Introducing the Concepts Chapter 1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Chapter One Learning Objectives 1.1 Explain why strategic management is important. 1.2 Explain what strategic management is. 1.3 Explain who’s involved with strategic management. 1.4 Discuss the three important factors impacting strategic management today.   Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Learning Outcome 1.1 Explain Why Strategic Management Is Important Despite your job function, everyone in the organization has a role in strategic management It enables understanding how strategic decisions are made Establishes an understanding of how work is valued and rewarded It makes a difference in how well an organization performs You may be asking yourself, “Why is this stuff important to organizations and, even more to the point, why is it important to me?” Life after school for most of you means finding a job in order to have an income, this means you’ll be working for some organization. Understanding how and why strategic decisions are made is important so you can do your job well and have your work valued and rewarded accordingly. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 1.1. – cont’d Effective organizations use strategy to Impact the bottom line Adapt to changing situations, internal & external Cope with uncertainties Effectively guide organizational decision makers Studies show relationship between effective organizations and their use of strategic management. All types and sizes face continually changing situations both externally and internally. Being able to cope with these uncertainties and achieve expected levels of performance is a real challenge. The deliberate structure of the strategic management process guides organizational decision makers in examining important issues to determine the most appropriate strategic decisions and action. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Relationship Between Strategic Management & Performance Studies of decision making process suggest the way strategy is developed can have an affect on performance Decision makers that collected information and used analytical techniques make more effective strategic decisions than those that do not Another study found organizations that used several approaches to develop strategy outperform those that use a single approach Structured, systematic approach can positively affect organizational performance Strategic management helps achieve the organization’s goals by coordinating and focusing the various divisions, departments, and work activities Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Corporate Reputations A good corporate reputation is critical and surveys support its importance and influence On financial performance Executing strategy Transparency and disclosure of information Strong corporate governance Check Companies with the best reputations www.reputationinstitute.com/knowledge-center/hall-of-fame Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Learning Outcome 1.2 Explain what strategic management is. Definition of Strategy Strategy is a series of goal-directed plans and actions that align an organization’s skills and resources with the opportunities and threats in its environment Definition of Strategic Management This is a process for situation analysis and strategy formulation, implementation, and evaluation Early efforts ranged from defining strategies as integrated decisions, actions, or plans designed to set and achieve organizational goals to defining strategy as simply the outcome of the strategy formulation process. We’re defining strategies as an organization’s goal-directed plans and actions that align (“match”) its capabilities and resources with the opportunities and threats in its environment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Four Characteristics of Strategic Management Interdisciplinary It focuses on the whole organization, rather than any functional part External Focus – interaction of organization with external environment Economy Competitors Market demographics Strategic management has four characteristics. First, it is, by nature, interdisciplinary. It doesn’t focus on any one specific organizational area. Second, strategic management has an external focus, that is, it involves the interactions of the organization with its external environment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Four Characteristics of Strategic Management – cont’d Internal Focus Understands the resources and capabilities the organization does or does not have Future Direction of the Organization, includes Decisions Planning Shifts or changes in products or markets Strategic management also has an internal focus, meaning it involves assessing the organization’s resources and capabilities. Finally, strategic management involves the future direction of the organization. That “future” can mean weekly manufacturing decisions, yearly financial planning cycles, or significant long-term shifts in the organization’s products and markets. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Strategic Management Process A process is a series of interrelated and continuous steps that lead to an outcome The Strategic Management Process employs its four characteristics to create a set of strategies used to conduct its business In the strategic management process, the interrelated activities—situation analysis, strategy formulation, strategy implementation, and strategy evaluation—result in a set of strategies the organization . Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Situation Analysis Situation analysis is required before deciding upon a strategic direction or response and it involves scanning and evaluating The current organizational context The external environment The organizational environment A situation analysis involves scanning and evaluating the current organizational context, external environment, and organizational environment. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Strategy Formulation Strategy formulation is developing and choosing appropriate strategies, as guided by the situation analysis, and includes three main types of strategies Functional Strategies (also called operational strategies) Competitive Strategies (also called business strategies) Corporate Strategies (these are guiding strategies by which all efforts are aligned) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Functional Strategies Functional strategies are goal oriented plans and actions of the functional areas of an organization, they include: Production-Operations Marketing Research & Development Human Resources Financial-Accounting Information Technology & Support Functional strategies (also called operational strategies) are the goal-directed plans and actions of the organization’s functional areas. The most common functional areas include production-operations (manufacturing), marketing, research and development, human resources, financial-accounting, and information systems technology and support. But keep in mind that each organization has its own unique functions. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Competitive Strategies Competitive strategies or business strategies are goal directed plans and actions concerned with how an organization competes in a specific business or industry Looks at all aspects of strategies and actions Seeks to determine what the company currently can do and what it wants to do Focus is on how it might more effectively compete Competitive strategies (also called business strategies) are the goal-directed plans and actions concerned with how an organization competes in a specific business or industry. Competitive strategies address the competitive advantages an organization currently has or wants to develop. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Corporate Strategy Corporate strategies are goal directed plans and actions that are concerned with what business or businesses a firm wants to be in and what to do with those businesses; for example FedEx’s decision to acquire Kinko's PepsiCo’s decision to spin off their fast-food division Corporate strategies are goal-directed plans and actions concerned with the choices of what business(es) to be in and what to do with those businesses. For instance, FedEx’s decision to acquire Kinko’s is an example of a corporate strategy. Other examples would be decisions PepsiCo makes regarding its various divisions—PepsiCo Americas Beverage (beverages including Pepsi, Aquafina Tropicana, Gatorade, and so forth), PepsiCo International, Frito-Lay North America (snack foods), Quaker Foods North America (prepared foods), and Latin America Foods. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Strategy Implementation It is not enough to formulate great strategies, they must be implemented Strategy implementation is putting the various stages of strategies into action How a strategy is implemented must be considered Strategy implementation is putting the various strategies into action. Because how a strategy is implemented should be considered as it’s formulated, we’ll be looking at that as we discuss each type of strategy. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Strategy Evaluation Strategy evaluation involves evaluating both the outcomes of the strategies and how they have been implemented Determine if they produced the expected strategic goals Helps with the evaluation of results and, if necessary, any modification of strategies Strategy evaluation involves evaluating both the outcomes of the strategies and how they’ve been implemented. If they don’t measure up to expectations or strategic goals, then the strategy itself or its implementation may need to be modified. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Strategic Management Process in Action The Strategic Management Process is a continual cycle It is not a sequential process It allows for analysis of the current situation Enables adjustments to current strategies as necessary, to pursue and achieve goals The way organizations actually do strategic management doesn’t always happen according to a prescribed sequence, but that doesn’t minimize the importance of the specific steps in the process. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Looking at Strategic Management’s Past Strategy’s military roots Origin of the word is Greek referring to military commander Historical references to the design of plans and actions to gain an edge on the enemy The concept involves analyzing the situation and effecting an appropriate response Strategy can be seen in historical decisions and actions used by military organizations. (The word strategy itself comes from the Greek word strategos, or military commander.) Historical accounts tell us that a country’s military decision makers designed battlefield strategies to gain an edge on the enemy Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Academic Origins of Strategic Management Strategic management is a relatively young field. The theoretical foundation is from economics and organization studies; with emphasis on Rationality Predictability Similarity As a field of study, strategic management is relatively young. Much of its theoretical foundation comes from economics and organization studies. Early organizational studies by Frederick Taylor (scientific management), Max Weber (bureaucratic organizations), and Chester Barnard (administrative functions and the organization as an open system) provided important knowledge about efficient and effective organizations and the role that managers played. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Strategic Planning and Strategic Management Emerge During the 1960s, organization theorists searched for explanations of organizational differences in functioning and performance Attempts made to determine if there was one best way to manage in all situations Contingency approaches emerged when it was determined that each organization was different and the best way to manage depended on the situation During the 1960s, the belief that there was one correct way to manage in all situations was replaced by contingency approaches, which proposed that each organizational situation was different and that the best way of managing depended on the situation. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Learning Outcome 1.3 Explain Who’s Involved with Strategic Management The Board of Directors The Role of Top Management Other Managers and Organizational Employees Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Who’s Involved with Strategic Management? Strategic management is more than the responsibility of an organization’s top managers People at all levels of the organization play a role in strategy Developing it Implementing it Changing it Strategic thinking techniques are needed at all levels of an organization. People at all organizational levels play a role in developing, implementing, and changing strategy. Strategic management is just as important for the bank teller at a drive-through facility as it is for the bank’s executive vice president who’s in charge of commercial loans Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall The Board of Directors Usually an elected group that represents a company’s shareholders They have a legal obligation to represent and protect the interests of shareholders through corporate governance In the past, board participation was viewed as approving strategies designed by management With increasing shareholder activism, boards are more involved in the strategic process The board of directors is an elected group that represents a company’s shareholders. A board’s legal obligation is to represent the shareholders (stockholders) and protect their interests. It is empowered to act on the shareholders’ behalf in overseeing the management of the company and plays a significant role in corporate governance. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Typical Board Responsibilities Review and approve strategic goals and plans Review and approve organization’s financial standards and policies Ensure the integrity of organization’s financial controls and reporting system Approve an organizational philosophy Monitor organizational performance and regularly review performance results Table 1.1 lists some of the responsibilities of a board of directors. Even not-for-profit organizations often have a board of advisers. In fact, your college may have a governing board that evaluates top management decisions and perhaps even makes recommendations as far as future strategic decisions and actions Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Typical Board Responsibilities – cont’d Select, and compensate top level managers Develop management succession plans Review and approve capital allocations and expenditures Monitor relations with shareholders and other key stakeholders Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Role of Top Management Responsible for every decision and outcome, top management plays a most significant role in strategic management process Top management includes C-Suite level officers, including CEO, Chief Executive Officer COO, Chief Operating Officer CFO, Chief Finance Officer CIO, Chief Information Officer An organization’s top managers play a significant role in the strategic management process. An organization’s top manager is typically the chief executive officer (CEO). This usually works with a top management team that includes other executive or senior managers such as a chief operating officer (COO), chief financial officer (CFO), chief information officer (CIO), and other individuals who may have various titles. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall How can top managers provide effective strategic leadership? Six key dimensions have been identified. In Figure 1.4.) These dimensions include determining the organization’s purpose or vision, exploiting and maintaining the organization’s core competencies, developing the organization’s human capital, creating and sustaining a strong organizational culture, emphasizing ethical organizational decisions and practices, and establishing appropriately balanced organizational controls. Each dimension describes an important part of the strategic management process. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Other Managers and Organizational Employees Managers and employees at all levels have strategic responsibilities that include: Strategy implementation, putting strategies into action Strategy evaluation, determining if the strategies are working Adjust the strategies to achieve desired ends Although an organization’s top managers have several important strategic leadership responsibilities in the strategic management process, managers and employees at other levels throughout the organization also are important to the process. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Learning Outcome 1.4 Discuss the two important factors impacting strategic management today The Global Economy and Globalization Corporate Governance Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Global Economy and Globalization In past twenty-five years, globalization has become a leading focus of company strategies Increasing number of companies have revenues coming from outside their country of origin Global recession creates strategic challenges Reduced consumer demand Restricted access to capital Pressures to reduce costs Over the last quarter century, globalization has been an important component of many company’s strategies. National borders have become irrelevant. For instance, more than two-thirds of Avon’s revenues come from outside North America. Although globalization has offered significant business opportunities, today’s economic climate is challenging even the best managed global companies. Doing business globally has never been easy, but the next few years are likely to be even more difficult as countries continued to face an uncertain economic environment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Global Economy: Key Mechanisms World Trade Organization (WTO) Helps 153 member countries conduct business World Bank Group Cooperative of 185 member countries that provides financial and technical assistance, to promote economic development and poverty reduction International Monetary Fund (IMF) Loans and assistance to establish financial stability The World Trade Organization (WTO), a global organization of 153 countries whose goal is to help organizations conduct business by enacting trade agreements negotiated and ratified by the vast majority of the world’s trading nations. The World Bank Group, a cooperative of 187 member countries that provides vital financial and technical assistance to developing countries around the world. It’s goal is to promote long-term economic development and poverty reduction. The International Monetary Fund (IMF) is an organization of 187 countries that promotes international monetary cooperation and provides member countries with policy advice, temporary loans, and technical assistance to establish and maintain financial stability and strengthen economies. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Corporate Governance: The Global Perspective – cont’d GMI also looks at corporate behavior and social responsibility Among the highest ratings went to Ireland, Canada, UK, Australia, USA Among the lowest were Indonesia, Mexico, China, Japan Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Corporate Governance Greater awareness of the value of corporate governance driven by the financial scandals of the past decade Destroyed billions of dollars in shareholder value Directors of boards failed to find or address organizational problems Enron. Tyco. Worldcom. These are just a few of the more notorious names from the corporate financial scandals that destroyed billions of dollars in shareholder value during a timespan of approximately 18 months in 2001 and 2002. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Corporate Governance – cont’d What is corporate governance? The way the a corporation is governed The way the board uses organizational resources The manner in which conflicts are resolved among multiple participants in the organization The sum of how a corporation uses its resources to protect the interests of shareholders Corporate governance is the way a corporation is governed or the “determination of the broad uses to which organizational resources will be deployed and the resolution of conflicts among the myriad participants in organizations.” Corporate governance involves how a corporation uses its resources and protects stakeholders’ interests. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Role of Boards of Directors The original role of the board of directors was to ensure a group, independent from management to look out for investors who In practice, the boards developed a “cozy” relationship with the CEO and management It resulted in reciprocal “care taking” The original purpose of a corporate board of directors was to ensure that a group, independent from management, looked out for the interests of the owners (i.e., the shareholders) who were not involved in the day-to-day operations of the corporation. What actually happened in too many organizations was that board members often enjoyed a cozy relationship in which board members “took care” of the CEO and the CEO “took care” of board members. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Guiding Principles of Corporate Governance The primary duty of the board is to select a CEO and oversee the CEO and senior management in an effort to achieve a competent and ethical operation of the business It is the responsibility of management to operate in an effective and ethical manner to produce shareholder value It is the responsibility of management to produce in a timely manner financial statements that fairly represent the financial condition and results of corporate operations Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Guiding Principles of Corporate Governance – cont’d 4. It is the responsibility of the board to engage an independent accounting firm to audit the financial statements, issue an opinion that those statements are in accordance with Generally Accepted Accounting Principles, and oversee the corporation’s relationship with the outside auditor 5. It is the responsibility of the board to play a leadership role in shaping corporate governance 6. It is the responsibility of the board to adopt and oversee implementation of compensation policies for management and CEO performance Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Guiding Principles of Corporate Governance – cont’d 7. It is the responsibility of the board to respond appropriately to shareholder concerns 8. It is the responsibility of the corporation to deal with its employees, customers, suppliers, and other constituencies in a fair and equitable manner Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Corporate Governance – cont’d Sarbanes-Oxley, a US law, was designed to protect investors by improving accuracy and reliability of corporate disclosures The law mandates two areas of corporate governance reform The role of the board of directors The type and scope of financial reporting Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The Role of Boards of Directors – cont’d Sarbanes-Oxley changed the relationship Demanding board members of publicly traded companies be responsible for strategic and financial decisions The Business Roundtable, an association of CEOs of leading companies outlined a set of governance principles for boards and top managers that are critical to the effective functioning of corporations and the integrity of public markets Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Financial Reporting Sarbanes-Oxley also called for more disclosure and transparency of financial information, creating specific requirements for businesses Certification of the accuracy of financial statements by requiring senior managers to sign off on them Mandated publicly traded firms establish an auditing of internal financial controls through independent auditors These mandates have created compliance costs Sarbanes-Oxley also called for more disclosure and transparency of financial information. One requirement was the certification of the accuracy of financial statements, which senior managers now must do by signing off on them. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Concluding Thought Strategic management is a business reality No matter where in an organization a person works or what their particular job may be, they will be involved with and affected in some way by strategic management No matter where in an organization you work or what your job is, you’ll find yourself involved in some way with strategic management. Whether your career goal is to be part of a top management team or whether you plan to apply your academic training in some functional area of the organization, you’ll be affected by and have an effect on the organization’s strategic management process. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall