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.Environmental Scanning
2.Strategy Formulation
3.Strategy Implementation
4.Evaluation and Control
 1.10 Environmental Variables (Fig. 1.3)

Environmental Variables
Societal Environment

Sociocultural Task Economic

Forces Task
Environment Forces
Environment
(Industry)

Shareholders Suppliers

Governments
Internal
Employees/
Environment
Special Labor Unions
Interest Structure
Culture
Groups
Resources
Competitors

Customers
Trade Associations
Creditors
Political-Legal Technological
Communities
Forces Forces

11 Chapter 1 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
organization’s 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 company’s present situation?
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 company’s most
reliable ticket to above average profitability
Four “Best” Strategic Approaches to Building
Sustainable Competitive Advantage
 Being the industry’s 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 company’s 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 company’s Concerns whether revenues and
competitive initiatives and costs flowing from the strategy
business approaches demonstrate a business can be
amply profitable and viable
Tests of a Winning Strategy
 GOODNESS OF FIT TEST

 How well does strategy fit

the firm’s situation?

 COMPETITIVE ADVANTAGE TEST

 Does strategy lead to sustainable

competitive advantage?

 PERFORMANCE TEST

 Does strategy boost firm’s 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 company’s 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 company’s strategic
course in preparing for the future.
Characteristics of well worded vision
statement
1. 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
2. Directional: says something about company’s journey
or destination and signals the kinds of businesses and
strategic changes that will be forthcoming
3. Focused: is specific enough to provide mangers with
guidance in making decisions and allocating resources
Characteristics of a well worded vision
statement
4. Flexible : is not a once-and-for-all time pronouncement;
vision about a company’s future path may need to change as
events unfold and circumstances change
5. Feasible: is within the realm of what the company can
reasonably expect to achieve in due time
6. Desirable : appeals to the long term interests of stake holders
- particularly shareowners, employees and customers
7. 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. Incomplete : short on specifics about where the
company is headed and what kind of company
management is trying to create
2. Vague : doesn’t provide much indication of whether or
how management needs to alter the company’s
current product/ market/ customer/ technology
focus
3. Bland : lacking in motivational power
4. 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 doesn’t rule out any
opportunity that management might opt to pursue
Google’s 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
Google’s 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.
Google’s 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.
Google’s 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
firm’s 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 Strategic Objectives

Outcomes focused Outcomes focused on

on improving financial improving competitive
vitality and future
performance
business position

$
 Financial 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
Strategic Objectives
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 company’s 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 company’s 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 de-emphasizing
the strategic objectives may have merit)
 Just tracking financial performance overlooks the importance
of measuring whether a company is strengthening its
competitiveness and market position.
The surest path to sustained future profitability year after
year is to relentlessly pursue strategic outcomes
that strengthen a company’s 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 Company’s 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 strategically-relevant 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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