Strategic Management
Chapter 1
Definition of
Strategic Management

Strategic Management
The set of managerial decisions and
actions that determines the ...
Sequential Phases of
Strategic Planning
1. Basic Financial Planning
2. Forecast-Based Planning
3. Externally-Oriented Plan...
Benefits of Strategic
Management
• Clearer sense of strategic vision
• Sharper focus on what is strategically
important
• ...
Q. Why has strategic management become so
important to today's organizations?
Ans. Research indicates that organizations w...
Q. Why are strategic decisions different from
other types of decisions?
• Strategic decisions deal with the long-run futur...
Three Key Strategic
Questions
1. Where is the organization now?
2. If no changes are made, where will the
organization be ...
Challenges to Strategic
Management
• Impact of Electronic Commerce:
1. Internet is forcing companies to transform
themselv...
Challenges to Strategic Management
(cont.)
4. Competition is changing. New technology driven firms
as well as the traditio...
Globalization
• Regional & Global Trade Agreements
• European Union (EU)
• North American Free Trade Agreement
(NAFTA)
• W...
Learning Organization
An organization skilled at creating, acquiring, transferring knowledge,
and at modifying its behavio...
Composition of
Strategic Management
Strategic Management is Composed of

1.Environmental Scanning
2.Strategy Formulation
3...
1.10 Environmental Variables (Fig. 1.3)

Environmental Variables
Societal Environment

Task Task
Environment
Environment
(...
Societal Environment
Composed of general forces in environment
1. Socio-cultural forces
2. Economic Forces
3. Technologica...
Task Environment
Composed of
• Groups in environment that directly affect or are affected
by the organization’s operations...
Definition of Strategy Formulation
Strategy Formulation

The process of developing long-range plans to
deal effectively wi...
• What Is Strategy and Why
Is It Important?
Thinking Strategically: The Three
Big Strategic Questions
1. What is the company’s present situation?
2. Where does the co...
What Do We Mean By
“Strategy”?
• Consists of competitive moves and business
approaches used by managers to run the
company...
Strategy and the Quest for
Competitive Advantage
• The heart and soul of any strategy are the actions and
moves in the mar...
Four “Best” Strategic Approaches to
Building Sustainable Competitive
Advantage
• Being the industry’s low-cost provider (a...
Identifying a Company’s Strategy
Why Do Strategies Evolve?
• A company’s strategy is a work in progress
• Changes may be necessary to react to
– Shifting m...
What Is a Business Model?

• A business model addresses the question: “How do we
make money in this business?”
– Is the st...
Relationship Between
Strategy and Business Model
Strategy . . .

Business Model . . .

Deals with a company’s
competitive ...
Tests of a Winning Strategy
• GOODNESS OF FIT TEST
– How well does strategy fit
the firm’s situation?

• COMPETITIVE ADVAN...
Why Is Strategy Important?
• A compelling need exists for managers
to proactively shape how a firm’s
business will be cond...
The Strategy-Making, Strategy-Executing
Process
Developing a Strategic Vision
Phase 1 of the Strategy-Making Process

• Involves thinking strategically about
– Future dir...
Characteristics of well worded
vision statement
1. Graphic: Paints a picture of the kind of
company that management is try...
Characteristics of a well worded
vision statement
4.

5.
6.
7.

Flexible : is not a once-and-for-all time
pronouncement; v...
Common shortcomings in company
vision statements
1. Incomplete : short on specifics about where
the company is headed and ...
Common shortcomings in company
vision statements
5. Too reliant on such superlatives as best, most
successful, recognized ...
Exelon’s Strategic Vision
• Exelon Strives to build exceptional value by becoming
the best and most consistently profitabl...
Exelon’s Strategic Vision
2. Perform at world class levels
• Relentlessly pursue greater productivity, quality, and
innova...
Exelon’s Strategic Vision
3. Invest in our consolidating industry
• Develop strategies based on learning from past
success...
Critique on Exelon’s Vision
• The one sentence vision is definitely overly general and
void of directions
• What rescues i...
Strategic Vision vs. Mission
• A strategic vision
concerns a firm’s
future business path
- “where
we are going”
– Markets ...
Characteristics of a Mission
Statement
• Identifies the boundaries of the current
business and highlights:
– Present produ...
Setting Objectives
Phase 2 of the Strategy-Making Process
• Purpose of setting objectives
– Creates yardsticks to track pe...
Types of Objectives Required
Financial Objectives
Outcomes focused
on improving financial
performance

$

Strategic Object...
Financial Objectives

Strategic Objectives

An x percent increase in annual
revenues
Annual increases in after tax
profits...
A Balanced Scorecard Approach –
Setting Strategic and Financial Objectives
• A balanced scorecard for measuring
company pe...
Components of a Balanced
Scorecard
• Financial Perspective: Increase Returns;
broaden revenue streams
• Customer Perspecti...
How the BSC works
• Equip our people to…,
• Build strategic capabilities needed to…,
• Deliver unique set of benefits to c...
Short-Term vs.
Long-Term Objectives
• Short-term objectives
– Targets to be achieved soon
– Milestones or stair steps for ...
Crafting a Strategy
Phase 3 of the Strategy-Making Process
• Strategy-making involves entrepreneurship
– Actively searchin...
A Company’s Strategy-Making Hierarchy
Tasks of Corporate Strategy
• Moves to achieve diversification
• Actions to boost performance of
individual businesses
• C...
Tasks of Business Strategy
• Initiating approaches to produce successful
performance in a specific business
• Crafting com...
Tasks of Functional Strategies
• Game plan for a strategically-relevant
function, activity, or business process
• Detail h...
Tasks of Operating Strategies
• Concern narrow strategic approaches to
manage key operating units and
strategically-releva...
What Is a Strategic Plan?
Its strategic vision
and business mission

A
Company’s
Strategic Plan

Its strategic and
financi...
Implementing and Executing Strategy
• Operations-oriented activity aimed at
Phase 4 of the Strategy-Making Process
perform...
What Does Strategy
Implementation Involve?
• Building a capable organization
• Allocating resources to strategy-critical a...
Evaluating Performance and
Making Corrective Adjustments
Phase 5 of the Strategy-Making Process
• Tasks of crafting and im...
Corporate Governance:
Strategic Role of a Board of
Directors

• Exercise strong oversight to ensure five
tasks of strategi...
Obligations of a Board of
Directors
• Be inquiring critics and overseers
• Evaluate caliber of senior executives’ strategy...
The Basis for Good
The Basis for Good
Strategic Decisions
Strategic Decisions
Intuition + Analysis

Effective Strategic De...
Actual Vs Planned Strategy

Company
Experience
know-how,
strengths,
weaknesses,
and
Competitive
position

Planned Strategy...
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Strategic Management

  1. 1. Strategic Management Chapter 1
  2. 2. Definition of Strategic Management Strategic Management The set of managerial decisions and actions that determines the long-run performance of an organization
  3. 3. Sequential Phases of Strategic Planning 1. Basic Financial Planning 2. Forecast-Based Planning 3. Externally-Oriented Planning (Strategic Planning) 4. Strategic Management
  4. 4. Benefits of Strategic Management • Clearer sense of strategic vision • Sharper focus on what is strategically important • Improved understanding of rapidly changing environment
  5. 5. 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
  6. 6. 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
  7. 7. 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?
  8. 8. 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.
  9. 9. 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
  10. 10. Globalization • Regional & Global Trade Agreements • European Union (EU) • North American Free Trade Agreement (NAFTA) • WTO • Association of South East Asian Nations (ASEAN)
  11. 11. 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 past 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.
  12. 12. Composition of Strategic Management Strategic Management is Composed of 1.Environmental Scanning 2.Strategy Formulation 3.Strategy Implementation 4.Evaluation and Control
  13. 13. 1.10 Environmental Variables (Fig. 1.3) Environmental Variables Societal Environment Task Task Environment Environment (Industry) Sociocultural Forces Shareholders Governments Economic Forces Suppliers Internal Environment Special Interest Groups Structure Culture Resources Employees/ Labor Unions Competitors Customers Trade Associations Creditors Political-Legal Forces Communities Technological Forces Chapter 1 13
  14. 14. Societal Environment Composed of general forces in environment 1. Socio-cultural forces 2. Economic Forces 3. Technological Forces 4. Political-legal forces
  15. 15. 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
  16. 16. 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 • • • • Mission / Vision Objectives Strategies Policies
  17. 17. • What Is Strategy and Why Is It Important?
  18. 18. Thinking Strategically: The Three Big Strategic Questions 1. What is the company’s present situation? 2. 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. How should it get there? – A company’s answer to “how will we get there?” is its strategy
  19. 19. What Do We Mean By “Strategy”? • Consists of competitive moves and business approaches used by managers to run the company • Management’s “action plan” to – Grow the business – Attract and please customers – Compete successfully – Conduct operations – Achieve target levels of organizational performance
  20. 20. 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 strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reliable ticket to above average profitability – Competing with a competitive advantage is more profitable than competing with no advantage – Competing with a competitive disadvantage nearly always results in below-average profitability
  21. 21. 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) • Developing expertise and resource strengths not easily imitated or matched by rivals (a capabilities-based competitive advantage)
  22. 22. Identifying a Company’s Strategy
  23. 23. 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
  24. 24. 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?
  25. 25. Relationship Between Strategy and Business Model Strategy . . . Business Model . . . Deals with a company’s competitive initiatives and business approaches Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable gy te ra St ss ne l si e Bu od M
  26. 26. 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?
  27. 27. Why Is Strategy Important? • A compelling need exists for managers to proactively shape how a firm’s business will be conducted • A strategy-focused firm is more likely to be a strong bottom-line performer than one that views strategy as secondary
  28. 28. The Strategy-Making, Strategy-Executing Process
  29. 29. 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 A strategic vision describes the route a company intends to take in developing and strengthening • Future prospects its business. It lays out the company’s strategic course in preparing for the future.
  30. 30. 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
  31. 31. Characteristics of a well worded vision statement 4. 5. 6. 7. 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 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
  32. 32. 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)
  33. 33. 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
  34. 34. Exelon’s Strategic Vision • Exelon Strives to build exceptional value by becoming the best and most consistently profitable electricity and gas utility company in the United States. To succeed, we must 1. Live up to our commitments • Keep the lights on • Perform safely – especially our nuclear operations • Consistently improve our environmental performance • Act honorably and treat everyone with respect, decency, and integrity • Continue building a high performance culture that reflects the diversity of our communities • Respect our results, opportunities, and problems honestly and reliably
  35. 35. Exelon’s Strategic Vision 2. Perform at world class levels • Relentlessly pursue greater productivity, quality, and innovation • Understand the relationships among our businesses and optimize the whole • Promote and implement policies that build effective markets • Adapt rapidly to changing markets, politics, economies, and technology to meet our customer needs • Maximize the earnings and cash flow from our assets and businesses and sell those that do not meet our goals
  36. 36. Exelon’s Strategic Vision 3. Invest in our consolidating industry • Develop strategies based on learning from past successes and failures • Implement systems and best practices that can be applied to future acquisitions • Prioritize acquisition opportunities based on synergies from scale, scope, generation and delivery integration, and our ability to profitably satisfy regulatory obligations • Makes acquisitions that will best employ our limited investment resources to produce the most consistent cash flow and earnings accretion • Return earnings to share holders when higher returns are not available from acquisition opportunities
  37. 37. Critique on Exelon’s Vision • The one sentence vision is definitely overly general and void of directions • What rescues it and makes overall vision statement managerially useful are the specifics that follow it • The three points that management says the company must do to succeed convey a reasonably clear sense where management intends to take the company and what the company is endeavoring to do in order to deliver exceptional values to stakeholders • But Exelon’s vision statement is still somewhat vague on where the management is trying to take the company in terms of its future product/market-customer technology focus
  38. 38. Strategic 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 product and service offerings – Customer needs being served – Technological and business capabilities
  39. 39. Characteristics of a Mission Statement • Identifies the boundaries of the current business and highlights: – Present products and services – Types of customers served – Geographic coverage • Conveys – Who we are, – What we do, and A well-conceived mission statement distinguishes a company’s – Why we are here business makeup from that of other profit-seeking enterprises in language specific enough to give the company its own identify!
  40. 40. 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
  41. 41. Types of Objectives Required Financial Objectives Outcomes focused on improving financial performance $ Strategic Objectives Outcomes focused on improving competitive vitality and future business position
  42. 42. 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 company’s brand appeal Having stronger sales and distribution capabilities than rivals
  43. 43. 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) The tracking to sustained future profitability year after • Just surest path financial performance overlooks year is to relentlessly pursue strategic outcomes the that strengthen of measuring whether a and importance a company’s business position company is strengtheningadvantage over rivals! give it a growing competitive its competitiveness and market position.
  44. 44. 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
  45. 45. 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.
  46. 46. 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
  47. 47. 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
  48. 48. A Company’s Strategy-Making Hierarchy
  49. 49. 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
  50. 50. 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
  51. 51. 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
  52. 52. 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
  53. 53. What Is a Strategic Plan? Its strategic vision and business mission A Company’s Strategic Plan Its strategic and financial objectives Consists of Its strategy
  54. 54. Implementing and Executing Strategy • Operations-oriented activity aimed at Phase 4 of the Strategy-Making Process 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
  55. 55. 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
  56. 56. 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
  57. 57. Corporate Governance: Strategic Role of a Board of Directors • Exercise strong oversight to ensure five tasks of strategic management are executed to benefit – Shareholders or – Stakeholders • Make sure executive actions are not only proper but also aligned with interests of stakeholders
  58. 58. Obligations of a Board of Directors • Be inquiring critics and overseers • Evaluate caliber of senior executives’ strategy-making and strategy-executing skills • Institute a compensation plan for top executives rewarding them for results that serve interests of – Stakeholders and – Shareholders • Oversee a company’s financial accounting and reporting practices
  59. 59. The Basis for Good The Basis for Good Strategic Decisions Strategic Decisions Intuition + Analysis Effective Strategic Decisions 59
  60. 60. Actual Vs Planned Strategy Company Experience know-how, strengths, weaknesses, and Competitive position Planned Strategy Actual company strategy Adaptive reactions to challenging circumstances Reactive strategy

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