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Since the purpose of this thesis is to give SSU’s a promising starting ground for a long-term success. I claim that this can then happen, when a firm pursues the right strategy. Hence Top-management has to understand why it is a must to have: first a strategy and second how to get the right one. For that I will nearly go back to the business terms of Adam and Eve. I’m going to start with some basic theory about world affairs, economy, trade theory and strategic management. All of this follows in this first section. Then I will continue with the analysis of strategic terms.
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The world and the world society have greatly changed in the last decades, following the time after the WW2. The main incidents in this period created neoterism like:Moved World PopulationPopulation growth is slowing down but has been higher in developing countries. The increase of world population in the developing countries rose from 70% in 1960 to 81% in 2001. Urbanization increased and more people live in cities.Changed Material ConditionsRadio and TV receivers and newspaper circulation grew per capita among less developed countries. Internet connection rose worldwide.Improved Living ConditionsInfant mortality rates (IMR) has been shrinking, illiteracy and percent of population without any schooling as well, and GDP per capita increased. Less Developed Countries Improve SlowerInfant mortality rate (IMR) decreased among industrialized countries more than twice the number it increased in developing countries. Illiteracy in 1970 developing countries was 10 times larger than illiteracy in more developed countries to about almost 20 times larger in 2000. Changing Patterns and Conflict ConsequencesInternational terrorist attacks increased, whereby there have been fewer terrorist attacks at all. But not fewer casualties: there has been a raise in Asia and the Middle East. around 40-50 countries have been involved in civil wars per year, out of about 223 countries. In general there have been 10 to 15 million refugees each year till 2000.
Some of the main debated issues of today’s world focusing on social, economic and political areas, and the interaction among them. Basically the issues are: Globalization A rapid increase in cross-border economic, social, technological and cultural exchange. Globalization is neither a uniform trend, nor is it irreversible, or inexorable. Rather it is fragmented, incomplete, discontinuous, and unpredictable.
Democratization and Governance Refers to a system involving effective competition between political parties for positions of power. And the securing of human rights.Demographic Changes Society’s population size, age, race/ethnic breakdown, and urbanization. Economic Changes Like long term economic growth (see World Economy).Poverty and Inequality A decline in poverty would be consistent with other changes among less developed countries (see above mentioned - Less developed countries improvement slower).Health and Human Development The life expectancy in the last several decades has increased in most regions of the world (except Sub-Saharan Africa because of AIDS and conflicts, Eastern Europe and CIS states). Social Changes social values like national pride is likely to be greatest in stable, established, developed democracies.
Some sources say that the three main issues of world economy are: 1. The economic growth, related with the GDP, that increased over the last decade in OECD countries, and in non OECD Eastern Europe and Asia, whereby Central Europe countries proved small growth numbers. But in contrast, there was little growth in Africa and the Middle East. 2. The structure of economies are still changing towards strong service based economies. Because much of technological improvement allowed for automating of agricultural and industrial processes. A recent increase was only seen in Asia and Oceania. Agriculture in developing countries still accounted for one half of the labor force in 2001. 3. Poverty is increasing Europe, Central Asia, Latin America and Africa. In contrast, East and South Asia has seen a decline in the number of people in poverty (using $1 a day). Besides the above mentioned terms, there are much more issues to list, here an overview about them: Environment, security, conflict, crime, disarmament, extra state actors, human rights, knowledge revolution, scientific development, basic education, capacity development, desertification, child protection, gender equality, health and nutrition, HIV/AIDS, humanitarian crises, information and communication technologies, peace building, and private sector development. They all influence the world economy and with that every globalized business as well. Now let’s see how world economy today looks like.
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As economy is a part of the human history, it can’t be observed as a stand alone item. The contemporary economy represents just a snap-shot of history. And history in the long-term analysis shows colossal changes. From there, I recommend everybody not only to study economical coherences, but also to study human’s history and geology. But in this chapter now the scope is limited on today’s world economy. Some of the most important statistical indicators are yearly updated by the CIA and stated in its Factbook. There are 5 main indicators:
Economy (most are estimated for 2005)Financial data availableGDP summarized in GWP $59.38 trillionGDP real growth rate 4.3% GDP per capita: purchasing power parity $9,300GDP approximately by sector: agriculture: 4% industry: 32% services: 64 (in 2004)Inflation rate (consumer prices): developed countries 1% to 4% typically; developing countries 5% to 60% typicallyEmploymentdeveloped countries typically 4%-12% unemploymentnon-industrialized countries around 30% (unemployment and underemployment)Producing industriesIndustries: dominated by the onrush of technology, especially in computers, robotics, telecommunications, and medicines and medical equipment; most of these advances take place in OECD nations; only a small portion of non-OECD countries have succeeded in rapidly adjusting to these technological forces; the accelerated deployment of new industrial (and agricultural) technology is complicating already grim environmental problems.Industrial production growth rate was approximately 3% (est. 2003)Energy issuesYearly electricity - production: 15,85 trillion kWh (est.2003)Oil - production: 79.65 million bbl/day (~12,500,000 m³/d) (est. 2003)Oil - proved reserves: 1.025 trillion barrel (163 km³) 37257Natural gas - production: 2,640 km³ (est. 2001)Natural gas - proved reserves: 161,200 km³ (1 January 2002)Cross-border issuesYearly exports (f.o.b.) $9.099 trillion est. 2004, compared to $6.6 trillion in 2002Exports - partners: US 15.7%, Germany 7.7%, UK 5.1%, Japan 4.5% (2004)Yearly imports (f.o.b.) $9.47 trillion est. 2004, compared to $6.6 trillion in 2002Debt - external: $12.7 trillion (est.2004)Yearly economic aid recipient $154 billion (2004)CommunicationsLike Internet users in total: 604,111,719 (est. 2002).TransportationAll the important transportation ways from Airports to Tramways etc.Military ExpendituresThis number is measured in % of a countries GDP. Roughly 2% where spend worldwide in 1999.Transnational IssuesThere are the local and mostly unarmed disputes described a country is involved.
On the financial side, the numbers never ever were as high as in the current period. These numbers display the strong level of international relationship we are in. Let’s have a quick view at some further interesting financial examples: Global OTC-Derivatives (over-the-counter) are financial commitments that are to amortize somewhere in the future. The OTC outstanding notional amount was $270 trillion in 2005. The global debt issuance was $5.187 trillion in 2004. This number compared to the total dept of $12.7 trillion points out that dept are more likely long term. The global equity issuance reached $505 billion in 2004.
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One of the well know theory is called mercantilism, which means that countries should export more than they import to keep the balance in the plus. But only when it results from a more significant value (Gold vs. High-tech for example). A national wealth base, bases more on available goods and services than on frozen values like Gold for example. There is a difference between natural advantages (like climate, natural resources, and labor availability) and acquired advantages (product or process technology). Comparative advantage is the change of production from less efficient to more efficient output. Somebody else will carry out the given up (less efficient) production. And involved institutions can benefit from international trade. Bigger countries tend to export and import less than smaller countries do. But in turn they are more likely able to handle large-scale production. The factor-proportion theory describes the circumstance, that scarcely available factors are dearer than well available factors. Production location are likely to move from one country to another in order to safe costs - depending on the stage in the PLC. Hence production is likely to move from developed countries to underdeveloped countries. Economies depend on each other to a certain degree, going from almost independence, to interdependence, and dependence, according to their needs and strategy. The strategic trade policy tries to improve trade capabilities by altering an industry’s condition to the better. Porter’s diamond describes four conditions an industry has to have in order to become international competitive. These are: demand conditions, factor conditions, related and supporting industries, and a firm’s strategy, structure, and rivalry. Trade theories come into existence due to a underlying pattern of strategic thinking. The pattern of strategic thinking in the business world is called strategic management.
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My research work about strategic management resulted therein that a business strategy is equitable with value based management. Strategic management starts with strategic planning and is the highest level of managerial activity. First the current state is assessed and the strategic groundwork (vision, mission, core values) expressed, as well as seeking for key success factors, the strategic objectives, is done. Further it deals with the development of policies and plans to achieve these objectives, and allocating resources so as to implement the plans. Usually performed by the company's Top-management, lead by the Chief Executive Officer (CEO) and the executive team. Strategic management provides the overall direction to the whole enterprise. It must be appropriate to its resources, circumstances, and objectives. An objective of strategic management is to put the organization into a position to carry out its mission effectively and also efficiently. A good corporate strategy should integrate an organization’s goals, policies, and action sequences (tactics) into a cohesive whole. Strategic management involves an assessment of the current situation and gives advice where to go now. That flows into a formulation of strategy and continues in the implementation of it. The first term strategy formulation involves primarily:Where We AreInternal and external situation analysis - both micro-environmental and macro-environmental.Where We Want to GoObjective setting - crafting vision statements (long term), mission statements (medium term), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.How to Get ThereStrategic plan - the above mentioned should suggest a plan how to obtain the goals basically by operational actions.
After addressing these terms the strategist is ready for the next step. Now he can tackle the second term strategy implementation which mainly related with the following topics:Resource AllocationConcentrate all the needed resources, like: financial, personnel, time, (ICT-) technology.Chain of CommandEstablish a chain of command and/or cross functional teams to do the tasks.Assigning Responsibility Responsibility has to be linked to specific tasks or processes and to specific individuals or groups.Managing the Process Monitor the results; Benchmark them and use best practices; Evaluate efficacy and efficiency of the processes; Control for variances, and ensure process adjustments.Specific Program Implementation Acquire the requisite resources; Develop the processes, Train the staff; Test processes; and document all the tasks in order to reconstruct them when needed.
Both, strategy formulation and implementation, are on-going, never-ending, and integrated processes and they require continuous reassessment and reformation. It involves also complex patterns of action and reaction, partially planned and partially unplanned. So a strategy has to admit tolerance for planned and emergent events. Critical points of strategic change are called strategic inflection points, at which a strategy should take a new direction in order to keep pace with a changing business environment. There are several time scales. Short term strategies involve planning and managing for the present. Long term strategies involve preparing for and preempting the future. The following strategy wheel is a practical foothold in the process of strategy formulation:
Some sources of strategic management allude that there are two general directions of strategic management, and one perhaps first has to decide which one to choose. There is a more industrial based one and a more sociological based:Industrial Approachbased on economic ideas (like Chandler’s) — deals with issues like competitive rivalry, resource allocation, economies of scaleassumptions — rationality, self interested behavior, profit maximization
Communicationsdeals primarily with human interactionsassumptions — bounded rationality, satisfying behavior, profit sub-optimality (new economy firms for example)Strategic management theories can also be divided into: 1. Efficiency - doing things the right way (going up the ladder and take the fruits). 2. Effectiveness - doing the right things (bring the ladder to the right tree). Strategic management techniques are either bottom-up approaches, where employees submit proposals to their managers who, in turn, funnel the best ideas further up the organization (capital budgeting process); or top-down approaches, where the CEO, with assistance of a strategic planning team, decides on the overall direction the company should take.
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Strategic management is often the highest level of strategy, since it is the broadest, applying to all parts of the firm. A so called corporate strategy gives direction to corporate values, corporate culture, corporate goals, and corporate missions.
Under this broad strategy there are often functional or business unit strategies. This level means functional strategies, like a marketing strategy for example. Those encompass new product development strategies, human resource strategies, financial strategies, legal strategies, and information technology management strategies. Mostly with short and medium term plans including limitation to the domain of each department’s functional responsibility. Another way to organize those activities is by using strategic business units (called SBUs), semi-autonomous unit within an organization, - or simple a profit center. Then follows “the lowest” level of strategy - operational strategy. Very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies. Information technology allows for simpler strategic structure. It is felt that knowledge management systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process.
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Birth of strategic managementStrategic (business) management originated in the 1950s and 60s. the most influential pioneers were Alfred Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker. Alfred Chandler recognized the importance of coordinating the various aspects of management under one all-encompassing strategy. He showed that a long term coordinated strategy was necessary to give a company structure, direction, and focus (see Strategy and Structure, 1962). And he said “structure follows strategy”. But today we now that strategy also follows from structure (see Tom Peters Liberation Management) Philip Selznick introduced the idea of matching the organization's internal factors with external environmental circumstances – the SWOT analysis (Harvard Business School). Strengths and weaknesses of the firm are assessed in light of the opportunities and threats from the business environment. Igor Ansoff developed the Ansoff-Matrix, a strategy grid that compared market penetration strategies, product development strategies, market development strategies and horizontal and vertical integration and diversification strategies. Ansoff thought that management could use these strategies to systematically prepare for future opportunities and challenges - gap analysis (see Corporate strategy, 1965). Peter Drucker contributed to strategic management on the one hand by stressing the importance of objectives. An organization without clear objectives is like a ship without a rudder. And the developed the MBO theory - management by objectives. On the other hand he predicted the importance of what today we would call intellectual capital - the rise of what he called the “non-hierarchical knowledge worker” (team) - with the person most knowledgeable in the task at hand being the temporary leader. E. Chaffee (1985) summarized what he thought were the main elements of strategic management theory by the 1970s:Strategic management involves adapting the organization to its business environment.Strategic management is fluid and complex. Change creates novel combinations of circumstances requiring unstructured non-repetitive responses.Strategic management affects the entire organization by providing direction.Strategic management involves both strategy formation (he called it content) and also strategy implementation (he called it process).Strategic management is partially planned and partially unplanned.Strategic management is done at several levels: overall corporate strategy, and individual business strategies.Strategic management involves both conceptual and analytical thought processes.Growth and portfolio theoryStrategic management before the 80’s dealt with size, growth, and portfolio theory . The PIMS study was a long term study, started in the 1960s and lasted for 19 years, that attempted to understand the Profit Impact of Marketing Strategies (PIMS), particularly the effect of market share. Started at General Electric, moved to Harvard in the early 1970s, and then moved to the Strategic Planning Institute in the late 1970s, it now contains decades of information on the relationship between profitability and strategy. Their initial conclusion was unambiguous: The greater a company's market share, the greater will be their rate of profit. The high market share provides volume and economies of scale. It also provides experience and learning curve advantages. The combined effect is increased profits. But the study's conclusions have recently been questioned (Tellis, G. and Golder, P., 2002). Research also indicated that low market share could be profitable as well by using niche strategies (Schumacher, 1973; Woo and Cooper, 1982; Levenson, 1984; and later Traverso, 2002). In the 80’s Michael Porter defined the stuck in the middle problem. He concluded that high market share and low market share companies were often very profitable but not the ones between. Alfred Sloan, CEO of GM, addressed the problem of multidivisional firms: GM was decentralized into semi-autonomous “strategic business units” (SBU's), but with centralized support functions. Harry Markowitz and other financial theorists developed the theory of portfolio analysis - a valuable concept for multi-divisional companies. It was concluded that a broad portfolio of financial assets could reduce specific risk. In the 1970s marketers extended the theory to product portfolio decisions and managerial strategists extended it to operating division portfolios. Each of a company’s operating divisions were seen as an element in the corporate portfolio. Each operating division (also called strategic business units) was treated as a semi-independent profit center with its own revenues, costs, objectives, and strategies (B.C.G. Analysis) . Companies continued to diversify until the 1980s when it was realized that in many cases a portfolio of operating divisions was worth more as separate completely independent companies.The marketing revolutionIn the 70’s the rise of marketing oriented firms began. In the production orientated era, capitalism assumed that a business has to produce of high (technical) quality. Such products worked well and were durable, where not difficult to sell them with profit. But after WW2 (untapped demand) it became obvious that products were not selling as easily as they had been. So firms concentrated on selling. (sales orientation between the 50s’ and 60’s). In the 70’s, Theodore Levitt (Harvard) stated that instead of producing products then trying to sell them to the customer, businesses should start with the customer, find out what they wanted, and then produce it for them (customer driven). This era is called the marketing orientation. The Japanese challengeBut also in the 70s, people noticed how successful Japanese industry had become. They surpassed Westerners in industry after industry. And theories purport the Japanese success, like:Higher employee morale, dedication, and loyalty;Lower cost structure, including wages;Effective government industrial policy;Modernization after WWII leading to high capital intensity and productivity;Economies of scale associated with increased exporting;Relatively low value of the Yen leading to low interest rates and capital costs, low dividend expectations, and inexpensive exports;Superior quality control techniques such as Total Quality Management and other systems (W. Edwards Deming in the 50s and 60s, detailed by Schonberger R. 1982).But in fact by 1980, the Japanese cost structure was higher than the American. Richard Pascale and Anthony Athos (The Art of Japanese Management, 1981), claimed that the main reason for Japanese success was their superior management techniques - the 7-S: 1. Strategy, 2. Structure, 3. Systems, 4. Skills, 5. Staff, 6. Style, and 7. Subordinate goals. . The first three of them were called hard factors, and the remaining four were called soft factors - shared values (not well understood by Westerners). Japanese saw management as managing the whole complex of human needs, economic, social, psychological, and spiritual. And so was the decision making style in Japan, based on consensus and long term vision. Kenichi Ohmae (The Mind of the Strategist, 1975/1982) claimed that strategy should be a creative art: It is a frame of mind that requires intuition and intellectual flexibility. Vagueness, ambiguity, and tentative decisions are acceptable in Japan’s culture. In the same year Tom Peters and Robert Waterman released their study to challenge the Japanese. They concluded (In Search of Excellence) that there were 8 keys to excellence that were shared by firms they studied:A bias for action - Do it or try it. Don’t waste time studying multiple reports and committees.Customer focus - Get close to the customer. Know your customer.Entrepreneurship - think small by giving people the authority to take initiatives.Productivity through people - Treat your people with respect and they will reward you with productivity.Value oriented CEOs – they should actively propagate corporate values throughout the firm.Stick to the knitting - Do what you know well.Keep things simple and lean - Complexity encourages waste and confusion.Simultaneously centralized and decentralized - Have tight centralized control while also allowing maximum individual autonomy.Gaining competitive advantageStrategic management deals closely with competitive advantage. Gary Hamel and C. K. Prahalad said that strategy is active and interactive, and introduced terms like strategic intent and strategic architecture (see Hamel, G. & Prahalad, C.K., 1989, and Hamel, G. & Prahalad, C.K., 1994). Their big advance was the idea of core competency, where they showed the importance to know the one or two key things that your company does better than the competition (see Hamel, G. & Prahalad, C.K., 1990). Active strategic management required active information gathering and active problem solving. Hewlett-Packard managers (Dave Packard and Bill Hewlett) called their style Management By Walking Around (MBWA). They spent most of their days visiting employees, customers, and suppliers in order to gather solid information from such key people. Japanese managers employ a similar system, which originated at Honda, and is sometimes called the 3 G's (Genga, Gengutsu, and Genjitsu, which translate into “actual place”, “actual thing”, and “actual situation”). But Michael Porter was the most influential theorist: some of his work are: 5 forces analysis, generic strategies, the value chain, strategic groups, and clusters. With his 5 forces analysis he showed forces that shape a firm's strategic environment. And it is like a SWOT analysis with structure and purpose and shows how a firm can obtain sustainable competitive advantage. Porter modifies Chandler's dictum about structure following strategy by introducing a second level of structure: Organizational structure follows strategy, which in turn follows industry structure. Porter's generic strategies detail the interaction between cost minimalization strategies, product differentiation strategies, and market focus strategies. He showed the importance of choosing one of them rather than to position your company between them. He also challenged managers to see the industry as a value chain. A firm will be successful only to the extent that it contributes to the industry's value chain. This forced management to look at its operations from the customer's point of view. Every operation should be examined in terms of what value it adds in the eyes of the final customer. In 1993 John Kay argued that: “adding value is the central purpose of business activity”. Where adding value is defined as the difference between the market value of outputs and the cost of inputs including capital, all divided by the firm's net output. Borrowing from Gary Hamel and Michael Porter, Kay claims that the role of strategic management is to identify your core competencies, and then assemble a collection of assets that will increase value added and provide a competitive advantage. He claims that there are 3 types of capabilities that can do this; innovation, reputation, and organizational structure. Al Ries and Jack Trout stated (Positioning: The Battle For Your Mind, 1979) that a strategy should not be judged by internal company factors but by the way customers see it relative to the competition. Crafting and implementing a strategy involves creating a position in the mind of the collective consumer. Several techniques were applied to positioning theory, some newly invented but most borrowed from other disciplines. Perceptual mapping for example, creates visual displays of the relationships between positions. Multidimensional scaling, discriminant analysis, factor analysis, and conjoint analysis are mathematical techniques used to determine the most relevant characteristics (called dimensions or factors) upon which positions should be based. Preference regression can be used to determine vectors of ideal positions and cluster analysis can identify clusters of positions. In 1992 Jay Barney saw strategy as assembling the optimum mix of resources, including human, technology, and suppliers, and then configure them in unique and sustainable ways. In 1993 Michael Hammer and James Champy saw the need for restructuring and called this process reengineering. The idea was to organize a firm's assets around whole processes rather than tasks. In this way people recognized projects from inception to completion. And that avoided functional silos, and eliminated waste due to functional overlap and interdepartmental communications. Richard Lester (and MIT, 1989) explored 7 best practices (also benchmarking - Camp, R., 1989) and concluded that firms must accelerate the shift away from the mass production of low cost standardized products. The seven areas of best practice were:Simultaneous continuous improvement in cost, quality, service, and product innovationBreaking down organizational barriers between departmentsEliminating layers of management creating flatter organizational hierarchies.Closer relationships with customers and suppliersIntelligent use of new technologyGlobal focusImproving human resource skillsAnd that supports when determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying its best practices in your firm. Some theorists felt that western business was most lacking in product quality (W. Edwards Deming, 1982; Joseph M. Juran, 1992; A. Kearney, 1992; Philip Crosby, 1979; and Armand Feignbaum, 1983). They suggested quality improvement techniques like Total Quality Management, continuous improvement, lean manufacturing, Six Sigma, and Return on Quality (ROQ). Other theorists stated that inadequate customer service was the source of the problem (James Heskett, 1988; Earl Sasser, 1995; William Davidow, 1989; Len Schlesinger, 1991; A. Paraurgman, 1988; Len Berry, 1995; Jane Kingman-Brundage, 1993; Christopher Hart, and Christopher Lovelock, 1994). They worked out fishbone diagramming, service charting, Total Customer Service (TCS), the service profit chain, service gaps analysis, the service encounter, strategic service vision, service mapping, and service teams. Their assumption was that there is no better source of competitive advantage than a continuous stream of delighted customers. Process efficiency is the object of process management (product quality management, customer service management). It looks at an activity as a sequential process and tries to find inefficiencies and make the process more effective (theory dating back to Taylorism). Since it is broad applicable, they can be used as a basis for competitive advantage. Some found that businesses spent more on acquiring new customers than on retaining current ones (Carl Sewell, 1990; C. Gronroos, 1994; Earl Sasser, 1990; and Frederick Reicheld, 1996. The competitive advantage found was the loyalty effect (stakeholder loyalty). The appropriate technique developed is called customer lifetime value (CLV). So to create a sustained relationship with customers (relationship marketing, customer relationship management). Many see customer experience management as a form of theatre. In 1997 James Gilmore and Joseph Pine argued that competitive advantage lies in mass customization. Since flexible manufacturing techniques allowed to individualize products without losing economies of scale. And that turned products into services. If a service is mass customized by creating a “performance” for each individual client, that service would be transformed into an “experience” (The Experience Economy, 1999; see also the work of Bernd Schmitt). James Collins and Jerry Porras research work of about six years uncovered a key underlying principle behind 19 successful companies that they studied: all firms encourage and preserve a core ideology (core set of values) that nurtures the company, even when strategy and tactics change daily. Those values enable employees to build a strong organization (Built To Last, 1994). Both claim that short term profit goals, cost cutting, and restructuring will not stimulate dedicated employees to build a great company that will endure. In 2000 Collins described a business culture where technological change inhibits a long term focus. In 1997 Arie de Geus identified four key traits for companies to prosper for 50 years or more. They are:Sensitivity to the business environment — the ability to learn and adjustCohesion and identity — the ability to build a community with personality, vision, and purposeTolerance and decentralization — the ability to build relationshipsConservative financingSuch companies are able to perpetuate themselves. If a company emphasizes knowledge rather than finance, and sees itself as an ongoing community of human being, it has the potential to become great and endure for decades. It is an organic entity capable of learning and capable of creating its own processes, goals, and persona. Jordan Lewis in 1999 saw distributors, suppliers, firms in related industries, and even competitors as potential assistants or partners. He explains how mutual respect and trust is the cornerstone of this approach and describes how this can be fostered at the interpersonal relationship level.The Military TheoristsStrategic management relies also on military theory. So business strategists in the 80’s recognized the vast knowledge base stretching back thousands of years and turned to military strategy for guidance (The Art of War - Sun Tsu, On War - von Clausewitz, The Red Book - Mao Tse Tung). Marketing warfare books were published (Business War Games - Barrie James, 1984; Marketing Warfare - Al Ries and Jack Trout, 1986; Leadership Secrets of Attila the Hun - Wess Roberts, 1987). Also Philip Kotler is a well-known proponent of marketing warfare strategy. Four types of business warfare theories exist:Offensive marketing warfare strategiesDefensive marketing warfare strategiesFlanking marketing warfare strategiesGuerrilla marketing warfare strategiesNowadays those theories are seen as limiting. Other approaches, non-confrontial for example, are seen as more appropriate (Strategy of the Dolphin, in the 90’s) shows when to use aggressive strategies and when to use non-aggressive strategies. J. Moore created an ecological theory of predators and prey (see ecological model of competition, 1993). A sort of Darwinian management strategy in which market interactions mimic long term ecological stability.Strategic ChangeStrategic management should include the possibility to change itself. Back in the 70’s Alvin Toffler (Future Shock - Toffler, A., 1970) realized a trend towards accelerating rates of change and social as well as technological norms had shorter lifespans with each generation. So he questioned society's ability to cope with resulting turmoil and anxiety. In the past, periods of change were always punctuated with times of stability. So society was able to assimilate the change and deal with that before the next change arrived. But stability-periods shortened and by the late 20th century had all but disappeared (The Third Wave - Toffler, A., 1980) and this shift to relentless change as the defining feature of the third phase of civilization. The first two phases being the agricultural and industrial waves. In the beginning of this change there will be great anxiety for those that grew up in the previous phases. And it will cause much of conflicts and opportunities in the business world. In 1997 Watts Waker and Jim Taylor change a 500 year delta which occurs every 5 centuries. We undergo the transition from the “Age of Reason” to a new chaotic Age of Access. Jeremy Rifkin popularized and expanded this term (Age of access, 2000). Also Peter Drucker argued that change forces disrupt into the continuity of our lives (Age of discontinuity, 1969). In such an age, extrapolating from the past is hopelessly ineffective. He identifies four sources of discontinuity: new technologies, globalization, cultural pluralism, and knowledge capital. Dereck Abell describes 1978 the strategic windows and stresses the importance of the entrance and exit timing of any given strategy (planned obsolescence). Charles Handy argues 1989 that a strategic drift is a gradual change that occurs so subtlety that it is not noticed until it is too late. By contrast, transformational change is sudden and radical. It is typically caused by discontinuities or exogenous shocks in the business environment. Andy Grove mentions that new trends are initiated at the strategic inflection point. Inflection points can be subtle or radical. Malcolm Gladwell talks 2000 about the importance of the tipping point, that point where a trend or fad acquires critical mass and takes off. In 1990 Richard Pascale said “Nothing fails like success” by which he means that yesterday’s success becomes today’s root of weakness. An inquiry and healthy debate that encourage a creative process of self renewal based on constructive conflict produces relief. The idea of Art Kleimer in 1996 is that the right people (heretics, heroes, outlaws, and visionaries) with uncommon approaches helps to embrace chances. In 1996 Adrian Slywotsky displayed change in the business environment that reflect value migrations between industries, between companies, and within companies. He claims that recognizing the patterns behind these value migrations is necessary if we wish to understand the world of chaotic change. He describes businesses as being in a state of strategic anticipation as they try to spot emerging patterns (Profit Patterns, 1999). Slywotsky and his team identified 30 patterns that have transformed industry after industry. Clayton Christensen in 1997 argued that outstanding companies lose their market leadership when confronted with disruptive technology. Great companies can fail precisely because they do everything right since the capabilities of the organization also defines its disabilities. Christensen called the approach to discovering the emerging markets for disruptive technologies agnostic marketing, i.e., marketing under the implicit assumption that no one - not the company, not the customers - can know how or in what quantities a disruptive product can or will be used before they have experience using it. Kees van der Heijden in 1996 used scenario planning to show that change and uncertainty make “optimum strategy” determination impossible. There is neither the time nor the information required for such calculations. The best to hope for is “the most skillful process”. And Peter Schwartz in 1991 means that strategic outcomes cannot be known in advance. Fast changes in the business environment makes it too uncertain to find sustainable value in formulas of excellence or competitive advantage. Sot the sources of competitive advantage cannot be predetermined. But scenario planning (development of multiple outcomes) helps to evaluate possible outcomes. Pierre Wack says 1985 that scenario planning deals with insight, complexity, and subtlety, not with formal analysis and numbers. 1998 Henry Mintzberg examined strategic processes and concluded it was much more fluid and unpredictable than people had thought. Because of this, he could not point to one process that could be called strategic planning. Instead he concludes that there are five types of strategies. They are:Strategy as plan - a direction, guide, course of action - intention rather than actualStrategy as ploy - a maneuver intended to outwit a competitorStrategy as pattern - a consistent pattern of past behavior - realized rather than intendedStrategy as position - locating of brands, products, or companies within the conceptual framework of consumers or other stakeholders - strategy determined primarily by factors outside the firmStrategy as perspective - strategy determined primarily by a master strategist.Mintzberg developed these five types of management strategy further into 10 “schools of thought”, grouped in three categories (prescriptive or normative, how strategic management is actually done, configuration or transformation school). Constantinos Markides 1999 describes strategy formation and implementation as an on-going, never-ending, integrated process requiring continuous reassessment and reformation. Strategic management is planned and emergent, dynamic, and interactive. And J. Moncrieff 1999 recognized that strategy is partially deliberate and partially unplanned. The unplanned element (strategy dynamics) comes from two sources: Emergent strategies (result from the emergence of opportunities and threats in the environment) and Strategies in action (ad hoc actions by many people from all parts of the organization). Chaos theory deals with turbulent systems that rapidly become disordered. Complexity is not quite so unpredictable. It involves multiple agents interacting in such a way that a glimpse of structure may appear. Complex adaptive systems (Axelrod, R., 1999; Holland, J., 1995; Kelly, S. and Allison, M.A., 1999) are systems of multiple actions and reactions. So rather than fear complexity, business should harness it. That can best be done when “there are many participants, numerous interactions, much trial and error learning, and abundant attempts to imitate each other’s successes”. In 2000 E. Dudik proposed that an organization should adapt mechanisms to understand sources and levels of complexity it faces and then transform its organism into a complex adaptive system in order to deal with that complexity. Information and technology driven strategyStrategic management deals more and more with knowledge: Peter Drucker theorized the rise of the “knowledge worker”, so fewer workers would be doing physical labor, and more will apply the mind. In 1984, John Nesbitt theorized that companies that managed information well could obtain an advantage. However this advantage would all but disappear as inexpensive computers made information more accessible. Shoshana Zuboff 1988 analyzed psychological factors in a five-year study of eight pioneering corporations. She made the important distinction between “automating technologies” and “infomating technologies”. And studied the effect that both had on individual workers, managers, and organizational structures. She largely confirmed Peter Drucker's predictions three decades earlier, about the importance of flexible decentralized structure, work teams, knowledge sharing, and the central role of the knowledge worker. Zuboff also detected a new basis for managerial authority, based not on position or hierarchy, but on knowledge (also predicted by Drucker) which she called “participative management”. In 1990 Peter Senge (collaborated with Arie de Geus at Dutch Shell) took de Geus' idea of the learning organization, expanded it, and popularized it. The underlying theory is that a company's ability to gather, analyze, and use information is a necessary requirement for business success in the information age (see organizational learning). Hence an organization would need to be structured such that:people can continuously expand their capacity to learn and be productive,new patterns of thinking are nurtured,collective aspirations are encouraged, andpeople are encouraged to see the “whole picture” together.Senge identified five components of a learning organization, which are:Personal responsibility, self reliance, and mastery — We accept that we are the masters of our own destiny. We make decisions and live with the consequences of them. When a problem needs to be fixed, or an opportunity exploited, we take the initiative to learn the required skills to get it done.Mental models - We need to explore our personal mental models to understand the subtle effect they have on our behavior.Shared vision - The vision of where we want to be in the future is discussed and communicated to all. It provides guidance and energy for the journey ahead.Team learning — We learn together in teams. This involves a shift from “a spirit of advocacy to a spirit of enquiry”.Systems thinking - We look at the whole rather than the parts. This is what Senge calls the “Fifth discipline”. It is the glue that integrates the other four into a coherent strategy. For an alternative approach to the “learning organization”, see Garratt, B. (1987).Thomas Stewart in 1997 described the investment an organization makes in knowledge – the intellectual capital. It comprises human capital (the knowledge inside the heads of employees), customer capital (the knowledge inside the heads of customers that decide to buy from you), and structural capital (the knowledge that resides in the company itself). And in the same year, Manuel Castells notes that network societies are characterized by globalization, organizations structured as networks, instability of employment, and a social divide between those with access to information technology and those without. The blur equation (Stan Davis, Christopher Meyer, 1998) combines three variables (speed of change, Internet connectivity, and intangible knowledge value) that define a society's rate of blur. The three variables interact and reinforce each other making this relationship highly non-linear. The real experience was called by Regis McKenna in 1997 and addresses life in the high tech information age – he calls it a real time experience, since events occur in real time. Now is what matters for ever more demanding customers. Pricing will become variable pricing that changes with each transaction. And customers expect immediate service, customized to their needs, and will be prepared to pay a premium price for it. He claimed that the new basis for competition will be time based competition. Some found that a shift in the nature of competition. In industries with high technology content, technical standards become established and this gives the dominant firm a near monopoly (Geoffrey Moore, 1991; R. Frank and P. Cook, 1995). The same is true of networked industries in which interoperability requires compatibility between users. And by focusing on one group of customers at a time, using each group as a base for marketing to the next group. A promising idea is to create a bandwagon effect so that your product becomes a de facto standard. In 1997 Evans and Wurster showed with their publication Blown to Bits how industries with a high information component are being transformed. The music industry is desperately looking for a new business model. Start-up savvy firms, not to burden cumbersome physical assets, are changing the competitive landscape, redefining market segments, and disinter mediating ancestral channels. One manifestation of this is personalized marketing. Information technology allows marketers to treat each individual as its own market, a market of one. Traditional ideas of market segments will no longer be relevant if personalized marketing is successful. The balanced scorecard (Kaplan, R. and Norton, D. 1992) measures several factors financial, marketing, production, organizational development, and new product development in order to achieve a 'balanced' perspective. It shows for example, that access to information systems allows senior managers to take a much more comprehensive view of strategic management than ever before.Strategic Management PsychologyStrategic management relates to psychology: Chester Barnard’s The Function of the Executive, published in 1938 sees executive decision-making, based on his own experience as a business executive, as informal, intuitive, non-routinized processes, and involving primarily oral, 2-way communications. The terms pertinent to it (feeling, judgement, sense, proportion, balance, appropriateness) are a matter of art rather than science. In 1973 Henry Mintzberg found out that senior managers typically deal with unpredictable situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. The manager works in an environment of stimulus-response, and he develops in his work a clear preference for live action. In 1982 John Kotter measured daily activities of 15 executives and concluded that they spent most of their time developing and working a network of relationships from which they gained general insights and specific details to be used in making strategic decisions. They tended to use “mental road maps” rather than systematic planning techniques. Daniel Isenberg studied executives (1984, 1986) and came to the conclusion, that their decision-making were highly intuitive. Those senior managers often sensed what they were going to do before they could explain why. So he claims that the complexity of strategic decisions and the resultant information uncertainty is one of the reasons for this. And Shoshana Zuboff (1988) explained that information technology divides senior managers (who typically make strategic decisions) and operational level managers (who typically make routine decisions) even more. She claimed that since computers facilitated routine processes, these activities were moved further down the hierarchy, leaving senior management free for strategic decision making (deskilled). According to Abraham Zaleznik (1977) there are leaders (visionaries) who inspire and care about substance. And there are managers who care about process, plans, and form. In 1989 he said that the main factor, why American business declined in the 70’s and 80’s, was the rise of managers. Because lacking leadership qualities is most damaging at the level of strategic management where it can paralyze an entire organization. In 1994 Corner, Kinichi, and Keats claimed that strategic decision making in organizations occurs at two levels: individual and aggregate. Those processes are not independent, but interact at each stage of the process (getting attention, encoding information, storage and retrieval of information, strategic choice, strategic outcome, and feedback). Shortcoming of Strategic managementStrategic management is not free of perfidies: Here a list of shortcomings of strategic management and strategic plans:Failure to Understand the CustomerWhy do they buyIs there a real need for the productInadequate or incorrect marketing research
inability to Predict Environmental ReactionWhat will competitors do Fighting brands and pricesWill government intervene
Over-Estmation of Resource CompetenceCan the staff, equipment, and processes handle the new strategyFailure to develop new employee and management skills
Failure to CoordinateReporting and control relationships not adequateOrganizational structure not flexible enough
Failure to Obtain Executive CommitmentFailure to get management involved right from the startFailure to obtain sufficient company resources to accomplish task
Failure to Obtain Employee CommitmentNew strategy not well explained to employeesNo incentives given to workers to embrace the new strategy
Under-Estimation of Time RequirementsNo critical path analysis done
Failure to follow the plan no follow through after initial planningno tracking of progress against planno consequences for above
Failure to manage changeInadequate understanding of the internal resistance to changeLack of vision on the relationships between processes, technology and organization
Poor communicationsInsufficient information sharing among stakeholdersExclusion of stakeholders and delegates.Every kind of control and direction can restrain creativity. And since we live now in a uncertain and ambiguous world, fluidity can be more helpful than a narrow strategic compass. Strategies that are well internalized into an organism, can lead to myopia (Levitt, Marketing Myopia). The scope of most theories seems to be too narrow to build a complete corporate strategy on, or too general and abstract to be applicable to specific situations. And most of them solve yesterday’s problems, because when they arrive they are too late. As the basic purpose of strategic management is to match a company's strategy with the business environment it is in, and this environment is constantly changing, it requires a continuous flow of new business theory to keep pace with it.
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A company may pursues several strategies of different levels: An overall corporate strategy, a business level strategy (perhaps congruent with the corporate strategy), diverse functional strategies (OM , HRM etc.), and a global strategy which can aim to guide a whole enterprise or more simple just some functional areas. Besides them, there are strategies that relate to geographical expansion:
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What a Successful Global Strategy MakesFirms who seek for a global promising strategy should take into account the following steps:1. Developing a Core StrategyFor enterprises there is a need to have a core strategy that focuses on elemental and that gives a basis for sustainable advantage. A global successful strategy should first be proven in the home market. The core strategy can be split into two separate dimensions – the type of need met and the type of technology used to meet that need. Some key elements of a core strategy needs are: 1. type of products/services to offer, 2. customers to serve, 3. geographic markets served, 4. sources of sustainable competitive advantage, 5 functional strategy for value-adding activities, 6. competitive posture including competitors to target, 7. investment strategy.2. Internationalizing the Core StrategyThe process of internationalizing the strategy includes to identify: 1. market attractiveness, 2. potential competition, 3. ways how to adapt to local conditions, and 4. how to manage business on a larger geographic area. If a firm stops here it wouldn’t be a global approach and could result in a weakened market position. Why? Because the differences of countries served absorbs plenty of performance. A global strategy has to fit into international business, but then needs to change the rules.3. Globalizing the International StrategyGlobalizing helps to overcome the above mentioned disadvantages. Hence a firm can take usage of business leverages for their competitive advantage. By systematically analyzing the own industry, companies find answers what part of the strategy can be globalized. A industry’s globalization drivers create the potential for a worldwide business to achieve the benefits of global strategy. To achieve these benefits, a worldwide business needs to set its global strategy levers (e.g. use of globally standardized products) appropriately relative to the industry drivers, and relative to the position and resources of the business and its parent company. See also Appendix I: A Framework for Global Strategy. A globalized strategy means to be able to go anywhere, deploy any assets, and access any resources, and to maximize profits on a global scale. See also Appendix II: The Globalization Triangle.Financial Benefits of Internationalization and GlobalizationIt is common that outdated products were shifted from industrialized countries to developing countries. This allows extended product life cycles and ongoing returns on the initial investments. And that in turn is an advantage of international trade. And since political and other environmental risks can be difficult to manage for companies committed to one or a few national markets, internationalized firms can shift production, promotion, distribution, and even development among a number of markets. So they can take advantage (or avoid) of local conditions or increase their bargaining power while lowering the risks mentioned above. But what are now the benefits of globalization? Seeking for a global integration is a relatively new phenomenon. Studies of sourcing strategies identified various sourcing patterns adopted by European and Japanese multinational manufacturing firms in serving the U.S. market. The founding was that the product's market performance is not at all related to its PLC-stage in world trade or to production location, but is positively related to the internal components sourcing and negatively related to the product adaptation. So businesses with globally standardized products performed better The findings strongly support the call for a global product. (see Levitt). A 1994 study of American and Japanese companies found a strong positive relationship between the use of global strategy and superior performance in terms of relative market share and relative profitability. And as mentioned above, a global strategy allows to bundle performance. And this should also be truth for financial terms like: ROA, ROI, and formulas like that.Industry Globalization DriversAn industry’s condition is reflected by globalization drivers that determine the potential and need for global competition with a global strategy. The groups of drivers that support to feel out that are:1. Market DriversThe most common market drivers are: 1. per capita income, 2. convergence of lifestyles, 3. global customers caused by increased travel, 4. growth of local channels to global participants, 5. establishment of world brands, 6. regional medias become global.2. Cost DriversSome of the cost drivers are: 1. economies of scale/scope (-), 2. experience curve (-), 3. advances in transportation (-), 4. industrializing emerging countries (-), 5. product development vs. market-life (+). Note: + means rise of costs, - means drop of costs. 3. Government DriversGovernment drivers are: 1. reduction of barriers (tariff/non-tariff), 2. creation of trading blocs, 3. world trade institutions, 4. declining role of regions and governments, 5. privatization of markets and opening of markets, 6. increasing participation of “new countries”.4. Competitive DriversThose group of drivers include: 1. increase in world trade, 2. more international competitive battlegrounds, 3. ownership by foreign acquirers, 3. global competitors, 4. “born global” e-companies, 5. global networks. Yip notes that: “other groupings are possible”. But he distinguish these four drivers among the sources. Because it should “allow managers more easily to identify and deal with them”. And he says that: “each industry has a level of globalization potential that is determined by external drivers”. Regarding those four group of drivers, it is clear that some industries have more globalization potential than others, and the potential also changes. See also Appendix II: Industry Globalization Potential.Global Strategy LeversThe levers for a global strategy describe the dimensions that show whether a chosen strategy is a more multi-local or more a global one. When deciding for a global strategy, managers have to deal with those dimensions and therefore to determine the degree of globalization a company wants to execute. The 5 groups of global strategy levers are:1. Market ParticipationA firm’s market participation involves the choice of countries in which a firm wants to start doing business and the level of activity (market share etc.) a company pursues there. A global strategy does not support the selection of single countries on the basis of their stand-alone potential, but the selection of countries on the basis of their potential contribution to globalization benefits. E.g. to enter an unattractive market just to disrupt a competitor’s home market.2. Products and ServicesThis dimension deals with the question whether or not to offer different goods and services in different countries. And the degree of adaption of goods and services to local conditions. A global strategy favors highly standardized core products with little need for local adaption. 3. Activity LocationActivity location deals with the question where to add values to the own portfolio (research, production, sales, etc.). A global strategy allows to break up the value chain and to conduct different activities in different countries. This enables to settle activities on locations best qualified for it. The basis then should be a systematic placement of the value chain around the globe.4. MarketingOf interest here is the degree of the usage of same marketing elements (brands etc.) in different countries. A global strategy favors a uniform marketing approach around the globe. If there is little or no adaption to local conditions, the goods and services represent a global positioning. With local adaption, marketing can create universalistic, non-national images (Benetton).5. Competitive MovesThis lever deals with the extend of competitive moves in individual countries a worldwide business makes as a part of a global strategy. In contrast to a multilocal strategy, a global strategy fights its competitors not on a single country basis in separate contests. Furthermore competitive moves are integrated across countries. The same type of move is made in different countries and so competitors are attacked at the same time or in sequences in different countries.Benefits of a Global StrategyThe usage of global strategy levers can lead to benefits of four major categories:1. Reducing CostsEconomies of scale by a pooling of production or other activities for two or more countries. Labor intensive manufacturing or services can shift these activities to low-cost countries. The more products produced (standardized), the lower the production costs are. Moving products from location to location (production and sale) enhances flexibility and can lead to short term advantages, called opportunities. Possibly a firm’s bargaining power can be enhanced when sourcing central for its manufacturing. 2. Improved quality of goods & services and programsGlobal focus is seen as one of the reasons for Japanese companies success in automobiles. Further the concentration on a few products rather than on a bunch of them allows to focus resources and can lead to improved quality of goods and services.3. Enhanced Customer PreferenceA worldwide supply of standardized products can benefit from worldwide familiarity which multinational customers may appreciate. Customer preference can be enhanced through reinforcement of global availability, global serviceability, and global recognition.4. Increased Competitive LeverageA global strategy gives a firm more room for attacks and counterattacks against its competitors.5. Drawbacks of Global StrategyA global strategy can also mean higher coordination cost for management, resulting in increased reporting, requirements, and even added staff. Over-centralization could hurt an organization’s efficiency, e.g. local motivation and morale. The (over-) standardization of products could result in products that fully satisfy nobody.6. Finding the BalanceAn ideal strategy matches the level of globalization with the globalization potential of an industry a firm is in. But high globalization potential for globally standardized products does not mean high globalization potential for the manufacturing. For example a product that lead to high transportation costs relative to its value isn’t predestined to be produced central. And global strategies are typically expensive to implement initially even though there should be great cost savings and revenue gains later. Yip states in his book a matrix that combines mentioned global strategy levers and benefits of global strategies and related possible drawbacks. Organization and management factors determine a business’s ability to develop and implement a global strategy, like: 1. Organization structure; 2. Management processes; 3. People; 4. and last but not least Culture.Because global strategies are still mostly executed by large (multinational) firms, most of the theory relates to their situations they face when doing business. Such firms that pursue a global strategy face benefits of cost reductions but hardly any drawback for local responsiveness. That allows them to sell standardized products worldwide. And so these firms are able to take advantage of scale economies & experience curve effects, because they are able to mass-produce a standard product which can be exported (providing that demand is greater than the costs involved). However, fixed costs (capital equipment) are often substantial for them. But that’s not of the same tenor for SSU’s who want to become global successfully. Such entities should more focus on factors that MNE’s can’t and turn them into advantages, like: fast decision making (when bringing goods and services to markets, choosing potential markets) exemplify flexibility (making agreements with foreign market partners) because start-ups do not face much internal political limitations when they have to act and react.
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Economies of scope or financial economies between businesses and market power through additional business-levels are main sources of value creation when firms pursue a diversifying strategy. Sharing of activities or transfer of core competencies is feasible through choosing a related diversification strategy. Regarding this, a diversified strategy is preferable. But before that, a single or dominant business corporate-level strategy may be the right choice. A way to implement a corporate-level strategy is by applying subjective and objective criteria – in other words through strategic and financial criteria. Both are instruments of organizational control. Tangible resources and core competencies are subject of transfer between businesses and between them and the corporate office. In general transfer is there possible, where business units are related to each other. Activity sharing can be costly to implement and coordinate and possibly creates unequal benefits for the single businesses. Managers are likely to loose risk-taking behavior (entrepreneurship) when they are accustomed with activity sharing. Financial economies are often obtained by rigorous control of processes like efficient allocating of resources or the restructuring of a target firm’s assets. That becomes discernible in an unrelated diversification strategy. The multidivisional corporate-level strategy (M-form) exists in many forms. One of them is the cooperative M-form strategy that has a centralized corporate office and extensive integrating mechanisms. Incentives of each division are linked to the overall corporate performance. Another form is the related linked SBU M-form that separates profit centers in diversified firms. Those profit centers may offer similar products, but do not share activities or resources together. The competitive M-form is characterized by a lack of centralization and integration. Single businesses are measured by their specific financial objectives. Besides that, there are some unique forms of combinations of the multidimensional strategy. Reasons for diversification are many. Some of them are: tax-incentives, antitrust government policies, performance disappointments, risk and cash-flow uncertainties and the enhancement of a corporation’s value-creation. There is a risk of over diversification and related with that a decrease in value-creation. Managers motives to diversify are many and not unimportant are those that help them to increase their power and compensation within a corporation. As discussed before, the external environment as well as the internal organization is something managers have to strongly analyze when dealing with diversification.
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A firm tries to gain competitive advantage by exploitation of core competencies in specific product markets. A business level strategy summarizes its integrated and coordinated set of commitments and actions. Well known are Michael Porter’s five business level strategies: 1. Cost leadership; 2. Differentiation; 3. Focused cost leadership; 4. Focused differentiation; and 5. Integrated cost leadership. Firms keep their competitiveness when they are able to exploit new core competencies faster than its competitors are able to mimic the competitive advantage yielded by the firm’s current competencies. Three issues (who, what and how) refer to a customer group’s needs a firm wants to satisfy. It achieves those value creation by utilization of its core competencies. The global economy increases the segmentation of markets and creates opportunities for firms to find specific customer needs. Structure and strategy influence each other. An effective manager recognizes very early needs for structural changes and quickly modifies structure for appropriate embedding of a firm’s strategy in its environment. Hence strategies have more influence on structures than vice versa. A cost leadership strategy needs centralized functional structures that allow efficient manufacturing and well designed processes. A differentiation strategy requires decentralized implementation decisions for marketing and individual organizations. A simple structure tends to come along with a focus strategy and thus is often found in small companies. Integrated low cost strategy needs both a transparent functional structure and well-developed processes to manage partial centralization and semi-specialized labor. So business level strategies are implemented through functional areas and structures. A cost leadership strategist seeks for competitive advantage through no-frills, standardized products for average customers within an industry. A differentiation of its products combined with low-cost production compared to industry’s average, should allow this producer to keep ahead of its competition. Risks associated with that strategy are substitution by newer technologies, undetected customer needs that are changing, and competitor’s ability to imitate cost leader’s competitive advantage through strategic actions. Products that are sold to premium prices make the customer believe that the cost/feature combination is competitive through the product’s uniqueness, differentiation, or services. Any dimension that a customer group values is a field for differentiation of one’s product from that of its competitors. The more differentiated a firm’s products are, the more buffered it is from competitors, attainable with a differentiation strategy. A firm has to deal with several risks that appear when it works out a products and services differentiation strategy: 1. Customer group’s decision that it will no longer pay a premium price for a differentiated product but prefer a low-cost product; 2. The inability to create a differentiation for which customers are willing to pay a premium price; 3. Competitors are able to deliver products to customers with similar features like differentiated products but to lower prices; 4. Counterfeiting differentiated products with knock-offs to lower prices; 5. If companies strategically focus on cost leadership or differentiation, they serve the needs of narrow competitive segments (buyer group, product segment, geographic area). It pays when firms have the core competencies required to provide value to narrow competitive segments that deliver value to customers which exceeds value delivered from firms that serve on an industry-wide basis. Firms that apply a focus strategy bear the risk to: 1. Get out focused by competitors that are able to focus even more narrowly on defined competitive segments; 2. Industry-wide competitors that decide also to serve a customer group’s specialized needs; 3. Shrink of differentiated needs between customers in a narrow competitive segment and the industry-wide market; 4. A “Stuck in the middle” phenomenon occurs when firms concentrate on a cost leadership or differentiation strategy but are not able to sell cheap enough or to serve enough value to its customers versus its competitors. To care about the daily business and sales is a task on business-level. That includes the question why people buy a firm’s products. There are two reasons for that: 1. The basic needs of customers – this is the "qualifying dimension" (core features to offer to attract customers, e.g. before buying a car, there is a need for a license and finance). 2. The specific needs the product should fulfill – the "determining dimensions" (factors that actually affect the customer's purchase of a specific product or brand).
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Globalization and deregulation affects many industries and prepares the ground for acquisition activities of global competitors that pursue a broader value-creation. Firms use acquisition strategies in order to:increase market-powerget access to new markets and regionssave product development expensesspeed-up new market entriesreduce risks when entering new businessesbecome more diversifiedenhance their learning and knowledge-basedevelop a different business-portfolioand with that reshape their competitive scopeDifficulties related with acquisition strategies are:effective integration of the involved firmscorrectly evaluating the target firm’s valuecreating debt loads which does preclude long-term investmentsoverestimating synergy-potentialbuilding of too much diversified corporationstime-consuming environment for managers that deal with acquisitionextensive bureaucratic rather than strategic controlSome of the above mentioned problem-areas are due to a wrong implementation approach or simply because of created companies that are too big to manage. Contrary to that shows an effective acquisition a characteristic like:complementary resources of both the acquiring and the target firm as basis of core competencies in the newly created firmeasy integration of the target firm due to a friendly acquisitionselection and purchase is based on due diligence enough cash or debt capacity to make the acquisitionpoor performing units are sold offfirms have experience in adapting changesinnovation and R&D are key in the newly created firmDownsizing is a form of restructuring which often requires to trim management-levels and to lay out employees. In the latter case, the loss of valuable knowledge is a huge risk and can put strain on long-term success. Another way to improve a firm’s performance is by process-reengineering and eliminating of ineffective management methods.
Downscoping is a restructuring method that focuses on reduction of diversification levels. Thereby a firm get rid of unrelated businesses for the purpose of focusing on its core businesses and to achieve a better performances.
A leveraged buyouts (LBO) are another form of restructuring and describes the purchasing of a firm in order to establish a private equity. Buyouts are practiced to improve efficiency and performance and for a successful resale afterwards. Often they are financed through debt. Whole-firm LBO, Employee buyouts and Management-buyouts are the three types of LBO’s and provide clear managerial incentives.
Strategic control is mainly the reason for restructuring activities. Whereas downscoping is the most closely one to establish and use strategic control.
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As mentioned before a proven internationalization strategy can be essential before changing to the global scale. The combination of Internet and mobile telecommunication alleviates global transactions and is recognized as an emerging motivator. Traditional motivators of internationalization are extending product life-cycle, securing key resources, and access to low-cost labor. Further, pressure for global integration is increasing because of borderless demand of commodities. Drivers for internationalization strategies are benefits like:increased market sizeopportunity to earn a return on large investmentseconomies of scale and scopelearning effectsadvantage of locationsThree types of international corporate-level strategies are known: 1. The multi-domestic strategy that focuses on country-to-country competition. Typically for this strategy are decentralized strategic and operating decisions in each country. So each country-unit can tailor its goods and services to its market. This strategy is implemented through a company’s geographic area structure spread over the world. 2. The global strategy that assumes a high level of standardization of products and services across countries, regions and markets. Companies use the global product division structure to implement it. Its characteristics are global centralization of strategic and operating decisions to gain economies of scope and scale. Decisions are reached at the headquarter. 3. The transnational strategy combines aspects of both the multi-domestic and the global strategies so as to strengthen country responsiveness and centralized decision making and coordination. Such a strategy sways between integration and non-integration, formalization and non-formalization. For that companies use a combination structure which requires an integrated network and a culture of individual commitment where continual training is key. Most notably some of the large corporations are trying to use a transnational strategy to properly respond to environmental trends. Such trends cause those companies to consider needs for both global efficiency and local responsiveness in order to manage their broad output portfolio. According to recent research, international strategies bring liabilities with it that can be difficult to overcome. That increases a firm’s risk and cost (for example terrorist-attacks). It is recognized as an advantage of international strategies (in oppose to a global strategy), to make use of know-how about specific markets, cultures, locations, and to focus on its own resources. But such strategies aim to compete only in certain regions of the world. Companies enter international markets through several ways: 1. Exporting; 2. Licensing; 3. Forming strategic alliances; 4. Making acquisitions; 5. Establishing new wholly owned subsidiaries. The lowest cost and risk are related with exporting and licensing. On the other end of the scale lies the risky option of establishing of wholly owned subsidiaries. But the more risk the way is, the more control a company gains about its foreign business. An international diversification may enables a firm to sustain a large-scale R&D program and with that works as a lever for innovation. Because internationalization means access to a larger markets and may leads to faster return on investments. An effectively implemented and well managed diversification strategy allows above-average returns. Economies of scope, learning and innovation can further elevate above-average returns. Always when doing cross-border business, political risks (government instability) and economical risks (currency fluctuation) are related with that. Several factors like trade barriers, logistical costs, cultural diversity and so on, can put a strain on international businesses. And complicate an effectively managed expansion.
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With strategic alliances companies try to combine resources and capabilities to create competitive advantage. The three basic distinction of strategic alliances are:Joint-Venture Firms own equal shares of a new venture that is intended to develop competitive advantage.Equity Strategic Alliances Firms own different shares of a newly created venture.Non-Equity Alliances Firms cooperate through a contractual relationship.
The latter one comprises also outsourcing activities, whereby firms form a non-equity strategic alliance. When firms seek to achieve shared objectives, they form a strategy of network cooperation. With that a firm has the opportunity to gain access to its partner’s other partnerships (stakeholders). Sometimes in such combinations, a firm functions as a strategic center for resource- and capability-sharing. And that strengthens the success-rate of such a strategy. Network cooperative strategies are used to form either stable or dynamic cooperative partnerships. In mature industries, firms use stable networks so as to exploit competitive advantages in new areas. Dynamic networks are used in rapidly changing environments where product innovations frequently appear on the agenda. Hence, those kind of networking is used to explore new innovative solutions. Another form of strategic cooperation is the collusion between firms for tacit cooperation within their industry. This to shorten the output below it’s potential in order to heighten prices above normal competitive levels. Those kind of strategy is prohibited in most states. And globalization derogates the numbers of collusion sanctioned by governments. Reasons for use of cooperative strategies are to enter restricted markets (in slow-cycle markets), to change quickly one’s competitive advantage position (in fast-cycle markets), and to gain market power (in slow-cycle markets). Companies use cooperative strategies on a business level in order to improve their performance in individual markets. With that companies combine their resources and capabilities and there are four types of business level cooperative strategies:Vertical and Horizontal Complementary Alliances In different (vertical) or same (horizontal) parts of the value-chain.Competition Responding Strategies So to respond to strategic moves of competitors.Competition Reducing Strategies In order to avoid excessive competition.Uncertainty Reducing Strategies That allows to hedge against risks of uncertain competition.
Sustainable advantage is more likely obtainable by complementary alliances than by competition reducing. Companies use cooperative strategies on a corporate level in order to pursue product an/or geographic diversification. And when they choose a diversifying strategy, they agree to share their resources and capabilities. So to enter new markets or produce new products together. When seeking for economies of scope, firms choose synergistic alliances. And so they concentrate on horizontal exchange on corporate level - Franchising is one of those forms. A cross-border alliance is a form of international cooperative strategy and used to exert superiority in markets outside their domestic market or to bypass governmental restrictions regarding Mergers & Acquisitions. Cross-border alliances are then risky, when partners aren’t fully aware of each other’s purpose for participation in this partnership. In general, cooperative strategies aren’t risk free. Failures are likely when partners miss to represent competencies or fail to make them available. Or one of the firms may be held hostage through asset-specific investments. Trust is clearly a guarantor for sustainability of cooperative strategies. And trustworthiness is valued by partners, because it reduces managing costs (formal contracts, extensive monitoring) and maximizes opportunity exploitation.
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Marketing ManagementAs every functional strategy, marketing management can be seen as an appendage of strategic management. Brian Norris explained what marketing is and what it makes effective: Marketing is a four step process. Beginning with the first step of analyzing and defining a qualified universe of potential users or buyers. The second phase deals with marketing effort that aims to succeed capturing the attention of the intended buyers. Third phase means the systematic effort to put into getting the prospects to accept the concepts or propositions being offered via the marketing effort. Finally, with all three of the previous steps achieved, the marketer must convert the prospective buyer into an actual buyer by guiding their action in that way, that they buy the product (purchase, rent, call, download, subscribe, refer, sell, follow the law, become a member, etc.). This four step process pertains primarily to the recruitment phase of marketing. Many marketing activities focus on retention of existing clients and customers. This process shifts marketer to think about a certain kind of customer relationship by enhancing the benefits that the client bought in the first place. That should help to withstand competitor’s offences. And what are the 4-P’s of Marketing? The term marketing refers in professional usage to the force that cares about the customer. Hence products are developed to meet the needs of customers (groups or individuals). The 4-P’s originated from McCarthy which he used to refer to the 4 main activities: Product (specifications of goods and services, relation to the end-user's needs and wants). Pricing (process of setting prices for products). Promotion (advertising, sales promotion, publicity, and personal selling of a product, brand, or a company). Place or distribution (how to bring the product to the customer).Those elements are called the marketing mix. A marketer task is to use these variables to craft a marketing plan. When selling other than simple consumer products (Industrial products, services, and high value consumer products) an adjustments of this model can be necessary. Industrial marketing requires long term contractual agreements. Relationship marketing attempts to do this by looking at marketing from a long term relationship perspective rather than individual transactions. The meaning of exchanges between seller and buyers can be structured in more detail referring to different kind of markets (geographic markets, type of buyers, etc.). And several terms are used to better address markets: 1. consumer markets B2C, 2. business to business B2B, 3. institutional-, and 4. reseller markets. Internet marketing is a relatively new platform for marketing activities (e-marketing, online marketing). It can help to perfect the segmentation strategy used in traditional marketing. Because it targets the segments more precisely (personalized marketing, one-to-one marketing). A marketing plan is a structured allocation of the 4-P's and aims to meet the wants and needs of target costumers. Often marketers start with doing some marketing research to determine what consumers really want and what they are willing to pay for. At best it gives the marketer the information needed to build sustainable competitive advantage. Marketing management describes all activities that are executed in order to increase sales. As mentioned above to focus on the customer is key. That means also that activities and products are centered on customer needs. There are two ways to do that:Consumer-driven Approach concentrates on consumer wants as the drivers for all strategic marketing decisions. No strategy is applied before it passed a consumer research test. No spending for R&D and no developing of products is pursued for products that people will not buy.Product-innovation Approach pursues the idea of producing innovations. And then tries to develop a market for them. Innovation drives the process and not the customer. But marketing research is conducted to ensure that profitable market segment(s) exists for the innovation. This approach assumes that customers are not knowing what could serve emerging needs in the future - so why expect that they know what they will buy in the future? Mostly research and development focused companies successfully focus on product innovation.
Promotion is perhaps the most influential part of marketing and hence let’s start with that: Promotion describes the process of information dissemination about products, product lines, brands, or companies. It is comprised of four subcategories: 1. advertising, 2. personal selling, 3. sales promotion, 4. and publicity and public relations. These variables in a promotional plan in order to increase sales, launch new products, position products, competitive actions, create brand equity, or create a corporate image. Branding aims to pull together all the information connected with a brand carrier (product, service or an enterprise). So a brand comes to the point in terms of desired associations others should have about the brand carrier. A brand includes a name, a logo, and other visual elements (images, symbols etc.). branding yields also to the term of trademark, where legal issues are solved. The brand experience itself consists of all the points of contact with a brand a prospect buyer has. The brand image is a symbolic construct that buyers have in mind regarding the information and expectations associated with the brand carrier. Branding incorporates all the promises a brand carrier has in terms of quality, characteristic personality, and every other kind of value a brand owner is able to offer in the marketplace. A brand equity expresses the value a brand attains in a certain marketplace. Brand management aims to maintain all the above mentioned factors. It is then successful, when consumers look on branding as an important value added aspect of an offering. Which possibly allows to pocket premium prices. Branding in the past ought to help manufacturers make their commodities familiar for buyers. Positioning describes the technique by which marketers aim to occupy a certain place in a target market. Positioning is something that is done in the minds of the target market. The occupied position expresses the relative position to competitors. And it shows how potential buyers perceive a market offering’s value. And it ought to base on a product's sustainable competitive advantage. A certain position is achieved by: 1. specific product features, 2. specific benefits, needs, or solutions, 3. specific use categories, 4. specific usage occasions, 5. discrimination to other offerings, 6. and by expressing cultural values. The following steps need to be done in order to position the own offering: 1. identify competitor offerings, 2. find out a product’s range in the market place, 3. collect buyer information (perceptions and relevant attributes), 4. define a product’s core values, 5. determine a product’s current position, 6. decide for markets to target, 7. test market suitability (competing products, ideal vector, optimum market position). It’s essential to state the values customers derive and the attributes offering. A marketer can take usage of surveys or statistical techniques (multi dimensional scaling, factor analysis, conjoint analysis, logic analysis) to check the success of positioning actions. A firm’s position has to be linked to the corporate image or vice versa. There should be a as high as possible congruency between the overall corporate image and every single position of the market offerings. Otherwise potential buyers get confused and that almost surely hurts sales. For example a company that has a social image but starts to lower social welfare. The marketing plan (and every single action) also should be in consistence with the overall corporate image. For example it’s hardly beneficial for a luxury car manufacturer to choose garagists that can’t ensure high quality services. So let’s have a quick view at corporate image. This term expresses primarily the image created by marketers through promotional actions in the public. So it mirrors how a corporation is perceived in target markets. An image is often shaped by external influencers like news media, journalists, labor unions, environmental organizations, and other NGOs. A successful corporate image should be believable and reflect the actual behavior of a firm. Marketing strategies are unique in nature, appropriate to specific situations firms are in. But there are common strategies categorized in schemes. Because almost every strategy can be led back to a generic marketing strategy as the following:Porter Generic StrategiesAs we have enumerated before: Cost leadership, Product differentiation, and Market segmentation.Strategies Classified by Market Dominance Which position one wants to capture in the market: Leader, Challenger, Follower, Nicher, Only Producer or something similar.Stage of Development StrategiesThe idea is to hunt, being hunted, or being lost: Pioneers, Close followers, or Late followers.Innovation Strategies These strategies call for either new product development or a new business model innovation. New product development.Growth Strategies These strategies address to the question “how to grow?”: Horizontal integration, Vertical integration, Diversification (or conglomeration), Intensification.Aggressiveness Strategies The strategist may asks himself “grow or not grow- if yes, how fast?”: Building, Holding, Harvesting.Strategies of CategoriesOr strategies divided into categories: Prospector, Analyzer, Defender, Reactor.Marketing warfare strategies Here the marketer will have to show his color, in terms of marketing warfare strategy he wants to pursue: Offensive Strategy, Defensive Strategy, Flanking Strategy, Guerrilla Strategy.
The art of marketing means now to assemble the right unique strategy according to one or more generic strategies mentioned above. Marketing discriminates buyers into groups (age, sex, location wealth etc.) and aims to target these groups with the 4-P process. And it uses platforms (mass media etc.) to influence a buyer’s decision process. Some critics find that marketer’s ability to change buyers behavior can be too powerful. And some see marketing as a systematic method to exploit consumers and workers by treating people as commodities whose purpose is to consume. For more details about the marketing area mentioned here visit the following link.Operations-StrategyThe term operations refers to processes within a firm. So the operations function is responsible to transform certain inputs into finished goods and services that are sold on a marketplace. Let’s assume that such processes should add value in order to assist a firm’s value-chain. Process quality affects production. But not every producer of goods and services is affected equivalent. An efficient value-chain requires processes that are tightly aligned to each other. Process differences exists among mass production and specialization, in terms of the amount of single activities that have to be completed. The idea to “compete with operations” aims to gain advantage through effective and efficient processes. The first task is to find the sound basis for competitiveness in the marketplace. So with recognition and definition of process inefficiencies, the collection of information as well as the analysis of them can start. Here a simple approach is to ask for possible alternatives and, if there are some, to choose the most attractive one. With that the strategy stands. Now it has to be implemented in the right (effective and efficient) way. And the value chain’s performance will show the outcome of change. The idea of “operations as a competitive weapon” targets to outperform the competition through applying several points:Management of Customer Relations Or so called CRM which defines the quality of the exchange a company has with its customers (Marketing & Sale, Manufacturing or Services, and Accounting etc.).Development of New Market Offerings (services, products) to (better) fulfill changed market-needs. Unbureaucratic Order FulfillmentA smooth and nice business administration that prevents from disruption.Supplier RelationshipFor an excellent procedure of all supply-chain transactions - from suppliers to customers.
The term productivity describes the value of outputs divided by the values of inputs. Competitive advantage can be reached by choosing the right changes (e.g. new technology, new operations) and by the effective management of them, as well as by an efficient operation of them. Ethical as well as environmental issues, and diverse workforce do influence an operational performance. The outcome depends on how well several steps are implemented, like choosing a unifying strategy, redesigning the organizational structure, setting goals and reward systems trans-sectoral, improving the ICT-system, set up (or influence) informal social systems (cafeteria, exercise rooms etc.) and employee selection and promotion helps foster cross-functional coordination. The strategy decision is clearly one of the most important considerations an operations manager faces. If one does not choose the right one, it is likely that resources are wasted for years. And so it is also evident, that all decisions should reflect the corporate strategy. The decision making process includes: 1. recognize and define the problem; 2. collect the information needed to analyze possible alternatives; 3. choose the most attractive alternative; 4. Implement the chosen strategy. Some of those steps are strategic, some are tactical. Clearly strategy only works if the tactic is well realized. There are some questions to answer preliminary to the decision making: 1. Is the predicted sales volume of goods and service sufficient? 2. How low must the variable cost per unit be to break even? 3. How low must the fixed cost be to break even? 4. How do price levels affect the break even volume? So the formal procedures for decision making are: 1. break-even analysis; 2. preference matrix; 3. decision theory; 4. decision tree. So what is a operations strategy? To find the right one, it is essential to have a corporate strategy. The market analysis categorizes the firm’s customers and their needs and assesses the competitors strengths. With that a company can now develop its competitive priorities for processes that deal with internal and external customers. That helps to develop the right goods and services and to be competitive in the marketplace. To develop a corporate strategy involves three considerations: 1. monitoring and adjusting to changes in the business environment; 2. identifying and developing the firm’s core competencies; 3. developing the firm’s core processes. The core competencies are the unique resources and strengths that a management considers when formulating strategy, like: 1. workforce; 2. facilities; 3. market and financial know-how; 4. systems and technology. That sets the basis for a firm’s core processes. These are: 1. customer relationship; 2. new service/products development; 3. order fulfillment; 4. supplier relationship. Market analysis helps to define a customer driven strategy that in turn requires market segmentation. Ergo identifying customer groups with enough in common to warrant the design of goods and services. Further it enables to assess needs of each segment and assesses how well competitors are addressing those needs. Then a firm can differentiate itself from competitors. Market needs may be grouped as follows: 1. service or product needs (price, quality, customization); 2. delivery system needs (availability, convenience, courtesy, safety, accuracy, reliability, delivery speed, delivery dependability); 3. volume needs (high or low, variability, predictability); 4. other needs (reputation, experience, after-sale support, ability to invest internationally, competent legal service, goods and services design capability). There are nine core competencies in operations: 1. cost (low-cost); 2. top quality; 3. consistent quality; 4. delivery speed; 5. on-time delivery; 6. development speed; 7. customization; 8. variety; 9. volume flexibility. The lead-time or delivery speed is one of several time issues. It means how quickly a firm fulfils customer orders. On-time delivery means to meet the delivery time promised to the customer. The development speed is another time issue that deals with how fast new goods and services are brought to markets. Strategy development includes such time issues to define its own position in the market, e.g. to be a leader, middle-of-the-road or laggard. Operations management has to deal with trends like globalization, technological advancement and changing customer requirements. If a firm is able to serve market needs, it can bring the advantages of: 1. enhancing profitability of existing offerings; 2. attracting new customers to the firm; 3. improving loyalty of existing customers; 4. opening markets of opportunity. For the source of the above mentioned about Marketing look up the following .ICT and HRMICT means information and communication technology and refers to the technology that helps to handle information and enables to communicate electronically with others. If multiple business disciplines are linked together by ICT, the pro speaks about enterprise resource planning (ERP). These ERP systems have their origin on software that integrates information from different applications into one universal database. HRM means human resource management and describes a highly structured procedure within firms in order to select, evaluate, and pay human capital. Since the advent of ICT the management of HR-processes has become an increasingly imperative and complex activity to all HR professionals. Their function consists of tracking innumerable data points on each employee, from personal histories, data, skills, capabilities, experiences to payroll records. ICT governs roughly the following areas of HR functionalities: 1. the automated pay process to gather data on employee time and attendance; 2. the management tool to cost effectively gather and evaluate employee time/work information cost accounting); 3. the benefit administration model to easily administer and track employee participation in benefits programs (healthcare, insurance, and pension ). HR systems record basic demographic and address data, selection, training and development, capabilities and skills management, compensation planning records and other related activities. Well engineered systems enable to read applications and enter relevant data to applicable database fields, notify employers and provide position management and position control. ICT allows to exchange large number of electronic data, it helps to reduce transaction costs and leads to greater HR and organizational efficiency. And it replaces the above mentioned paper based HR activities by streamlining them electronically and enables to use self-service functionalities that benefit involved stakeholders alike. Hence managers freeing resources for more strategic business issues which can lead to more business innovation. For the source of the above mentioned about ICT and HRM look up the following.FinanceThe term finance addresses the raise, allocation and use of monetary resources over time of individuals, businesses and organizations. Finance can be categorized into:The study of money and other assetsThe management of those assetsProfiling and managing project risksAs a verb, "to finance" is to provide funds for business.With a set of financial techniques organizations try to manage their financial affairs, particularly the differences between income and expenditure and the risks of their investments. An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference. Questions in finance revolve around: How much money (cash etc.) will be needed at various points in the future? And how does this money need to be funded? It involves balancing risk and profitability. Long term funds would be provided by equity and long-term credit, often in form of bonds. These decisions lead to the company's capital structure. Short term funding or working capital is mostly provided by banks as line of credit. On the bond market, borrowers package their debt in the form of bonds. The borrower receives the money it borrows by selling the bond, which includes a promise to repay the value of the bond with interest. The purchaser of a bond can resell the bond, so the actual recipient of interest payments can change over time. Bonds allow lenders to recoup the value of their loan by simply selling the bond. Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hopes that it will maintain or increase its value. In investment management - in choosing a portfolio - one has to decide what, how much and when to invest. In doing so, one needs toIdentify relevant objectives and constraints: institution or individual - goals - time horizon - risk aversion - tax considerationsIdentify the appropriate strategy: active vs. passive - hedging strategyMeasure the portfolio performanceFinancial management is duplicate with the financial function of the accounting profession. However, accounting is concerned with reporting of historical financial information, while the financial decision is directed toward the future of the firm. Financial Economics is the branch of Economics studying the interrelation of financial variables, q.v. prices, interest rates and shares as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance. It studies:Valuation - Determination of the fair value of an asset How risky is the asset? (identification of the asset appropriate discount rate)What cash flows will it produce? (discounting of relevant cash flows)How does the market price compare to similar assets? (relative valuation)Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)Financial markets and instruments are:CommoditiesStocksBondsMoney market instruments Derivative securities For the above mentioned source or more information about finance look up the related links.
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