Strategic Management

Lecture1

Definition of
Strategic Management
Strategic Management
The set of managerial decisions and actions that
determines the long-run performance of an
organization

Q. Why has strategic management become so important to

today's organizations?

Ans. Research indicates that organizations which

engage in strategic management generally
outperform those that do not
The attainment of an appropriate match or fit
between an organization's environment and its
strategy, structure, and processes has positive effects
on the organization's performance.
Bruce Henderson, founder of the Boston Consulting
Group, pointed out that a firm cannot afford to follow
intuitive decisions once it becomes large, has layers
of management, or its environment changes
substantially
As the world's environment becomes increasingly
complex and changing, strategic management is used
by today's organizations as one way to make the
environment more manageable

Q. 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

Three Key Strategic Questions

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

Challenges to Strategic
Management
Impact of Electronic Commerce:
1. Internet is forcing companies to transform

themselves. The concept of electronically

networking customers, suppliers, and partners
is now a reality.
2. New channels are changing market access
and branding, causing the disintermediation of
traditional distribution channels.
3. The balance of power is shifting to the
consumer. Now, having unlimited access to
information on the internet, customers are
much more demanding.

Challenges to Strategic Management

(cont.)
4. Competition is changing. New technology driven
firms as well as the traditional firms are exploiting
internet to become more innovative and efficient
5. The pace of business is increasing drastically.
Planning horizons, information needs,
customer/supplier expectations are reflecting the
immediacy of internet
6.
The internet is pushing corporations out of their
traditional boundaries. The traditional separation
between supplier, manufacturer, and customer is
becoming blurred
7.
Knowledge is becoming a key asset and source of
competitive advantage

Globalization
Regional & Global Trade Agreements

European Union (EU)

North American Free Trade Agreement

(NAFTA)
WTO
Association of South East Asian Nations
(ASEAN)

Learning Organization
An organization skilled at creating, acquiring, transferring knowledge,
and at modifying its behavior to reflect new knowledge and
insights
Learning organizations are skilled at four main skills
1.
Solving problem systematically
2.
Experimenting with new approaches
3.
Learning from their own experiences and history as well as from
the experiences of others
4.
Transferring knowledge quickly and efficiently through out the
organization

This means that people at all levels, not just top management,
need to be involved in strategic management
- by helping to scan the environment for critical information
- suggesting changes to strategies and programs to take
advantage of environmental shifts,
- and working with others to continuously improve work methods,
procedures, and evaluation techniques.

Composition of
Strategic Management
Strategic Management is Composed of
1.
2.
3.
4.

Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control

1.10 Environmental Variables (Fig. 1.3)

Environmental Variables
Societal Environment

Sociocultural
Forces

Economic
Forces

Task
Task
Environment
(Industry)
Environment
Shareholders

Governments

Suppliers

Internal
Environment

Special
Interest
Groups

Structure
Culture
Resources

Employees/
Labor Unions

Competitors

Customers

Trade Associations
Creditors
Political-Legal
Forces

11

Chapter 1

Communities

Technological
Forces

Prentice Hall, 2000

Societal Environment
Composed of general forces in environment
1. Socio-cultural forces
2. Economic Forces
3. Technological Forces
4. Political-legal forces

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

Definition of Strategy Formulation

Strategy Formulation
The process of developing long-range plans to
deal effectively with environmental
opportunities and threats in light of corporate
strengths and weaknesses
Composed of:
Vision & Mission
Objectives
Strategies
Policies

Difference between Vision,

Objectives & Strategy
1. VISION: What is the companys present situation and
where do we want to take it?
2. OBJECTIVES: Where does the company need to go
from here?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Direction to head

3. STRATEGY: How should it get there?

That leaves., a Mission

A Mission describes:
Products which the company is offering
Markets which are being reached
Customers who are being served
How the customers are being served (Value

Proposition)
The unique value proposition by a company is a

result of its Core Competencies (inner strengths)

and comes out as a Competitive Advantage

Strategy and the Quest for

Competitive Advantage
The heart and soul of any strategy are the actions and

moves in the marketplace that a company makes to

strengthen its competitive position and gain a
competitive advantage over rivals
A creative-distinctive value proposition that sets a
company apart from rivals and yields a competitive
advantage is a companys most reliable ticket to
above average profitability

Four Best Strategic Approaches to

Building Sustainable Competitive Advantage
Being the industrys low-cost provider (a cost-based

competitive advantage)
Incorporate differentiating features (a superior
product type of competitive advantage keyed to
higher quality, better performance, wider selection,
value-added services, or some other attribute)
Focusing on a narrow market niche (winning a
competitive edge by doing a better job than rivals of
serving the needs and preferences of buyers
comprising the niche)
Making a unique value proposition by combining
lower costs with differentiating features (A best
value product)

Some Consolidated Mission

Statements:
"To make the world's information universally

accessible and useful

To inspire and nurture the human spirit one
person, one cup and one neighborhood at a
time
To bring inspiration and innovation to every
athlete* in the world.
*"If you have a body, you are an athlete.
TO BUILD UNIQUE SPORTS CARS DESTINED TO

REPRESENT THE EXCELLENCE OF ITALIAN

CARS, WHETHER ON THE ROAD OR ON RACING
CIRCUITS.

Why Do Strategies Evolve?

A companys strategy is a work in progress

Changes may be necessary to react to

Shifting market conditions
Technological breakthroughs

Fresh moves of competitors

Evolving customer preferences
Emerging market opportunities
New ideas to improve strategy
Crisis situations

What is a Business Model?

A business model addresses the question: How do we

make money in this business?

Is the strategy capable of delivering
good bottom-line results?
Do the revenue-cost-profit economics of the strategy
make good business sense?
Look at revenue streams the strategy is expected to
produce
Look at associated cost structure and potential
profit margins
Do resulting earnings streams and ROI indicate that
the strategy makes sense and the company has a
viable business model for making money?

Relationship Between
Strategy and Business Model
Strategy . . .

Business Model . . .

Deals with a companys

competitive initiatives and
business approaches

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

Tests of a Winning Strategy

GOODNESS OF FIT TEST
How well does strategy fit

the firms situation?

COMPETITIVE ADVANTAGE TEST
Does strategy lead to sustainable

competitive advantage?
PERFORMANCE TEST
Does strategy boost firms performance?

The Strategy-Making, Strategy-Executing

Process

Developing a Strategic Vision

Phase 1 of the Strategy-Making Process
Involves thinking strategically about
Future direction of company
Changes in companys product/market/customer

technology to improve

Current market position

Future prospects

A strategic vision describes the route a company

intends to take in developing and strengthening
its business. It lays out the companys strategic
course in preparing for the future.

Characteristics of well worded vision

statement
1.

2.

3.

Graphic: Paints a picture of the kind of

company that management is trying to
create and the market position a company
is striving to stake out
Directional: says something about
companys journey or destination and
signals the kinds of businesses and
strategic changes that will be forthcoming
Focused: is specific enough to provide
mangers with guidance in making decisions
and allocating resources

Characteristics of a well worded

vision statement
4.

5.

6.

7.

Flexible : is not a once-and-for-all time

pronouncement; vision about a companys future
path may need to change as events unfold and
circumstances change
Feasible: is within the realm of what the company
can reasonably expect to achieve in due time
Desirable : appeals to the long term interests of
stake holders - particularly shareowners,
employees and customers
Easy to communicate: is explainable in less than
10 minutes and ideally be reduced to a simple
memorable slogan

Common shortcomings in company

vision statements
1.

2.

3.
4.

Incomplete : short on specifics about where

the company is headed and what kind of
company management is trying to create
Vague : doesnt provide much indication of
whether or how management needs to alter
the companys current product/ market/
customer/ technology focus
Bland : lacking in motivational power
Not distinctive: could apply to almost any
company (or at-least several others in the
same industry)

Common shortcomings in company

vision statements
5.
Too reliant on such superlatives as best,
most successful, recognized leader, global or
worldwide leader, or first choice of customers
6.
Too generic fails to identify the
business, or industry, to which it is supposed
to apply. The statement could apply to
companies in any of several industries
7. So broad that it really doesnt rule out any
opportunity that management might opt to
pursue

Googles Vision Statement

Google believes that an open web benefits all

users and publishers. However, "open" need not

mean free. We believe that content on the
Internet can thrive supported by multiple business
models -- including content available only via
subscription. While we believe that advertising will
likely remain the main source of revenue for most
news content, a paid model can serve as an
important source of additional revenue. In
addition, a successful paid content model can
enhance advertising opportunities, rather than
replace them

Googles Vision Statement

When it comes to a paid content model, there are

two main challenges. First, the content must offer

value to users. Only content creators can address
this. The second is to create a simple payment
model that is painless for users. Google has
experience not only with our e-commerce
products; we have successfully built consumer
products used by millions around the world. We
can use this expertise to help create a successful
e-commerce platform for publishers.

Googles Vision Statement

Beyond the mechanics of any payment system,

users must know the product exists. Discovery

and distribution are just as, if not more, important
to premium content as they are to free content
given the smaller audience of potential
subscribers. Google is uniquely positioned to help
publishers create a scalable e-commerce system
via our Checkout product and also enable users
to find this content via search -- even if it's behind
a paywall.

Googles Vision Statement

Our vision of a premium content :ecosystem includes the following
features:
Single sign-on capability for users to access content and
manage subscriptions
Ability for publishers to combine subscriptions from different titles
together for one price
Ability for publishers to create multiple payment options and
easily include/exclude content behind a paywall
Multiple tiers of access to search including 1) snippets only with
"subscription" label, 2) access to preview pages and 3) "first click
free" access
Advertising systems that offer highly relevant ads for users, such
as interest-based advertising

Vision vs. Mission

A strategic vision

concerns a firms future

business path - where
we are going
Markets to be pursued
Future product/market/
customer/technology focus
Kind of company
management is
trying to create

The mission statement

of a firm focuses on its

present business
purpose - who we are
and what we do
Current markets and
market offerings
Customer needs being
served
Technological and
business
capabilities (competitive
advantage)

Setting Objectives
Phase 2 of the Strategy-Making Process
Purpose of setting objectives
Creates yardsticks to track performance
Converts vision into specific performance targets
Well-stated objectives are

Quantifiable
Measurable
Contain a deadline for achievement

Spell-out how much of what kind of performance by

when

Types of Objectives Required

Financial Objectives
Outcomes focused
on improving financial
performance

Strategic Objectives
Outcomes focused on
improving
competitive vitality
and future business
position

Financial Objectives

Strategic Objectives

An x percent increase in annual

revenues
Annual increases in after tax
profits
Annual increases in earnings per
share of x percent
Annual dividend increases of x
percent
Profit margin of x percent
An x percent return on ROE
Strong bond and credit ratings
Stable earnings during periods of
recession

Winning an x percent market share

Achieving lower overall costs than
rivals
Overtaking key competitors on
product performance or quality or
customer service
Deriving x percent of revenues from
sale of new products introduced
within five years
Achieving technological leadership
Strengthening the companys brand
appeal
Having stronger sales and
distribution capabilities than rivals

A Balanced Scorecard Approach

Setting Strategic and Financial
Objectives
A balanced scorecard for measuring

company performance is optimal; it entails

Setting financial and strategic objectives
Placing balanced emphasis on achieving
both types of objectives

(However, if a companys financial performance is

dismal or if its very survival is in doubt because of
poor financial results, then stressing the achievement
of the financial objectives and temporarily deemphasizing the strategic objectives may have merit)
Just tracking financial performance overlooks

the importance of measuring whether a

The
surest path
sustained future profitability
year after
company
istostrengthening
its competitiveness
year is to relentlessly pursue strategic outcomes
and
market position.
that strengthen a companys business position and
give it a growing competitive advantage over rivals!

Components of a Balanced
Scorecard
Financial Perspective: Increase Returns; broaden

revenue streams
Customer Perspective: Increase customer
satisfaction; strengthen customer loyalty
Internal Perspective : Create innovative products;
improve after-sales service
Learning Perspective: Develop the requisite skills;
provide incentive based on customer feedback

How the BSC works

Equip our people to,

Build strategic capabilities needed to,

Deliver unique set of benefits to customers to..,
Achieve financial performance

_________________________________
People, knowledge, skills, systems and tools
develop Internal capabilities, leading to
Customer benefits, driving Financial results.

Short-Term vs.
Long-Term Objectives
Short-term objectives

Targets to be achieved soon

Milestones or stair steps for reaching long-range

performance
Long-term objectives
Targets to be achieved within

3 to 5 years
Prompt actions now that will

permit reaching targeted

long-range performance later

Crafting a Strategy
Phase 3 of the Strategy-Making Process
Strategy-making involves entrepreneurship
Actively searching for opportunities to do new things

or
Actively searching for opportunities to do
existing things in new or better ways
Strategizing involves
Developing timely responses to happenings

in the external environment

and
Steering company activities in new directions dictated
by shifting market conditions

A Companys Strategy-Making Hierarchy

Tasks of Corporate Strategy

Moves to achieve diversification
Actions to boost performance of individual

businesses
Capturing valuable cross-business synergies to

provide 1 + 1 = 3 effects!
Establishing investment

priorities and steering

corporate resources into the
most attractive businesses

Tasks of Business Strategy

Initiating approaches to produce successful

performance in a specific business

Crafting competitive moves to build

sustainable competitive advantage

Developing competitively valuable

competencies and capabilities

Uniting strategic activities of functional areas
Gaining approval of business strategies by

corporate-level officers and directors

Tasks of Functional Strategies

Game plan for a strategically-relevant

function, activity, or business process

Detail how key activities

will be managed
Provide support for

business strategy
Specify how functional objectives

are to be achieved

Tasks of Operating Strategies

Concern narrow strategic approaches to

manage key operating units and strategicallyrelevant operating activities

Add detail to business

and functional strategies

Delegation of responsibility

to frontline managers

Implementing and Executing Strategy

Phase 4 of the Strategy-Making Process
Operations-oriented activity aimed at

performing core business activities in a

strategy-supportive manner
Tougher and more time-consuming

than crafting strategy

Key tasks include
Improving efficiency of strategy being executed
Showing measurable progress in achieving targeted

results

What Does Strategy

Implementation Involve?
Building a capable organization
Allocating resources to strategy-critical activities
Establishing strategy-supportive policies
Instituting best practices and programs for

continuous improvement
Installing information, communication,|

and operating systems

Motivating people to pursue the target objectives
Tying rewards to achievement of results
Creating a strategy-supportive corporate culture
Exerting the leadership necessary to drive the

process forward and keep improving

Evaluating Performance and

Making Corrective Adjustments
Phase 5 of the Strategy-Making Process
Tasks of crafting and implementing the strategy are not

a one-time exercise
Customer needs and competitive conditions change
New opportunities appear; technology
advances; any number of other
outside developments occur
One or more aspects of executing the
strategy may not be going well
New managers with different ideas take over
Organizational learning occurs
All these trigger a need for corrective actions and
adjustments on an as-needed basis

The Basis for Good

Strategic Decisions
Intuition + Analysis

Effective Strategic Decisions

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