargaining power of suppliers - suppliers can squeeze profitability by increasing prices or lowering the quality of the goods.
The bargaining power of buyers (customers) - customers can force down prices, demand better quality, more service or play competitors off on each other.

Once you assess how the market forces are affecting competition in your industry and their underlying causes, you can identify the underlying strength and weaknesses of your company, determine where it stands against each force and then determine a plan of action. Plans of action may include:

Positioning the company – match your strengths and weaknesses to the company’s industry, build defenses against competitive forces or find a position in the industry where forces are the weakest. You need to know your company’s capabilities and the causes of the competitive forces
Influencing the balance – take the offensive, for example innovative marketing can raise brand identification or differentiate the product.
Exploiting industry change – an evolution of an industry can bring changes in competition. For example, in an industry life-cycle growth rates change and/or product differentiation declines; anticipate shifts in the factors underlying these forces and respond to them.

The framework for analyzing the industry and developing a strategy provides the road map for answering the question “what is the potential of this business?"

Reconciling the Business Model and Strategy

I will use a short example to illustrate the difference between a business model and strategy. Although you may think that Wal-Mart pioneered a new business model on its road to success, the reality is that the model was really no different than the one Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and everyday low prices, that was the real reason for his success. Although Sam Walton’s model was the same as Kmart's, his unique strategy made him a success.

Value chain analysis

Posted by Muhammad Atif Saeed | Tuesday, 27 December 2011 | Posted in Strategic Management

Introduction

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:

(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and

(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.

Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").

Linking Value Chain Analysis to Competitive Advantage

What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.

Primary Activities

Primary value chain activities include:

Primary Activity	Description
Inbound logistics	All those activities concerned with receiving and storing externally sourced materials
Operations	The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)
Outbound logistics	All those activities associated with getting finished goods and services to buyers
Marketing and sales	Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)
Service	All those activities associated with maintaining product performance after the product has been sold

Support Activities

Support activities include:

Secondary Activity	Description
*Procurement*	This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers)
*Human Resource Management*	Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business
*Technology Development*	Activities concerned with managing information processing and the development and protection of "knowledge" in a business
*Infrastructure*	Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

Steps in Value Chain Analysis

Value chain analysis can be broken down into a three sequential steps:

(1) Break down a market/organisation into its key activities under each of the major headings in the model;

(2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;

(3) Determine strategies built around focusing on activities where competitive advantage can be sustained

Strategy: SWOT analysis - introduction

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

SWOT analysis is a method for analysing a business, its resources, and its environment.

SWOT is commonly used as part of strategic planning and looks at:

Internal strengths
Internal weaknesses
Opportunities in the external environment
Threats in the external environment

SWOT can help management in a business discover:

What the business does better than the competition
What competitors do better than the business
Whether the business is making the most of the opportunities available
How a business should respond to changes in its external environment

The result of the analysis is a matrix of positive and negative factors for management to address:

	Positive factors	Negative factors
Internal factors	Strengths	Weaknesses
External factors	Opportunities	Threats

The key point to remember about SWOT is that:
Strengths and weaknesses

Are internal to the business
Relate to the present situation

Opportunities and threats

Are external to the business
Relate to changes in the environment which will impact the business

Using SWOT analysis

There is no point producing a SWOT analysis unless it is actioned! SWOT analysis should be more than a list - it is an analytical technique to support strategic decisions

Strategy should be devised around strengths and opportunities

The key words are match and convert:

A key challenge for any business is to convert weaknesses into strengths. For example:

Weakness	Possible Response
Outdated technology	Acquire competitor with leading technology
Skills gap	Invest in training & more effective recruitment
Overdependence on a single product	Diversify the product portfolio by entering new markets
Poor quality	Invest in quality assurance
High fixed costs	Examine potential for outsourcing or offshoring

Don’t forget that for every perceived threat, the same change presents an opportunity for business.

Strategy: Porter's Five Forces Model: analysing industry structure

Posted by Muhammad Atif Saeed | | Posted in Recent, Strategic Management

Defining an industry

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).

Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.

The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are

- The threat of entry of new competitors (new entrants)
- The threat of substitutes
- The bargaining power of buyers
- The bargaining power of suppliers
- The degree of rivalry between existing competitors

Threat of New Entrants

New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include

- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.

Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:

- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes

Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:

- There are many buyers and few dominant suppliers
- There are undifferentiated, highly valued products
- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers

Bargaining Power of Buyers

Buyers are the people / organisations who create demand in an industry

The bargaining power of buyers is greater when

- There are few dominant buyers and many sellers in the industry
- Products are standardised
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers

Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on:

- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader

- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting

- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry

- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier

- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less

- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.

Strategy: PEST analysis

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

PEST analysis is concerned with the key external environmental influences on a business.

The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.

Identifying PEST influences is a useful way of summarising the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

The table below lists some possible factors that could indicate important environmental influences for a business under the PEST headings:

Political / Legal	Economic	Social	Technological
Environmental regulation and protection	Economic growth (overall; by industry sector)	Income distribution (change in distribution of disposable income;	Government spending on research
Taxation (corporate; consumer)	Monetary policy (interest rates)	Demographics (age structure of the population; gender; family size and composition; changing nature of occupations)	Government and industry focus on technological effort
International trade regulation	Government spending (overall level; specific spending priorities)	Labour / social mobility	New discoveries and development
Consumer protection	Policy towards unemployment (minimum wage, unemployment benefits, grants)	Lifestyle changes (e.g. Home working, single households)	Speed of technology transfer
Employment law	Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates)	Attitudes to work and leisure	Rates of technological obsolescence
Government organisation / attitude	Exchange rates (effects on demand by overseas customers; effect on cost of imported components)	Education	Energy use and costs
Competition regulation	Inflation (effect on costs and selling prices)	Fashions and fads	Changes in material sciences
	Stage of the business cycle (effect on short-term business performance)	Health & welfare	Impact of changes in Information technology
	Economic "mood" - consumer confidence	Living conditions (housing, amenities, pollution)	Internet!

Strategy: objectives

Posted by Muhammad Atif Saeed | | Posted in feature, Strategic Management

What is an objective? A good definition is:

"Objectives are statements of specific outcomes that are to be achieved"

As we shall see, objectives are set at various levels in a business - from the top (corporate) and through the layers underneath (functional and unit).

Objectives are often set in financial terms. That means that the objective is expressed in terms of a financial outcome that is to be achieved. Those could include:

Desired sales or profit levels
Rates of growth
Amount of cash generated
Value of the business or dividends paid to shareholders

However, it is incorrect to say that objectives have to be expressed in money terms, or that they have to be able to be measured. Some objectives are hard to measure, but are often important. For example, an objective to be:

An innovative player in the market
A leading in the quality of customer service

A popular way to look at objectives is to see them as part of a hierarchy of forward-looking terms which help set and shape the strategy of a business. That hierarchy can be summarised as follows:

Corporate objectives

Corporate objectives are those that relate to the business as a whole. They are usually set by the top management of the business and they provide the focus for setting more detailed objectives for the main functional activities of the business.

This can be illustrated as follows:

Corporate objectives tend to focus on the desired performance and results of the business. It is important that corporate objectives cover a range of key areas where the business wants to achieve results rather than focusing on a single objective.
Peter Drucker suggested that corporate objectives should cover eight key areas:

Area	Examples
Market standing	Market share, customer satisfaction, product range
Innovation	New products, better processes, using technology
Productivity	Optimum use of resources, focus on core activities
Physical & financial resources	Factories, business locations, finance, supplies
Profitability	Level of profit, rates of return on investment
Management	Management structure; promotion & development
Employees	Organisational structure; employee relations
Public responsibility	Compliance with laws; social and ethical behaviour

Functional objectives

A well-established business will divide its activities into several business functions. These traditionally include areas such as:

Finance & administration
Marketing & sales
Production & operations
Human resource management

Whilst each of these functional areas requires specialist expertise, their activities are not carried out in isolation from the rest of the business. It is vital in your studies to consider the ways in which the functional activities are connected to each other.
However, it is common for each functional area to be set its own objectives, which should be consistent with the higher-level corporate objectives.
So, functional objectives are:
Set for each major business function and are designed to ensure that the corporate objectives are achieved
Consider some example objectives for the marketing function. Examples of functional marketing objectives” might include:

We aim to build customer database of at least 250,000 households within the next 12 months
We aim to achieve a market share of 10%
We aim to achieve 75% customer awareness of our brand in our target markets

SMART objectives

Many business textbooks suggest that both corporate and functional objectives need to conform to a set of criteria referred to as an acronym SMART.
The SMART criteria are summarised below:

Specific	The objective should state exactly what is to be achieved.
Measurable	An objective should be capable of measurement – so that it is possible to determine whether (or how far) it has been achieved
Achievable	The objective should be realistic given the circumstances in which it is set and the resources available to the business.
Relevant	Objectives should be relevant to the people responsible for achieving them
Time Bound	Objectives should be set with a time-frame in mind. These deadlines also need to be realistic

Strategy - mission

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

A strategic plan starts with a clearly defined business mission.

Mintzberg defines a mission as follows:

“A mission describes the organisation’s basic function in society, in terms of the products and services it produces for its customers”.

A clear business mission should have each of the following elements:
Mission statements

Taking each element of the above diagram in turn, what should a good mission contain?

(1) A Purpose

Why does the business exist? Is it to create wealth for shareholders? Does it exist to satisfy the needs of all stakeholders (including employees, and society at large?)

(2) A Strategy and Strategic Scope

A mission statement provides the commercial logic for the business and so defines two things:

- The products or services it offers (and therefore its competitive position)
- The competences through which it tries to succeed and its method of competing

A business’ strategic scope defines the boundaries of its operations. These are set by management.

For example, these boundaries may be set in terms of geography, market, business method, product etc. The decisions management make about strategic scope define the nature of the business.

(3) Policies and Standards of Behaviour

A mission needs to be translated into everyday actions. For example, if the business mission includes delivering “outstanding customer service”, then policies and standards should be created and monitored that test delivery.

These might include monitoring the speed with which telephone calls are answered in the sales call centre, the number of complaints received from customers, or the extent of positive customer feedback via questionnaires.

(4) Values and Culture

The values of a business are the basic, often un-stated, beliefs of the people who work in the business. These would include:

• Business principles (e.g. social policy, commitments to customers)

• Loyalty and commitment (e.g. are employees inspired to sacrifice their personal goals for the good of the business as a whole? And does the business demonstrate a high level of commitment and loyalty to its staff?)

• Guidance on expected behaviour – a strong sense of mission helps create a work environment where there is a common purpose

What role does the mission statement play in marketing planning?

In practice, a strong mission statement can help in three main ways:

• It provides an outline of how the marketing plan should seek to fulfil the mission
• It provides a means of evaluating and screening the marketing plan; are marketing decisions consistent with the mission?
• It provides an incentive to implement the marketing plan

GE Matrix

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.

The company must:

(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.

The two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.

The McKinsey / General Electric Matrix

The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed.

The diagram below illustrates some of the possible elements that determine market attractiveness and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:

Factors that Affect Market Attractiveness

Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below:

- Market Size
- Market growth
- Market profitability
- Pricing trends
- Competitive intensity / rivalry
- Overall risk of returns in the industry
- Opportunity to differentiate products and services
- Segmentation
- Distribution structure (e.g. retail, direct, wholesale

Factors that Affect Competitive Strength

Factors to consider include:

- Strength of assets and competencies
- Relative brand strength
- Market share
- Customer loyalty
- Relative cost position (cost structure compared with competitors)
- Distribution strength
- Record of technological or other innovation
- Access to financial and other investment resources

Competitive Advantage

Posted by Muhammad Atif Saeed | | Posted in feature, Strategic Management

Definition

A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Competitive Strategies

Following on from his work analysing the competitive forces in an industry, Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses' activities are narrow versus broad and the extent to which a business seeks to differentiate its products.

The four strategies are summarised in the figure below:

The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.

Strategy - Differentiation

This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.

Examples of Differentiation Strategy: Mercedes cars; Bang & Olufsen

Strategy - Cost Leadership

With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.

Examples of Cost Leadership: Nissan; Tesco; Dell Computers

Strategy - Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.

Examples of Differentiation Focus: any successful niche retailers; (e.g. The Perfume Shop); or specialist holiday operator (e.g. Carrier)

Strategy - Cost Focus

Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".

Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.

Benchmarking

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

Definition

Benchmarking is the process of identifying "best practice" in relation to both products (including) and the processes by which those products are created and delivered. The search for "best practice" can taker place both inside a particular industry, and also in other industries (for example - are there lessons to be learned from other industries?).

The objective of benchmarking is to understand and evaluate the current position of a business or organisation in relation to "best practice" and to identify areas and means of performance improvement.

The Benchmarking Process

Benchmarking involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organisation or in key areas of the business environment.

Application of benchmarking involves four key steps:

(1) Understand in detail existing business processes

(2) Analyse the business processes of others

(3) Compare own business performance with that of others analysed

(4) Implement the steps necessary to close the performance gap

Benchmarking should not be considered a one-off exercise. To be effective, it must become an ongoing, integral part of an ongoing improvement process with the goal of keeping abreast of ever-improving best practice.

Types of Benchmarking

There are a number of different types of benchmarking, as summarised below:

Type	Description	Most Appropriate for the Following Purposes
Strategic Benchmarking	Where businesses need to improve overall performance by examining the long-term strategies and general approaches that have enabled high-performers to succeed. It involves considering high level aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes in the external environment. Changes resulting from this type of benchmarking may be difficult to implement and take a long time to materialise	Re-aligning business strategies that have become inappropriate
Performance or Competitive Benchmarking	Businesses consider their position in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector. This type of analysis is often undertaken through trade associations or third parties to protect confidentiality.	Assessing relative level of performance in key areas or activities in comparison with others in the same sector and finding ways of closing gaps in performance
Process Benchmarking	Focuses on improving specific critical processes and operations. Benchmarking partners are sought from best practice organisations that perform similar work or deliver similar services. Process benchmarking invariably involves producing process maps to facilitate comparison and analysis. This type of benchmarking often results in short term benefits.	Achieving improvements in key processes to obtain quick benefits
Functional Benchmarking	Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements.	Improving activities or services for which counterparts do not exist.
Internal Benchmarking	Involves benchmarking businesses or operations from within the same organisation (e.g. business units in different countries). The main advantages of internal benchmarking are that access to sensitive data and information is easier; standardised data is often readily available; and, usually less time and resources are needed. There may be fewer barriers to implementation as practices may be relatively easy to transfer across the same organisation. However, real innovation may be lacking and best in class performance is more likely to be found through external benchmarking.	Several business units within the same organisation exemplify good practice and management want to spread this expertise quickly, throughout the organisation
External Benchmarking	Involves analysing outside organisations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the "leading edge". This type of benchmarking can take up significant time and resource to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations.	Where examples of good practices can be found in other organisations and there is a lack of good practices within internal business units
International Benchmarking	Best practitioners are identified and analysed elsewhere in the world, perhaps because there are too few benchmarking partners within the same country to produce valid results. Globalisation and advances in information technology are increasing opportunities for international projects. However, these can take more time and resources to set up and implement and the results may need careful analysis due to national differences	Where the aim is to achieve world class status or simply because there are insufficient"national" businesses against which to benchmark.

Product portfolio - the Boston Matrix (or Boston Box)

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

Introduction

The company must:

(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.

Methods of Portfolio Planning

The two best-known portfolio planning methods are from the Boston Consulting Group (the subject of this revision note) and by General Electric/Shell. In each method, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.

The Boston Consulting Group Box ("BCG Box")

Using the BCG Box (an example is illustrated above) a company classifies all its SBU's according to two dimensions:

On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market

On the vertical axis: market growth rate - this provides a measure of market attractiveness

By dividing the matrix into four areas, four types of SBU can be distinguished:

Stars - Stars are high growth businesses or products competing in markets where they are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows.

Cash Cows - Cash cows are low-growth businesses or products with a relatively high market share. These are mature, successful businesses with relatively little need for investment. They need to be managed for continued profit - so that they continue to generate the strong cash flows that the company needs for its Stars.

Question marks - Question marks are businesses or products with low market share but which operate in higher growth markets. This suggests that they have potential, but may require substantial investment in order to grow market share at the expense of more powerful competitors. Management have to think hard about "question marks" - which ones should they invest in? Which ones should they allow to fail or shrink?

Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that have low relative share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in.

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In the diagram above, the company has one large cash cow (the size of the circle is proportional to the SBU's sales), a large dog and two, smaller stars and question marks.

Conventional strategic thinking suggests there are four possible strategies for each SBU:

(1) Build Share: here the company can invest to increase market share (for example turning a "question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present position

(3) Harvest: here the company reduces the amount of investment in order to maximise the short-term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising "question marks").

Strategy: What is strategy?

Posted by Muhammad Atif Saeed | | Posted in Strategic Management

Overall Definition:

Johnson and Scholes (Exploring Corporate Strategy) define strategy as follows:

"Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations".

In other words, strategy is about:

* Where is the business trying to get to in the long-term (direction)

* Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope)

* How can the business perform better than the competition in those markets? (advantage)?

* What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (resources)?

* What external, environmental factors affect the businesses' ability to compete? (environment)?

* What are the values and expectations of those who have power in and around the business? (stakeholders)

Strategy at Different Levels of a Business

Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".

Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

How Strategy is Managed - Strategic Management

In its broadest sense, strategic management is about taking "strategic decisions" - decisions that answer the questions above.

In practice, a thorough strategic management process has three main components, shown in the figure below:

Strategic Analysis

This is all about the analysing the strength of businesses' position and understanding the important external factors that may influence that position. The process of Strategic Analysis can be assisted by a number of tools, including:

PEST Analysis - a technique for understanding the "environment" in which a business operates

Scenario Planning - a technique that builds various plausible views of possible futures for a business

Five Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry

Market Segmentation - a technique which seeks to identify similarities and differences between groups of customers or users

Directional Policy Matrix - a technique which summarises the competitive strength of a businesses operations in specific markets

Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a businesses' overall competitive position

Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed

SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a businesses "internal" position and "external" environmental influences.

Strategic Choice

This process involves understanding the nature of stakeholder expectations (the "ground rules"), identifying strategic options, and then evaluating and selecting strategic options.

Strategy Implementation

Often the hardest part. When a strategy has been analysed and selected, the task is then to translate it into organisational action.

Ansoff's product / market matrix

Posted by Muhammad Atif Saeed | | Posted in feature, Strategic Management

Introduction

The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy.

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets.

Ansoff matrix

The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below:

Market penetration

Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:

• Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling

• Secure dominance of growth markets

• Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors

• Increase usage by existing customers – for example by introducing loyalty schemes
A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Market development

Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets.

There are many possible ways of approaching this strategy, including:

• New geographical markets; for example exporting the product to a new country

• New product dimensions or packaging: for example

• New distribution channels

• Different pricing policies to attract different customers or create new market segments

Product development

Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

Diversification

Diversification is the name given to the growth strategy where a business markets new products in new markets.

This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience.

For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

BENEFITS OF STRATEGIC MANAGEMENT

Posted by Muhammad Atif Saeed | Monday, 28 November 2011 | Posted in Management, Strategic Management

BENEFITS OF STRATEGIC MANAGEMENT

Objectives:
After reading this lecture you will be able to know that:
. What are Non financial benefits of Strategic Management?
. Why firms do no strategic planning?
. Pitfalls to avoid in strategic planning
. Business Ethics
. Global challenges

Non- financial Benefits
. Increased employee productivity
. Improved understanding of competitors’ strategies
. Greater awareness of external threats
. Understanding of performance reward relationships
. Better problem-avoidance
. Lesser resistance to change
Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as an
enhanced awareness of external threats, an improved understanding of competitors' strategies, increased
employee productivity, reduced resistance to change, and a clearer understanding of performance-reward
relationships. Strategic management enhances the problem-prevention capabilities of organizations because
it promotes interaction among manager’s at all divisional and functional levels. Interaction can enable firms
to turn on their managers and employees by nurturing them, sharing organizational objectives with them,
empowering them to help improve the product or service, and recognizing their contributions.
In addition to empowering managers and employees, strategic management often brings order and
discipline to an otherwise floundering firm.
It can be the beginning of an efficient and effective managerial
system. Strategic management may renew confidence in the current business strategy or point to the need
for corrective actions. The strategic-management process provides a basis for identifying and rationalizing
the need for change to all managers and employees of a firm; it helps them view change as an opportunity
rather than a threat.

Greenly stated that strategic management offers the following benefits:
1. It allows for identification, prioritization, and exploitation of opportunities.
2. It provides an objective view of management problems.
3. It represents a framework for improved coordination and control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows major decisions to better support established objectives.
6. It allows more effective allocation of time and resources to identified opportunities.
7. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.
8. It creates a framework for internal communication among personnel.
9. It helps integrate the behavior of individuals into a total effort.
10. It provides a basis for clarifying individual responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and
opportunities.
13. It encourages a favorable attitude toward change.
14. It gives a degree of discipline and formality to the management of a business.

Why Some Firms Do No Strategic Planning?
Some firms do not engage in strategic planning and some firms do strategic planning but receive no support
from managers and employees. Some reasons for poor or no strategic planning are as follows:
1. Poor Reward Structures—when an organization assumes success, it often fails to reward success.
Where failure occurs, then the firm may punish. In this situation, it is better for an individual to do
nothing (and not draw attention) than risk trying to achieve something, fail, and be punished.
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2. Fire-fighting—an organization can be so deeply embroiled in crisis management and fire-fighting
that it does not have time to plan.
3. Waste of Time—some firms see planning as a waste of time since no marketable product is
produced. Time spent on planning is an investment.
4. Too Expensive—some organizations are culturally opposed to spending resources.
5. Laziness—People may not want to put forth the effort needed to formulate a plan.
6. Content with Success—particularly if a firm is successful, individuals may feel there is no need to
plan because things are fine as they stand. But success today does not guarantee success tomorrow.
7. Fear of Failure—by not taking action, there is little risk of failure unless a problem is urgent and
pressing. Whenever something worthwhile is attempted, there is some risk of failure.
8. Overconfidence—as individuals amass experience, they may rely less on formalized planning.
Rarely, however, is this appropriate. Being overconfident or overestimating experience can bring
demise. Forethought is rarely wasted and is often the mark of professionalism.
9. Prior Bad Experience—People may have had a previous bad experience with planning, where
plans have been long, cumbersome, impractical, or inflexible. Planning, like anything, can be done
badly.
10. Self-Interest—when someone has achieved status, privilege, or self-esteem through effectively
using an old system, they often see a new plan as a threat.
11. Fear of the Unknown—People may be uncertain of their abilities to learn new skills, their aptitude
with new systems, or their ability to take on new roles.
12. Honest Difference of Opinion—People may sincerely believe the plan is wrong. They may view
the situation from a different viewpoint, or may have aspirations for themselves or the organization
that are different from the plan. Different people in different jobs have different perceptions of a
situation.
13. Suspicion—Employees may not trust management.

Pitfalls to avoid in Strategic Planning
Strategic planning is an involved, intricate, and complex process that takes an organization into non
chartered territory. It does not provide a ready-to-use prescription for success; instead, it takes the
organization through a journey and offers a framework for addressing questions and solving problems.
Being aware of potential pitfalls and prepared to address them is essential to success.
Some pitfalls to watch for and avoid in strategic planning are provided below:
1. Using strategic planning to gain control over decisions and resources
2. Doing strategic planning only to satisfy accreditation or regulatory requirements
3. Too hastily moving from mission development to strategy formulation
4. Failing to communicate the plan to employees, who continue working in the dark
5. Top managers making many intuitive decisions that conflict with the formal plan
6. Top managers not actively supporting the strategic-planning process
7. Failing to use plans as a standard for measuring performance
8. Delegating planning to a "planner" rather than involving all managers
9. Failing to involve key employees in all phases of planning
10. Failing to create a collaborative climate supportive of change
11. Viewing planning to be unnecessary or unimportant
12. Becoming so engrossed in current problems that insufficient or no planning is done
13. Being so formal in planning that flexibility and creativity are stifled.

Business Ethics and Strategic Management
Definition:
Business ethics can be defined as principles of conduct within organizations that guide decision making and
behavior.
Good business ethics is a prerequisite for good strategic management; good ethics is just good business.

Implementation:
A rising tide of consciousness about the importance of business ethics is sweeping America and the world.
Strategists are the individuals primarily responsible for ensuring that high ethical principles are espoused and
15
practiced in an organization. All strategy formulation, implementation, and evaluation decisions have ethical
ramifications.
A new wave of ethics issues related to product safety, employee health, sexual harassment, AIDS in the
workplace, smoking, acid rain, affirmative action, waste disposal, foreign business practices, cover-ups,
takeover tactics, conflicts of interest, employee privacy, inappropriate gifts, security of company records,
and layoffs has accented the need for strategists to develop a clear code of business ethics. A code of
business ethics can provide a basis on which policies can be devised to guide daily behavior and decisions
at the work site.
The explosion of the Internet into the workplace has raised many new ethical questions in organizations
today. For example, United Parcel Service (UPS) recently caught an employee actually running a personal
business from his computer.
Merely having a code of ethics, however, is not sufficient to ensure ethical business behavior. A code of
ethics can be viewed as a public relations gimmick, a set of platitudes, or window dressing. To ensure that
the code is read, understood, believed, and remembered, organizations need to conduct periodic ethics
workshops to sensitize people to workplace circumstances in which ethics issues may arise. If employees see
examples of punishment for violating the code and rewards for upholding the code, this helps reinforce the
importance of a firm's code of ethics.
Internet privacy is an emerging ethical issue of immense proportions.
– 38% of companies store and review employees’ email messages
– Up from 15% in recent years
– 54% companies monitor employees’ internet connections
– Situation in Pakistan is not much different
Advertisers, marketers, companies, and people with various reasons to snoop on other people now can
discover easily on the Internet others' buying preferences, hobbies, incomes, medical data, social security
numbers, addresses, previous addresses, sexual preferences, credit card purchases, traffic tickets, divorce
settlements, and much more.
Some business actions always considered to be unethical include misleading advertising or labeling, causing
environmental harm, poor product or service safety, padding expense accounts, insider trading, dumping
banned or flawed products. In foreign markets, lack of equal opportunities for women and minorities,
overpricing, hostile takeovers, moving jobs overseas, and using nonunion labor in a union shop.

Nature of global competition:
Foreign competitors are battering U.S. firms in many industries. In its simplest sense, the international
challenge faced by U.S. business is twofold:
(1) How to gain and maintain exports to other nations and
(2) How to defend domestic markets against imported goods.
Few companies can afford to ignore the presence of international competition. Firms that seem insulated
and comfortable today may be vulnerable tomorrow; for example, foreign banks do not yet compete or
operate in most of the United States.
More and more countries around the world are welcoming foreign investment and capital. As a result, labor
markets have steadily become more international. East Asian countries have become market leaders in
labor-intensive industries, Brazil offers abundant natural resources and rapidly developing markets, and
Germany offers skilled labor and technology. The drive to improve the efficiency of global business
operations is leading to greater functional specialization. This is not limited to a search for the familiar lowcost
labor in Latin America or Asia. Other considerations include the cost of energy, availability of
resources, inflation rates, existing tax rates, and the nature of trade regulations. Yang Shangkun insists that
China's door is still open to foreign capital and technology, despite the continued strength of the
Communist Party.
The ability to identify and evaluate strategic opportunities and threats in an international environment is a
prerequisite competency for strategists. The nuances of competing in international markets are seemingly
infinite. Language, culture, politics, attitudes, and economies differ significantly across countries. The
availability, depth, and reliability of economic and marketing information in different countries vary
extensively, as do industrial structures, business practices, and the number and nature of regional
organizations.

The Capital Market Line

The Role of the Business Model and Strategy for Business

Value chain analysis

Strategy: SWOT analysis - introduction

Using SWOT analysis

Strategy: Porter's Five Forces Model: analysing industry structure

Strategy: PEST analysis

Strategy: objectives

Corporate objectives

Functional objectives

SMART objectives

Strategy - mission

GE Matrix

Competitive Advantage

Benchmarking

Product portfolio - the Boston Matrix (or Boston Box)

Strategy: What is strategy?

Ansoff's product / market matrix

BENEFITS OF STRATEGIC MANAGEMENT

BENEFITS OF STRATEGIC MANAGEMENT

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