Chapter 7 Strategic Management

Learning Objectives After reading this chapter, you should be able to: Explain how the firm’s external environment should be examined as part of the strategic management process. Explain how the firm’s internal environment should be examined as part of the strategic management process. State the meaning and purpose of the firm’s strategic intent and mission. Understand how the strategy formulation process helps the firm achieve its mission. Describe the issues that should be considered in strategy implementation. Understand how the outcomes of the strategic management process should be assessed.

iPod Universe Critical Thinking Questions focus on Apple’s strategy of encouraging the manufacture of Ipod accessories Role of strategic management in encouraging other manufacturers to ride on iPod’s success Possible results of Apple’s aggressive entry into accessory market

The Strategic Management Process It is the job of top level management to chart the course of the entire enterprise. It consists of: Analysis of the internal and external environment of the firm. Definition of the firm’s mission. Formulation and implementation of strategies to create or continue a competitive advantage.

The Strategic Management Process (cont) Strategic management involves both long-range thinking and adaptation to changing conditions. Strategies should be designed to generate a sustainable competitive advantage. Competitors should be unable to duplicate what the firm has done or should find it too difficult or expensive.

Components of the Strategic Management Process: Analyze the external and internal environments Define strategic intent and mission Formulate strategies Implement strategies Assess strategic outcomes

SWOT Analysis Commonly used strategy tool: SWOT Strengths, Weaknesses, Opportunities, Threats External Environment Internal Environment Components Scanning Monitoring Forecasting Assessing Scope General environment Industry environment Strategic groups Direct competitors Resource types Tangible Intangible Firm capabilities Functional Value Chain Benchmarking

The External Environment Company leaders must study the external environment in order to: Identify opportunities and threats in the marketplace. Avoid surprises. Respond appropriately to competitors’ moves. A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage.

Components of External Analysis Scanning Monitoring Assessing Forecasting 3

Scope of the External Analysis General Environment The Industry Competitor Analysis Strategic Groups 3

The Segments of the General Environment Economic Conditions Demography Globalization Political/Legal Forces Socio-cultural Conditions Technological Changes

Porter’s Analyzing the Industry Environment Threat of new entrants Threat of substitutes Suppliers Customers Intensity of rivalry among competitors

Focusing on the Future (p. 300) Refer to Focusing on the Future in Chapter 5 (p.215)

The Internal Environment Each company has something that it does well. These are called “core competencies.” Company executives should identify the resources, capabilities, and knowledge the firm has that may be used to exploit market opportunities and avoid potential threats. Resource-based view: Basing the strategy on what the firm is capable of doing

Resource Types: Tangible Resources Assets that can be quantified and observed. Include financial resources, physical assets, and workers. Strategic assessment of tangible resources should enable management to efficiently use tangible resources to support the company and to expand the volume of business.

Resource Types: Intangible Resources Difficult to quantify and included on a balance sheet Often provides the firm with a strong competitive advantage. Competitors find it difficult to purchase or imitate these resources. Strategically most important intangibles: Reputation Technology Human Capital

Analyzing the Firm’s Capabilities Functional Analysis Value Chain Analysis Benchmarking

Analyzing Capabilities by Functional Areas Capability Corporate Management Effective financial control systems Expertise in strategic control of diversified corporation Effectiveness in motivating and coordinating divisional and business-unit management Management of acquisitions Values-driven, in-touch corporate leadership Information Management Comprehensive and effective MIS network, with strong central coordination Research and Development Capability in basic research Ability to develop innovative new products Speed of new product development

Analyzing Capabilities by Functional Areas (cont.) Capability Manufacturing Efficiency in volume manufacturing Capacity for continual improvements in production processes Flexibility and speed of response Product Design Design capability Marketing Brand management and brand promotion Promoting and exploiting reputation for quality Responsive to market trends Sales and Distribution Effectiveness in promoting and executing sales Efficiency and speed of distribution Quality and effectiveness of customer service

Value-Chain Analysis Breaks down the firm into a sequential series of activities and attempts to identify the value added of each activity

Benchmarking Involves Four Stages: Identifying activities or functions that are weak and need improvement. Identifying firms that are known to be at the leading edge of these activities or functions. Studying the leading-edge firms by visiting them, talking to managers and employees, and reading trade publications. Using the information gathered to redefine goals, modify processes, and acquire new resources to improve the firm’s functions.

Strategic Intent and Mission The primary guides to strategic management are formal statements of strategic intent and mission. Strategic intent is internally focused, defining how the firm uses its resources, capabilities, and core competencies. Strategic mission is externally focused, defining what will be to produced and marketed, utilizing its internal core competencies.

Strategic Intent and Mission (cont.) Intent: How firm would like to use Resources Capabilities Core competencies Mission: Determine the firm’s external focus on Products Markets

Strategy Formulation The design of an approach to achieve the firm’s mission. Takes place at: Corporate-Level Business-Level

Corporate-Level Strategy The corporation’s overall plan concerning the: Number of businesses the corporation holds. Variety of markets or industries it serves. Distribution of resources among those businesses. This diversification strategy may be analyzed in terms of: Portfolio mix Type of diversification Process of diversification

Portfolio Analysis The basic idea is to classify the businesses of a diversified company within a single framework. Two of the most widely applied include: The McKinsey-General Electric Portfolio Analysis Matrix The Boston Consulting Group’s Growth Share Matrix

The McKinsey-General Electric Portfolio Analysis Matrix Business-Unit Position Low Medium High 1) Harvest 2) 3) 4) 5) Hold 6) 7) 8) 9) Build Low Industry Attractiveness Medium High

The Boston Consulting Group’s Growth Share Matrix Relative Market Share Earnings: high stable, growing Cash Flow: neutral Strategy: invest for growth STAR Earnings: low, unstable, growing Cash Flow: negative Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog ? Earnings: high, stable Cash Flow: high stable Strategy: milk COW Earnings: low, unstable Cash Flow: neutral or negative Strategy: divest DOG Annual Real Rate of Market Growth

Diversification Strategy Type of Diversification Concentration strategy Vertical integration strategy Concentric diversification strategy Conglomerate diversification Process of Diversification Acquisition and restructuring strategies Acquisition Merger International strategy

Business-Level Strategy Deals with how to compete in each business area or market segment. Firms have two basic choices: Cost leadership strategy Differentiation strategy

Strategy Implementation Organizational Structure and Controls Corporate Entrepreneurship and Innovation Cooperative Strategies Human Resource Strategies Strategic Leadership 3

Strategic Outcomes Company leaders should periodically assess whether the outcomes meet expectations. A firm must first and foremost cater to the desires of its primary stakeholders. The firm should also consider the desires of other stakeholders affected by its performance. Some of the standard measures of strategic success includes: Profits Growth of sales/market share Growth of corporate assets Reduced competitive threats Innovations

iPod Universe Critical Thinking Questions focus on iPod sales benefitted from the availability of ipod accessories. The concept of complementors (accessories in this case) and their role in increasing the popularity of a new technology is a key concept in strategic management (in high technology industries) Because accessories manufacturers have increased iPod popularity, Apple’s entry into accessories should prove beneficial

Video: Developing the golden parachute Discuss the three questions on p. 276

In-class writing Refer to Focusing on the Future p. 300 Write on a sheet of paper, what are you not clear on and what aspect needs clarification? Exchange with your neighbor. Write your clarification to his or her question. Exchange and discuss. Do you agree?