Chapter 5: strategy and strategic management Business Leadership: Management Fundamentals John R. Schermerhorn, Jr., Barry Wright, and Lorie Guest © John Wiley & Sons Canada, Ltd.

Planning Ahead — Chapter 5 Learning Goals Understand the meaning of strategic management Identify and apply the essentials of strategic analysis Understand what corporate strategies are and how are they formulated

Strategic Management Basic concepts of strategy: Competitive advantage: operating with an attribute or set of attributes that allows an organization to outperform its rivals. Cost and quality Knowledge and speed Barriers to entry Financial resources Sustainable competitive advantage: one that is difficult for competitors to imitate. © John Wiley & Sons Canada Ltd.

Basic concepts of strategy Strategy: a comprehensive action plan that identifies long-term direction for an organization and guides resource utilization to accomplish organizational goals with sustainable competitive advantage. Strategic intent: focusing all organizational energies on a unifying and compelling goal. © John Wiley & Sons Canada Ltd.

Figure 5.2 Three levels of strategy corporate, business, and functional strategies © John Wiley & Sons Canada Ltd.

Levels of strategies Corporate strategy: sets long-term direction for the total enterprise Business strategy: identifies how a division or strategic business unit will compete in products or services Functional strategy: guides activities within one specific area of operations © John Wiley & Sons Canada Ltd.

Strategic Management Process Goal of strategic management is to create above-average returns for investors Returns exceeding those for alternative opportunities at equivalent risk Earning above-average returns depends in part on the organization’s competitive environment © John Wiley & Sons Canada Ltd.

Strategic Management Process (cont’d) Strategic management: the process of formulating and implementing strategies to accomplish long-term goals and sustain competitive advantage Strategic analysis: process of analyzing the organization, the environment, its competitive position and current strategies Strategy formulation: the process of crafting strategies to guide allocation of resources Strategy implementation: putting strategies into action © John Wiley & Sons Canada Ltd.

Figure 5.3 Strategy formulation and implementation in the strategic management process. © John Wiley & Sons Canada Ltd.

Essentials of Strategic Analysis Drucker’s strategic questions for strategy formulation: What is our business mission? Who are our customers? What do our customers consider valuable? What have been our results? What is our plan? © John Wiley & Sons Canada Ltd.

Essentials of Strategic Analysis (cont’d) Analysis of mission: The reason for an organization’s existence An important test of the mission is how well it serves the organization’s stakeholders © John Wiley & Sons Canada Ltd.

Figure 5.4 How external stakeholders can be valued as strategic constituencies of organizations © John Wiley & Sons Canada Ltd.

Essentials of Strategic Analysis (cont’d) Analysis of core values: Values are broad beliefs about what is or is not appropriate Organizational culture reflects the predominant value system of the organization as a whole © John Wiley & Sons Canada Ltd.

Organizational Culture Strong core values: Helps build organizational identity Gives character to the organization in the eyes of employees and external stakeholders Backs up the mission statement Guides the behaviour of organizational members in meaningful and consistent ways © John Wiley & Sons Canada Ltd.

Organizational Culture (cont’d) Observable Culture: Visible actions and events Heroes Ceremonies, rites, rituals Legends and stories Metaphors and symbols Core Culture: Underlying values Innovation and risk-taking Ethics and integrity Social responsibility Customer service Performance and teamwork © John Wiley & Sons Canada Ltd.

Organizational Culture (cont’d) Analysis of objectives: Operating objectives direct activities toward key and specific performance results Typical operating objectives: Profitability Financial health Cost efficiency Customer service Product quality Market share Human talent Innovation Social responsibility © John Wiley & Sons Canada Ltd.

SWOT Analysis What are our Strengths? Manufacturing efficiency? Skilled workforce? Good market share? Strong financing? Superior reputation? What are our Weaknesses Outdated facilities? Inadequate research and development? Obsolete technologies? Weak management? Past planning failures? © John Wiley & Sons Canada Ltd.

SWOT Analysis (cont’d) What are our Opportunities? Possible new markets? Strong economy? Weak market rivals? Emerging technologies? Growth of existing market? What are our Threats? New competitors? Shortage of resources? Changing market tastes? New regulations? Substitute products? © John Wiley & Sons Canada Ltd.

Figure 5.6 SWOT analysis of strengths, weaknesses, opportunities, and threats © John Wiley & Sons Canada Ltd.

P.E.S.T. Analysis Political: laws and regulations, government policies. Economic: general environment influenced by customer spending, resource supplies, and investment capital. Socio-Cultural: norms, customs, social values, gender roles. Technological: developments in technology and the edge of another technology revolution. © John Wiley & Sons Canada Ltd.

Porter’s Five Forces Model Porter’s model of five strategic forces affecting competition: Industry competition: The intensity of rivalry among firms and their competitive behaviour New entrants: the threat of new competitors entering the market Substitute products or services: the threat of substitute products or services © John Wiley & Sons Canada Ltd.

Porter’s Five Forces Model (cont’d) Porter’s model of five strategic forces affecting competition: Bargaining power of suppliers: the ability of resource suppliers to influence the cost of products or services Bargaining power of customers: the ability of customers to influence the price they will pay for products or services © John Wiley & Sons Canada Ltd.

Figure 5.8 Porter’s model of five strategic forces affecting industry competition © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation Grand or master strategies: Growth strategies: seek an increase in size and the expansion of current operations Stability strategy: maintains current operations without substantial changes Renewal strategy: tries to solve problems and overcome weaknesses that are hurting performance Combination strategy: pursues growth, stability, or retrenchment in some © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) Growth and diversification strategies: Growth strategies Seek an increase in size and the expansion of current operations. Types of growth strategies: Concentration strategies Diversification strategies Related diversification Unrelated diversification Vertical integration © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) Restructuring strategies: Tries to correct weaknesses by changing the mix or reducing the scale of operations by: Restructuring through turnaround Restructuring through downsizing Restructuring through divestiture © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) Global strategies: Globalization strategy World is one large market; standardize products and advertising as much as possible Ethnocentric view Multidomestic strategy Customize products and advertising to local markets as much as possible Polycentric view Transnational strategy Balance efficiencies in global operations and responsiveness to local markets Geocentric view © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) Co-operative strategies Strategic alliances: two or more organizations partner to pursue an area of mutual interest Types of strategic alliances: Outsourcing alliances Supplier alliances Distribution alliances Co-opetition © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) E-business strategies The strategic use of the Internet to gain competitive advantage Popular e-business strategies Business-to-business (B2B) strategies Business-to-customer (B2C) strategies © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) Web-based business models: Brokerage model Advertising model Merchant model Subscription model Infomediary model Community model © John Wiley & Sons Canada Ltd.

Corporate-Level Strategy Formulation (cont’d) Strategic portfolio planning: Portfolio planning seeks the best mix of investments among alternative business opportunities BCG Matrix analyzes business opportunities according to market growth rate and market share © John Wiley & Sons Canada Ltd.

Boston Consulting Group (BCG) Matrix Ties strategy formulation to analysis of business opportunities according to … Industry or market growth rate Low versus high Market share © John Wiley & Sons Canada Ltd.

Figure 5.9 The BCG matrix approach to corporate strategy formulation © John Wiley & Sons Canada Ltd.

BCG Matrix (cont’d) Business conditions and related strategies: Stars High share/high growth businesses Preferred strategy: growth Cash cows High share/low growth businesses Preferred strategy: stability or modest growth © John Wiley & Sons Canada Ltd.

BCG Matrix (cont’d) Question marks Low share/high growth businesses Preferred strategy: growth for promising question marks and restructuring or divestiture for others Dogs Low share/low growth businesses Preferred strategy: retrenchment by divestiture © John Wiley & Sons Canada Ltd.

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