1. 7 Chapter Strategic Management McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives After reading this chapter, you should be able to: Implement the steps in the strategic management process. Conduct an analysis of the firm’s strengths, weaknesses, opportunities, and threats. Identify the factors that create a sustained competitive advantage. Link external and internal environment data to determine a firm’s strategic intent and mission. Choose appropriate business strategies at the corporate and business-unit levels. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

4. The Strategic Management Process (continued) 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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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: McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

6. SWOT Analysis Commonly used strategy tool: SWOT  Strengths, Weaknesses, Opportunities, Threats Step 1: Analyze the organization’s internal environment, identifying its strengths and weaknesses. Step 2: Analyze the organization’s external environment, identifying its opportunities and threats. Step 3: Cross-match  Strengths with opportunities  Weaknesses with threats  Strengths with threats  Weaknesses with opportunities McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

7. 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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

8. Components of External Analysis ScanningMonitoring ForecastingAssessing McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

9. Scope of the External Analysis General Environment The Industry Strategic Groups Competitor Analysis McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

10. The Segments of the General Environment Demography Economic Conditions Political/Legal Forces Socio-cultural Conditions Technological Changes Globalization McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

11. Porter’s Framework for Analyzing the Industry Environment Threat of new entrants Threat of substitutes Suppliers Customers Intensity of rivalry among competitors McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

12. 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

13. 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 McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

14. Resources Capabilities Strategy Potential for sustainable competitive advantage 1.Identify the firm’s resources and locate areas of strength and weakness relative to competitors. 2.Identify the firm’s capabilities (What can the firm do?) 3.Appraise the profit generating potential of resources/capabilities in terms of creating, sustaining, and exploiting competitive advantage. 4.Select a strategy that best exploits the firm’s capabilities relative to external opportunities. 5.Identify resource gaps that need to be filled. Invest in replenishing and augmenting the firm’s resource base. Core Competencies and Market Opportunities McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

15. 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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

16. 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 McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

17. Analyzing the Firm’s Capabilities Functional Analysis Value Chain Analysis Benchmarking McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

18. 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 DevelopmentCapability in basic research Ability to develop innovative new products Speed of new product development McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

19. Analyzing Capabilities by Functional Areas (continued) 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 McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

20. A Simple Value Chain Technology Product Design ManufacturingMarketingDistributionService SourceSophisticationPatents Product Process Product Choices Function Physical Characteristics AestheticsQualityIntegration Raw Materials CapacityLocationProcurement Parts Production AssemblyPricesAdvertisingPromotion Sales Force PackageBrandChannelsIntegrationInventoryWarehousingTransportWarranty Dealer Support AvailabilitySpeedPrices McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

21. 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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

22. 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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

23. Strategy Formulation The design of an approach to achieve the firm’s mission. Takes place at:  Corporate-Level  Business-Level McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

24. 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 McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

25. The Boston Consulting Group’s Growth Share Matrix 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 Relative Market Share Annual Real Rate of Market Growth McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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 McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

27. ORGANIZATIONAL STRATEGIES PRODUCTS Present Products New Products Present Market penetration Product development Concentric Diversification MARKETS New Market development Diversification Conglomerates

28. Business-Level Strategy Deals with how to compete in each business area or market segment. Firms have three basic choices:  Cost leadership strategy  Differentiation strategy  Focus strategy McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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 7.4 7.12

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

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

32. Feature 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

33. Strategy Implementation Organizational Structure and Controls Cooperative Strategies Human Resource Strategies Strategic Leadership Corporate Entrepreneurship and Innovation McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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 McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

35. Applications: Management Is Everyone’s Business — For the Manager An effective manager must be proactive in responding to evolving challenges and opportunities rather than being overtaken by events. Learning to think strategically forces managers to:  Be alert for changes in the external and internal environments.  Modify the firm’s strategic intent, mission, and formulated strategy when necessary.  Effectively implement the new or redesigned strategies. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

36. Applications: Management Is Everyone’s Business — For Managing Teams The strategic management process generally involves teams of managers and employees from different areas who bring their perspectives and expertise to bear on issues facing the firm. A key factor is how well the firm can mobilize and integrate the efforts of team members. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

37. Applications: Management Is Everyone’s Business — For Individuals Individual employees are more likely to make greater contributions to the firm if they engage in activities that have strategic value. Employees can be attuned to changes in their area of expertise and advise management on the strategic implications of those changes. Employee success depends on the ability to adapt to the firm’s strategic change. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.