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CHAPTER 1

BASIC CONCEPTS OF STRATEGIC MANAGEMENT Read : America Online, Inc. (AOL) P. 1 - 2 1.1 THE STUDY OF STRATEGIC : set of MANAGEMENT Strategic management managerial decisions and actions that determines the long-run performance of a corporation :- includes : external - environmental scanning internal

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- strategy formulation (strategic or long - range planning) - strategy implementation - evaluation and control

Phases of Strategic Management


Many concepts and dealing have with been strategic developed managers take

techniques used all

management and in

successfully i.e. GE - now, organizations strategic

management seriously in order to keep their company competitive in

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an

increasingly

volatile

environment

Four

phases

of

strategic

management : Phase 1 : Basic financial planning : next year's Budget pretend management) Phase 2 : Forecast-based planning : as budget become less useful at little to analysis be (only strategic simplest operational planning

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stimulation years

long-term &

planning, External as

managers attempt to propose five plans-Internal gets very environment, - process managers - 3 - 5 years Phase 3 : Externally of process oriented top planning (strategic planning) - frustrated planning political, by management takes control of the initiating strategic planning political for compete larger

shares of funds

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- top-down formal

planning strategy leaves

emphasizes formulationto lower

implementation

management levels - typically 5 - year plan

Phase 4 : Strategic management Realizing that even the best strategic plans are worthless without the input and commitment of lower level managers, top management forms planning groups of managers

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and key employees at many levels from various departments and workgroups - strategic thinking at all levels of the organization - people involved GE led the transition from strategic planning to strategic management during the 1980s By 1990s, most corporation had also begun the conversion to strategic management at all levels are now

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Read : Company Spotlight P.5 Phase 1? Maytag Corporation Benefits of Strategic Management Research management Benefits : Clearer sense of strategic vision for the firm Sharper Improved focus on what of is a strategically important understanding rapidly changing has revealed that organizations that engage in strategic generally outperform those that do not

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environment To be effective, strategic management need not always be a formal process (Ex. Maytag asking a few simple questions) 1. Where is the organization now ? (Not where do we hope it is !) 2. If no changes are made, where will the organization be in one year ? two years ? five years ? ten years ? Are the answer acceptable ?

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3. If

the

answers

are

not

acceptable, what specific actions should management undertake ? What are the risk and payoffs involved ? Small companies may plan

informally and irregularly Even the degree of formality in strategic planning had no significant impact on a firm's profitability, formal planners had twice the growth rate in

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sales.

How

about

multidivisional

corporations ?

1.2 GLOBALIZATION : A CHALLENGE TO STRATEGIC MANAGEMENT Why ? Read Global Issues for the 21 Century of each chapter
st

As more industries become global, strategic management is becoming as increasingly position the important company advantage. way for (i.e. to keep track of international development and long-term Maytag competitive

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purchased Hoover) P.7 : a company without a manufacturing presence in the European Union (EU) would be at a competitive disadvantage More and more companies are realized that they must shifted from a vertically organized, top-down type of organization to a more horizontally managed, interactive organization. Attempting to adapt more quickly to changing conditions by becoming learning organizations.

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1.3 CREATING ORGANIZATION Primary value

A of

LEARNING "Strategic the

Management" :

helping

organization operate successfully in a dynamic, complex environment. Ex. Inland Steel Company Any advantage following a sustainable lies not in centrally competitive doggedly fivemanaged

years plan, but in stringing together a series of strategic short-term thrusts corporations must develop strategic

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flexibility

the ability to shift from demands

one dominant strategy to another Strategic flexibility : organization" that the company becomes a "learning organizations which are skilled at 4 main activities : 1) Solving problems systematically 2) Experimenting approaches 3) Learning from their own experiences and past history as well as from the experiences of others with new

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4) Transferring and efficiently

knowledge

quickly

throughout the organization People at all levels, not just top management, need to be involved in strategic management : Xerox 1.4 BASIC MODEL OF STRATEGIC

MANAGEMENT Strategic management consists of 4 basic elements : Fig. 1.1 P. 9 1) 2) environmental scanning strategy formulation

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3) 4)

strategy implementation evaluation and control Scanning : to identify (SWOT "strategic and

Environmental Analysis) Purposes factors"

monitoring,

evaluation,

disseminating of information from the external and internal environments Strength, Weaknesses, Opportunity and Threats External environment : O & T CH. 3 Fig. 1.2 P. 9, Fig 1.3 P. 10

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societal environment Environmental variables environment (Industry) Internal environment : S+W 4 structure Corporation's Strengths culture resources core competencies CH. task

Strategy Formulation

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development of long-range plans for effective management of S,W,O,T - mission - objectives - strategies - policy guidelines Mission : : the purpose or reason for the organization's existence : : tells may what also the include company the is providing to society firm's philosophy

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about how business it employees Some people Mission Vision : :

it treats

does its

describes describes

what what

the the

organization is now organization I would like to be in the future This vision book combines mission &

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Mission : " It tells who we are and what we do as will as what we'd like to become" Ex. Maytag " To improve the quality of home life by designing, building, marketing, and servicing the best appliances in the world" Ex. Newport News Ship building " We shall build good ships here at a profit if we can - at a loss it we must - but always good ships" Mission may be broad or narrow Maytag appliances (ex. P 11)

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Objectives

the

end

results

of

planned activity * State what is to be accomplished by when and should be quantified if possible. Ex. Minnesota Mining + Manufacturing (3M) 1. To achieve 10 % annual growth in earnings per share. 2. To achieve 20 % - 25 % return on equity.

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3. To

achieve

27

return

on

capital employed. Goals : an open-ended statement of what one wants to accomplish with no quantification of what is to be achieve and no time criteria for completion "goal" is often used interchangeably with the term " objective" Example objectives" of P. 12 " goals" and "

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Strategies : a comprehensive master plan stating how the corporation will achieve its mission and objectives. - it maximizes and competitive minimizes advantage

competitive disadvantage. Ex. Rockwell - realized that it could no longer achieve its objectives by continuing diversification business so with into its strategy line of of multiple

- sold its aerospace and defense units to Boeing

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- concentrated electronics management

on (an felt

commercial area had that greater

opportunities for growth) 3 type of strategy


1.

Corporate strategy : describes a company's terms toward of overall its growth of direction and its in the various general attitude

management - stability - growth - retrenchment

businesses and product line

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Ex. Maytag growth strategy by acquiring other appliance companies


2.

Business strategy : usually occurs at the business unit or product level, position products specific unit. May fit within or competitive strategie and of a of or it the emphasizes competitive corporation's in the or market improvement

services

industry

segment served by that business

cooperatives

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Ex Maytag

uses

differentiation

competitive strategy - emphasizes quality for its Maytag brand appliances, but - uses a low-cost competitive strategy for its Magic Chef brand appliances 3. Functional strategy : the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity.

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concerned with developing and nurturing competence a to distinctive provide a

company or business unit with a competitive advantage Ex. R & D department


-

technological the products of

fellowship

(imitate

other companies)
-

technological leadership an innovation)

(pioneer a making

Maytag-converting manufacturing different types strategy of home

from of

appliances

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under the same brand name in one plant


-

to a more cost-effective strategy of making one type of appliance (e.g. dishwashers) for many brands in a very large plant

Business firms use all three types of strategy simultaneously Hierarchy of strategy : Fig 1.4 P.13 The grouping of strategy types by level in the organization they complement and support one another (functional strategies support business

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strategies, which, in turn, support the corporate strategy (ies)) Policies : a broad guiline for decision making that links the formulation of strategy with its implementation - companies use policies to make sure take actions that P. 14 Strategy Implementation support the corporation's mission, objectives, and strategies. Ex

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The process by which strategies and policies are put into action through the development of programs, budgets, and procedures. This process : - may involves changes (culture, structure, management system) - typically conducted by middle and lower management (with review by top management) - often decisions Programs activities : or a statement steps of the to needed involves day-to-day

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accomplish a single-use plan (it makes the strategy action- oriented) - it may involve restructuring the corporation, company's Ex. Intel changing internal not culture, be able the or to

beginning a new research effort. would continue its corporate growth strategy without the continuous development of new Keep generations in mind a of : microprocessors Be careful of (P. 14 - 15) introducing new program without

ensuring its fit with the organization's

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overall strategies and objectives as well as its impact on the rest of the firm Budgets dollars - lists detailed cost of each program (used in planning and control) - not only serves as a detailed plan of new strategy in action, it also specifies through program financial statements the expected : a statement in of terms a of corporation's programs

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impact future Procedures sequential

on

the

firm's

financial

: steps

(Standard or

Operating of that

Procedures : SOP) : a system techniques

describe in detail how a particular task or job is to be done * Strategy implementation in CH. 8&9 Evaluation and Control The process in which corporate activities and performance results are monitored so that actual performance detail

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can

be

compared

with

desired

performance. - final major element of management - can plans pinpoint weaknesses the in previously implemented stimulate strategic entire strategic

process to begin again - for evaluation and control to be effective, managers must obtain clear, prompt, and unbiased information from the people below

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them hierarchy

in

the

corporation's detail

* Evaluation and control in CH. 10 Feedback / Learning Process Fig. As 1.2 a (P. firm 9) or

includes business

a unit

feedback/learning process
-

develops

strategies,

programs,

and the like, it often must go back to revise or correct decision made earlier in the model.

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1.5 INITIATION Henry Mintzberg

OF

STRATEGY strategy

TRIGGERING EVENTS formulation is typically not a regular, continuous process Triggering strategy. event : something that acts as a stimulus for a change in

New CEO External intervention (firm's bank refuses to

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approve a new loan) Threats of change in ownership (takeover) Performance gap (errors) 1.6 STRATEGIC DECISION MAKING As organizations grow larger and more complex with more uncertain become environments, make. What makes a Decision Strategic Strategic decisions : deal with the long-run future of the entire decisions

increasingly complicated and difficult to

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organization :
1.

have 3 characteristics

Rare : unusual and typically have no precedent to follow Consequential : commit

2.

substantial resources and demand a great deal of commitment from people at all levels
3.

Directive lesser actions

set

precedents and

for

decisions

future

Mintzberg's

Modes

of

Strategic

Decision Making

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Entrepreneurial mode : strategy is made by one powerful individual (founders : AOL) Adaptive mode (muddling through) : reactive solutions for new to existing problems, rather than a proactive search (much large Planning gathering opportunities goes on most systematic appropriate bargaining corporations, mode of :

concerning priorities of objectives universities)

information for situation analysis,

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the rational the

generation selection

of of

feasible and the for the most new

alternative

strategies,

appropriate strategy (includes both proactive search and the opportunities reactive

solution of existing problems) Some instances : 4


th

approach : a the

Logical and, to

incrementalism the lessor

synthesis of the planning, adaptive, extent, entrepreneurial modes

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Strategic

Decision-Making

Process

Aid to Better Decisions This book prefer more analytical less political Eight-step 1. Evaluate results 2. Review corporate governance 3. Scan and access the external environment (O,T) : strategic current decisionmaking process Fig. 1.5 P. 20 performance planning mode

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4. Scan and assess the internal corporate environment (S,W) 5. Analyze factors 6. Generate, evaluate, and select the best alternative strategy 7. Implement selected strategies 8. Evaluate implemented strategies 1.7 GLOBAL ISSUES FOR THE 21 CENTURY * Read P. 21 - 22
ST

strategic

(SWOT)

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nations

are

forming

regional

trading associations (ASEAN, NAFTA etc.) globalization creates opportunities, but also poses threats to companies that are not able to adapt quickly enough more people at all levels are involved greater need for more access to information greater difficulty in dealing with it increasing organizations pressure for a on quick

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response to changing conditions make it difficult for corporations to engage in the planning mode of strategic management