Chapter 1 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives 1. Explain the concept of strategic management 2. Describe how strategic decisions differ from other decisions that managers make 3. Name the benefits and risks of a participative approach to strategic decision making 4. Understand the types of strategic decisions for which different managers are responsible 5. Describe a comprehensive model of strategic decision making 6. Appreciate the importance of strategic management as a process 7. Give examples of strategic decisions that companies have recently made 1-3

The Nature and Value of Strategic Management Strategic management: The set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives 1-4

Nine Critical Tasks of Strategic Management - - Tasks 1-5: Formulate the company’s mission Conduct an internal analysis Assess the external environment – competitive and general contexts Analyze the company’s options by matching its resources with the external environment Identify the most desirable options in light of the mission 1-5

Nine Critical Tasks of Strategic Management - - Tasks 6-9: Select a set of long-term objectives and grand strategies that will achieve the most desirable options Develop annual objectives and short-term strategies that are compatible with long- term objectives and grand strategies Implement the strategic choices Evaluate the success of the strategic process for future decision making 1-6

What is Strategy? Large-scale, future-oriented plan Used to interact within competitive environment to achieve company goals Provides a framework for managerial decisions Reflects a company’s awareness of the main elements of competition 1-7

Dimensions of Strategic Decisions Strategic issues require top-management decisions Strategic decisions overarch several areas of a firm’s operations Usually only top management has the perspective needed to understand their broad implications Usually only top managers have the power to authorize necessary resource allocations 1-8

Dimensions of Strategic Decisions (contd.) Strategic issues require large amounts of the firm’s resources They involve substantial allocations of people, physical assets, and money Strategic decisions commit the firm to actions over an extended period In highly competitive firms, achieving and maintaining customer satisfaction frequently involves commitment from every facet of the firm 1-9

Dimensions of Strategic Decisions (contd.) Strategic issues often affect the firm’s long-term prosperity Strategic decisions commit the firm for a long time, typically 5 years; however the impact lasts much longer Once a firm has committed itself to a strategy, its image and competitive advantages are usually tied to that strategy Firms become known for what they do and where they compete. Shifting away from that can jeopardize their previous gains. 1-10

Dimensions of Strategic Decisions (contd.) Strategic issues are future-oriented They are based on what managers forecast, rather than what they know Emphasis is on the development of solid projections that will enable a firm to seek the most promising strategic options A firm will succeed only if it takes a proactive (anticipatory) stance toward change 1-11

Dimensions of Strategic Decisions (contd.) Strategic issues usually have multifunctional or multibusiness consequences. Strategic decisions have complex implications for most areas of the firm Decisions about customer mix, competitive emphasis, or organizational structure involve a number of the firm’s SBUs, divisions, or program units 1-12

Dimensions of Strategic Decisions (contd.) Strategic issues require considering the firm’s external environment All businesses exist in an open system. They affect and are affected by external conditions that are largely beyond their control Successful positioning requires that strategic managers look beyond operations and consider what relevant others are likely to do 1-13

Three Levels of Strategy Corporate level: board of directors, CEO & administration [Highest] Business level: business and corporate managers [Middle] Functional level: Product, geographic, and functional area managers [Lowest] 1-14

Ex. 1.3 Alternative Strategic Management Structures 1-15

Characteristics of Strategic Management Decisions: Corporate Often carry greater risk, cost, and profit potential Greater need for flexibility Longer time horizons Choice of businesses, dividend policies, sources of long-term financing, and priorities for growth 1-16

Characteristics of Strategic Management Decisions: Functional Implement the overall strategy formulated at the corporate and business levels Involve action-oriented operational issues Relatively short range and low risk Modest costs: depend upon available resources Relatively concrete and quantifiable 1-17

Characteristics of Strategic Management Decisions: Business Help bridge decisions at the corporate and functional levels Less costly, risky, and potentially profitable than corporate-level decisions More costly, risky, and potentially profitable than functional-level decisions Include decisions on plant location, marketing segmentation, and distribution 1-18

Formality in Strategic Management Formality is the degree to which participation, responsibility, authority, and discretion in decision-making are specified in strategic management 1-19

Forces Determining Formality Organizational Size Predominant Management Styles Complexity of Environment Production Process Problems in the Firm Purpose of the Planning System Stage of Firm’s Development 1-20

Three Modes of Formality Entrepreneurial Mode – most small firms Planning Mode – most large firms Adaptive Mode – most medium size firms 1-21

Strategy Makers Ideal strategic team includes decision makers from all three levels Top managers must give final approval Strategic decisions coincide with managers’ responsibilities 1-22

Strategy Makers: The CEO A firm’s CEO plays a dominant role in strategic planning The CEO’s principal duty is giving long-term direction to the firm The CEO bears ultimate responsibility for the firm’s success and strategic success CEOs are typically strong-willed, company-oriented individuals 1-23

Benefits of Strategic Management Managers at all levels interact in planning and implementing strategy Similar to participative decision making Assessing strategy formulation requires looking at nonfinancial evaluations as well as financial ones Promoting positive behavioral consequences enables achievement of financial goals 1-24

Risks of Strategic Management Managers’ time away from other responsibilities Unrealistic expectations promised by strategy formulators Possible disappointment of participating subordinates if goal is not reached 1-25

Strategic Management Process Businesses vary in formulation and other processes The basic components of the models used to analyze strategic management are similar Strategic management is a process—a flow of information through interrelated stages of analysis toward the achievement of some goal 1-26

Ex. 1.6 Strategic Management Model 1-27

Components of Strategic Management Model Company Mission External Analysis Long-Term Objectives Short-Term Objectives Policies Empowering Action Strategic Control & Continuous Improvement Internal Analysis Strategic Analysis & Choice Generic & Grand Strategies Functional Tactics Restructuring, Reengineering & Refocusing 1-28