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The Nature of Strategic Management

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Ch 1 -1

Strategic Management Defined

Art & science of formulating, implementing, and evaluating, cross-functional decisions that enable an organization to achieve its objectives

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The Study of Strategic Management

Strategic Management: a set of managerial decisions

and actions that determines the long-run performance of a corporation.

Includes:
Internal and external environment scanning Strategy formulation

Strategy implementation
Evaluation and control
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Purpose of Strategic Management


To exploit and create new and different opportunities for tomorrow,long range planning.

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Strategic Management

In essence, the strategic plan is a companys game plan

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Benefits of Strategic Management:


Clearer sense of strategic vision for the firm
Sharper focus on what is strategically

important Improved understanding of a rapidly changing environment

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Additional Benefits of Strategic Management:


Improved organizational

performance Achieves a match between the organizations environment and its strategy, structure and processes Important in unstable environments

Strategic thinking Organizational learning

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Phases of Strategic Management:


Phase 1: Basic financial planning
Phase 2: Forecast-based planning Phase 3: Externally oriented strategic planning Phase 4: Strategic management

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What Do We Mean By Strategy?


Consists of competitive moves and business

approaches used by managers to run the company


Managements action plan to
Grow the business Attract and please customers Compete successfully Conduct operations Achieve the targeted levels of organizational performance
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The Hows That Define a Firm's Strategy


How to grow the business How to please customers How to outcompete rivals How to manage each functional
Strategy is HOW to . . .

piece of the business (R&D, production, marketing, HR, finance, and so on)
How to respond to changing market conditions How to achieve targeted levels of performance

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Choosing the Hows of Strategy


Strategic choices about how are based on
Trial-and-error organizational learning about what has worked and

what has not worked


Managements appetite for taking risks Managerial analysis and strategic thinking about how best to

proceed, given market conditions and a companys circumstances

In choosing a strategy, management is in effect saying,


Among all the many different ways of competing we could have chosen, we have decided to employ this combination of competitive and operating approaches to move the company in the intended direction, strengthen its market position and competitiveness, and boost performance.
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Key Elements of a Successful Strategy


Developing a successful strategy hinges on

making competitive moves aimed at


Appealing to buyers in ways to set the company

apart from rivals and


Carving out its own market position

Involves developing a distinctive aha element

to
Attract customers and Produce a competitive edge

Copying competitive moves of other successful companies rarely works!


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Starbucks Strategy: The Key Elements


Expand number of Starbucks stores domestically by

blanketing metropolitan areas, then adding stores on the citys perimeter Make Starbucks a global brand by opening stores in an increasing number of foreign locations View each store as a billboard for the company and as a contributor to building the companys brand and image Broaden in-store products to include coffee-flavored ice cream, teas, fresh pastries, music CDs, and coffee accessories Fully exploit the growing power of the Starbucks name and brand image with out-of-store sales Display corporate responsibility and environmental sustainability Control costs of opening new stores Promote customer-friendly service and enhance store ambience by making Starbucks a great place to work
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3 Stages of the Strategic Management Process

Strategy formulation Strategy implementation Strategy evaluation


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Strategy Formulation
Vision & Mission External Opportunities & Threats Internal Strengths & Weaknesses Long-Term Objectives Alternative Strategies

Strategy Selection

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Issues in Strategy Formulation


Businesses to enter Businesses to abandon Allocation of resources Expansion or diversification International markets Mergers or joint ventures Avoidance of hostile takeover

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Strategy Implementation

Annual Objectives Policies Employee Motivation Resource Allocation

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Strategy Implementation Steps


Developing a strategy-supportive culture Creating an effective organizational structure Redirecting marketing efforts Preparing budgets Developing and utilizing information systems Linking employee compensation to organizational

performance

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Issues in Strategy Implementation


Action Stage of Strategic Management Mobilization of employees & managers Most difficult stage Interpersonal skills critical

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Strategy Evaluation

Internal Review External Review Performance Measurement Corrective Action

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Prime Task of Strategic Management

Peter Drucker: Think through the overall mission of a business. Ask the key question: What is our Business?

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Integrating Intuition & Analysis

The strategic management process attempts to organize quantitative and qualitative information under conditions of uncertainty

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Integrating Intuition & Analysis


Intuition is based on: Past experiences Judgment Feelings Intuition is useful for decision making in conditions of: Great uncertainty Little precedent Highly interrelated variables Several plausible alternatives
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Integrating Intuition & Analysis

Intuition & Judgment

Involve management at all levels

Influence all analyses

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Adapting to Change

Organizations should continually monitor internal and external events and trends so that timely changes can be made as needed

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Key Terms in Strategic Management


Competitive advantage
Strategists Vision and mission statements External opportunities and threats Internal strengths and weaknesses Long-term objectives Strategies Annual objectives Policies
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Strategic Management is Gaining and Maintaining Competitive Advantage

Anything that a firm does especially well compared to rival firms

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Achieving Sustained Competitive Advantage


1. Continually adapting to changes in external trends and events and internal capabilities, competencies, and resources
2. Effectively formulating, implementing, and evaluating strategies that capitalize on those factors

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Strategists

Gather Information Analyze Information Organize Information

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Vision and Mission Statements

Vision Statement What do we want to become?

Mission Statement What is our business?

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External Opportunities and Threats


Analysis of Trends
Economic
Social Cultural

Demographic/Environmental
Political, Legal, Governmental Technological Competitors

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External Opportunities and Threats

Basic Tenet of Strategic Management


Take advantage of External Opportunities Strategy Formulation

Avoid/minimize impact of External Threats

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Internal Strengths and Weaknesses


Controllable activities performed

especially well or poorly

Determined relative to competitors

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Internal Strengths and Weaknesses


Typically located in functional areas of the firm
Management Marketing Finance/Accounting Production/Operations Research & Development

Management Information Systems

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Internal Strengths and Weaknesses


Assessing the Internal Environment
Ratios

Performance Measures

Internal Factors
Industry Averages

Survey Data

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Long-Term Objectives
Specific results that an organization

seeks to achieve in pursuing its basic mission

Long-term means more than one year

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Long-Term Objectives
Essential for ensuring the firms success
Provide direction
Aid in evaluation Create synergy Reveal priorities Focus coordination Provide basis for planning, organizing,

motivating, and controlling

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Strategies

Means by which long-term objectives are achieved

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Strategies
Examples
Geographic expansion Diversification Acquisition Product development

Market penetration
Retrenchment Divestiture Liquidation Joint venture

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Sample Strategies
Table 1-1
Best Buy Levi Strauss

New York Times Company

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Annual Objectives

Short-term milestones that firms must achieve to reach long-term objectives

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Policies

Means by which annual objectives will be achieved

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Strategy and the Quest for Competitive Advantage


The heart and soul of any strategy are actions a

company makes to
Improve its financial performance,

Strengthen its competitive position, and


Gain a competitive advantage over rivals

A creative, distinctive strategy that sets a company

apart from rivals and yields a competitive advantage is a companys most reliable ticket to above average profitability
Operating with a competitive advantage is more profitable

than operating without one


Operating with a competitive disadvantage nearly always

results in below-average profitability


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A Powerful Strategy Leads to Sustainable Competitive Advantage


A company achieves sustainable competitive

advantage when
An attractive number of buyers prefer its

products/services over those of rivals and The basis for this preference is durable

Its nice when a strategy produces


A temporary competitive edge but A sustainable edge over rivals greatly enhances a

companys prospects for above-average profitability


What separates a powerful strategy from an ordinary strategy is managements ability to forge a series of moves, both in the marketplace and internally, that produces sustainable competitive advantage!
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Strategic Approaches to Building Sustainable Competitive Advantage


Be the industrys low-cost provider
Achieve a cost-based competitive advantage

Incorporate differentiating features


Superior product/service keyed to higher quality,

better performance, wider selection, value-added services, or some other attribute

Focus on a narrow market niche


Win a competitive edge by doing a

better job than rivals of serving the needs and preferences of buyers in the niche

Develop expertise and resource strengths

not easily imitated or matched by rivals


Achieve a capabilities-based competitive advantage
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Competitive Advantage Examples


Strive to be industrys low-cost provider Wal-Mart Southwest Airlines
Outcompete rivals on a key differentiating feature Johnson & Johnson Reliability in baby products Harley-Davidson King-of-the-road styling Rolex Top-of-the-line prestige BMW Engineering design and performance Amazon.com Wide selection and convenience
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Competitive Advantage Examples


Focus on a narrow market niche
eBay Online auctions
Best Buy Home electronics McAfee Virus protection

(cont)

Starbucks Premium coffees and coffee drinks


The Weather Channel Info about the weather

Develop expertise, resource strengths, and

capabilities not easily imitated by rivals


Walt Disney Theme park management and family

entertainment
Dell Computer Build-to-order manufacturing capabilities

Ritz-Carlton Personalized customer service

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Figure 1.1: Identifying a Companys Strategy

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A Companys Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments

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Linking Strategy With Ethics


Ethical and moral standards go beyond Prohibitions of law and language of thou shalt not

to issues of

Duty and right vs. wrong

Ethical and moral standards address

What is the right thing to do? Two criteria of an ethical strategy

Does not entail actions and behaviors that cross the line from should do to should not do (because such actions are unsavory, shady, unconscionable, injurious to others, or harmful to the environment) Allows management to fulfill its ethical duties to all stakeholders
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A Firms Ethical Responsibilities to Its Stakeholders


Owners/shareholders Rightfully expect some form of return on their investment

Employees Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise
Customers Rightfully expect a seller to provide them with a reliable, safe product or service Suppliers Rightfully expect to have an equitable relationship with firms they supply and be treated fairly Community Rightfully expect businesses to be good citizens in their community
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Role of Senior Executives: Linking Strategy with Ethics


Forbid pursuit of ethically questionable business

opportunities Insist all aspects of company strategy reflect high ethical standards Make it clear that all employees are expected to act with integrity Install organizational checks and balances to
Monitor behavior

Enforce ethical codes of conduct


Provide guidance to employees in gray areas

Display genuine commitment to conduct business

activities ethically
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Relationship Between Strategy and Business Model


Strategy . . .
Deals with a companys competitive initiatives and business approaches

Business Model . . .
Concerns whether revenues and costs flowing from the strategy demonstrate a business can be profitable and viable

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Strategic Management Model

Strategic Management Process


Dynamic & continuous More formal in larger

organizations

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Strategic Management
Communication is a key to

successful strategic management

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Benefits of Strategic Management

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Benefits of Strategic Management


Nonfinancial Benefits Enhanced awareness of threats Improved understanding of competitors strategies Increased employee productivity Reduced resistance to change Clearer understanding of performance-reward relationship Enhanced problem-prevention capabilities

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Why Some Firms Do No Strategic Planning


Lack of knowledge of strategic planning Poor reward structures Fire fighting Waste of time Too expensive Laziness Content with success

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Why Some Firms Do No Strategic Planning (continued)


Fear of failure Overconfidence Prior bad experience Self-interest Fear of the unknown Honest difference of opinion Suspicion

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Pitfalls in Strategic Planning


Strategic planning is an involved, intricate, and complex process that takes an organization into uncharted territory

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Effective Strategic Planning is:


A people process more than a paper process
A learning process Words supported by numbers Simple and nonroutine Varying assignments, team membership, meeting

formats, and planning calendars Challenging assumptions underlying corporate strategy

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Effective Strategic Planning continued


Welcomes bad news Requires open-mindedness and a spirit of inquiry Is not a bureaucratic mechanism Is not ritualistic or stilted Is not too formal, predictable, or rigid Does not contain jargon or arcane language

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Effective Strategic Planning continued


Is not a formal system for control
Does not disregard qualitative information Is not controlled by technicians

Does not pursue too many strategies at once


Continually strengthens the good ethics is

good business policy

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Comparing Business and Military Strategy


Strategic planning started in the military
Similarity
Both business and military organizations must

adapt to change and constantly improve

Difference
Business strategy assumes competition Military strategy assumes conflict

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