CHAPTER 1 Basic Concepts of Strategic Management STRATEGIC MANAGEMENT & BUSINESS POLICY 11TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER Prentice Hall, Inc. © 2009 Prentice Hall 2006

Learning Objective After finishing this chapter, you should be able to Understand the benefits of strategic management, Explain how globalization and e-commerce influence strategic management, Understand the basic model of strategic management, Identify some triggering events that act as stimuli for strategic change, Understand strategic management decision making modes, Use the strategic audit as a method of analyzing corporate functions and activities. Prentice Hall, Inc. © 2008

Globalization Electronic Commerce Basic Concepts of Strategic Management Globalization Internationalization of markets and corporations Global (worldwide) markets rather than national markets Electronic Commerce Use of the Internet to conduct business transactions Basis for competition on a more strategic level rather than traditional focus on product features and costs Prentice Hall, Inc. © 2009 Prentice Hall 2006

Electronic Commerce -- Trends Forcing company transformation Basic Concepts of Strategic Management Electronic Commerce -- Trends Forcing company transformation Market access & branding changing – disintermediation of traditional distribution channels Balance of power shift to consumer Competition changing Prentice Hall, Inc. © 2009 Prentice Hall 2006

Electronic Commerce -- Trends Pace\speed of business increasing Basic Concepts of Strategic Management Electronic Commerce -- Trends Pace\speed of business increasing Internet purchasing beyond traditional boundaries Knowledge key asset – source of competitive advantage Prentice Hall, Inc. © 2009 Prentice Hall 2006

Strategic Management Defined Set of managerial decisions and actions that determines the long-run performance of a firm. It includes environmental scanning, strategy formulation, strategy implementation, and evaluation and control. Prentice Hall, Inc. © 2009 Prentice Hall 2006

Strategic Management Defined Strategic management is the process by which managers set an organization’s (or several organizations’) long-term course, develop plans in the light of internal and external circumstances, and undertake appropriate action to reach those goals. Prentice Hall, Inc. © 2008

4 Phases of Strategic Management Basic Concepts of Strategic Management 4 Phases of Strategic Management Firms evolve through the following faces of strategic management. Basic financial planning Forecast-based planning Externally-oriented planning Strategic management Prentice Hall, Inc. © 2009 Prentice Hall 2006

Strategic management in profit sectors and non profit sectors Although strategic management as a conscious enterprise emerged first in the private, profit-making sector, managers in other sectors are beginning to use its methods to try to improve their effectiveness. Prentice Hall, Inc. © 2008

Strategic Management and research As a self-identified area of inquiry, strategic management is still young. The first major conference devoted to the subject was only held in 1977 at the University of Pittsburgh. The Strategic Management Journal and the Journal of Business Strategy each published their first issue three years later. Michael Porter’s landmark study, Competitive Strategy, appeared in 1980. The Academy of Management, the professional association of business school teachers, organized its Business Policy and Strategy division at around the same time. Prentice Hall, Inc. © 2008

Basic Concepts of Strategic Management Basic financial planning: initiate some planning when they requested to set up their budgets; considers activities for one year. Forecast-based planning: consider projects for more than a year. The time horizon is usually 3-5 years. Externally-oriented planning: conduct strategic planning by top management and they leave implementation to low level. Strategic management: planning by forming a team from all levels in the company. Prentice Hall, Inc. © 2009 Prentice Hall 2006

Benefits of Strategic Management Research has revealed that organizations that engage in strategic management generally outperform those that do not. The attainment of an appropriate match, or “fit,” between an organization’s environment and strategy, structure, and processes has positive effects on the organization's performance. For example, studies of the impact of deregulation on The U.S. railroad and trucking industries found that companies that changed their structures as their environment changed outperformed companies that did not. Prentice Hall, Inc. © 2008

Clearer sense of strategic vision Basic Concepts of Strategic Management Highly Rated Benefits A survey of nearly 50 corporations in a variety of countries and industries found the three most highly rated benefits of strategic management to be: Clearer sense of strategic vision Sharper focus on strategic importance Improved understanding of changing environment Prentice Hall, Inc. © 2009 Prentice Hall 2006

Not Always a Formal Process Basic Concepts of Strategic Management Not Always a Formal Process Where is the organization now? (not where do we hope it is) If no changes are made, where will the organization be in 1,2,5 or 10 years? What specific actions should management undertake? What are the risks and payoffs? Prentice Hall, Inc. © 2009 Prentice Hall 2006

Basic Elements of the Strategic Management Process Basic Concepts of Strategic Management Basic Elements of the Strategic Management Process Prentice Hall, Inc. © 2009 Prentice Hall 2006

Environmental Scanning Defined Monitoring, evaluation, and disseminating information from external and internal environments –to key people in the firm Prentice Hall, Inc. © 2009 Prentice Hall 2006

Environmental Variables Basic Concepts of Strategic Management Environmental Variables Prentice Hall, Inc. © 2009 Prentice Hall 2006

SWOT Analysis SWOT is an acronym used to describe the particular strengths, weaknesses, opportunities, and threats, that are strategic factors for a specific company. The external environment consists of variables (OT)that are outside the organization and not typically within the short run control of top management. These variables from the context within which the corporation exists Prentice Hall, Inc. © 2008

SWOT Analysis The internal environment of a corporation consists of variable(SW) that are within the organization itself and are not usually within the short run control of top management. These variables from the context in which work is done. They include the corporation’s structure, culture, and resources, key strengths from a set of core competencies that the corporation can use to gain competitive advantage Prentice Hall, Inc. © 2008

Strengths – Weaknesses Opportunities - Threats Environmental Scanning SWOT Analysis Strengths – Weaknesses Opportunities - Threats Prentice Hall, Inc. © 2009 Prentice Hall 2006

Strategy Formulation Formulation is the development of long-range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses (SWOT). It includes defining the corporate mission, specifying achievable objectives, developing strategies, and setting policy guidelines. Prentice Hall, Inc. © 2008

Mission statement An organization’s mission statement is the purpose or reason for the organization’s existence. It tells what the company is providing to society. Prentice Hall, Inc. © 2008

Purpose/reason for organization Promotes shared expectations Strategy Formulation Mission Statement Purpose/reason for organization Promotes shared expectations Communicates public image Who we are; what we do; what we aspire to Prentice Hall, Inc. © 2009 Prentice Hall 2006

Objectives Objectives are the end results of planned activity. They should be stated as action verbs and tell what is to be accomplished by when and quantified if possible. The achievement of corporate objectives should result in the fulfillment of corporation’s mission. The term goal is often used interchangeably with the term objective. In this book we prefer to differentiate the two terms. In contrast to an objective, we consider a goal as an open ended statement of what we want to accomplish, with no quantification of what is to be achieved and no time criteria for completion Prentice Hall, Inc. © 2008

Goals and objective Corporate Goals/Objectives Profitability (net profit) Efficiency (low costs.etc) Growth (increase in total assets, sales, etc) Resource utilization (ROE, ROI) Reputation(being considered a “top” firm Contributions to employees(employment security, wages, diversity) Contributions to society(tax paid, participation in charities) Market leadership (market share) Prentice Hall, Inc. © 2008

Objective and goals continue Technological leadership(innovation, creativity) Survival (avoiding bankruptcy) Personal need of top management (using the firm for personal purposes, such as providing jobs for relatives) Prentice Hall, Inc. © 2008

Strategy A strategy of a corporation forms a comprehensive master plan that states how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage Prentice Hall, Inc. © 2008

Policy A policy is a broad guideline for decision making that links the formulation of a strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives, and strategies Prentice Hall, Inc. © 2008

Policies 1. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. 2. Policies are most often stated in terms of management, marketing, finance/accounting, production/operations, research and development, and computer information systems activities. Examples: smoking policy, recruitment policy Prentice Hall, Inc. © 2008

Strategy implementation Strategy implementation is a process by which strategies and policies are put into action through the development of programs, budgets, and procedures. the implementation of strategy directly or indirectly connects to all facts of management. Thus it is fundamental to follow a holistic approach when analyzing and assessing complex issues of strategy implementation. Prentice Hall, Inc. © 2008

Budgeting and procedures Budgeting: Is the process of allocating resources to be employed to achieve objectives. Budget is a statement of a corporation’s activities in terms of dollars. Used in planning and control, a budget lists the detailed cost of each program. Many corporations demand a certain percentage return on investment, often called a “hurdle rate” before management will approve a new program. Budget should be directly linked to strategy implementation. Procedures: Sometimes termed Standard Operating Procedures (SOP), are a system of sequential steps or techniques that describe in detail how a particular task or job is to be done. They typically detail the various activities that must be carried out in order to complete the corporation’s program. Prentice Hall, Inc. © 2008

Strategy control and evaluation Ensure that a company is achieving what it sets out to accomplish. It compares performance with desired result and provides the feed back necessary for management to evaluate results and take corrective action, as needed. Prentice Hall, Inc. © 2008

Performance Performance is the end result of activities, it includes the outcomes of the strategic management process. The practice of strategic management is justified in terms of its ability to improve an organization’s performance, typically measured in terms of profits and return in investment. For evaluation and control to be effective, managers must obtain clear, prompt, and unbiased information from the people below them in the corporation’s hierarchy. Using this information, managers comparing what is actually happening with what was originally planed in the formulation stage. Prentice Hall, Inc. © 2008

Organization “fit” with environment Organizational Adaptation Organization “fit” with environment Theory of population ecology\biology: org. unable to adapt to changing conditions. Institution theory: org. can adapt to changes. Strategic choice perspective: not only adapt to changes but also it can reshape its environment. Organizational learning theory: Prentice Hall, Inc. © 2009 Prentice Hall 2006

Strategic flexibility Organizational Adaptation Strategic flexibility Demands long-term commitment to development of critical resources Demands firm become a learning organization Prentice Hall, Inc. © 2009 Prentice Hall 2006

Learning Organizations An organization skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights Prentice Hall, Inc. © 2009 Prentice Hall 2006

Systematic problem solving New approach experimentation Learning Organizations 4 Chief Activities Systematic problem solving New approach experimentation Learning from experiences Intra-organization knowledge transfer Prentice Hall, Inc. © 2009 Prentice Hall 2006

Hierarchy of Strategy Basic Concepts of Strategic Management Prentice Hall, Inc. © 2009 Prentice Hall 2006

levels of strategy\hierarchy A large corporation tends to have three levels of strategy (corporate, business, and functional) which form a hierarchy of strategy. Prentice Hall, Inc. © 2009

3 Types of Strategy Corporate strategy Business strategy Basic Concepts of Strategic Management 3 Types of Strategy Corporate strategy Business strategy Functional strategy Prentice Hall, Inc. © 2009 Prentice Hall 2006

Corporate strategy Describes a company’s overall direction in terms of it’s general attitude toward growth and the management of it’s various businesses and product lines. Corporate strategies typically fit within the three main categories of stability, growth, and retrenchment. Staples, for example, was following a corporate strategy of growth by diversifying from it’s base in retailing into the delivery business. Prentice Hall, Inc. © 2008

Corporate Strategy Stability Growth Retrenchment Basic Concepts of Strategic Management Corporate Strategy Stability Growth Retrenchment Prentice Hall, Inc. © 2009 Prentice Hall 2006

Business Strategy Competitive strategies Cooperative strategies Basic Concepts of Strategic Management Business Strategy Competitive strategies Cooperative strategies Prentice Hall, Inc. © 2009 Prentice Hall 2006

Functional Strategy Technological leadership Basic Concepts of Strategic Management Functional Strategy Technological leadership Technological followership Prentice Hall, Inc. © 2008 Prentice Hall 2006

Strategic Decision-Making Process Basic Concepts of Strategic Management Strategic Decision-Making Process Prentice Hall, Inc. © 2008

Business strategy Usually occurs at the business unit or product level, and it emphasizes improvement of the competitive position of a corporation’s products or services in the specific industry or market segment served by that business unit. Business strategies are grouped into two overall categories , competitive and cooperative strategies. For example, staples has used a competitive strategy to differentiate it’s retail stores from it’s competitors by adding services to it’s stores, such as copying, UPS shipping, and hiring mobile technicians who can fix computers and install networks. British airways has followed a cooperative strategy by forming an alliance with American airlines in order to provide global service. Cooperative stratgey may thus be used to support a competitive strategy. Intel, a manufacturer of computer microprocessors, uses it’s alliance (cooperative strategy) with Microsoft to differentiate itself (competitive steategy) from AMD, it’s primary competitor. Prentice Hall, Inc. © 2008

Functional strategy Is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. Examples of research and development (R&D) functional strategies are technological followership (imitation of the products of other companies)and technological leadership (pioneering of an innovation). For years, Magic Chef had been a successful appliance maker by spending little on R&D but by quickly imitating the innovations of other competitors. This has helped the company to keep it costs lower than those of it’s competitors and consequently to compete with lower prices. In terms of marketing pull , the process of spending huge amounts on advertising in order to create customer demand. This supports P&G’s competitive strategy of differentiating it’s products from those of it’s competitors. Prentice Hall, Inc. © 2008

Strategic Decision Making Strategic Decisions Rare: unusual, no precedent to follow. Consequential : require substantial resources and commitment from all. Directive: set precedent for future action. Prentice Hall, Inc. © 2008 Prentice Hall 2006

Top managers tend to use one of four modes of strategy formulation: Strategic Decision Making Top managers tend to use one of four modes of strategy formulation: Mintzberg’s Modes Entrepreneurial mode Adaptive mode Planning mode Logical incrementalism Prentice Hall, Inc. © 2008 Prentice Hall 2006

Mintzberg’s Modes Entrepreneurial mode: the strategy is made by powerful individual. The focus on opportunities. Adaptive mode: using reactive solution rather than proactive. Planning mode: it uses reactive and proactive mode. Data gathering and analysis and select strategies. Logical incrementalism: strategy is set based on a series of incremental commitment rather than through global formulation of total strategies. This suitable when environment is changing rapidly. Prentice Hall, Inc. © 2008

5 Elements of Good Strategy Hambrick and Fredrickson – Good Strategy 5 Elements of Good Strategy Arenas Vehicles Differentiators Staging Economic logic Prentice Hall, Inc. © 2008 Prentice Hall 2006