Chapter 1

The Nature of Strategic Management

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Ch 1 -1

Chapter Objectives
1. 2. 3. 4.
Describe the strategic-management process. Explain the need for integrating analysis and intuition in strategic management. Define and give examples of key terms in strategic management. Discuss the nature of strategy formulation, implementation, and evaluation activities.

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Chapter Objectives (cont.)

5. 6.
Describe the benefits of good strategic management. Discuss the relevance of The Art of War to strategic management. Discuss how a firm may achieve sustained competitive advantage.

7.

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Defining Strategic Management

Strategic management
the art and science of formulating, implementing, and evaluating crossfunctional decisions that enable an organization to achieve its objectives

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Defining Strategic Management

Strategic management is used
synonymously with the term strategic planning. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation.
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Defining Strategic Management

A strategic plan is a companys game
plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations.

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Stages of Strategic Management

Strategy formulation

Strategy
implementation

Strategy evaluation

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Strategy Formulation
Vision & Mission External Opportunities & Threats Internal Strengths & Weaknesses Long-Term Objectives Alternative Strategies

Strategy Selection

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Ch 1 -8

Stages of Strategic Management

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, and choosing particular strategies to pursue

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Strategy Formulation
Deciding what new businesses to enter, What businesses 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 a hostile takeover.
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Strategy Implementation

Annual Objectives Policies Employee Motivation Resource Allocation

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Ch 1 -11

Stages of Strategic Management

Strategy implementation
requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed often called the action stage

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Strategy Evaluation

Internal Review External Review Performance Measurement Corrective Action

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Ch 1 -13

Stages of Strategic Management

Strategy evaluation
reviewing external and internal factors that are the bases for current strategies, measuring performance, and taking corrective actions

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Stages of Strategic Management

Strategy formulation, implementation, and
evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional Strategic management helps a firm function as a competitive team

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Basic Concepts of Strategic Management

3 Types of Strategy
Corporate strategy

Business strategy
Functional strategy

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Levels of Strategy-Making in a Diversified Company

Corporate-Level Managers

Corporate Strategy
Two-Way Influence

Business-Level Managers

Business Strategies
Two-Way Influence

Functional Managers

Functional Strategies
Two-Way Influence

Operating Managers

Operating Strategies

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Basic Concepts of Strategic Management

Corporate Strategy
Stability Growth Retrenchment

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Basic Concepts of Strategic Management

Business Strategy
Competitive strategies Cooperative and Complementary strategies

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Basic Concepts of Strategic Management

Functional Strategy
Technological leadership Technological followership

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Integrating Intuition and Analysis

Most organizations can benefit from
strategic management, which is based upon integrating intuition and analysis in decision making Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent

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SWOT
Strengths identifying existing

organisational strengths Weaknesses identifying existing organisational weaknesses Opportunities what market opportunities might there be for the organisation to exploit? Threats where might the threats to the future success come from?

PEST
Political: local, national and international political developments how will they affect the organisation and in what way/s? Economic: what are the main economic issues both nationally and internationally that might affect the organisation? Social: what are the developing social trends that may impact on how the organisation operates and what will they mean for future planning? Technological: changing technology can impact on competitive advantage very quickly!

PEST
Examples:

Growth of China and India as manufacturing centres Concern over treatment of workers and the environment in less
developed countries who may be suppliers The future direction of the interest rate, consumer spending, etc. The changing age structure of the population The popularity of fads like the Atkins Diet The move towards greater political regulation of business The effect of more bureaucracy in the labour market

Adapting to Change
The second-largest bookstore chain in the
United States, Borders Group, declared bankruptcy in 2011 as the firm had not adapted well to changes in book retailing from traditional bookstore shopping to customers buying online, preferring digital books to hard copies Borders was on the brink of financial collapse before being acquired in July 2011 by Direct Brands
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Key Terms in Strategic Management

Competitive
advantage
anything that a firm does especially well compared to rival firms

Strategists
the individuals who are most responsible for the success or failure of an organization

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Key Terms in Strategic Management

Vision statement
answers the question What do we want to become? often considered the first step in strategic planning

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Key Terms in Strategic Management

Mission statements
enduring statements of purpose that distinguish one business from other similar firms identifies the scope of a firms operations in product and market terms addresses the basic question that faces all strategists: What is our business?

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Key Terms in Strategic Management

External opportunities and external

threats
refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future

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Some Opportunities and Threats

Computer hacker problems are increasing. Intense price competition is plaguing most
firms. Unemployment and underemployment rates remain high. Interest rates are rising. Product life cycles are becoming shorter. State and local governments are financially weak.
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Basic Concepts of Strategic Management

Environmental Variables

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Key Terms in Strategic Management

Internal strengths and internal

weaknesses
an organizations controllable activities that are performed especially well or poorly determined relative to competitors

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Key Terms in Strategic Management

Objectives
specific results that an organization seeks to achieve in pursuing its basic mission long-term means more than one year should be challenging, measurable, consistent, reasonable, and clear

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Strategic and Financial Objectives

Unilevers Strategic and Financial Objectives

Grow annual revenues by 5-6% annually Increase operating profit margins from 11% to
16% within 5 years

Trim companys 1200 food, household, and

personal care products down to 400 core brands

Focus sales and marketing efforts on those

brands with potential to become respected, market-leading global brands

Streamline companys supply chain

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Strategic and Financial Objectives

Examples: Financial Objectives

X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share Annual dividend increases of X % Profit margins of X % X % return on capital employed (ROCE) Increased shareholder value Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital
investment Stable earnings during periods of recession
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Strategic and Financial Objectives

Examples: Strategic Objectives

Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality
or customer service Deriving X % of revenues from sale of new products introduced in past 5 years Achieving technological leadership Having better product selection than rivals Strengthening companys brand name appeal Having stronger national or global sales and distribution capabilities than rivals Consistently getting new or improved products to market ahead of rivals
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Key Terms in Strategic Management

Strategies
the means by which long-term objectives will be achieved may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures

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Types of Strategy
Competitive Advantage something which
gives the organisation some advantage over its rivals Cost advantage A strategy to seek out and secure a cost advantage of some kind - lower average costs, lower labour costs, etc.

Types of Strategy
Market Dominance:

Achieved through:
Internal growth Acquisitions mergers and takeovers

New product development: to keep

ahead of rivals and set the pace

Contraction/Expansion focus on what

you are good at (core competencies) or seek to expand into a range of markets?

Types of Strategy
Price Leadership through dominating the
industry others follow your price lead Global seeking to expand global operations Reengineering thinking outside the box looking at news ways of doing things to leverage the organisations performance

Types of Strategy
Downsizing selling off unwanted parts of the

business similar to contraction Delayering flattening the management structure, removing bureaucracy, speed up decision making Restructuring complete re-think of the way the business is organised
Internal business level strategies

Key Terms in Strategic Management

Annual objectives
short-term milestones that organizations must achieve to reach long-term objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritized should be established at the corporate, divisional, and functional levels in a large organization
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Sample Strategies in Action in 2011

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Key Terms in Strategic Management

Policies
the means by which annual objectives will be achieved include guidelines, rules, and procedures established to support efforts to achieve stated objectives guides to decision making and address repetitive or recurring situations

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The Strategic-Management Model

Where are we now?

Where do we want to go? How are we going to get there?
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Basic Concepts of Strategic Management

Strategic DecisionMaking Process

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Benefits of Strategic Management

Historically, the principal benefit of
strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice

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Benefits of Strategic Management

Communication is a key to successful
strategic management Through dialogue and participation, managers and employees become committed to supporting the organization

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Benefits to a Firm That Does Strategic Planning

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Financial Benefits
Businesses using strategic-management
concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic planning activities High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences

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Nonfinancial Benefits
It allows for identification, prioritization,
and exploitation of opportunities. It provides an objective view of management problems. It represents a framework for improved coordination and control of activities. It minimizes the effects of adverse conditions and changes.
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Nonfinancial Benefits
It allows major decisions to better support
established objectives. It allows more effective allocation of time and resources to identified opportunities. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions. It creates a framework for internal communication among personnel.
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Why Some Firms Do No Strategic Planning

Lack of knowledge in strategic planning Poor reward structures Firefighting Waste of time Too expensive Laziness Content with success
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Why Some Firms Do No Strategic Planning

Fear of failure Overconfidence Prior bad experience Self-interest Fear of the unknown Honest difference of opinion Suspicion
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Pitfalls in Strategic Planning

Using strategic planning to gain control over
decisions and resources Doing strategic planning only to satisfy accreditation or regulatory requirements Too hastily moving from mission development to strategy formulation Failing to communicate the plan to employees, who continue working in the dark Top managers making many intuitive decisions that conflict with the formal plan
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Pitfalls in Strategic Planning

Top managers not actively supporting the
strategic-planning process Failing to use plans as a standard for measuring performance Delegating planning to a planner rather than involving all managers Failing to involve key employees in all phases of planning Failing to create a collaborative climate supportive of change
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Guidelines for Effective Strategic Management

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Comparing Business and Military Strategy

A fundamental difference between military
and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas military strategy is based on an assumption of conflict Both business and military organizations must adapt to change and constantly improve to be successful
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Excerpts from Sun Tzus The Art of War Writings

War is a matter of vital importance to the
state: a matter of life or death, the road either to survival or ruin. Hence, it is imperative that it be studied thoroughly Know your enemy and know yourself, and in a hundred battles you will never be defeated Skillful leaders do not let a strategy inhibit creative counter-movement
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