STRATEGICAL MANAGEMENT FOR BUSINESS

Strategic management is the ongoing planning, monitoring, analysis, and assessment of processes and steps necessary for organizations to meet goals. It centered strategic management on three things: an organization's mission and purpose, its vision for where it wants to be in the future, and the values that will guide its actions. It requires a commitment to strategic planning and long-term, short-term goals. Because managing an institution's strategies helps decision making and goal development, strategic management helps organizations keep pace with strengthening technologies and markets, and gain a competitive advantage. There are five phases to the strategic management process: assess the organization's current strategic direction, identify and analyze strengths and weaknesses, formulate action plans, execute action plans, and evaluate the success of the action plans.

 

Effective communication, data collection, and organizational culture also play an important part in the strategic management process, especially at large, complex companies. SWOT analysis is a popular strategic management framework that involves identifying strengths, weaknesses, opportunities, and threats to an organization. Strategic management has both financial and non-financial benefits. It helps leadership think about and plan for an organization's future, sets a direction for the organization and its employees, and continuously plans, monitors, and tests activities leading to operational efficiency and profitability. What benefits have you experienced with strategic management? Let us know the comments and hit that like button too.

 

WHAT IS A STRATEGY?

I want everybody in this room to think about your company and as we're talking, this is not a theory, this is about how to think about your own business and how you're developing how you're thinking about it the choices you're making. What choices you're making and so let's use this as a working session and then over the course of the day we're going to hear from several other companies that are doing really interesting work and hopefully, we'll cumulatively because of all of this. I think we'll all enrich our understanding of this very fundamental topic Strategy. Now, what do we what have we kind of learned about how to think about strategy? Well, I think what we learned is that the instinct that most leaders have about success and most people actually have about success is dangerous is potentially distracting. What I find is that when you ask a company what success looks like.

The answer that you get, I get a lot is well; I want to be the best company in my industry. I want to be the best Bank; I want to be the best Auto Company. I want to be the best Consumer packaged goods company in this category. I want to be the best that's success if I can be the best company in my industry. I will succeed, and that is a very natural human way to think. We all hope to be the best at what we do, but in business competition and what we understand is that's actually not the way to think about success. The reason is that there is no best company. So it's pretty dangerous to do something that's impossible.

BIGGEST MISTAKE IN STRATEGY:

There is no best Auto company, there is no best Insurance company, and it all depends. It all depends, there is no best, there's no one way to compete. The biggest mistake in strategy is to think that there's only one way to compete. In every industry, there are different ways to compete depending on what customer and customer need you're actually trying to meet? So when you ask them the question, what's the best car or the best car company? You can't answer that because being the best of all depends on who you're trying to serve?

BEST WAY TO THINK FOR STRATEGY

If you're trying to serve young families, being the best is different, and if you're trying to serve people like me. Serving people that want, you know, luxury and performance, to be the best at that differ from providing a very low cost-efficient, you know the electric vehicle. There is no best way to compete. There are lots of good ways to compete depending on who you're trying to serve. So the number one principle strategy is to don't think this way. Instead, what you want to think about is how can I in my company be unique? How can I create unique value for the set of customers I choose to serve?

Strategy is about choice. It's making a set of choices and the most fundamental choice am I trying to serve, and One of the worst mistakes in strategy is to serve everybody. You can't meet the need of every customer you just can't do it it's impossible. I've seen hundreds of companies try it's impossible. You can't meet all the needs of every customer. If you have a strategy, you've got to decide which needs of which customers. You’re actually going to seek to me what you might do if you're clear about where you're heading. Another tremendous mistake in strategy is to get into a competition with your competitors on the same thing. If your competitor is trying to be at the lowest cost, it’s pretty.

 Unusual to win if you then try to chase them and be low cost. The essence of strategy is to find a unique position in your business that delivers unique value to the customers you choose to serve. Sounds simple, but most companies don't do it. It confused most companies they lack clarity on what strategy is and in many companies, there is a fundamental inability to make choices.

 Which ultimately leads to a lack of success. Now again in a country like India where growth has been relatively rapid, you can ride the rising tide and do okay. But I'm talking today about the companies that are going to be truly successful, truly successful, not the ones that are just bumping along with the market. To be truly successful, we really need a strategy and that strategy isn't about just being the best. Now, you know the word strategy gets used a lot and I always try to help companies I work with, and people I work with clearly understand what we mean by a strategy. Here it is Strategy is a set of choices we make Long-term choices to distinguish ourselves from competitors. That's what it's all about. It defines how we're going to compete differently, and it also really articulates the competitive advantages that we will seek to create and use in order to win.

LONG TERMS STRATEGY:

Okay, so at a very high level, this is how I would define strategy. Again note the word long-term Strategies about long term it's not about tomorrow and the next day. It's about the long term because strategy takes a long time to put in place and implement. Strategies about distinguishing yourself being different.

DOES OPERATIONAL EXCELLENCE ARE STRATEGIES

If you're doing the same thing as your competitor, you don't have a strategy. You're just trying to do the same thing better. That’s what we call operational excellence. We'll talk about that in a minute Strategy is around choices what choices you make versus the choices that your competitors are making Strategy then differs from just we want to be number 1 or number 2. That's not a strategy wanting to grow faster is not a strategy.

 Those are goals, those are aspirations the strategy is the unique position that allows you to get to whatever goal you set. We can't confuse the strategy and the goal. We can't mix them up. We have to separate the goal we're trying to achieve, and then the strategy is how we're going to get there.

DOES STRATEGY IS SINGLE ONE STEP?

Strategy is not just one thing, one step, strategy is not to go international. That's not a strategy. You know, raising R&D is not a strategy. Strategy is holistic. It's the complete set of choices that you make collectively in order to position the company for success over time in the marketplace. It's not just it's not one-step it's a set of steps.

 Strategy involves all the functions. It includes marketing production finance everything together to create that unique positioning that's what strategy is all about and strategy isn't vague. It's not a mission statement it’s very specific as we'll see.

DOES STOCK PRICE IS THE GOAL OF STRATEGY?:

So here's where we start with a sort of we all have to get grounded in a clear idea of what we actually mean by a strategy and once we start there, then we can start making doing the analysis and making the choices necessary to get there now many of you are public companies and here we have an additional issue that a lot of companies get confused about and that is if you're a public company, we have a stock price and we you know, everybody looks into the stock price and What we also have to understand if we're going to set a good strategy, is actually the stock price is not the goal.

SUPERIOR ECONOMIC STRATEGIES

The stock price is a result. The goal is superior economic performance strategies about creating a superior economic performance in terms of return on capital and in terms of growth. Not one year, but sustainedly. Okay, and what we know is that its economic performance that really creates value Price can go up or down depending on what happens in the world. That doesn't mean that value changed. The economic performance actually created value. The ability to be profitable and earn a good return on capital and grow that business. Well, we've got to remember is when we set strategy we have to focus on the economic performance part, We can't try to please the stock market. We can't try to figure out what today investors want that's going to confuse us.

 

It's going to pull us away from where we want to go. So I think you know critical for a strategy particularly in public companies is the idea that actually performs. Determines shareholder value, not the other way around. You'd be surprised this sounds awfully simple, it's not I work with hundreds of public company CEOs and they get all confused about well, who? What’s the scorecard here? And the stock market is a sort of long-term works pretty well as a scorecard if you have good economic performance eventually your stock price goes up. But in the short term, the stock price is a lousy way of judging success.

The markets can be way off, That's what we find in the studies on this question, So we're this is all about long-term sustained economic performance and we should have the courage to let the stock price take care of itself and not try to get crazy trying to please the analysts or Deal with whatever criticism we're getting, you know in the stock market.

KEY PRINCIPALS

Now when we think about strategy again another key principle and then we're going to dig in a little is strategy occurs at multiple levels in any company, in many companies, not every company. The core level strategy is what we call business strategy that’s how to compete in each or in the distinct business in which you operate. So here, if you're in passenger cars, you'd have a strategy for passenger cars. That's a business strategy, but there's in many companies. There's another level of strategy, which is what we call corporate strategy, and that has to do with the overall strategy of the diversified or multi-business company.

We got a lot of conglomerates. I don't like the word conglomerate.  The conglomerate is not a strategy. We've got a lot of companies, though that is over one business we got to have a strategy for each one business. Because that's in a different market competing differently to serve different customers but we also need to think about the overall strategy of the diversified group and that is a very different animal and There's a new there's this new set of principles or a different set of principle for thinking about that again I Find a lot of confusion a lot of companies mix these up together.

CORPORATE AND BUSINESS

Corporate and business get mixed up. That's a mistake We've got to keep these levels separately and we'll talk about these briefly as we have time now let's talk about business unit strategy and not go quickly because Again, I hope that most of you are pretty well-grounded in the key ideas here .so what we understand is in it can in business a particular business.

 The drivers of success and the key elements of strategy have to do with the industry itself, the business itself, and the position we choose to occupy in that business. Strategy is both together. What we understand is that industries are different in terms of competition, and we got to understand our industry. We got understand how it. Competition is developing. Where it's heading?

 And what kind of competitive dynamics are we going to contend with? We've got to understand that business by business and then, of course, we have to make those choices about where we're going to compete but one thing I find repeatedly is often the health of your industry is just as important as how good a position you have If you're in an industry that's in trouble that's failing. You may have a dominant position but that's not precious, so we got to learn to worry about our industry, too we have to help our industry thrive, not just focus only on our own position again.

 Competitive Forces

These are things we've learned from many examples. In terms of industry analysis, hopefully, everybody finds this familiar. You know we after you know 20 or 25 years of work we have overwhelming evidence that really industry competition is driven by these competitive forces. That we introduced many years ago now. Those competitive forces collectively drive the fundamental attractiveness of the industry, the average profitability in the industry, yeah, here's a simple example in the heavy truck industry and in our country very difficult industry if you look at this industry you see a lot of Competitive forces that are challenging. We have a lot of vicious competition on price among the truck manufacturers. We have some high regulatory standards which are pushing up their cost.

To meet those standards, but it's very hard to pass those costs on to the customer because the customer is merging into large or larger fleets and leasing companies that have a lot of bargaining power in order to push down the price. So the combination of rising regulatory costs and a powerful customer is squeezing the truck manufacturers. We see that to make heavy trucks you make some parts in-house some companies make more some companies make less but you're so having to source things like engines and Drivetrain components axles and things like that and many of the suppliers of those components that you're buying have very strong brands and in fact the trucking company. Specifies the brand of the parts that they want on the truck, now they want a Cummins engine. For example, so you're buying from suppliers who have a lot of clouts because they have their own relationship with the end customer. So that squeezes the truck companies, the truck manufacturers in the middle.

This is in North America Primarily, but the same basic structure exists in many other parts of the world. It actually isn't that hard to enter in the industry and the threat of entry and entry barriers are a key part of industry analysis, and you know it's actually harder to get the dealer network than it is to actually get the parts and assemble the truck. And then of course trucks are always competing with a substitute. Yet all of us hopefully understand what a substitute is a different way of meeting the need That's not this is the same as your product but meets the same need that your product does.

So if you're trucking if you're a truck manufacturer, You know, the customer doesn't need a truck if they're going to use the railroad or if they're going to use water transportation, so particularly You know as railroads have been a real tough competitor for trucks over the years. Okay, so this is a classic example of industry analysis. It's something that is timeless. Always every single time you think about the strategy you have to have a systematic, rigorous understanding of your industry and what are the competitive drivers? And how are they changing are they getting worse than getting better where's the new competitive force coming from? That you're going to have to deal with if you're going to win in that industry.

Gases Companies

 You know, here's another example of an industry, industrial gases This industry makes oxygen-hydrogen, argon, all these industrial gases that are increasingly used in production processes in all kinds of other industries and What your first look at this industry says, oh my God do I really this is a pretty tough industry Because I'm selling industrial gases that are commodities. Hydrogen is hydrogen how can I ever make money just selling a commodity gas? Particularly when I'm selling to a lot of customers who often have the bargaining power they're big manufacturing companies, it made Industrial gases with feedstocks like, you know, petrochemicals, and I have no control over the price of the feedstock.

 So if the feedstock price goes up, I'm in trouble if I'm selling a commodity gas again not so good element of the industry. You know, it's not that hard to get in I mean lots of people can figure out using the figure out how to make helium or hydrogen and have a little facility in the factory And many of the customers decide. Well, this is not something I want to buy. I want to make my industrial gases in-house and make them right in my factory, right on the production line.

Ok. So again, here's an industry your first look says not so good. I don't want to play here. That's your first instinct but again what we learn about industry analysis is we've got to we've got to be sophisticated We can't just take the superficial look at the industry, we've got to dig down a little and if we dig down in this industry, what we've learned is actually it's quite an exciting industry, in fact, the companies in this industry have done very well and the reason is that the superficial look doesn't really get at the true industry a structure so just an example is Probably the most interesting thing about the industry is that the cost of transportation is very high?. To move gas from your plant to your customer takes a big truck. It's very expensive to ship. It's got to be shipped under pressure and you have to kind of have a big tanker truck and it has to go to the customer side and it has to unload the gas through you know pumping it into the tank there and transport cost Means that in order to be efficient in this industry, have the density of customers.

So if you have only one customer in Mumbai and you have to drive all the way to Mumbai for one customer and spend all that money to drive that truck full of helium here and you get to offload a bit for one customer. Your costs are going to be very high but if you come to Mumbai and you have 17 customers and your trucks from one to the next and they're all close by. Then actually that makes your business super-efficient.

Compared to the guy who's only going to deliver to one or two customers. Transportation costs take a very superficially lousy industry and make it into a very attractive industry, because suddenly, If you have a dense group of customers in a market, it's almost impossible for your competitor to attack you, It's just too expensive. They'll never be able to afford to win those customers and it creates a lot of, because you've got to build a customer base over a long period and this is a very critical product for the manufacturing process, so you don't want to try some newcomer and not be sure that they'll show up, if they don't show up with your helium, you're in trouble in your plant.

 Okay. So again, I won't go through the details, but what I'm trying to get across here is that we all have to be really sophisticated at industry analysis in our businesses. We got a look below the surface. We can't just say oh, this is a commodity. It allows the industry. Uh-uh, it’s a commodity. It's quite an attractive industry dig down to understand the real entry barriers. Understand that the real bargaining power of the customer and the supplier and the people that could see this have built tremendous businesses in the industry, that nobody else wanted to go into, for the stock market thought this was a crummy industry for a long time boy, were they wrong.

 The investors that could understand how attractive this business was, boy, did they do well again. You know what? What we find in competition is that actually, the concepts themselves are not that complicated but actually applying them well is really hard and that applies both to the companies but also to the investors that are trying to figure out whether a company is successful or will be successful.

We’ll discuss more strategic planning in the next article, so keep in touch for more fruitful discussion ahead on this topic and subscribe to blog www.israrumar.com.

 

Muhammad Israr Umar An NGO worker for the last 17 years muhammadisrarumar6@gmail.com