Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Chapter 7 Strategic Management

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 2 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 3 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 4 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 5 Analyze the external and internal environments Define strategic intent and mission Formulate strategies Implement strategies Assess strategic outcomes Components of the Strategic Management Process:

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 6 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 7 Components of External Analysis ScanningMonitoring ForecastingAssessing

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 8 Scope of the External Analysis General Environment The Industry Strategic Groups Competitor Analysis

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 9 The Segments of the General Environment Demography Economic Conditions Political/Legal Forces Socio-cultural Conditions Technological Changes Globalization

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 10 Porter’s Analyzing the Industry Environment Threat of new entrants Threat of substitutes Suppliers Customers Intensity of rivalry among competitors

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 11 Competitive Forces in the Task Environment Adapted from Figure 3.3 Suppliers bargaining power Threat of new competitors Buyers bargaining power Threat of substitute goods/services Rivalry among existing firms in industry 3.8

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 12 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 13 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 14 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 15 Analyzing the Firm’s Capabilities Functional Analysis Value Chain Analysis Benchmarking

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 16 Analyzing Capabilities by Functional Areas Functional AreaCapability 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 ManagementComprehensive 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 17 Analyzing Capabilities by Functional Areas (cont.) Functional AreaCapability Manufacturing Efficiency in volume manufacturing Capacity for continual improvements in production processes Flexibility and speed of response Product DesignDesign capability MarketingBrand management and brand promotion Promoting and exploiting reputation for quality Responsive to market trends Sales and DistributionEffectiveness in promoting and executing sales Efficiency and speed of distribution Quality and effectiveness of customer service

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 18 Value-Chain Analysis Breaks down the firm into a sequential series of activities and attempts to identify the value added of each activity

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 19 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 20 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.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 21 Strategic Intent and Mission (cont.) Strategic Intent and Mission Intent: How firm would like to use Resources Capabilities Core competencies Mission: Determine the firm’s external focus on Products Markets

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 22 Strategy Formulation The design of an approach to achieve the firm’s mission. Takes place at:  Corporate-Level  Business-Level

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 23 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 24 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 25 Boston Consulting Group’s Growth Share Matrix High Share, High Growth Earnings: high stable, growing Cash Flow: neutral Strategy: invest for growth STAR Low Share, High Growth Earnings: low, unstable, growing Cash Flow: negative Strategy: analyze to determine whether can be grown into a star, or will become a dog ? High Share, Low Growth Earnings: high, stable Cash Flow: high stable Strategy: milk CASH COW Low Share, Low Growth Earnings: low, unstable Cash Flow: neutral or negative Strategy: divest DOG Relative Market Share Annual Real Rate of Market Growth McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 26 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 27 ORGANIZATIONAL STRATEGIES » Present Products New Products Present Market penetration Product development Markets Concentric Diversification New Market development Conglomerates Markets

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 28 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

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 29 Generic Strategies Model Low Cost (price) Broad Narrow Uniqueness Source of Advantage StrategicTarget Differentiationstrategy Cost leadership strategy Focus strategy Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors (p. 39) by Michael E. Porter, Copyright © 1980 by The Free Press. Adapted from Figure

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 30 Application of the Generic Strategies Model Feature Company Examples Business-Level Strategy Differentiation Premium Quality Brand image Technological leadership Customer service Toyota Mercedes-Benz Honda Lexus 7.13

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 31 Cost Leadership Strategy Essential actions associated with a cost leadership strategy: Utilizing facilities or equipment that yield high economies of scale Constantly striving to reduce per unit overhead, manufacturing, marketing, labor and follow-up service costs Minimizing the labor-intensive personal services and sales forces Avoiding customers whose demands would result in high personal selling or service costs 7.15

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 32Feature Business-Level Strategy Focus  Careful identification of target market (niche)  Cost leadership emphasis or differentiation emphasis applied to a specific niche  Constant review of customer demand in niche  Create a unique image for the products Application of the Generic Strategies Model (cont.) 7.14

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 33 Strategy Implementation Organizational Structure and Controls Cooperative Strategies Human Resource Strategies Strategic Leadership Corporate Entrepreneurship and Innovation

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 34 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