Chapter 1

The Nature of Strategic

management
“Without a strategy the organization is
like a ship without a rudder, going
around in circles.”

Joel Ross and Michael Kami

 Thinking Strategically:
The Three Big Strategic
Questions

1. Where are we now?

2. Where do we want to go?
– Business(es) to be in and market
positions to stake out?
– Buyer needs and groups to
serve?
– Outcomes to achieve?
3. How do we get there?
 What is Strategy?

• A company’s strategy consists of the set of

competitive moves and business approaches that
management is employing to run the company
• Strategy is management’s “game plan” to
– Attract and please customers
– Stake out a market position
– Conduct operations
– Compete successfully
– Achieve organizational objectives
 What is a Business Model?

• A company’s business model addresses “How do we make

money in this business?”
– Is the strategy that management is pursuing capable
of delivering good bottom-line results?
• Do the revenue-cost-profit economics of the company’s
strategy make good business sense?
– Look at the revenue streams the
strategy is expected to produce
– Look at the associated cost structure
and potential profit margins
– Do the resulting earnings streams and
ROI indicate the strategy makes sense and that the
company has a viable business model?
 Strategy vs. Business Model :
What is the Difference?

Strategy -- Deals with a Business Model --

company’s competitive Concerns whether the
initiatives and business revenues and costs
approaches flowing from the
strategy demonstrate
that the business can be
amply profitable and
viable
Microsoft’s Business Model
Employ a cadre of highly skilled programmers to
develop proprietary code; keep source code hidden
from users

Sell resulting operating system and software

packages to PC makers and users at relatively
attractive prices and achieve large unit sales

Most costs arise in developing the software; variable

costs are small—once breakeven volume is reached,
revenues from additional sales are almost pure profit.

Provide technical support to users at no cost

 Redhat Linux’s Business
Model
Use volunteer programmers to create the software;
make source code open and
available to all users

Give Linux operating system away free of charge to

those who download it (charge a small fee to users
who want a copy on CD)

Make money by employing a cadre of technical

support personnel who provide technical support to
users for a fee
 Why Are Strategies
Needed?

To proactively To mold the

shape how a independent actions
company’s business and decisions of
will be managers and
conducted employees into a
coordinated,
company-wide game
plan
 What is Strategic
Management

• Art and science of formulating,

implementing, ad evaluating cross-
functional decisions that enable an
organization to achieve the objectives
• The purpose of strategic management
is to exploit, and create new and
different opportunities for tomorrow,
long-range planning, in contrast, tries
to optimize for tomorrow the trend of
today
 Strategic Management
Concept

Competent execution of a well-conceived

strategy is the best test of managerial
excellence and a proven recipe for
organizational success!

Good Strategy + Good Strategy Execution =

Good Management
 Three-Stage Process

Strategy Formulation

Strategy
Implementation

Strategy Evaluation
 Strategy Formulation

• Developing vision & mission

• Identifying organization’s external
opportunities and threats
• Determining internal strength and
weaknesses
• Establishing long-term objectives
• Generating alternative strategies
• Choosing particular strategy to
pursue
 Strategy Formulation

Issues include:
– What new businesses to enter
– What businesses to abandon
– How to allocate resources
– Expand operations or diversify
– Enter international markets
– Merge or form joint venture
– Avoidance of hostile takeover
 Strategy Implementation

• Establish annual objectives

• Devices policies
• Motivated employees
• Allocate resources

So that formulated strategies can be

executed
 Strategy Implementation

Action Stage of strategic management:

– Most difficult stage

– Mobilizing employees and
managers
– Interpersonal skills are critical
– Consensus on pursuing goals
 Strategy Evaluation

• Reviewing external and internal

factors that are the bases for current
strategies
• Measuring performance
• Taking corrective actions
 Strategy Evaluation

Final stage of strategic management:

– All strategies subject to future

modification
– Success today is no guarantee of
success tomorrow
– Success creates new and different
problems
– Complacency leads to demise
 Integrating Intuition and
Analysis

The strategic management

process attempts to organize
quantitative and qualitative
information under conditions of
uncertainty.
 Integrating Intuition and
Analysis
Intuition based on:
–Past experiences
–Judgment
–Feelings
Useful for decision making
–Conditions of great uncertainty
–Conditions with little precedent
 Integrating Intuition and
Analysis
Intuition and judgment
–Management at all levels
–Analyses are influenced

Analytical thinking and intuitive

thinking
–Complement each other
 Integrating Intuition and
Analysis

Strategic management process is an attempt

both to duplicate what goes on in the mind of
brilliant, intuitive person who knows the
business and to couple it with analysis
 Adaptation to Change

Organizations must monitor

events
–On-going process
–Internal and external events
–Timely changes
 Adaptation to Change

Rate and magnitude of changes

–Increasing dramatically
•E-commerce
•Demographics
•Technology
•Merger-mania
–Effective Adaptation
•Long-run focus
 Adaptation to Change

The need to adapt to change lead these

questions:
– What kind of business should we become?
– Are we in the right fields?
– Should we reshape our business?
– What new competitors are entering our
industry?
– What strategies should we pursue?
– How are our customers changing?
 Key Term of Strategic
Management
• Competitive Advantage
– Anything that a firm does especially well
compared to rival firms
– A firm must strive to achieve sustained
competitive advantage by:
• Continually adapting to change in external
trends and events and internal capabilities,
competencies, and resources
• Effectively formulating, implementing, and
evaluating strategies
 Key Term of Strategic
Management
• Strategists
– The individuals who are most responsible
for the success or failure of an
organization
– Example:
• CEO
• President
• Executive director
• Owner
• Entrepreneur
 Key Term of Strategic
Management
• Vision and Mission

Vision Statement
– What do we want to become?

Mission Statement
– What is our business?
 Missions vs. Strategic
Visions
• A mission statement • A strategic vision
focuses on current concerns a firm’s future
business activities -- business path -- “where
“who we are and we are going”
what we do” Markets to be
–
– Current product pursued
and service – Future technology-
offerings product-customer
– Customer needs focus
being served – Kind of company
– Technological and that management
business is
capabilities trying to create
 Why is a Strategic Vision
Important?

• Amanagerial imperative exists to look beyond

today and think strategically about
– Impact of new technologies
– How customer needs and
expectations are changing
– What it will take to outrun competitors
– Which promising market opportunities ought
to be aggressively pursued
– External and internal factors driving what a
company needs to do to prepare for the
future
Examples: Mission and Vision
Statements

Microsoft Corporation

Empower people
through great software
anytime, anyplace, and
on any device.
 Examples: Mission and Vision
Statements

Intel

Our vision: Getting to a billion connected computers

worldwide, millions of servers, and trillions of dollars of
e-commerce. Intel’s core mission is being the building
block supplier to the Internet economy and spurring
efforts to make the Internet more useful. Being
connected is now at the center of people’s computing
experience. We are helping to expand the capabilities
of the PC platform and the Internet.
 Examples: Mission and Vision
Statements

Otis Elevator
Our mission is to provide any customer a means of
moving people and things up, down, and sideways
over short distances with higher reliability than
any similar enterprise in the world.

Avis Rent-a-Car
Our business is renting cars. Our mission is total
customer satisfaction.
 Examples: Mission and Vision
Statements

(a unique grocery store chain)

Our mission: To give our customers the best

food and beverage values that they can find
anywhere and to provide them with the
information required for informed buying
decisions. We provide these with a dedication to
the highest quality of customer satisfaction
delivered with a sense of warmth, friendliness,
fun, individual pride, and company spirit.
 Examples: Mission and Vision
Statements

American Red Cross

The mission of the American Red Cross

is to improve the quality of human life; to
enhance self-reliance and concern for
others; and to help people avoid,
prepare for, and cope with emergencies.
 Key Term of Strategic
Management
• External Opportunities and Threats
– Largely beyond the control of a single
organization.
– It refer to economic, social, cultural,
demographic, environmental, political,
legal, governmental, technological,
competitive trend
– Basic tenet of strategic management
• Strategy formulation to:
– Take advantage of external opportunities
– Avoid or reduce impact of external
threats
 Key Term of Strategic
Management
• Environmental Scanning

–Industry Analysis
•Process of conducting research and
gathering and assimilating external
information
 Key Term of Strategic
Management
• Internal Strengths and Weakness
– Controllable activities performed
especially well or poorly.

– Arise in functional areas of the business:

• Management
• Marketing
• Finance/accounting
• Production/operations
• Research & development
• Computer Information Systems
 Key Term of Strategic
Management
– Determining Internal Factors:

•Financial ratios
•Measuring performance
•Industry averages
•Survey data
•Customer loyalty
 Key Term of Strategic
Management
• Long- Term Objectives
– Objectives: specific results that an organization
seeks to achieve in pursuing its basic mission
– Long-term: more than one year
– Essential for organizational success
• State direction
• Aid in evaluation
• Create synergy
• Focus coordination
• Basis for planning, motivating and controlling
– Objectives should be challenging, measurable,
consistent, reasonable, and clear
 Key Term of Strategic
Management
• Strategies
– Means by which long-term objectives will
be achieved.

– May include:
• Geographic expansion, diversification
• Acquisition
• Product development, market penetration
• Retrenchment, divestiture
• Liquidation, joint venture
 Key Term of Strategic
Management
• Annual Objectives:

– Short-term milestones that organizations

must achieve to reach long-term
objectives.

• Policies:

– Means by which annual objectives will be

achieved.
 The Strategic Management
Model

Perform
external audit

Implement
strategies
Generate, Implement
Establish long marketing, Measure and
Develop vision evaluate, and strategies
term finance, Evaluate
& mission select management
objectives accounting, Performance
strategies issues
R&D, MIS
Issues

Perform
internal audit

Strategy formulation Strategy implementation Strategy evaluation

 Strategic-Management
Model

Strategic-Management Process –

• Dynamic and Continuous

• More formal in larger organizations
 Strategic-Management
Model

1.Identify Organization’s existing (vision,

mission, objectives, strategies)
2.Perform External Audit
3.Perform Internal Audit
4.Establish long-term objectives
5.Generate, evaluate, select strategies
6.Implement strategies
7.Measure and evaluate performance
 Benefits of Strategic
Management

• Proactive in shaping organization’s future

• Initiate and influence activities
• Formulate better strategies
– Systematic, logical, rational approach
 Benefits of Strategic
Management

• Financial benefits
– Improvement in sales
– Improvement in profitability
– Improvement in productivity
 Benefits of Strategic
Management
• Non-Financial benefits
– Enhanced awareness of external threats
– Improved understanding of competitors’
strategies
– Increased employee productivity
– Reduced resistance to change
– Understanding of performance-reward
relationships
– Enhances problem-prevention capabilities
 Benefits of Strategic
Management
1.Identification of opportunities
2.Objective view of management problems
3.Improved coordination and control
4.Minimizes adverse conditions and changes
5.Decisions to better support objectives
6.Effective allocation of time and resources
7.Internal communication among personnel
 Benefits of Strategic
Management

8.Integration of individual behaviors

9.Clarifies individual responsibilities
10.Encourages forward thinking
11.Encourages favorable attitude toward
change
12.Discipline and formality to the
management of the business
 Why some firms do no
Strategic Planning

• Lack of knowledge or experience is

strategic planning
• Poor reward structures
• Waste of time
• Too Expensive
• Laziness
• Fear of Failure
• Overconfidence
• Suspicion
 Guidelines for effective
Strategic Planning
1. It should be a people process more than paper process
2. It should be a learning process for all managers and
employees
3. It should be word supported by numbers rather than
numbers supported by words
4. It should be simple and non-routine
5. It should be vary assignments, team memberships,
meeting format and even the planning calendar
6. It should challenge the assumptions underlying the
current corporate strategy
7. It should welcome bad news
8. It should welcome open-mind and a spirit of inquiry and
learning
9. It should not be bureaucratic
10. It should not become ritualistic, stilted, or orchestrated
 Guidelines for effective
Strategic Planning
11. It should not be too formal, predictable, or rigid
12. It should not contain jargon or arcane planning language
13. It should not be a formal system for control
14. It should not disregard qualitative information
15. It should not controlled by “technicians”
16. Continually strengthen the “ good ethics is good
business” policy
Assignment
1. Describe the strategic management process
2. Explain the need for integrating analysis and
intuition in strategic management
3. Define and give examples of key term in
strategic management
4. Describe the benefits of giid strategic
management
5. Discuss the relevance of Sun Tzu’s The art of
war to strategic management
6. Discuss how a firm may achieve sustained
competitive advantages