STRATEGIC

MANAGEMENT
Chapter 8

Learning Objectives
You should learn to:
Explain the importance of strategic
management
Describe the steps in the strategic
management process
Explain SWOT analysis
Differentiate corporate-, business-, and
functional-level strategies
Explain what competitive advantage is
and why its important to organizations

Prentice Hall, 2002 8-2
Learning Objectives (cont.)
You should learn to:
Describe the five competitive forces
Identify the various competitive
strategies
Prentice Hall, 2002 8-3
The Importance Of Strategic Management
What Is Strategic Management?
A set of managerial decisions and actions
that determines the long-run performance of
an organization
Purposes of Strategic Management
involved in many decisions that managers
make
companies with formal strategic management
systems have higher financial returns than
companies with no such system
important in profit and not-for-profit
organizations
Prentice Hall, 2002 8-4
Sequential Phases of
Strategic Planning
1. Basic Financial Planning
2. Forecast-Based Planning
3. Externally-Oriented Planning (Strategic
Planning)
4. Strategic Management

Three Key Strategic Questions
Where is the organization now?
If no changes are made, where will the
organization be in one, two, five or ten
years? Are the answers acceptable?
If the answers are not acceptable, what
specific actions should management
undertake? What are the risks and payoffs
involved?

7
The Stages and Activities in the
Strategic Management Process
Stages Activities
Strategy
formulation
Strategy
evaluation
Strategy
implementation
Conduct
research
Establish
annual
objectives
Review internal
and external
factors
Integrate
intuition
with
analysis
Devise
policies
Measure
performance
Make
decisions
Allocate
resources
Take
corrective
action
1999 Prentice Hall
Why are strategic decisions different from other types
of decisions?
Strategic decisions deal with the long-run future of the
entire organization and have three characteristics
which differentiate them from other types of decisions
(1) They are rare.
Strategic decisions are unusual and typically have no
precedent to follow
(2) They are consequential.
Strategic decisions commit substantial resources and
demand a great deal of commitment;
(3) They are directive.
Strategic decisions set precedents for lesser decisions
and future actions throughout the organization

The Strategic Management
Process
Prentice Hall, 2002 8-9
The Strategic Management
Process
1. Identifying the Organizations Current
Mission, Objectives, and Strategies
mission - statement of the purpose of
an organization
important in profit and not-for-profit
organizations
important to identify the goals currently in
place and the strategies currently being
pursued
Prentice Hall, 2002 8-10
Prentice Hall, 2000 Chapter 1 11
Definition of Mission
Mission

The purpose or reason for the corporations
existence. It may be narrow or broad in
scope.

Narrow Broad
Railroad Transportation
Insurance Financial Services
1.17 Definition of Mission
Components of a Mission
Statement
Prentice Hall, 2002 8-12
The Strategic Management Process
(cont.)
2. Analyzing the Environment
successful strategies are aligned with the
environment
examine both the specific and general
environments to determine what trends and
changes are occurring
General Environment
Composed of general forces in environment
1. socio-cultural forces
2. Economic Forces
3. Technological Forces
4. Political-legal forces
Prentice Hall, 2002 8-13
Task Environment
Composed of
Groups in environment that directly affect or are
affected by the organizations operations
(Often called industry)
Competitors
Customers
Suppliers
Creditors
Share holders
Trade association
Employees/ labor unions
communities

The Strategic Management Process (cont.)
3. Identifying Opportunities and Threats
threats
negative trends in the external
environment
opportunities
- positive trends in the external
environmental

The Strategic Management
Process (cont.)
4. Analyzing the Organizations Resources
and Capabilities
examine the inside of the organization
available resources and capabilities
always constrain the organization in
some way
core competence - a unique and
exceptional capability or resource
the organizations major value-creating,
competitive weapon
Prentice Hall, 2002 8-16
The Strategic Management Process
(cont.)
5. Identifying Strengths and Weaknesses
strengths - activities the organization does well or any
unique resource
weaknesses - activities the organization does not do well or
resources it needs but does not possess
organizations culture has its strengths and weaknesses
strong culture - new employees easily identify the organizations core
competencies
may serve as a barrier to accepting change
influence managers preferences for certain strategies
SWOT analysis - analysis of the organizations strengths,
weaknesses, opportunities, and threats
Prentice Hall, 2002 8-17
Identifying the Organizations
Opportunities
Organizations
Opportunities
Organizations
Resources/Abilities
Opportunities in
the Environment
Prentice Hall, 2002 8-18
The Strategic Management
Process (cont.)
6. Formulating Strategies
require strategies at the corporate, business, and
functional levels of the organization
strategy formulation follows the decision-making
process
7. Implementing Strategies
a strategy is only as good as its implementation
8. Evaluating Results
control process to determine the effectiveness of a
strategy
Prentice Hall, 2002 8-19
Levels of Organizational
Strategy
Prentice Hall, 2002 8-20
Types Of Organizational
Strategies
Corporate-Level Strategy
determines
what businesses a company should be in or wants
to be in
the direction that the organization is going
the role that each business unit will play
Grand Strategy - Stability
no significant change is proposed
organizations performance is satisfactory
environment appears to be stable and unchanging
few organizations today pursue this strategy
Prentice Hall, 2002 8-21
Types Of Organizational
Strategies (cont.)
Corporate-Level Strategy (cont.)
Grand Strategy - Growth
seeks to increase the level of the organizations
operations
concentration - growth through direct expansion of
organizations own business operations
vertical integration
backward - become your own supplier
forward - become your own distributor
horizontal integration - grow by combining with other
organizations in the same industry
needs approval by U.S. Federal Trade Commission
Prentice Hall, 2002 8-22
Types Of Organizational
Strategies (cont.)
Corporate-Level Strategy (cont.)
Grand Strategy - Growth (cont.)
related diversification - grow by merging
with or acquiring firms in different, but
related, industries
strategic fit
unrelated diversification - grow by
merging with or acquiring firms in different
and unrelated industries
Prentice Hall, 2002 8-23
Types Of Organizational
Strategies (cont.)
Corporate-Level Strategy (cont.)
retrenchment - designed to address
organizational weaknesses that are leading
to performance declines
intended to:
stabilize operations
revitalize organizational resources and
capabilities
prepare to compete once again
Prentice Hall, 2002 8-24
SWOT Analysis And Grand
Strategies
Corporate
Growth
Strategies
Corporate
Stability
Strategies
Corporate
Retrenchment
Strategies
Abundant
Environmental
Opportunities
Critical
Environmental
Threats
Corporate
Stability
Strategies
C
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i
t
i
c
a
l

W
e
a
k
n
e
s
s
e
s

V
a
l
u
a
b
l
e

S
t
r
e
n
g
t
h
s

Environmental Status
F
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m

S
t
a
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u
s

Prentice Hall, 2002 8-25
Types of Organizational
Strategies (cont.)
Corporate-Level Strategy (cont.)
Corporate Portfolio Analysis - used when
corporate strategy involves a number of business
Boston Consulting Group (BCG) matrix - provides a
framework for understanding diverse businesses
helps managers establish priorities for making resource
allocation decisions
businesses classified in terms of
market share
anticipated market growth
Prentice Hall, 2002 8-26
The BCG Matrix
Stars
Cash
Cows
Dogs
Question
Marks
Market Share
High Low
H
i
g
h

L
o
w

Anticipated
Growth
Rate
Prentice Hall, 2002 8-27
Types of Organizational
Strategies (cont.)
Corporate-Level Strategy (cont.)
BCG matrix (cont.)
strategic implications of the matrix
cash cows - milk
use cash to invest in stars and question marks
stars - require heavy investment
eventually will become cash cows
question marks - two strategies
invest to transform them into stars
divest
dogs - sold off or liquidated
Prentice Hall, 2002 8-28
Types Of Organizational
Strategies (cont.)
Business-Level Strategy
determines how an organization should compete in
each of its businesses
strategic business units - independent
businesses that formulate their own strategies
Role of Competitive Advantage
competitive advantage - sets an organization apart by
providing a distinct edge
comes from the organizations core competencies
not every organization can transform core competencies into a
competitive advantage
once created, must be able to sustain it
Prentice Hall, 2002 8-29
Types Of Organizational
Strategies (cont.)
Business-Level Strategy (cont.)
Competitive Strategies
Michael Porter - industry analysis based on five
competitive forces
Threat of new entrants - affected by barriers to entry
Threat of substitutes - affected by buyer loyalty and
switching costs
Bargaining power of buyers - affected by number of
customers, availability of substitute products
Prentice Hall, 2002 8-30
Business-Level Strategy (cont.)
Competitive Strategies (cont.)
Porters competitive forces analysis (cont.)
Bargaining power of suppliers - affected by
degree of supplier concentration
Existing rivalry - affected by industry growth
rate, demand for firms product or service, and
product differences
Types Of Organizational
Strategies (cont.)
Prentice Hall, 2002 8-31
Current Rivalry
Industry
Competitors
Forces In The Industry Analysis
Suppliers
New
Entrants
Buyers
Substitutes
Threat of
New Entrants
Threat of
Substitutes
Bargaining
Power or
Buyers
Bargaining
Power or
Suppliers
Prentice Hall, 2002 8-32
Types of Organizational
Strategies (cont.)
Business-Level Strategy (cont.)
Competitive strategies (cont.)
Porters three generic strategies
cost leadership - goal is to become the lowest-cost
producer in the industry
tries to identify efficiencies in all operations
overhead kept to a minimum
product or service must be perceived to be of
comparable quality to that offered by competitors
Prentice Hall, 2002 8-33
Types of Organizational
Strategies (cont.)
Business-Level Strategy (cont.)
Competitive strategies (cont.)
Porters three generic strategies (cont.)
differentiation - offer unique products that are widely
valued by customers
sets the firm apart from competitors
differentiation based on quality, service, product
design, brand image
customers must be willing to pay a price premium
that exceeds the cost of differentiation
Prentice Hall, 2002 8-34
Types of Organizational
Strategies (cont.)
Business-Level Strategy (cont.)
Competitive strategies (cont.)
Porters three generic strategies (cont.)
focus - aims at a cost advantage or
differentiation advantage in a narrow segment
no attempt to serve the broad market
feasibility of strategy depends on the size of
the segment and the ability of the firm to
support the cost of focusing
Prentice Hall, 2002 8-35
Requirements for Successfully Pursuing
Porters Competitive Strategies
Prentice Hall, 2002 8-36
Types Of Organizational
Strategies (cont.)
Functional-Level Strategy (cont.)
used to support the business-level
strategy
creates an appropriate supporting role
for each functional area of the
organization
e.g., manufacturing, marketing, human
resources
Prentice Hall, 2002 8-37