1 ICS 462 Information Systems Strategy & Implementation 2.1 Analytical Tools in Strategic Management: Strategic Analysis
2 Framework for SM n Framework for strategic management - Johnson & Scholes, 1993: u Strategic analysis (environment, culture and stakeholder analysis, and resources and strategic capability) – to understand the strategic situation u Strategic choice (generation of strategic options, evaluation of options and selection of strategy) – to form the strategies u Strategy implementation (planning & allocating resource, organizational structure and design, managing strategic change) – to implement the strategies (tactical)
3 n Notes: u Above elements not done sequentially u Analysis + choice = strategic planning – implies that SM is more about SP u Above design school of strategy (strategy as a planning activity) is not necessarily right (cf pattern school) – but provides a framework for discussion of SM n Role of tools is not necessarily to help develop strategy but also to provide a basis for communication, discussion and sense-making
5 1. Introduction n SA aims to form a picture of the influences playing upon the organization in order to be informed of the strategic choice elements of the overall strategic management process n It is concerned with the following: u Organizational strategic position u Environmental conditions u Organization strengths and weaknesses u Effects of all the above on organization stakeholders
6 n SA involves understanding factors: u External environment F the world in which the organization exists F need to understand the impact of the environment upon the organization u Internal environment, e.g. F Values and objectives these influence the perceived acceptability (to each stakeholder group) of candidate strategies it is through these perceptions that other influences are interpreted especially power differentials F Resources they provide the internal influences upon strategy choice
8 External Env. Analysis n Purpose u to increase the quality of the strategic decision making by considering a range of relevant features well before the need to make an irrevocable decision n Threats and opportunities u the strategy is directed at exploiting the environmental opportunities and to blocking environmental threats in a way that is consistent with internal capabilities (Porters concept of environmental fit that allows the organization to maximise its competitive position)
9 n Success of environmental analysis largely depends on the complexity of the environment n A possible process of environmental analysis and tools to use: u Audit the environmental influences u Assess the nature of the environment to judge whether it is simple or complex u Identify the key environmental factors using porters five forces model u Identify the competitive position using a life cycle analysis u Identify the threats, opportunities, strengths and weaknesses using the SWOT analysis
10 Nature of the Environment n An organizations environment comprises all the events, issues and facts which will influence its performance but over which it has little influence n Societal environment u conditions that have a broad rather than direct impact upon the organization u conditions represent the world within which the organization operates e.g. demographic factors n Task environment u that which has major and direct impact upon the organization and its strategic planning process
12 2.1 PESTEL analysis n Political u Government policies and strategies, e.g. sessional paper no. 1 of 2005, V2030, Education MTP, University strategy, … u National coalition government – stability, governance u Development partner support to Kenya n Economic u Global economic changes u GDP growth u Inflation rates u Taxation rates u Exchange rates u Employment level u Poverty level n Socio-cultural u Population growth u Lifestyle changes u Customer preferences
13 u Labour mobility u Education levels u Income distribution u Governance n Technological u Enterprise applications u Mobile applications u Internet u Undersea bandwidth u National optic fibre backbone infrastructure (NOFBI) project u Energy use and cost n Environmental u Any environmental requirements? n Legal u Legal framework governing the organization u One can also consider the regulatory framework, as it has regulations and licenses which are legally binding
14 n Strategic analysis involves assessing the effects of possible changes in the environment. It involves: u Considering how the external (societal & task) and internal environment factors may change u Assessing the strategic implications of such change for the organization
15 Strategic analysis framework Ext. environmentLikely changeStrategic implications Political Economic Socio-cultural Technological Ecological Legal Int. environment Structure & culture People & skills Processes Systems Leadership, etc.
16 2.2 Stakeholder analysis n One of the steps in environmental analysis or enabling to make strategic forecasts n Step 1: identify stakeholders u people who are affected by your work, who have influence or power over it, or have an interest in its success or failure n Step 2: Prioritize your stakeholders u Map them on a power/interest grid shown - next slide n Step 3: Understand your key stakeholders u What are their interests? u What are their strengths/weaknesses? u What edge do they have over your company? u You can use the power/interest grid to map your understanding – position on the grid implies strategy
17 Power/Interest grid Keep satisfied Manage closely Monitor (minimum effort) Keep informed POWER INTEREST L H H L
18 2.3 SWOT Analysis n Defines the relationship between the internal and external appraisals n Applied to self, competitors, supplies and customers as in order to assess the full position within the industry and to direct the firm towards the appropriate direction n SWOT analysis offers a fast pocket sized method of conceptualizing complex reality n Strategy: u Is a result of combined and realistic assessment of market attractiveness and business strength u Based on use of the existing business strengths to exploit opportunities, to create new opportunities, to counteract threats and repair the weaknesses n Also referred to as TOWS matrix or WOTS-UP
Key Questions/Strategies 19 Strengths What do we control - resources, people, knowledge - that gives us an advantage. These strengths are your core competencies. What are our major internal or present strengths? Internal strengths are resources or capabilities that help an organization accomplish its mandates or mission. Weaknesses What do we need to fix? What are our major internal or present weaknesses? Internal weaknesses are deficiencies in resources and capabilities that hinder an organizations ability to accomplish its mandate or mission. Opportunities What opportunities exist that we can take advantage of? What major external or future opportunities do we have? Challenges/Threats What major external or future threats do we face? External threats are outside factors or situations that can affect your organization in a negative way.
20 Key Questions/Strategies OT S How can organization use its strengths to take advantage of the available opportunities? Strategy - Exploit How can organization use its strengths to overcome the threats identified? Strategy - Confront W What does organization need to do to overcome the identified weaknesses in order to take advantage of the opportunities? Strategy - Search How will organization minimize its weaknesses to overcome the identified threats? Strategy - Avoid
21 Strategies Indicated by SWOT Analysis n Maxi-Maxi (SO) u Organization is playing from its strengths to an opportunity and hence the business objectives are generally to reduce internal weaknesses and overcome external threats in order to focus upon this segment. Rowe, Mason, et al. (1994) call this segment exploit n Mini-Maxi (WO) u Strategy appropriate minimizes weaknesses and maximizes the opportunities. The opportunity exists but requires strength where the Organization currently has a weakness. Without strategic action to remove this weakness the opportunity must go to competitors. Rowe et al. (1994) call this segment search
22 n Mini-Mini (TW) u The strategy for this segment is one that will reduce both the weakness and the threat. This is the precarious segment and so organisations should adopt strategies that avoid it. Rowe et al. (1994) call this segment avoid n Maxi-Mini (ST) u The indicated strategy for this segment is one that uses the strength of the organization in order to deflect the threat. Care must be taken to avoid unnecessary competitive battles, and strategic options that circumvent the threat are to be preferred. Rowe et al. (1994) call this segment confront
23 Another View of Strategies Implied by SWOT Attack go for it Beware dont do it Explore if have time Project watch yourself External Factors Internal Factors Strengths Weaknesses Opportunities Threats
24 n Strengths of SWOT u can be used to generate strategic options, so it also forms part of the Strategic Choice element u offers warning of the need for avoidance u may cause the objectives, and hence also the performance measures, to be reviewed n Weaknesses of SWOT u it does not build in any mechanisms for handling the uncertainty of the future u does not give any holistic model of the organization u tendency when doing a SWOT analysis to be less honest in appraisals. People cover up organizations feared weaknesses by proclaiming perceived strengths u Is not aimed at option evaluation and, hence, nor selection
2.4 Porters 5 forces framework Threat of new entrants Rivalry amongst existing competitors Bargaining power of suppliers Bargaining power of buyers Threat of substitute products or services
n It models the competitive world of an organization and the forces that play upon it n The current competitive position of the organization will be the aggregate of the 5 forces n The net power of the 5 forces needs to be judged n Strategy is to concentrate attention upon those most significant - either to exploit a powerful position or to protect from a weak one n Forces and their key factors are outlined below (a – e)
27 a. Rivalry of existing competitors n The structure of competition u How many competitors? u Is there a clear market leader? Where are you vis-à-vis the leader? n The structure of industry costs u Are there high fixed costs? Can competitors cut these costs? n Degree of product differentiation. u How do you distinguish your services? n Switching costs u Are there high/low switching costs? n Strategic objectives u Are competitors pursuing aggressive growth strategies? n Exit barriers u Are exit barriers high or low? How does that affect the competition?
28 b. Threat of new entrants n Economies of scale. n Capital / investment requirements. n Customer switching costs. n Access to industry distribution channels. n Access to technology. n Brand loyalty. Are customers loyal? n The likelihood of retaliation from existing industry players. n Government regulations. Can new entrants get subsidies?
29 c. Threat of substitute products/services n Quality. Is a substitute better? n Buyers' willingness to substitute. n The relative price and performance of substitutes. n The costs of switching to substitutes. Is it easy to change to another product?
30 d. Bargaining power of suppliers n Concentration of suppliers u Are there many buyers and few dominant suppliers? n Branding u Is the brand of the supplier strong? n Profitability of suppliers u Are suppliers forced to raise prices? n Suppliers threaten to integrate forward into the industry (for example: brand manufacturers threatening to set up their own retail outlets). n Buyers do not threaten to integrate backwards into supply. n Role of quality and service. n Switching costs u Is it easy for suppliers to find new customers?
31 e. Bargaining power of buyers n Concentration of buyers u Are there a few dominant buyers and many sellers in the industry? n Differentiation u Are products standardized? n Profitability of buyers u Are buyers forced to be tough? n Role of quality and service. n Threat of backward and forward integration into the industry. n Switching costs u Is it easy for buyers to switch their supplier?
32 n The aim of this model is to relate the competitive position of an organization to the maturity of the industry or its products n It assumes there is a basic S-shaped curve description to the growth phenomenon of the organization and its products 2.5 Life Cycle Analysis
33 Life Cycle Analysis Introduction Growth Maturity Decline Activity or product is new Rapid growth No further increase Decline in sales or activity Experimentation
34 Life Cycle Analysis Model Development Demand Unknown Product/Service is new Experimentation & gradual acceptance Growth Demand > Supply Rapid growth in sales. Maturity Demand Supply Sales remain high but there is no further increase Decline Demand < Supply Competition & product displacement cause decline in sales
35 Life Cycle Model Example in HE Development ICT use is new Laying infrastructure Experimentation & gradual acceptance No budgets Employ some ICT operations staff Growth Demand by students & staff grows Internet connection Key MIS implemented e-learning growth Top mgnt championship Budgets and controls Maturity ICT is strategic resource & Impacts all aspects Integration Ubiquitous impacts (quality, governance, etc. Decline ICT use & impact declines Complacency sets in Shift in focus Technology has changed Cannot sustain ICT (cost, staff, etc.) Introduction of ICT with limited use & impacts ICT use & impacts grows 1 23 4 5
36 3. Analysis of Internal Environment (Values and Objectives)
37 Internal environment analysis n Physical facilities n Culture n ICT (infrastructure, skills) n HR capacities n Leadership n Structure n Strategy n Objectives n Processes n Systems n Other resources
38 3.1 Strategy and Culture n Definition of corporate culture: u the pattern of basic assumptions that a given group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration and that worked well enough to be considered valid and, therefore taught to new members as the correct way to perceive, think and feel in relation to those problems. n Culture is sometimes described in terms of levels distinguishing between: u Visible aspects of culture (rules, procedures, technology); and u Underlying aspects of culture (the unseen, unarticulated, untested values & assumptions)
39 n Strong Vs. Weak culture u Strong - when the visible and underlying levels are consistent with each other u Weak - if the cultural levels are inconsistent with each other and/or in pockets n Elements of culture: u power, history, language, dress code, status symbols, reward structures, logos, organizational charts, etc. what Deal and Kennedy(1982) call the way we do things around here n Note: u Groups within any organization may have clashing cultures E.g., a sales team may have a results driven culture while the accountancy group may have a culture focused on accuracy
40 n Conservative organizations u Value low risk strategies, secure markets and well tested potential solutions u Also called defenders n Innovative organizations u Value ground breaking, risk and pay-off u Also called prospectors n Strategy – culture relationship. The 2 types of organizations will behave differently under the same circumstances: u Defenders value low-risk strategies (risk averse) u Prospectors go for higher-risk strategies and new opportunities (risk taker)
41 n How is culture related to strategy? u Analysis of culture will enable interpretations of its meaning to inform the selection of feasible and acceptable strategy options u Culture determines how an organization measures success. The common perception can have a dampening effect upon the influence of environmental factors upon strategy because the organization creates its own model of reality and every decision is seen in the light of that model u Culture influences strategy implementation
42 n Objectives in an organization serve three important functions: u They provide a statement of the financial objectives compared with the current performance of the organization indicating the extent and scope of the strategic decisions to be made u By providing a statement of the broad mission of the organization, they provide a product-market focus for the business strategy of the organization u Having a set of corporate goals provide objectives for individual functions or lower areas of responsibility within the organization 3.2 Strategy & Objectives
43 n Closed Vs open objectives u Closed F objectives that can be achieved F usually measurable and definable in terms of their in-built measures of success or performance indicators u Open F objectives that can be striven for, but can never be achieved, so they persist throughout the life of the organization F The organization-wide mission is always an open objective u E.g. UoN Mission To provide quality university education and training and to embody the aspirations of the Kenyan people and the global community through creation, preservation, integration, transmission and utilization of knowledge
44 E.g. Conflicting Objectives of Stakeholders StakeholderObjectives or interests Shareholder Market value of the investment Stability of dividends Size of dividend Management Sales growth Asset growth Profitability Labor force Wage increase Numbers employed Job security Society Production gains Exports Profitability Social welfare
45 n Stakeholders in organization usually have conflicting interests, and hence objectives. Therefore stakeholder analysis is important in strategic analysis n Stakeholder goals change as the coalition membership changes and as the goals of those individuals change n Corporate objectives or goals therefore: u emerge as a result of the process of internal negotiation amongst individuals and groups u represent the current position of compromise between different interests u represent satisfactory rather than optimal solution
46 n E.g. UoN Corporate Objectives n To manage the University efficiently n To produce quality and holistic graduates n To contribute to scientific and technological innovations n To enhance the competitiveness of the University At lower level unit, e.g. ICT objective To maximize student and staff productivity and service delivery, enhance teaching and learning and improve quality of research through ICT n Power structure determines where the balance point for the compromise lies u Power is the ability of individuals or groups to obtain and use the human and material resources available u Power is not evenly distributed, some units, groups and individuals are more powerful than others
48 3.3.1 Introduction n The aim is to understand the organizations strategic capability n It establishes what strengths & weaknesses the organization has i.e. what it does best and what it does not do well n Fig. suggests process of analyzing resources n Table (next 3 slides) show the key dimensions of the various business resources to be assessed n In the 1980s, it was felt out of fashion to base competitive strategy on internal capability – less chances of innovation (focus on ext. environment) n However, with the rise of TQM and BPR, there has been a corresponding growth in interest in understanding the organizations strategic capability
49 Value chain analysis Resource Analysis Process Drawing Comparisons Assessing balance Identification of key issues Understanding strategic capability
50 Key areas of business resources & competence n Product/market u Share of existing market u Range of products u Position in product life cycle u Dependence upon key product for sale/profits/cash flow u Distribution network u Marketing and market research n Production resources u Number, size, location, age and capacity of plants u Specialization/versatility of equipment u Production and cost levels u Cost/availability of raw materials u Production control system
51 n Financial resources u Present asset structure u Present capital structure u Access to additional equity and debt finance u Pattern of cash flow u Procedures for financial management n Technology u Currency of production methods and products u R&D spending and effectiveness
52 n Organizational and human resources u Organization structure u Management style and succession u Staff development policies u Management/labour force relationship u Reward structures
53 3.3.2 Value Chain Analysis n Competitive possibilities open to an organization can be discerned from a resource audit n Porters value chain is the commonest model and portrays an organization as a connected chain of activities, each of which relates the organizations products to its customers (see fig) n Model can be used to assess the degree of effectiveness and efficiency of resource use in the activities in the value chain u Efficiency - measure of how well the resources are being used, e.g. profitability, capacity use and the yield gained from that capacity u Effectiveness - assessment of how well the resources are allocated to those activities which are the most competitively significant within the value chain
54 n Primary activities u Contribute to getting the goods or service one step closer to the customers n Secondary activities u Support the primary activities Porters Value Chain Model Administration & Infrastructure Product/ Technology/ Development Human resource management Procurement Inbound logistics Operations Outbound logistics Sales & marketing Services Primary Activities Support/secondary Activities Value Added - Cost = MARGIN
55 (a) Primary activities n Inbound logistics u All processes associated with receiving, storing and disseminating inputs to the production process for the product or service n Operations u All processes associated with transforming i/ps into o/ps n Outbound logistics u All activities concerned with distributing the products or services to the customers n Sales & marketing u Activities which provide opportunities for the potential customer to buy the product or service and offer inducements to do so, e.g. advertising, pricing, tendering, n Services u All processes concerned with the provision of service as part of the deal struck with the customers, e.g. repairs, maintenance, spare parts supply, training, installation, etc.
56 (b) Secondary activities n Admin. & infrastructure u The tasks that comprise general management, e.g. financial management, planning, legal services, quality management, office administration, etc. n HR management u Activities associated with the recruiting, training, developing, appraising, promoting, and rewarding of personnel n Product/technology development u Activities that relate to developing the technology of the product or service and the processes that produce it and the processes that ensure the management of the org., e.g. IS, development of new product/service designs n Procurement u Activities that support the procurement of inputs for all of the activities of the value chain e.g. procurement of IS, raw materials, etc.
57 3.3.3 Product Portfolio Analysis n An example tool is the Boston consulting Group (BCG) tool matrix, which is a 2x2 matrix n The BCG tool models the relationship between u a divisions (or product) current or future revenue potential and u the appropriate management stance n It classifies businesses, products or divisions according to the present market share and the future growth of the market n The intention of the matrix is to distinguish between the cash generators and the cash consumers n The model uses the analogy in fig. below
58 BCG model Wild cat (quickly nurture into stars) Star (Exploit now & in future) Dog (Divest) Cash cow (Exploit now) Future market growth Existing Market share L H H L
59 The Interpretation of the BCG Model n Cash Cows u Products or segments that are the current high earners for the organization u They are relatively short term u The organization should seek to adopt measures to increase profit and extend their lifetime n Stars u Products or segments providing significant revenue now & expected to do so in future u The organization should seek to adopt measures to increase profit and extend their lifetime
60 n Dead dogs u Products or segments providing little or no contribution currently and not expected to change in the future u They should be divested n Wild cats u Products or segments providing little or no contribution currently but expected to change in the future u The organization should ensure that they quickly mature into profitable stars
61 3.3.4 Analysis of Core Competences n Core competencies are the capabilities that are vital for the competitive well-being of the organization. Significant resources must be put into acquiring them n Core competencies support all business aspects n Tests to identify core competences: u provides potential access to a wide variety of markets u makes a significant contribution to the perceived customer benefits of the end product u makes it difficult for a competitor to copy
62 n To produce a list of core competencies, an organization must consider its capabilities and any gaps that need to be plugged n Guidelines for core competences: u Should be few, about 5-6 u The embedded skills that breed the next generation of competitive products should not be bought or rented on outsourcing deals. Any outsourcing for core competencies must be treated with care. u Deliver core products F Core products embody the core competencies and are the components that add to the value of the end products F used to seek maximum world manufacturing share in core products
63 n The organization needs to create a strategic road map (architecture) of the desired core competencies and how to get them as part of SP n The organization can pose the following questions so as to judge the extent of the architecture: u how long it can preserve its competitiveness in the business if it doesnt control the core competence u how central the core competence is to the perceived customer benefits u what future opportunities would be foreclosed if it lost the particular competence n The architecture gives a way to assess possible diversification, provides a template for the allocation of resources, etc.
64 n Core competencies are a corporate resource and the more a core competence is used, the stronger it gets n Diversified organizations: u hold portfolio of core competencies (just like portfolio of many business) u must assess their core competencies, core products and end products u core competencies should be used to widen the domain of innovation so as to overcome the SBU constraints. This ensures hybrid opportunities that combine across SBUs are exploited. Unless this is done, only the ideas that lie close at hand (within one SBU) may be exploited n The organization should alter its patterns of communication, career paths, strategy formulation and managerial rewards away from the SBU constraints n Belonging together must be considered to add something that would not be present if each SBU were an independent operator
65 The mission core competence (MCC) decision matrix Dilution (Define framework) Drive (Cherish) Drain (Discard) Distraction (Develop) Fit with mission Fit with core competencies Poor Good Poor
66 n It is a tool based upon the analogy of an organization as a tree : u The mission and the vision provide the nutrients that feed the tree u The core competencies serve as the roots, which through core processes produce projects and products (the fruits) n Use of matrix u Resource allocation - assesses the relative merits of any competing claims on resources, not just those associated with product/market segments or SBUs OR u Resource allocation - apply strategic logic to resource-allocation decisions or day-to-day activities throughout an organization, ensuring their optimal contribution to building competitive strength.
67 n Product/service selection - offers a way of selecting which actual and potential project or product to support since each project and product can be judged in terms of its match to the mission and to core competencies of the organization n The best quadrant is the G-G n Notes: u This tool is good in forcing the testing of assumptions about what the core competencies actually are and what the mission actually is u It is also good in integrating issues to support making holistic decisions in an organization that has a definable mission and definable core competencies