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Strategic management

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2nd semester MBA

2nd semester MBA

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  • 1. © 2007 Prentice Hall, Inc. All rights reserved. 8–1L E A R N I N G O U T L I N EL E A R N I N G O U T L I N EFollow this Learning Outline as you read and study this chapter.Follow this Learning Outline as you read and study this chapter.The Importance of Strategic ManagementThe Importance of Strategic Management• Define strategic management, strategy, and businessDefine strategic management, strategy, and businessmodel.model.• Explain why strategic management is important.Explain why strategic management is important.The Strategic Management ProcessThe Strategic Management Process• List the six steps in the strategic management process.List the six steps in the strategic management process.• Describe what managers do during external and internalDescribe what managers do during external and internalanalyses.analyses.• Explain the role of resources, capabilities, and coreExplain the role of resources, capabilities, and corecompetencies.competencies.• Define strengths, weaknesses, opportunities, and threats.Define strengths, weaknesses, opportunities, and threats.
  • 2. © 2007 Prentice Hall, Inc. All rights reserved. 8–2L E A R N I N G O U T L I N E (cont’d)L E A R N I N G O U T L I N E (cont’d)Follow this Learning Outline as you read and study this chapter.Follow this Learning Outline as you read and study this chapter.Types of Organizational StrategiesTypes of Organizational Strategies• Describe the three major types of corporate strategies.Describe the three major types of corporate strategies.• Discuss the BCG matrix and how it’s used.Discuss the BCG matrix and how it’s used.• Describe the role of competitive advantage in business-Describe the role of competitive advantage in business-level strategies.level strategies.• Explain Porter’s five forces model.Explain Porter’s five forces model.• Describe Porter’s three generic competitive strategies andDescribe Porter’s three generic competitive strategies andthe rule of three.the rule of three.
  • 3. © 2007 Prentice Hall, Inc. All rights reserved. 8–3L E A R N I N G O U T L I N E (cont’d)L E A R N I N G O U T L I N E (cont’d)Follow this Learning Outline as you read and study this chapter.Follow this Learning Outline as you read and study this chapter.Strategic Management in Today’s EnvironmentStrategic Management in Today’s Environment• Explain why strategic flexibility is important.Explain why strategic flexibility is important.• Describe strategies applying e-business techniques.Describe strategies applying e-business techniques.• Explain what strategies organizations might use toExplain what strategies organizations might use tobecome more customer oriented and to be morebecome more customer oriented and to be moreinnovative.innovative.
  • 4. © 2007 Prentice Hall, Inc. All rights reserved. 8–4Strategic ManagementStrategic Management• What managers do to develop theWhat managers do to develop theorganization’s strategies.organization’s strategies.StrategiesStrategies• The decisions and actions that determine theThe decisions and actions that determine thelong-run performance of an organization.long-run performance of an organization.
  • 5. © 2007 Prentice Hall, Inc. All rights reserved. 8–5Strategic Management (cont’d)Strategic Management (cont’d)• Business ModelBusiness Model Is a strategic design for how a company intends toIs a strategic design for how a company intends toprofit from its strategies, work processes, and workprofit from its strategies, work processes, and workactivities.activities. Focuses on two things:Focuses on two things: Whether customers will value what the company is providing.Whether customers will value what the company is providing. Whether the company can make any money doing that.Whether the company can make any money doing that.
  • 6. © 2007 Prentice Hall, Inc. All rights reserved. 8–6Why is Strategic Management ImportantWhy is Strategic Management Important1.1. It results in higher organizational performance.It results in higher organizational performance.2.2. It requires that managers examine and adaptIt requires that managers examine and adaptto business environment changes.to business environment changes.3.3. It coordinates diverse organizational units,It coordinates diverse organizational units,helping them focus on organizational goals.helping them focus on organizational goals.4.4. It is very much involved in the managerialIt is very much involved in the managerialdecision-making process.decision-making process.
  • 7. © 2007 Prentice Hall, Inc. All rights reserved. 8–7Exhibit 8–1Exhibit 8–1 The Strategic Management ProcessThe Strategic Management Process
  • 8. © 2007 Prentice Hall, Inc. All rights reserved. 8–8Strategic Management ProcessStrategic Management Process• Step 1: Identifying the organization’s currentStep 1: Identifying the organization’s currentmission, goals, and strategiesmission, goals, and strategies Mission:Mission: the firm’s reason for beingthe firm’s reason for being The scope of its products and servicesThe scope of its products and services Goals:Goals: the foundation for further planningthe foundation for further planning Measurable performance targetsMeasurable performance targets• Step 2: Doing an external analysisStep 2: Doing an external analysis The environmental scanning of specific and generalThe environmental scanning of specific and generalenvironmentsenvironments Focuses on identifying opportunities and threatsFocuses on identifying opportunities and threats
  • 9. © 2007 Prentice Hall, Inc. All rights reserved. 8–9Exhibit 8–2Exhibit 8–2 Components of a Mission StatementComponents of a Mission StatementSource: Based on F. David, Strategic Management, 11 ed. (Upper Saddle River, NJ: Prentice Hall, 2007), p.70.
  • 10. © 2007 Prentice Hall, Inc. All rights reserved. 8–10Strategic Management Process (cont’d)Strategic Management Process (cont’d)• Step 3: Doing an internal analysisStep 3: Doing an internal analysis Assessing organizational resources, capabilities, and activities:Assessing organizational resources, capabilities, and activities: Strengths create value for the customer and strengthen theStrengths create value for the customer and strengthen thecompetitive position of the firm.competitive position of the firm. Weaknesses can place the firm at a competitive disadvantage.Weaknesses can place the firm at a competitive disadvantage. Analyzing financial and physical assets is fairly easy, butAnalyzing financial and physical assets is fairly easy, butassessing intangible assets (employee’s skills, culture, corporateassessing intangible assets (employee’s skills, culture, corporatereputation, and so forth) isn’t as easy.reputation, and so forth) isn’t as easy.• Steps 2 and 3 combined are called a SWOT analysis.Steps 2 and 3 combined are called a SWOT analysis.(Strengths, Weaknesses, Opportunities, and Threats)(Strengths, Weaknesses, Opportunities, and Threats)
  • 11. © 2007 Prentice Hall, Inc. All rights reserved. 8–11Exhibit 8–3Exhibit 8–3 Corporate Rankings (partial lists)Corporate Rankings (partial lists)Sources: “America’s Most Admired Companies,” Fortune, February 22, 2006, p. 65; “The 100 Best Companiesto Work For,” Fortune, January 11, 2006, p. 89; R. Alsop, “Ranking Corporate Reputations,” Wall StreetJournal, December 6, 2005, p. B1; and “The 100 Top Brands,” BusinessWeek, August 1, 2005, p. 90.Interbrand/BusinessWeek100 Top Global Brands (2005)1. Coca-Cola2. Microsoft3. IBM4. General Electric5. IntelHarris Interactive/Wall Street JournalNational Corporate Reputation (2005)1. Johnson & Johnson2. Coca-Cola3. Google4. United Parcel Service5. 3M CompanyHay Group/FortuneAmerica’s Most Admired Companies (2006)Great Place to Work Institute/Fortune100 Best Companies to Work For (2006)1. General Electric2. FedEx3. Southwest Airlines4. Procter & Gamble5. Starbucks1. Genentech2. Wegman’s Food Markets3. Valero Energy4. Griffin Hospital5. W. L. Gore & Associates
  • 12. © 2007 Prentice Hall, Inc. All rights reserved. 8–12Strategic Management Process (cont’d)Strategic Management Process (cont’d)• Step 4: Formulating strategiesStep 4: Formulating strategies Develop and evaluate strategic alternativesDevelop and evaluate strategic alternatives Select appropriate strategies for all levels in theSelect appropriate strategies for all levels in theorganization that provide relative advantage overorganization that provide relative advantage overcompetitorscompetitors Match organizational strengths to environmentalMatch organizational strengths to environmentalopportunitiesopportunities Correct weaknesses and guard against threatsCorrect weaknesses and guard against threats
  • 13. © 2007 Prentice Hall, Inc. All rights reserved. 8–13Strategic Management Process (cont’d)Strategic Management Process (cont’d)• Step 5: Implementing strategiesStep 5: Implementing strategies Implementation:Implementation: effectively fitting organizationaleffectively fitting organizationalstructure and activities to the environment.structure and activities to the environment. The environment dictates the chosen strategy;The environment dictates the chosen strategy;effective strategy implementation requires aneffective strategy implementation requires anorganizational structure matched to its requirements.organizational structure matched to its requirements.• Step 6: Evaluating resultsStep 6: Evaluating results How effective have strategies been?How effective have strategies been? What adjustments, if any, are necessary?What adjustments, if any, are necessary?
  • 14. © 2007 Prentice Hall, Inc. All rights reserved. 8–14Types of Organizational StrategiesTypes of Organizational Strategies• Corporate StrategiesCorporate Strategies Top management’s overall plan for the entireTop management’s overall plan for the entireorganization and its strategic business unitsorganization and its strategic business units• Types of Corporate StrategiesTypes of Corporate Strategies Growth: expansion into new products and marketsGrowth: expansion into new products and markets Stability: maintenance of the status quoStability: maintenance of the status quo Renewal: redirection of the firm into new marketsRenewal: redirection of the firm into new markets
  • 15. © 2007 Prentice Hall, Inc. All rights reserved. 8–15Exhibit 8–4Exhibit 8–4 Levels of Organizational StrategyLevels of Organizational Strategy
  • 16. © 2007 Prentice Hall, Inc. All rights reserved. 8–16Corporate StrategiesCorporate Strategies• Growth StrategyGrowth Strategy Seeking to increase the organization’s business bySeeking to increase the organization’s business byexpansion into new products and markets.expansion into new products and markets.• Types of Growth StrategiesTypes of Growth Strategies ConcentrationConcentration Vertical integrationVertical integration Horizontal integrationHorizontal integration DiversificationDiversification
  • 17. © 2007 Prentice Hall, Inc. All rights reserved. 8–17Growth StrategiesGrowth Strategies• ConcentrationConcentration Focusing on a primary line of business and increasingFocusing on a primary line of business and increasingthe number of products offered or markets served.the number of products offered or markets served.• Vertical IntegrationVertical Integration Backward vertical integration: attempting to gainBackward vertical integration: attempting to gaincontrol of inputs (become a self-supplier).control of inputs (become a self-supplier). Forward vertical integration: attempting to gain controlForward vertical integration: attempting to gain controlof output through control of the distribution channel orof output through control of the distribution channel orprovide customer service activities (eliminatingprovide customer service activities (eliminatingintermediaries).intermediaries).
  • 18. © 2007 Prentice Hall, Inc. All rights reserved. 8–18Growth Strategies (cont’d)Growth Strategies (cont’d)• Horizontal IntegrationHorizontal Integration Combining operations with another competitor in theCombining operations with another competitor in thesame industry to increase competitive strengths andsame industry to increase competitive strengths andlower competition among industry rivals.lower competition among industry rivals.• Related DiversificationRelated Diversification Expanding by combining with firms in different, butExpanding by combining with firms in different, butrelated industries that are “strategic fits.”related industries that are “strategic fits.”• Unrelated DiversificationUnrelated Diversification Growing by combining with firms in unrelatedGrowing by combining with firms in unrelatedindustries where higher financial returns are possible.industries where higher financial returns are possible.
  • 19. © 2007 Prentice Hall, Inc. All rights reserved. 8–19Growth Strategies (cont’d)Growth Strategies (cont’d)• Stability StrategyStability Strategy A strategy that seeks to maintain the status quo toA strategy that seeks to maintain the status quo todeal with the uncertainty of a dynamic environment,deal with the uncertainty of a dynamic environment,when the industry is experiencing slow- or no-growthwhen the industry is experiencing slow- or no-growthconditions, or if the owners of the firm elect not toconditions, or if the owners of the firm elect not togrow for personal reasons.grow for personal reasons.
  • 20. © 2007 Prentice Hall, Inc. All rights reserved. 8–20Growth Strategies (cont’d)Growth Strategies (cont’d)• Renewal StrategiesRenewal Strategies Developing strategies to counter organizationDeveloping strategies to counter organizationweaknesses that are leading to performance declines.weaknesses that are leading to performance declines. Retrenchment:Retrenchment: focusing of eliminating non-criticalfocusing of eliminating non-criticalweaknesses and restoring strengths to overcome currentweaknesses and restoring strengths to overcome currentperformance problems.performance problems. Turnaround:Turnaround: addressing critical long-term performanceaddressing critical long-term performanceproblems through the use of strong cost eliminationproblems through the use of strong cost eliminationmeasures and large-scale organizational restructuringmeasures and large-scale organizational restructuringsolutions.solutions.
  • 21. © 2007 Prentice Hall, Inc. All rights reserved. 8–21Corporate Portfolio AnalysisCorporate Portfolio Analysis• Managers manage portfolio (or collection) of businessesManagers manage portfolio (or collection) of businessesusing a corporate portfolio matrix such as the BCGusing a corporate portfolio matrix such as the BCGMatrix.Matrix.• BCG MatrixBCG Matrix Developed by the Boston Consulting GroupDeveloped by the Boston Consulting Group Considers market share and industry growth rateConsiders market share and industry growth rate Classifies firms as:Classifies firms as: Cash cows:Cash cows: low growth rate, high market sharelow growth rate, high market share Stars:Stars: high growth rate, high market sharehigh growth rate, high market share Question marks:Question marks: high growth rate, low market sharehigh growth rate, low market share Dogs:Dogs: low growth rate, low market sharelow growth rate, low market share
  • 22. © 2007 Prentice Hall, Inc. All rights reserved. 8–22Exhibit 8–5Exhibit 8–5 The BCG MatrixThe BCG Matrix
  • 23. © 2007 Prentice Hall, Inc. All rights reserved. 8–23Business or Competitive StrategyBusiness or Competitive Strategy• Business (or Competitive) StrategyBusiness (or Competitive) Strategy A strategy focused on how an organization shouldA strategy focused on how an organization shouldcompete in each of its SBUs (strategic businesscompete in each of its SBUs (strategic businessunits).units).
  • 24. © 2007 Prentice Hall, Inc. All rights reserved. 8–24The Role of Competitive AdvantageThe Role of Competitive Advantage• Competitive AdvantageCompetitive Advantage An organization’s distinctive competitive edge.An organization’s distinctive competitive edge.• Quality as a Competitive AdvantageQuality as a Competitive Advantage Differentiates the firm from its competitors.Differentiates the firm from its competitors. Can create a sustainable competitive advantage.Can create a sustainable competitive advantage. Represents the company’s focus on qualityRepresents the company’s focus on qualitymanagement to achieve continuous improvement andmanagement to achieve continuous improvement andmeet customers’ demand for quality.meet customers’ demand for quality.
  • 25. © 2007 Prentice Hall, Inc. All rights reserved. 8–25The Role of Competitive AdvantageThe Role of Competitive Advantage(cont’d)(cont’d)• Sustainable Competitive AdvantageSustainable Competitive Advantage Continuing over time to effectively exploit resourcesContinuing over time to effectively exploit resourcesand develop core competencies that enable anand develop core competencies that enable anorganization to keep its edge over its industryorganization to keep its edge over its industrycompetitors.competitors.
  • 26. © 2007 Prentice Hall, Inc. All rights reserved. 8–26Five Competitive ForcesFive Competitive Forces• Threat of New EntrantsThreat of New Entrants The ease or difficulty with which new competitors canThe ease or difficulty with which new competitors canenter an industry.enter an industry.• Threat of SubstitutesThreat of Substitutes The extent to which switching costs and brand loyaltyThe extent to which switching costs and brand loyaltyaffect the likelihood of customers adopting substitutesaffect the likelihood of customers adopting substitutesproducts and services.products and services.• Bargaining Power of BuyersBargaining Power of Buyers The degree to which buyers have the market strengthThe degree to which buyers have the market strengthto hold sway over and influence competitors in anto hold sway over and influence competitors in anindustry.industry.
  • 27. © 2007 Prentice Hall, Inc. All rights reserved. 8–27Five Competitive ForcesFive Competitive Forces• Bargaining Power of SuppliersBargaining Power of Suppliers The relative number of buyers to suppliers andThe relative number of buyers to suppliers andthreats from substitutes and new entrants affect thethreats from substitutes and new entrants affect thebuyer-supplier relationship.buyer-supplier relationship.• Current RivalryCurrent Rivalry Intensity among rivals increases when industryIntensity among rivals increases when industrygrowth rates slow, demand falls, and product pricesgrowth rates slow, demand falls, and product pricesdescend.descend.
  • 28. © 2007 Prentice Hall, Inc. All rights reserved. 8–28Exhibit 8–6Exhibit 8–6 Forces in the Industry AnalysisForces in the Industry AnalysisSource: Based on M.E. Porter, Competitive Strategy: Techniques forAnalyzing Industries and Competitors (New York: The Free Press, 1980).
  • 29. © 2007 Prentice Hall, Inc. All rights reserved. 8–29Types of Competitive StrategiesTypes of Competitive Strategies• Cost Leadership StrategyCost Leadership Strategy Seeking to attain the lowest total overall costs relativeSeeking to attain the lowest total overall costs relativeto other industry competitors.to other industry competitors.• Differentiation StrategyDifferentiation Strategy Attempting to create a unique and distinctive productAttempting to create a unique and distinctive productor service for which customers will pay a premium.or service for which customers will pay a premium.• Focus StrategyFocus Strategy Using a cost or differentiation advantage to exploit aUsing a cost or differentiation advantage to exploit aparticular market segment rather a larger market.particular market segment rather a larger market.
  • 30. © 2007 Prentice Hall, Inc. All rights reserved. 8–30The Rule of ThreeThe Rule of Three• Similar to Porter’s generic competitive strategiesSimilar to Porter’s generic competitive strategies The competitive forces in an industry will create aThe competitive forces in an industry will create asituation where three companies (full-line generalists)situation where three companies (full-line generalists)will dominate a market.will dominate a market. Some firms in the market become “super nicheSome firms in the market become “super nicheplayers” and while others end up as “ditch dwellers.”players” and while others end up as “ditch dwellers.” Firms unable to develop either a cost or differentiationFirms unable to develop either a cost or differentiationadvantage become “stuck in the middle” and lackadvantage become “stuck in the middle” and lackprospects for long-term success.prospects for long-term success. A few firms successfully pursue both differentiationA few firms successfully pursue both differentiationand cost advantages.and cost advantages.
  • 31. © 2007 Prentice Hall, Inc. All rights reserved. 8–31Strategic Management TodayStrategic Management Today• Strategic FlexibilityStrategic Flexibility• New Directions in Organizational StrategiesNew Directions in Organizational Strategies e-businesse-business customer servicecustomer service innovationinnovation
  • 32. © 2007 Prentice Hall, Inc. All rights reserved. 8–32Exhibit 8–7Exhibit 8–7 Creating Strategic FlexibilityCreating Strategic Flexibility• Know what’s happening with strategies currently beingused by monitoring and measuring results.• Encourage employees to be open about disclosingand sharing negative information.• Get new ideas and perspectives from outside theorganization.• Have multiple alternatives when making strategicdecisions.• Learn from mistakes.Source: Based on K. Shimizu and M. A. Hitt, “Strategic Flexibility: Organizational Preparedness to ReverseIneffective Strategic Decisions,” Academy of Management Executive, November 2004, pp. 44–59.
  • 33. © 2007 Prentice Hall, Inc. All rights reserved. 8–33How the Internet Has Changed BusinessHow the Internet Has Changed Business• The Internet allows businesses to:The Internet allows businesses to: Create knowledge bases that employees can tap intoCreate knowledge bases that employees can tap intoanytime, anywhere.anytime, anywhere. Turn customers into collaborative partners who helpTurn customers into collaborative partners who helpdesign, test, and launch new products.design, test, and launch new products. Become virtually paperless in specific tasks such asBecome virtually paperless in specific tasks such aspurchasing and filing expense reports.purchasing and filing expense reports. Manage logistics in real timeManage logistics in real time Change the nature of work tasks throughout theChange the nature of work tasks throughout theorganization.organization.
  • 34. © 2007 Prentice Hall, Inc. All rights reserved. 8–34Strategies for Applying e-BusinessStrategies for Applying e-BusinessTechniquesTechniques• Cost LeadershipCost Leadership On-line activities: bidding, order processing, inventoryOn-line activities: bidding, order processing, inventorycontrol, recruitment and hiringcontrol, recruitment and hiring• DifferentiationDifferentiation Internet-based knowledge systems, on-line orderingInternet-based knowledge systems, on-line orderingand customer supportand customer support• FocusFocus Chat rooms and discussion boards, targeted webChat rooms and discussion boards, targeted websitessites
  • 35. © 2007 Prentice Hall, Inc. All rights reserved. 8–35Customer Service StrategiesCustomer Service Strategies• Giving the customers what they want.Giving the customers what they want.• Communicating effectively with them.Communicating effectively with them.• Providing employees with customer serviceProviding employees with customer servicetraining.training.
  • 36. © 2007 Prentice Hall, Inc. All rights reserved. 8–36Innovation StrategiesInnovation Strategies• Possible EventsPossible Events Radical breakthroughs in products.Radical breakthroughs in products. Application of existing technology to new uses.Application of existing technology to new uses.• Strategic Decisions about InnovationStrategic Decisions about Innovation Basic researchBasic research Product developmentProduct development Process innovationProcess innovation• First MoverFirst Mover An organization that brings a product innovation toAn organization that brings a product innovation tomarket or use a new process innovationsmarket or use a new process innovations
  • 37. © 2007 Prentice Hall, Inc. All rights reserved. 8–37Exhibit 8–8Exhibit 8–8 First-Mover Advantages–DisadvantagesFirst-Mover Advantages–Disadvantages• AdvantagesAdvantages Reputation for beingReputation for beinginnovative and industryinnovative and industryleaderleader Cost and learning benefitsCost and learning benefits Control over scarceControl over scarceresources and keepingresources and keepingcompetitors from havingcompetitors from havingaccess to themaccess to them Opportunity to beginOpportunity to beginbuilding customerbuilding customerrelationships and customerrelationships and customerloyaltyloyalty• DisadvantagesDisadvantages Uncertainty over exactUncertainty over exactdirection technology anddirection technology andmarket will gomarket will go Risk of competitorsRisk of competitorsimitating innovationsimitating innovations Financial and strategic risksFinancial and strategic risks High development costsHigh development costs
  • 38. © 2007 Prentice Hall, Inc. All rights reserved. 8–38Terms to KnowTerms to Know• strategic managementstrategic management• strategiesstrategies• business modelbusiness model• strategic management processstrategic management process• missionmission• opportunitiesopportunities• threatsthreats• resourcesresources• capabilitiescapabilities• core competenciescore competencies• strengthsstrengths• weaknessesweaknesses• SWOT analysisSWOT analysis• corporate strategycorporate strategy• growth strategygrowth strategy• related diversificationrelated diversification• unrelated diversificationunrelated diversification• stability strategystability strategy• renewal strategyrenewal strategy• retrenchment strategyretrenchment strategy• turnaround strategyturnaround strategy• BCG matrixBCG matrix• business or competitivebusiness or competitivestrategystrategy• strategic business unitsstrategic business units• competitive advantagecompetitive advantage
  • 39. © 2007 Prentice Hall, Inc. All rights reserved. 8–39Terms to Know (cont’d)Terms to Know (cont’d)• cost leadership strategycost leadership strategy• differentiation strategydifferentiation strategy• focus strategyfocus strategy• stuck in the middlestuck in the middle• functional strategiesfunctional strategies• strategic flexibilitystrategic flexibility• first moverfirst mover