Strategic Management

Without a strategy, an organization is like a ship without a rudder, going around in circles. Its like a tramp; it has no place to go. Joel Ross and Michael Kami

What is Strategic Management?

Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. Purpose of Strategic Management To exploit and create new and different opportunities for tomorrow. Stages of Strategic Management Strategy formulation Strategy implementation Strategy evaluation

Strategy Formulation Includes Developing a vision and mission Identifying an organizations external opportunities and threats Determining internal strengths and weaknesses Establishing long-term objectives Generating alternative strategies Choosing particular strategy to pursue Issues of Strategy Formulation Deciding what new business to enter and what business to abandon How to allocate resources Whether to expand operations or diversify Whether to enter international markets Whether to merge or form a joint venture How to avoid hostile takeover

Strategy Implementation
It requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. It often is called the action stage of strategic management. Strategic implementation includes.. Developing a strategic supportive culture Creating an effective organizational structure Redirecting marketing efforts Preparing budgets Developing and utilizing information systems Linking employee compensation to organizational performance

Strategy Implementation
Often considered to be the most difficult stage, it requires personal discipline, commitment, and sacrifice. Interpersonal skills are especially critical for successful strategy implementation. The challenge is to stimulate managers and employees to work with pride and enthusiasm toward achieving stated objectives. Strategy Evaluation It is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well. Strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are. 1. Reviewing external and internal factors that are bases for current strategies. 2. Measuring performance. 3. Taking corrective actions. Strategy Evaluation

 Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise. Levels of Strategic Management Corporate level Divisional or strategic business unit level Functional level Integrating Intuition and Analysis The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative information in a way that allows effective decisions to be made under conditions of uncertainty. Integrating Intuition and Analysis Yet strategic management is not a pure science that lends itself to a nice, neat, one-two-three approach. Intuition is essential for making good strategic decisions. It is particularly useful for making decisions in situations of great uncertainty or little precedent or when highly unrelated variables exist . I believe in intuition and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the world. Albert Einstein Managers at all levels in an organization inject their intuition and judgment into strategic-management analyses. Analytical thinking and intuitive thinking complement each other. Key Terms in Strategic Management Competitive Advantage anything that a firm does especially well compared to rival firms. Strategists are the individuals who are most responsible for the success or failure of an organization. Vision Statement answers the question What do we want to become?

Mission Statement describes the values and priorities of an organization. External Opportunities and Threats external trends and events that could significantly benefit or harm an organization in future. Internal Strengths and Weaknesses are an organizational controllable activities that are performed especially well or poor. Long Term Objectives specific results that an organization seeks to achieve in pursuing its basic mission. Long term means more than one year. Annual Objectives are short-term milestones that organizations must achieve to reach long-term objectives. Strategies are the means by which long-term objectives are achieved. Policies are the means by which annual objectives are achieved. The Strategic-Management Model Benefits of Strategic Management Allows an organization to be more proactive than reactive in shaping its own future. Allows an organization to initiate and influence (rather than just respond to) activitiesand thus to exert control over its own destiny. Understanding may be the most important benefit of strategic management, followed by commitment and employee empowerment.

The Business Vision and Mission

The very essence of leadership is that you have to have vision. You cant blow an uncertain trumpet. THEODORE HESBURGH

What Do We Want to Become?

A vision statement should answer the above question. A clear vision provides the foundation for developing a comprehensive mission statement. The vision statement should be short, preferably one sentence, and as many managers as possible should have input into developing the statement. Exercise 1 Review vision statement examples. What is Our Business? Drucker says that asking the question What is our business ? is synonymous with asking the question What is our mission? An enduring statement of purpose that distinguishes one organization from other similar enterprises, the mission statement is a declaration of an organizations reason for being.

Mission Statement
It answers the pivotal question What is our business? A clear mission statement is essential for effectively establishing objectives and formulating strategies. A mission statement reveals what an organization wants to be and whom it wants to serve. Exercise 2 Review mission statement examples. The Process of Developing Vision & Mission Statements 1. Select several articles about these statements and ask all managers to read these as background statements.

2. Ask managers themselves to prepare a vision and mission statement for the organization. 3. A facilitator or a committee of top managers should merge these statements into a single document and distribute the draft statement to all managers. 4. A request for modification, additions, and deletions is needed next, along with a meeting to revise the document.

Importance of Vision & Mission Statements

To ensure unanimity of purpose within the organization. To provide a basis, or standard, for allocating organizational resources. To establish a general tone or organizational climate. To serve as a focal point for individuals to identify with the organizations purpose and direction. To specify organizational purposes and translate these purposes into objectives. To facilitate the translation of objectives into work structure. Divergent views among managers can be revealed and resolved through the process. Too often, strategists develop vision and business mission statements only when organization is in trouble. According to Drucker, the important time to ask seriously , What do we want to become? and What is our business? is when a company has been successful. An organization that fails to develop a vision statement as well as a comprehensive and inspiring mission statement looses the opportunity to present itself favorably to existing and potential stakeholders. The vision and mission statements are effective vehicles for communicating with important external and internal stakeholders. A Declaration of Attitude A Customer Orientation A Declaration of Social Policy A Declaration of Attitude A good mission statement allows for the generation and consideration of a range of feasible alternative objectives and strategies without unduly stifling management creativity.

Characteristics of a Mission Statement

 A mission statement needs to be broad to effectively reconcile differences among, and appeal to, an organizations diverse stake holders. An effective mission statement should not be too lengthy. It should arouse positive feelings and emotion about an organization. It should be inspiring in the sense that it motivates readers to action. A mission statement should be enduring. An effective mission statement generates the impression that a firm is successful, has direction, and is worthy of time, support and investmentfrom all socio- economic groups of people. A mission statement reflects judgments about future growth directions and strategies that are based upon forward looking external and internal analyses. The statement of mission should be dynamic in orientation, allowing judgments about the most promising growth directions and those considered less promising. A Customer Orientation A good mission statement reflects the anticipation of customers. Rather than developing a product and trying to find a market, the operating philosophy of organizations should be to identify customers needs and then provide a product or service to fulfill those needs. Examples Do not offer clothes. Offer me attractive looks. Do not offer me shoes. Offer me comfort for my feet and the pleasure of walking. Do not offer me a house. Offer me security, comfort, and a place that is clean and happy. Do not offer me books. Offer me hours of pleasure and the benefit of knowledge. Do not offer me things. Offer me ideas, emotions, ambience, feelings and benefits. Please, do not offer me THINGS. What the customer buys and considers value is never a product. It is always utility, meaning what a product or service does for him or her. The customer is the foundation of a business and keeps it in existence. A Declaration of Social Policy Another characteristic of mission statement is that they should reveal that the firm is socially responsible.

 The term social policy embraces managerial philosophy and thinking at the highest levels of an organization. The impact of society on business and vice-versa is becoming more pronounced each year. Social policies directly affect a firms customers, products and services, markets, technology, profitability, self-concept and public image. An organizations social policy should be integrated into all strategicmanagement activities, including the development of a mission statement.

Mission Statement Components

1. 2. 3. 4. 5. 6. 7. 8. 9. Customers Products or services Markets Technology Concern for survival, growth, and profitability. Philosophy Self-concept Concern for public image Concern for employees

Experiential Exercise 2A Evaluating Mission Statement Conclusion Every organization has a unique purpose and reason for being. This uniqueness should be reflected in vision and mission statement. Drucker says that developing a clear business vision and mission is the first responsibility of strategists. A good mission statement reveals an organizations customers; products or services; markets; technology; concern for survival, growth, and profitability; philosophy; self-concept; concern for public image; and concern for employees. Well designed vision and mission statements are essential for formulating, implementing, and evaluating strategies.

Overview of External Environmental Analysis and Forecasting

Introduction External and largely uncontrollable factors influence direction, action, organizational structure and internal processes. Sub-factors of external environment: 1) Remote Environment 2) Operating Environment

REMOTE ENVIRONMENT
Composed of a set of forces originating beyond firms operating situation: 1) Political 3) Social 5)Industry Factors Opportunities Threats Constraints for the firm 2) Economic 4)Technological and

Political consideration
Direction and Stability of political factors Legal and Government parameters Political constraints: Fair-Trade Decisions, Anti-Trust Laws, Tax Programs, Minimum- Wage Legislation, Pollution and Pricing Policies, Administrative Jaw-Boning, and Actions aimed at protecting the Consumer and the Environment Most commonly restrictive and tend to reduce firms potential profits However, other political actions are designed to benefit and protect a company e.g. Patent Laws, Govt Subsidies, and Product Research Grants.

Economic Consideration
Nature and Direction of the economy in which the business operates Firms must understand economic trends in their relative segments as consumption patterns are affected by the relative affluence of various market segments Firms must consider: Availability of credit, the level of Disposable Income and The Propensity of People to Spend. Prime Interest rates, Rates of Inflation and Growth Trends of the Gross National Product. Potential Economic impact of international forces was severely restricted until recently. But the Influence of International Power Brokers has changed the focus of economic environmental forecasting. E.g. European Economic Community (EEC), the Organization of Petroleum Exporting Countries (OPEC), and coalition of Lesser-Developed Countries (LDC). Other Economic Variables to be Monitored Interest Rates Inflation Rates Money Market Rates Stock Market Trends Import/Export Factors Tax Rates Monetary Policies Fiscal Policies, etc

Social Consideration
Involve Beliefs ,Values, Attitudes, Opinions and Lifestyles These are developed from their Cultural, Ecological, Demographic, Religious, Educational, and Ethnic Conditioning. Social attitudes influence demand for various clothing styles, books, leisure activities, and other products and services. Social Consideration contd

Profound Social changes include:

 Large number of women entering the labor market Consumer and Employee interest in quality-of-life issues Shift in National Age Distribution

Technological Considerations
Avoid Obsolescence and promote Innovation Affect Planning and improve Manufacturing and Marketing techniques A technological breakthrough may: a) Spawn sophisticated new markets and products b) Significantly shorten the anticipated life of a manufacturing facility Technological Forecasting: helps protect and improve profitability of firms in growing industries. alters strategic managers to both impeding challenges and promising opportunities.

OPERATING ENVIRONMENT
Involves factors in the immediate competitive situation The most prominent factors are: Competitive position Customer profiles Suppliers and Creditors: Sources of Resources Personnel: Nature of the labor market

Competitive Position
Optimizes Environmental Opportunities Enables more accurate forecasting of both its short and long term growth and profit potentials

 Some important competitive factors include, market share, breadth of product line, effectiveness of sales distribution, price competitiveness, raw material cost, relative product quality, caliber of personnel, general image, etc.

Customer Profiles
In developing a profile of present and prospective customers managers are: Better able to plan the strategic operations of the firm Anticipate changes in the size of markets Allocate resources supporting forecast shifts in demand patterns Four principal types of information: Geographic Demographic Psychographic Buyer Behavior Suppliers and Creditors Firms rely on suppliers and creditors for: Financial support Services Materials Equipment Quick Delivery Liberal Credit Terms Broken-Lot Orders Questions to be addresses regarding suppliers Are suppliers prices competitive? Do suppliers offer attractive quantity discounts? How costly are their shipping charges? Are vendors competitive in terms of production standards? In terms of deficiency rates? Are suppliers abilities, reputation, and services competitive? Are suppliers reciprocally dependent on the firm? Questions to be addressed regarding creditors Is stock fairly valued and willingly accepted as collateral?

 Do potential creditors perceive the firm as having an acceptable record of past payment? A strong working capital position? Little or no leverage? Are creditors current loan terms compatible with the firms profitability objective? Are creditors able to extend the necessary line of credit? Personnel: Nature of the Labor Market

Three important factors affecting a firms access to needed personnel:

Reputation as an employer Local employment rates Ready availability of needed knowledge and skills

 Assessment of Industry Attractiveness & Competitive Environment

Five Competitive Forces Threat of New Entrants Bargaining Power of Customers Bargaining Power of Suppliers Threat of Substitute Products and Services Rivalry among Existing Firms

Threat of New Entrants :New entrants in an industry bring: New Capacity Desire to gain Market Share Often Substantial Resources Major Barriers to Entry Economies of Scale Product Differentiation Capital Requirements Cost Disadvantages Independent of Size Access to Distribution Channels Government Policy

Bargaining Power of Suppliers A supplier group is powerful if: It is dominated by a few companies and is more concentrated than the industry it sells to Its product is unique or at least differentiated or can build up switching costs It is not obliged to contend with other products for sale to the industry It poses a credible threat of integrating forward into the industrys business The industry is not an important customer of the supplier group Bargaining Power of Buyers A buyer group is powerful if: It is concentrated or purchases in large volumes It purchases standard or undifferentiated products from the industry The purchase represents a significant fraction of the buyers costs Earns Low Profits

 The product is unimportant to the quality of the buyers product The product does not save the buyer money The buyer poses a credible threat of integrating backward into the industrys business Threat of Substitute Products and Services Substitutes limit the potential of an industry Up gradation of quality or Differentiation is a must Price-Performance Trade-off Not only during normal times but even boom periods

Rivalry among existing competitors Intense rivalry is caused by: Numerous competitors fairly equal in size Slow industry growth Product or service lacks differentiation or switching costs Fixed costs are high or the product is perishable Capacity is normally augmented in large increments Exit barriers are high Rivals are diverse in strategies, origins, and personalities

Strategic Groups and Competitive Environment Business models of companies within an industry may differ significantly in terms of: Distribution channels Market segments Customer service Pricing policy Advertising policy Quality of their products Technological leadership Promotions, etc Strategic Groups Distinct groups within industries that follow similar business models are called Strategic groups E.g. Pharmaceutical IndustryProprietary Group: Merck, Pfizer, Eli Lily Generic Group: Forest Labs, Watson

 Implications of Strategic Groups Helpful for identification of number of opportunities and threats within an industry Customers tend to view their products as direct substitutes because they follow similar business models Different strategic groups have different standings with respect to each of the competitive forces depending on their competitive positioning approach

The Internal Assessment

The nature of an internal audit Financial ratio analysis The Resource Based View (RBV) Management functions analysis Marketing capabilities audit Finance/ accounting functions audit Management information system audit Research and development capabilities audit Value chain analysis (VCA) and Benchmarking Internal Factor Evaluation (IFE) matrix The Nature of an Internal Audit All organizations have strengths and weaknesses in the functional areas of business. No organization is equally strong or weak in all areas. Objectives and strategies are established with the intention of capitalizing upon internal strengths and overcoming weaknesses. Key Internal Forces Different functional areas Sub functional areas Functional areas differ with different types of organizations Distinctive competencies Building competitive advantages The Process of Performing an Internal Audit Closely parallels the process of performing an external audit. Representative Managers and employees from through the firm need to be involved in determining a firms strengths and weaknesses. The internal audit requires gathering and assimilating information about the different functional areas of the organization. Key factors should be prioritized, so that the firms most important strengths and weaknesses can be determined collectively.

 Provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization. Performing an internal audit is an excellent vehicle or forum for improving the process of communication in an organization. Performing an internal audit requires gathering, assimilating, and evaluating information about the firms operations. Critical success factors, consisting of both strengths and weaknesses, should be identified and prioritized. A taskforce of managers from different units of the organization, supported by staff, should be charged with determining the 10 to 20 most important strengths and weaknesses that should influence the future of the organization. Strategic management is a highly interactive process that requires effective coordination among all the functional areas. Although the process is overseen by strategists, success requires that managers and employees from all functional areas work together to provide ideas and information.

Financial Ratio Analysis It exemplifies the complexity of relationships among the functional areas of business. A declining return on investment or profit margin ratio could be the result of ineffective marketing, poor management policies, research and development errors, or a weak management information system. The effectiveness of strategy formulation, implementation, and evaluation activities hinges upon a clear understanding of how major business functions affect one another. For strategies to succeed, a coordinated effort among all the functional areas of business is needed. The Resource-Based View(RBV) The Resource-Based View (RBV) approach to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage.

 Proponents of the RBV contend that organizational performance will primarily be determined internal resources that can be grouped into three categories: physical resources, human resources, and organizational resources. Physical Resources Plant and equipment Location Technology Raw materials Machines Human Resources All employees Training Experience Intelligence Knowledge Skills Abilities Organizational Resources Firm structure Planning processes Information systems Patents Trademarks Copyrights Databases etc.

RBV theory asserts that resources are actually what helps a firm exploit opportunities and neutralize threats.

 Managing strategically according to the RBV involves developing and exploiting a firms unique resources and capabilities, and continually maintaining and strengthening those resources. The theory asserts that it is advantageous for a firm to pursue a strategy that is not being currently implemented by any competitive firm. When other firms are unable to duplicate a particular strategy, then the focal firm has a sustainable competitive strategy. For a resource to be valuable, however, it must be either (1) rare, (2) hard to imitate, or (3) not easily substitutable. These three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to sustainable competitive advantage. The more resource(s) is rare, non-imitable, and non-substitutable, the stronger a firms competitive advantage will be and the longer it will last. Understanding both external and internal, and more importantly, understanding the relationships among them, will be the key to effective strategy formulation. Since both external and internal factors continually change, strategists seek to identify and take advantage of positive changes and buffer against negative changes in a continuing effort to gain and sustain a firms competitive advantage. This is the essence and challenge of strategic management, and often times survival of the firm hinges on this work.

Strategic Options
Long Term Objectives Represent the result expected from certain strategies Strategies represent the action to be taken to accomplish long term objectives The time frame for objectives and strategies should be consistent, usually from 2-5 years The nature of Long Term objectives Should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable and congruent among organizational units Each objective should also be associated with a time line They provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid both the allocation of resources and design of jobs They are needed at the corporate, divisional, and functional levels of an organization Clearly stated and communicated objectives are vital to success for many reasons I. II. Help stakeholders understand their role in an organizations future Provide a basis for consistent decision making by managers whose values and attitudes differ thereby minimizing potential conflict during implementation Set forth organizational priorities and stimulate exertion and accomplishment Serve as standards by which individuals, groups, departments, divisions, and entire organizations can be evaluated Provide the basis for designing jobs and organizing activities to be performed in an organization Also provide direction and allow for organizational synergy Without long term objectives, an organization will drift aimlessly towards some unknown end

III. IV. V. VI.

 It is hard to imagine an organization or individual being successful without clear objectives Success only rarely occurs by accident; rather it is the result of hard work directed toward achieving certain objectives Financial V/S Strategic Objectives Financial and Strategic objectives are most common in organizations Financial objectives include those associated with growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow, and so on Strategic objectives include things such as large market share, quicker ontime delivery than rivals, shorter design-to-market than rivals, lower cost than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving ISO 14001 certification, achieving technological leadership, consistently getting new or improved products to market ahead of rivals, and so on Although financial objectives are specially important in firms, oftentimes there is a tradeoff between financial and strategic objectives such that crucial decisions have to be made To improve financial position in the short run through higher prices may, for example, jeopardize long-term market share The dangers associated with trading of long-term strategic objectives with near-term bottom line performance are specially severe if competitors relentlessly pursue increased market share at the expense of short-term profitability Other tradeoffs are related to riskiness of action, concern for business ethics, need to preserve the natural environment and social responsibility issues Both should include annual and long-term performance targets The best way to sustain competitive advantage is to relentlessly pursue strategic objectives that strengthen a firms business position over rivals Financial positions can best be met by focusing first and foremost on achievement of strategic objectives that improve a firms competitiveness and market strength