CHAPTER 1 Basic Concepts of Strategic Management STRATEGIC

Basic Concepts of Strategic Management Set of managerial decisions and actions that determines the

Basic Concepts of Strategic Management 4 Phases in the Evolution of Strategic Management 1. 2. 3. 4. Basic financial planning – internal focus on budgeting (1 yr horizon) Forecast-based planning – extrapolate the current situation into the future (3 -5 yr horizon) Externally-oriented planning – planning department and/or consultants develop a top-down strategy with no lower level involvement. Strategic management – involves various departments and levels across the organization. An ongoing process that includes implementation, evaluation and control issues. Prentice Hall, Inc. © 2006 1 -3

Basic Concepts of Strategic Management Highly Rated Benefits • • • Clearer sense of strategic vision Sharper focus on strategic importance Improved understanding of changing environment Prentice Hall, Inc. © 2006 1 -4

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. © 2006 1 -5

Basic Concepts of Strategic Management Most Popular Management Tools 2003 Survey • Strategic Planning – 89% • Mission/Vision Statements – 84% Real Value? • Strategic Thinking • Organizational Learning Prentice Hall, Inc. © 2006 1 -6

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. © 2006 1 -7

Basic Concepts of Strategic Management Regional Trade Organizations • European Union (EU) – 25 member nations promote 60% local content to avoid tariffs • North American Free Trade Agreement (NAFTA) – Canada, Mexico and US 62. 5% local content. • Mercosur/Mercosul – South American equivalent of NAFTA • Central American Free Trade Agreement (CAFTA) – duty free textiles, consumer goods and farm exports. • Association of South Eastern Asian Nations (ASEAN) – less powerful due to Chine, Japan and Korea exclusion. Prentice Hall, Inc. © 2006 1 -8

Basic Concepts of Strategic Management Electronic Commerce -- Trends • Forcing company transformation – • Market access & branding changing – • Balance of power shift to consumer – networking of suppliers, customers and partners disintermediation of traditional distribution channels access to many options and comparative shopping • Competition changing – due to low barriers to entry Prentice Hall, Inc. © 2006 1 -9

Basic Concepts of Strategic Management Electronic Commerce -- Trends • Pace of business increasing – dog years = Internet years • Internet pushing companies beyond traditional boundaries – supply chain management and virtual companies • Knowledge key asset – source of competitive advantage Prentice Hall, Inc. © 2006 1 -10

Basic Concepts of Strategic Management Population Ecology vs. Institutional Theory (Can’t Change) (Mimic successful organizations) Strategic Choice Perspective (Management decisions have at least as much impact as industry factors) Organizational Learning Theory Prentice Hall, Inc. © 2006 1 -11

Basic Concepts of Strategic Management “Sustainable Competitive Advantage doesn’t lie in doggedly following a centrally managed 5 year strategic plan but in stringing together a series of strategic short term thrusts” Richard D’Aventi – Hypercompetition Prentice Hall, Inc. © 2006 1 -12

Basic Concepts of Strategic Management Learning Organization is skilled at creating, acquiring and transferring knowledge and modifying its behavior to reflect new knowledge and insight. • Key Activities: – – Solve problems systematically Experiment with new approaches Learn from experience Transfer knowledge throughout the organization Prentice Hall, Inc. © 2006 1 -13

Basic Concepts of Strategic Management Organizational Knowledge – Technical Skills – research – Functional Skills – manufacturing and marketing – Managerial Expertise – plan, organize, influence and control Prentice Hall, Inc. © 2006 1 -14

Basic Concepts of Strategic Management Basic Elements of the Strategic Management Process Prentice Hall,

Basic Concepts of Strategic Management Environmental Scanning Monitoring, evaluation, and disseminating information from external and internal environments –to key people in the firm Prentice Hall, Inc. © 2006 1 -16

Environmental Scanning SWOT Analysis • • Strengths – Weaknesses Opportunities – Threats Environmental Variables • • • Societal – technological, political, legal, social, economic Task/Industry – customers, suppliers, competitors Internal – structure, resources, culture Prentice Hall, Inc. © 2006 1 -17

Basic Concepts of Strategic Management Strategy Formulation Development of long-range plans for effective management of opportunities and threats in light of corporate strengths and weaknesses Prentice Hall, Inc. © 2006 1 -18

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. © 2006 1 -19

Goals & Objectives Corporate Goals/Objectives flow from the Mission/Vision statement –Profitability (net profit) –Growth –Resource utilization (ROE, ROI) –Market leadership Prentice Hall, Inc. © 2006 1 -20

Goals & Objectives Corporate Goals/Objectives need to be: Specific Measurable Action oriented Realistic Timing

Basic Concepts of Strategic Management Hierarchy of Strategy Corporate strategy – general direction (stability, growth, retrenchment) Business strategy – industry or market segment focus (competitive vs. cooperative) Functional strategy – functional planning to support the Corporate and Business strategy. (technology leader or follower) Prentice Hall, Inc. © 2006 1 -22

Basic Concepts of Strategic Management Strategy Implementation Process by which strategies and policies are put into action through development of programs and procedures Prentice Hall, Inc. © 2006 1 -23

Basic Concepts of Strategic Management Strategy Implementation • Programs – single use plans (projects) • Budgets – costs associated with a program • Procedures – system of sequential steps that describe how a particular task or job is to be done Prentice Hall, Inc. © 2006 1 -24

Basic Concepts of Strategic Management Evaluation and Control Process by which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Prentice Hall, Inc. © 2006 1 -25

Basic Concepts of Strategic Management Punctuated Equilibrium Corporations usually take 15 – 20 years

Basic Concepts of Strategic Management Triggering Event • • • New CEO External Intervention Threat of change in ownership Performance Gap Strategic inflection point (industry) Prentice Hall, Inc. © 2006 1 -27

Strategic Decision Making Strategic Decisions Rare – unusual, no precedent Consequential – commit substantial

Strategic Decision Making Mintzberg’s Modes Entrepreneurial mode – founders vision Adaptive mode – “muddling through” (reactive) Planning mode – systematic gathering and analysis of information Logical incrementalism – interactive strategy development (Planning + Adaptive) Prentice Hall, Inc. © 2006 1 -29

Basic Concepts of Strategic Management Strategic Decision-Making Process Prentice Hall, Inc. © 2006 1

Hambrick and Fredrickson – Good Strategy 5 Elements of Good Strategy 1. 2. 3. 4. 5. Arenas – Where? Vehicles – How to get there? Differentiators – How to win? Staging – Speed and sequence - tactics Economic logic – How will we gain a return? Prentice Hall, Inc. © 2006 1 -31