Chapter 1 The Nature of Strategic Management Concepts

Chapter 1 The Nature of Strategic Management: Concepts & Cases 12 th Edition Fred David Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -1

Themes in the Text • Global Considerations – impact virtually all strategic decisions • E-commerce – vital strategic management tool • Natural Environment – important strategic issue Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -2

Themes in the Text n n Global considerations impact virtually all strategic decisions. The boundaries of countries can no longer be the boundary of our minds. It has become a matter of survival for businesses to see and appreciate the world from the perspective of others. The underpinnings of strategic management hinge on managers gaining an understanding of competitors, markets, prices, suppliers, distributors, governments, creditors, shareholders, and customers worldwide. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -3

Themes in the Text n n The natural environment is an important strategic issue. Perhaps no greater threat exists to business and society than the continuous decimation and degradation of our natural environment. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -4

Strategic Management – Defined Art & science of formulating, implementing, and evaluating, cross-functional decisions that enable an organization to achieve its objectives Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -5

Strategic Management defined n Strategic management is the process by which managers set an organization’s (or several organizations’) long-term course, develop plans in the light of internal and external circumstances, and undertake appropriate action to reach those goals. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -6

Strategic Management n n The term originated in the 1950 S. Was very popular between mid-1960 s and mid-1970 s. It casted aside during 1980 s. The 1990 s and on brought the revival of strategic planning, the process is widely practiced. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -7

Strategic Management and Research n As a self-identified area of inquiry, strategic management is still young. The first major conference devoted to the subject was only held in 1977 at the University of Pittsburgh. The Strategic Management Journal and the Journal of Business Strategy each published their first issue three years later. Michael Porter’s landmark study, Competitive Strategy, appeared in 1980. The Academy of Management, the professional association of business school teachers, organized its Business Policy and Strategy division at around the same time. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -8

Strategic Management and planning n n n The term strategic management is used synonymously with strategic planning. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow While long-range planning tries to optimize for tomorrow the trends of today. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -9

Strategic Management In essence, the strategic plan is a company’s game plan. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -10

Strategic management achieves a firm’s success through integration –– Management Marketing Finance/Accounting Production/Operations Research & Development MIS Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -11

Stages of strategic planning n n Environmental analysis Strategy formulation Strategy implementation Strategy evaluation. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -12

Environmental Scanning defiened n Monitoring, evaluation, and disseminating information from external and internal environments –to key people in the firm Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -13

SWOT Analysis n n SWOT is an acronym used to describe the particular strengths, weaknesses, opportunities, and threats, that are strategic factors for a specific company. The external environment consists of variables (OT)that are outside the organization and not typically within the short run control of top management. These variables from the context within which the corporation exists Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -14

SWOT Analysis n The internal environment of a corporation consists of variable(SW) that are within the organization itself and are not usually within the short run control of top management. These variables from the context in which work is done. They include the corporation’s structure, culture, and resources, key strengths from a set of core competencies that the corporation can use to gain competitive advantage Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -15

Strategy formulation n Strategy Formulation is the development of long-range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses (SWOT). It includes defining the corporate mission, specifying achievable objectives, developing strategies, and setting policy guidelines. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -16

Mission Statement n An organization’s mission statement is the purpose or reason for the organization’s existence. It tells what the company is providing to society. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -17

Mission Statement • • Purpose/reason for organization Promotes shared expectations Communicates public image Who we are; what we do; what we aspire to Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -18

Objectives n n Objectives are the end results of planned activity. They should be stated as action verbs and tell what is to be accomplished by when and quantified if possible. The achievement of corporate objectives should result in the fulfillment of corporation’s mission. The term goal is often used interchangeably with the term objective. In this book we prefer to differentiate the two terms. In contrast to an objective, we consider a goal as an open ended statement of what we want to accomplish, with no quantification of what is to be achieved and no time criteria for completion Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -19

Corporate Goals/Objectives – – – Profitability (net profit) Efficiency (low costs. etc) Growth (increase in total assets, sales, etc) Resource utilization (ROE, ROI) Reputation(being considered a “top” firm Contributions to employees(employment security, wages, diversity) Contributions to society(tax paid, participation in charities) Market leadership (market share) Technological leadership(innovation, creativity). Survival (avoiding bankruptcy). Personal need of top management (using the firm for personal purposes, such as providing jobs for relatives) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -20

Strategy n A strategy of a corporation forms a comprehensive master plan that states how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -21

Policies n n n 1. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. 2. Policies are most often stated in terms of management, marketing, finance/accounting, production/operations, research and development, and computer information systems activities. Examples: smoking policy, recruitment policy Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -22

Strategy Formulation Vision & Mission External Opportunities & Threats Internal Strengths & Weaknesses Long-Term Objectives Alternative Strategies Strategy Selection Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -23

Issues in Strategy Formulation üNew business opportunities üBusinesses to abandon üAllocation of resources üExpansion or diversification üInternational markets üMergers or joint ventures üAvoidance of hostile takeover Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -24

Strategy implementation n n Strategy implementation is a process by which strategies and policies are put into action through the development of programs, budgets, and procedures. the implementation of strategy directly or indirectly connects to all facts of management. Thus it is fundamental to follow a holistic approach when analyzing and assessing complex issues of strategy implementation. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -25

Strategy Implementation Annual Objectives Policies Employee Motivation Resource Allocation Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -26

Strategy Implementation Action Stage of Strategic Management üMost difficult stage ürecruitment of employees & managers üInterpersonal skills critical üConsensus on goal pursuit üInterpersonal skills are essential. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -27

Strategy Evaluation n Ensure that a company is achieving what it set out to accomplish. It compares performance with desired result and provides the feed back necessary for management to evaluate results and take corrective action, as needed. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -28

Strategy Evaluation Internal Review External Review Performance Metrics Corrective Actions Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -29

Strategy Evaluation Final Stage of Strategic Management üSubject to future modification üToday’s success no guarantee of future success üNew & different problems üComplacencysatisfaction leads to demisedeath Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -30

Prime Task of Strategic Management Peter Drucker: Think through the overall mission of a business. Ask the key question: “What is our Business? ” Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -31

Integrating Intuition & Analysis The strategic management process attempts to organize quantitative and qualitative information under conditions of uncertainty. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -32

Integrating Intuition & Analysis The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -33

Integrating Intuition & Analysis Intuition is based on: q Past experiences q Judgment q Feelings Intuition is useful for decision making in: q Conditions of great uncertainty q Conditions with little precedent Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -34

Integrating Intuition & Analysis Intuition & Judgment Involve management at all levels Influence all analyses Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -35

Integrating Intuition & Analysis Analytical Thinking Intuitive Thinking Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -36

Adapting to Change Organizations must monitor events n Ongoing process n Internal and external events n Timely changes Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -37

Adapting to Change The need to adapt to change leads organizations to key strategic-management questions, such as, “What kind of business should be become? ” “Are we in the right field? ” “Should we reshape our business? ” “What new competitors are entering our industry? ” Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -38

Strategic Management is Gaining and Maintaining Competitive Advantage “Anything that a firm does especially well compared to rival firms” Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -39

Achieving Sustained Competitive Advantage 1. Adapting to change in external trends, internal capabilities, and resources 2. Effectively formulating, implementing, and evaluating strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -40

Adapting to Change Rate & magnitude of change increasing dramatically E-commerce Demographics Technology Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -41

Internet and sales value in US n n n 2006 online sales in US rose 25% to reach 24. 6$ billion. Traditional sales increased 5% only to 457. 4$ billion. The internet has changed the very nature and core of buying and selling. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -42

Adapting to Change Effective Adaptation Requires long-term focus Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -43

Adapting to Change – Key Strategic Management Questions n n n What kind of business should we become? Are we in the right fields? Are there new competitors? What strategies should we pursue? How are our customers changing? Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -44

Strategists 1. 2. 3. Strategists are individuals who are most responsible for the success or failure of an organization. Strategists hold various job titles, such as chief executive officers, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -45

Example Strategies in Action in 2007 Mc. Donald’s Corp The world’s largest restaurant chain by number of outlets, Big Mac is doing fantastic both in the United States and abroad. In past months, Mc. Donald’s began opening drive-through restaurants in China, closed 25 sites in the United Kingdom, and disposed of a supply-chain operation in Russia. Big Mac in 2007 opened 800 new restaurants in China, Japan, and Russia. Shares of Mc. Donald’s stock increased 42 percent in 2006 as sales for the year eclipsed $41 billion. Big Mac is working to eliminate trans fats from their food (New York City is requiring this of all restaurants in 2007). Mc. Donald’s plans in 2008 to turn ownership of about 2, 300 restaurants in Canada and the United Kingdom over to licensees. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -46

Example Strategies in Action in 2007 American General A Fortune 500 company based in Piscataway, New Jersey, American General split into three businesses in 2007: Air-conditioning systems, Bath-and-kitchen business, and vehicle-control systems. The firm also is renaming itself Trane, after its flagship air-conditioning brand name. The company plans to divest the bath-and-kitchen division and to spin off its vehicle control division into a publicly traded company named Wabco. Led by CEO Fred Poses, American General employs about 62, 000 persons and has manufacturing operations in 28 countries. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -47

Figure 1. 1 Comprehensive Strategic-Management Model External Audit Chapter 3 Vision & Mission Chapter 2 Long-Term Objectives Generate, Evaluate, Select Strategies Implement Strategies: Mgmt Issues Implement Strategies: Marketing, Fin/Acct, R&D, CIS Measure & Evaluate Performance Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Internal Audit Chapter 4 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -48

Strategic Management Model Strategic Management Process q q Dynamic & continuous More formal in larger organizations Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -49

Benefits of Strategic Management n Research has revealed that organizations that engage in strategic management generally outperform those that do not. The attainment of an appropriate match, or “fit, ” between an organization’s environment and strategy, structure, and processes has positive effects on the organization's performance. For example, studies of the impact of deregulation on The U. S. railroad and trucking industries found that companies that changed their structures as their environment changed outperformed companies that did not. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -50

Benefits of Strategic Management • Proactive in shaping firm’s future • Initiate and influence firm’s activities • Formulate better strategies • Systematic, logical, rational Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -51

Benefits of Strategic Management Financial Benefits • Improvement in sales • Improvement in profitability • Productivity improvement Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -52

Benefits of Strategic Management Nonfinancial Benefits • Improved understanding of competitors’ strategies • Enhanced awareness of threats • Reduced resistance to change • Enhanced problem-prevention capabilities Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -53

Benefits of Strategic Management (Greenley) 1. Identification of opportunities 2. Objective view of management problems 3. Improved coordination & control 4. Minimizes unfavorable conditions & changes 5. Decisions that better support objectives Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -54

Benefits of Strategic Management (Greenley – cont’d) 6. Effective allocation of time & resources 7. Internal communication among personnel 8. Integration of individual behaviors 9. Clarify individual responsibilities 10. Encourage forward thinking Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -55

Benefits of Strategic Management (Greenley – cont’d) 11. Encourages favorable attitude toward change 12. Provides discipline and formality to the management of the business Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -56

Why Some Firms Do No Strategic Planning ØPoor reward structures ØFire-fighting ØWaste of time ØToo expensive ØLaziness ØContenthappy with success Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -57

Why Some Firms Do No Strategic Planning ØFear of failure ØOverconfidence ØPrior bad experience ØSelf-interest: self-esteem through effectively using old system. ØFear of the unknown: uncertain of their ability to learn new skills. ØSuspicion: employees may not trust management. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -58

PITFALLS IN STRATEGIC PLANNING • Using strategic planning to gain control over decisions and resources • Doing strategic planning only to satisfy accreditation or regulatory requirements • Too hastilyquickly moving from mission development to strategy formulation • Failing to communicate the plan to employees, who continue working in the dark • Top managers making many intuitive decisions that conflict with the formal plan • Top managers not actively supporting the strategic-planning process • Failing to use plans as a standard for measuring performance • Delegating planning to a “planner” rather than involving all managers • Failing to involve key employees in all phases of planning • Failing to create a collaborative climate supportive of change • Viewing planning to be unnecessary or unimportant • Becoming so engrossed in current problems that insufficient or no planning is done © 2009 Pearson Education, Inc. Copyright Ch 1 -59 • Being so formal Hall in planning that flexibility and creativity are stifled Publishing as Prentice

Guidelines For Effective Strategic Management n n n “Is strategic management in our firm a people process or a paper process? ” should be addressed. Balancing between long-range versus short-range or maximizing profits versus increasing shareholders’ wealth. Subjective factors such as attitudes toward risk, concern for social responsibility, and organizational culture will always affect strategy-formulation decisions, but organizations must remain as objective as possible. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -60

COMPARING BUSINESS AND MILITARY STRATEGY n n n A Strong Military Heritage Underlies the Study of Strategic Management Terms such as objectives, mission, strengths, and weaknesses were first formulated to address problems on the battlefield. A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with the assumption of competition, while military strategy is based on an assumption of conflict. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -61

Business Ethics & Strategic Management Business ethics defined – q Principles of conduct within organizations that guide decision making and behavior Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -62

Business Ethics & Strategic Management Good business ethics – q Prerequisite for good strategic management Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -63

Business Ethics & Strategic Management Code of business ethics – q Provides basis on which policies can be devised to guide daily behavior and decisions in the workplace Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -64

Business Ethics & Strategic Management Business practices always considered unethical – q q q q Misleading advertising Misleading labeling Harm to the environment Insider trading Dumping flawed/faulty products on foreign markets Poor product or service safety Padding expense accounts Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -65

The Nature of Global Competition International/multinational corporations q Parent company: a firm investing in international q Host country: the country where that business is operations; conducted. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -66

The Nature of Global Competition Strategy implementation may be difficult q Cultural differences q q q Norms Values Work ethic Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -67

Advantages of International Operations ØAbsorb excess capacity ØReduce unit costs ØSpread risk over wider markets ØLow-cost production facilities Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -68

Advantages of International Operations (cont’d) ØLess intense competition ØLower taxes ØEconomies of scale Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -69

Disadvantages of International Operations ØDifficult communications ØUnderestimate foreign competition ØCultural barriers to effective management ØComplications arising from currency differences Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -70