how the firm decides which resource base
to use to gain positive economic
profit?
•
The criteria are as
follows:
•
i) Is it easily available? It means that the resources are traded in the market
or not. For example, the raw material or resources should not be easily
available to the competitors.
ii)
Inimitability: The resource should be
such that it cannot be easily copied by the competitors and hard to copy. There
are certain features of resources which makes it hard to copy:
•
Physical
uniqueness: It refers to acquiring assets which are not available to any other
competitor.
•
Path
Dependency: A resource base is developed expending lot over a long period of
time, which if the competitor wants to copy or develop has to spend the same
time and amount i.e will have to follow the same path. This is called path
dependency. For example: Corporate image, Goodwill etc.
•
· Causal ambiguity
:It means developing excellence in multi areas of which few can be copied but
not the all. It is developing the sum total attribute of characteristics which
are unique.
•
· Scale deterrence
: It means coming out with a mammoth size plant then taking down the cost which
cannot be copied by the competitors.*
•
iii) Durability:
•
Every asset
depreciates with use. But to gain sustainable competitive advantage, firm need
to have assets which don’t depreciate with use such as non-physical asset. For
example: Brand name of YSL.
•
iv) Appropriability: Resources create value. Receiver of the values
varies. As a manager, it is the duty to take care that the value created by
firm remains within the firm. A strategy that is both unique and sustainable
generates a significant economic value. The issue of appropriability addresses
the question of who will capture the resulting economic rent. Sometimes, the
owners of the business unit do not appropriate the totality of the value
created because of the gap that might exist between ownership and control.
•
v) Substitutability: If it can be substituted by anything else, then it
can’t be the source of competitive advantage.
•
vi) Superiority: Whether it is of superior value than the
competiting: firm or not.
•
vii) Opportunism: and timing: One other condition that is necessary to
obtain competitive advantage occurs prior to establishing superior resource
position. It is necessary that the cost incurred in acquiring the resources are
lower than the value created by them. In other words, the cost implicit in
implementing the strategy of business unit should not offset the value
generated by it.*
1/ Purpose of strategic
management:
•
The primary
concern of strategic management is to help the firm gain a sustainable
competitive advantage in the market place. Competitive advantage is a competitive
superiority in attracting customers. It helps the firm to gain a continuous
positive economic profit. Now economic profit is defined as ---
•
Economic
profit= Profit after tax (PAT) --- Cost of equity capital
•
It is
considered as a measure of competitive advantage because it considers the
productivity of all the factor.
Knowledge of strategic management helps a manager in
the following ways:*
•
i) Defining the boundary of the firm:
•
The
boundary of the firm has three aspects--- corporate, horizontal and vertical
boundary.
•
Corporate
boundary: It is not possible for a single firm to rule over the market. Thus
instead of looking at all areas , the firm must decide what are the business
areas it wants to look for and compete. This defines the corporate boundary of
the firm.
•
·Horizontal
boundary: As a manager, a person divides the business of the firm into
different product markets. Now based on resources the firm decides on which
segments it wants to compete. This is called the horizontal boundary of the
firm.
•
Vertical
boundary: Vertical boundary means whether the firm only produces the finished
product, or produces both the raw material, end products and distributes its
end product also. These all determines the market place the firm is going to
compete.
•
ii) Industry analysis:
•
Knowledge
of strategic management helps the manager in analyzing the industry the firm is
operating in.
•
It has been
found empirically that the kind of industry the firm operates in, determines
its profitability, at least to the extent of 20-30%. So at every point of time,
the manager has to think that whether the firm should enter the industry in
particular or exit.
•
iii) Positioning in the market place:
Positioning means how the firm wants to present itself in the market. There are
three ways to it:
•
Cost
leadership strategy—It means that the firm endeavors to keep the cost of
production and distribution less than any other firm in the industry.
•
Product differentiation—It means that the firm
differentiates its product by features as per the customer requirements.
•
· Focus
strategy—It postulates to concentrate at the niche market instead of looking at
all the market.
•
iv) Internal organization of the
firm:
•
It means
the administrative system which the firm can use to narrow down the goal
incongruence between the goal of the firm and goal of individuals. These are—
•
· Management control system (MCS)
•
· Management communication and information
system(MCIS)
•
· Organizational structure
(OS)
•
· Executive
compensation system(ECS)*
C) Distinguishing strategic problem from tactical problem:
•
All
organizational problem can be categorized as—strategic problem and tactical
problem.
•
There are
three characteristics based on which we can distinguish these two problems:
Range, Scope and End orientation.
•
Let’s
discuss each one of them one by one
•
a) Range: When an organizational problem is solved it creates
effects across the organization.
•
The
duration of the effect is called range. The longer the range, more difficult to
reverse it. Strategic problem has a longer effect thus a longer range and
tactical problem has a shorter range.
•
b) Scope:
•
Scope of a
problem denotes the area of an organization it encompasses and feels the effect
of the problem. Strategic problem has a larger scope than a tactical problem.
•
c) End orientation:
•
In order to
solve some problem, the end which is going to be achieved through solving the
problem is given and in some cases has to be identified while solving the problem.
•
In
strategic problem, the end result is not given, rather has to be identified
before embarking on the problem. In case of tactical problem, the end result is
given, e.g. minimize the total transportations cost.*
D) Formulation of a strategic plan:
•
The steps
involved in developing a strategic plan can be plotted as follows:
•
Developing
mission statement à Analysis of internal environment à Analysis of external
environment
•
Developing
broad strategies à Developing long term program à Developing short term
program Implementation.
Strategic issues at different levels:
•
Corporate
strategy deals with basic values and overall vision portfolio of activities
(Strategic Business Units - SBU’s) mission of each strategic business unit
overall allocation of resources
•
Business
strategy deals with competitive positioning of the business unit choice of
segments trade-offs, specific strengths action towards customers
•
Functional
strategy deals with development of functional strengths and resources as
required by businesses and the corporation*
Section 1: DEFINING THE BOUNDARY OF THE FIRM
•
Vision:
vision keeps the organization moving forward; vision is the motivation in the
organization.
•
Mission: it
is the founders intention at the outside of the organization. What they want to
achieve.
•
Values:
values manifest in what the organization does as a group and how it operates.
A/ Vision of a firm:
•
Definition:
•
“Kotler
defines vision as Description of something in the future”. In strategic
management literature vision being future aspirations that lead to an
inspiration to be the best in one’s field of activity.
•
Nature:
•
An organisation charter of core values &
principles.
•
The
ultimate source of our priorities, plans and goals.
•
A puller in
the future
•
A
determination that what makes us unique.
•
A vision
should not be like:
•
A history
of our proud past
•
Passion less
•
Higher
concept statement or literature or advertising slogan.
•
There are
several benefits to the organization by having a vision.
•
Good visions are inspiring
•
Good
visions posters, risk taking & experimentation.
•
Good vision
postures long term winning
•
Good vision
helps in creation of identity & shared it
•
Good vision
are competitive original & unique.
Characteristics of Vision:
•
1. Directional: A well stated vision says something about company’s
journey and signals the kind of business & strategic changes that will be
fourth coming.
•
2. Focused: A well stated vision is specific enough to provide
managers with guidance in decision making & allocating resources.
•
3. Flexible: A well stated vision is not a one’s- and- for- all-
time- pronouncements vision. About the company’s future part may need to change
as events.
•
4. Feasible: A well stated vision should be possible one.
•
5. Desirable: A well stated mission appeals to the long term
interest of stake holders, employees, customers.
•
6. Easy: A well stated vision is explained in less than 10 minutes & can be
reduced to communicate simple, memorable slogan.
Process of creating a vision or process of envisioning:
•
vision
consists of 2 major components core ideology & envision future.
•
Core
ideology: it defines the
enduring character of an organization that remains unchangeable as it passes
through many problems such as technology competition, management fools, core
ideology rests, core values & cores purposes.
•
Envision
future: It consists of 2
components ‘At 10 to 30 years goals & viewed description of what it will be
like to achieve that goals many organizations mentioned terms such as corporate
philosophy , corporate values that are used to convey what they stand for and
what guides them in strategic and day to day decision making.*
To sum up
•
A vision gives direction for the
desired future scope and position of a company:
•
It deals with the future.
• It
is ambitious.
•
It is expressed in simple terms - understandable
at all levels of the company.
•
It does not deal with details, but is
concrete.
•
It does not deal with solutions.
•
It opens space for creative forward
thinking, based on an (emotionally appealing) “picture”
•
It is not a secret plan but an open
declaration.
•
A vision serves to create a common mind set
throughout the organization.
•
It helps to mobilize people.
•
It creates momentum and initiative: “Am I
doing enough to increase the fit of my business with the corporate vision?”
B/ Mission of a firm:
•
Mission
of a firm is the expression of its strategic intent. Strategic intent is the
fundamental ends a firm wants to pursue.
•
Mission
statement also reveals the self-concept of the firm.
•
Thus,
the mission of the business is a qualitative statement of overall business
position that summarizes the key points with regard to products,
markets, geographic locations and unique competencies.
•
A mission statement abstracts the
important points to guide the development of business.
•
Besides others there are two pieces of
information that must be contained in the mission statement:
•
Clear definition of current and
future business scope and second the unique competencies that distinguish the
firm from others in the same industry.
•
Following is the detailed description
of the contents of the mission statement:
• i) Core values:
•
It is the beliefs which guide the
behavior of the firm. This is to be encoded in the mission statement so that
the employees understand that it has to be followed at any cost.
• ii) Core purpose:
•
It is the fundamental end for which
an organization exists. It is the very reason of the existence of the firm in
the market.
•
iii) BHAG: It represents Big Hairy
Audacious Goal. This implies, that the mission statement should be organized in
such a manner that it fires up the competitive zeal of the employees.
•
In their celebrated article, Garry
Hamel and C.K.Pralhad state that rather than trimming ambitions to match available
resources, managers should instead leverage resources to reach seemingly
unattainable goals. This challenge is at the heart of a proper mission
statement.
•
iv) Vivid description of future:
• A
mission statement is grossly incomplete without the clear definition of the
expected future business scope. This has got two dimensions: business and
ethical.
• Business
dimensions includes:
•
· Scope of the firm: the
description of current and future market scope, product scope, geographical
reach scope and customer scope.
•
· Positioning strategy: This
explains on what basis the firm wants to compete and how the firm wants itself
to be known in the market. There are two ways to create value for money for
shareholders— cost leadership strategy and product differentiation strategy.
The image of the firm will depend on this positioning strategy.
•
· Responsibilities to the
stakeholders: Here the firm has to spell out how it wants to treat its
different stakeholders*
Factors
influencing the development of mission statement:
•
Following factors play a crucial role
in developing and shaping the mission statement are as follows:
• ·
Organizational power structure
• ·
Corporate culture
• ·
Personal values
• ·
Societal value
i)
Organizational power structure:
·
In every organization there are two
groups of people : Internal stakeholders and External stakeholders which
competes with each other. An organization is a dynamic power structure.
·
The group which wins decides the
shape of the mission statement. One author has found out several power
structure which works toward the development of the mission statement:
·
a) Continuous Chain or Simple mass
output system: Here external stakeholders are the people who decides the
mission statement.
·
b) Closed system: Here the external
stakeholders are fragmented and internal stakeholders are more powerful and
there is no clear goal of the firm to follow.
·
c) Command type system: This is the
typical power structure in an organization set up by an entrepreneur or organization
passing through severe crisis. Here the entrepreneur decides the mission
statement. No value system is adhered to.
·
d) Missionary power configuration:
This is the type of organization which works for a voluntary cause. Here the
mission statement is driven by ideology.
·
e) Professional power configuration:
This is the organizational power structure typically found out in consulting
firms like IBM, Mckinsey etc where some
outstanding professional determine the mission statement.
·
f) Conflictive power configuration:
Here the entire organization is divided into power groups which fight with each
other and the group that wins determines the mission statement.*
ii)
Corporate culture:
Corporate culture is the sum total of beliefs,
values, norms, which regulate the behavior of an employee in the organization.
Since mission gets implemented by the employees, it’s very much imperative that
the organizational culture is taken into account with due importance while
framing the mission statement.
iii)
Personal Values:
Personal values, who is ultimately held
responsible for the company’s growth, determines the mission statement and also
this risk taking ability influences the mission statement.
iv)
Societal values:
Any firm is a social entity. Societal values is
the timeless principle which has evolved in society over very long period of
time and the firm must obey it and comply with it.*
to sum up: Advantages of Mission statement:
•
Developing an mission statement
serves several important purpose, such as…….
•
a) It gives the guidelines as to how
to treat different stakeholders: It is embedded in the mission statement, and
of course in its development, which stakeholder is more important and how to
satisfy them. So, in other words, mission statement sets a priority amongst the
stakeholder, to be served by the organization. It also determines the right of
every stakeholder on the economic value created by the stakeholders.
•
b) Mission statement helps to avoid
strategic opportunism:
•
c) Mission statement is a tool for
communication. It conveys the expectations of the firm from its employees.
C/ Objectives and goals
•
Objectives are the end results of
planned activity. They should be stated as action verbs
and tell what is to be accomplished by when and quantified if possible.
•
The achievement of corporate
objectives should result in the fulfillment of a corporation’s mission. In effect, this is what society gives back to the
corporation when the corporation does a good job of fulfilling its mission.
•
A good objective should be
action-oriented and begin with the word to. An example of an objective is
“to increase the firm’s profitability in 2010 by 10% over 2009.”
•
Example, by providing society with
gums, candy, iced tea, and carbonated drinks, Cadbury Schweppes, has
become the world’s largest confectioner by sales.
•
One of its prime objectives is to
increase sales 4%–6% each year. Even though its profit margins were lower
than those of Nestlé, Kraft, and Wrigley, its rivals in confectionary, or those
of Coca-Cola or Pepsi, its rivals in soft drinks, Cadbury Schweppes’ management
established the objective of increasing profit margins from around 10% in
2007 to the mid teens by 2011.
•
The term goal is often used
interchangeably with the term objective.
•
In management, we prefer to
differentiate the two terms. In contrast to an objective, we consider a goal as
an open ended statement of what one wants to accomplish, with no
quantification of what is to be achieved and no time criteria for
completion.
•
Example, a simple statement of
“increased profitability” is thus a goal, not an objective, because it does not
state how much profit the firm wants to make the next year.
Some
of the areas in which a corporation might establish its goals and objectives
are:
• Profitability
(net profits)
• Efficiency (low costs, etc.)
•
Growth (increase in total assets, sales, etc.)
•
Shareholder wealth (dividends plus stock price
appreciation)
•
Use of resources (ROE or ROI)
•
Reputation (being considered a “top” firm)
•
Contributions to employees (employment
security, wages, diversity)
•
Contributions to society (taxes paid,
participation in charities, providing a needed product or service)
• Market leadership (market share)
• Technological leadership (innovations,
creativity)
• Survival (avoiding bankruptcy)
•
Personal needs of top management (using the
firm for personal purposes, such as providing jobs for relatives)
•
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