CHAPTER 5

Strategic Management
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Learning Outcomes
ü Explain the role of strategic management and why it is
important.
ü Explain the role of managers in each of the six
strategic management step.
ü Describe three types of organizational strategies.
ü Describe competitive advantage and the competitive
strategies organizations use to get it.
ü Discuss current strategic management issues.
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5.1 Strategic Management

The set of managerial decisions

and actions that determines
the long-run performance
of an organization
5.1 Strategic Management
5.1.1 What is Strategic Management?
What managers do to develop the organization’s strategies -
the set of managerial decisions and actions that determines
the long-run performance of an organization.
Strategies
Plans for how an organization will do what it’s in business to
do, how it will compete successfully, and how it will attract and
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 5.1 Strategic Management
Business model
A strategic design for how a company intends to profit
from its strategies, work processes, and work activities.
A business model focuses on two things:

(1) whether customers will value what the company is providing

(2) whether the company can make any money doing that.

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5.1 Strategic Management

5.1.2 Why is Strategic Management Important?

Ø It results in higher organizational performance.

Ø It requires that managers examine and adapt to

business environment changes, allowing them to better

cope with uncertain environments.
Ø It’s involved in many of the decisions that managers

make.
5.2 Strategic Management Process
A six-step process that encompasses strategic
planning, implementation, and evaluation.
5.2 Strategic Management Process
Step 1: Identify the Organization’s Current Mission,
Objectives, and Strategies
ü Mission: the firm’s reason for being à The scope of its

products and services

ü Goals: the foundation for further planning à
Measurable performance targets.
 The Strategic
5.2 Strategic Management Process
Management Process
Components of a Mission Statement
ü Customers: Who are the firm’s customers?
ü Markets: Where does the firm compete geographically?
ü Concern for survival, growth, and profitability: Is the firm committed to
growth and financial stability?
ü Philosophy: What are the firm’s basic beliefs, values, and ethical priorities?
ü Concern for public image: How responsive is the firm to societal and
environmental concerns?
ü Products or services: What are the firm’s major products or services?
ü Technology: Is the firm technologically current?
ü Self-concept: What are the firm’s major competitive advantage and core
competencies?
ü Concern for employees: Are employees a valuable asset of the firm?
stated
goals

product

customer
5.2 Strategic Management Process
Step 2: Conduct an Internal Analysis
v The environmental scanning of specific and general internal
areas
ü Mission: A statement of an organization’s purpose.
ü Resources: An organization’s assets - financial, physical, human, intangible
that are used to develop, manufacture, and deliver products or services to
customers.
ü Capabilities: An organization’s skills and abilities that enable it to do the
work activities needed in its business.
ü Core competencies: An organization’s major value-creating skills,
capabilities, and resources that determine its competitive advantage.
 5.2 Strategic Management Process
Step 2: Conduct an Internal Analysis
v Assessing organizational resources, capabilities, activities,
and core competencies:
ü Strengths (core competencies) create value for the
customer and strengthen the competitive position of the
firm
ü Weaknesses (things done poorly or not at all) can place
the firm at a competitive disadvantage.

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5.2 Strategic Management Process
Step 3: Conduct an External Analysis
v The environmental scanning of specific and general
environments.
ü Opportunities: Positive trends in external
environment.
ü Threats: Negative trends in external environment.
v Steps 2 and 3 combined are called a SWOT analysis.
(Strengths, Weaknesses, Opportunities, and Threats)
5.2 Strategic Management Process
Step 4: Formulate Strategies
ü Develop and evaluate strategic alternatives.
ü Select appropriate strategies that provide relative
advantage over competitors.
ü Match organizational strengths to environmental
opportunities.
ü Correct weaknesses and guard against threats.
5.2 Strategic Management Process
Step 4: Formulate Strategies

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5.2 Strategic Management Process
Step 5: Implement Strategies
 5.2 Strategic Management Process
Step 6: Evaluate Results
v How effective have strategies been?
v What adjustments, if any, are necessary?

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LEVELS OF STRATEGIES IN ORGANISATIONS
5.3 Corporate Strategies
5.3.1 What is corporate strategy?
A corporate strategy is one that determines what businesses
a company is in or wants to be in and what it wants to do with
those businesses.
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oil, oil products, gas, chemicals and other selected
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5.3 Corporate Strategies

5.3.1 What is corporate strategy?
5.3.2 Types of Corporate Strategy
ü Growth: expansion into new products and markets.

ü Stability: maintenance of the status quo.

ü Renewal: address organizational weaknesses that are

leading to performance declines.
Growth Strategy
Expanding the number of products offered or markets
served, either through its current business(es) or through
new business(es).
a. Concentration
Concentrates on a primary line of business and increasing
the number of products offered or markets served.
Growth Strategy
b. Vertical Integration
ü Backward vertical integration: attempting to gain
control of inputs (become its own supplier).

ü Forward vertical integration: an organization

becomes its own distributor and is able to control its
outputs.
Growth Strategy
c. Horizontal Integration
A company grows by combining with other organizations
in the same industry - that is, combining operations with
competitors.
Growth Strategy
4. Diversification
ü Related Diversification - when a company grows by

combining with firms in different, but related,

industries.

ü Unrelated Diversification - When a company grows by

combining with firms in different and unrelated

industries.
Stability Strategy
A strategy characterized by an absence of significant
change in what the organization is currently doing.
Renewal Strategy
A strategy designed to address organizational
weaknesses that are leading to performance declines.
 5.3 Corporate Strategies
5.3.3 How Are Corporate Strategies Managed?
BCG Matrix developed by the Boston Consulting Group
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5.4 Competitive Strategies
5.4.1 Competitive Advantage
v Competitive Advantage: What sets an organization
apart – its distinct edge.
v Quality as a Competitive Advantage:
ü Differentiates the firm from its competitors.
ü Can create a sustainable competitive advantage.
ü Represents the company’s focus on quality
management to achieve constant improvement and
meet customers’ demand for quality and reliability.
5.4 Competitive Strategies
5.4.2 Five Forces Model (Porter, 1980)
Threats Of New
Entrants

Bargaining Rivalry Bargaining

Among Power Of
Power Of Existing
Suppliers Competitors Buyers

Threats Of
Substitutes
Five Forces Model
F1: Rivalry among existing Competitors
v Competitors
ü How many direct or indirect competitors are there?
ü What are the size of my competitors?
ü How diverse are my competitors?
v Industry
ü What is the industry growth rate?
ü What are the strategic stakes?
v Products
ü How different is my product?
ü What are the byers’ switching costs?
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Five Forces Model
F2: New Entrants Threats
v Production costs
ü Are there any economies of scale?
ü What are the capital requirements?
ü What is the absolute cost advantage?
v Brand
ü How different is the product?
ü How strong is the brand identity?
ü How high are the switching costs?
v Distribution
ü Is it easy to access distribution channels?
ü What are the government policies?
Five Forces Model
F3: Bargaining power of Suppliers
v Substitution
ü What are the switching costs of suppliers and firms in the
industry?
ü Is there any presence of substitute inputs?
v Players
ü What is the suppliers’ concentration?
ü How high is the concentration of suppliers?
v Integration
ü What is the suppliers’ threat of forward integration?
ü What is the buyers’ threat of backward integration?
Five Forces Model
F4: Bargaining Power of Buyers
v Buyer‘s type
ü What is the buyer volume?
ü What are the buyer switching costs relative to the firm’s?
ü Is the buyer capable of backward integration?
v Information
ü How much information does the buyer have?
ü Are they attracted by substitutes or product differences?
v Brand awareness
ü How does the buyer judge the brand identity?
ü How high is the impact of quality/performance?
Five Forces Model
F5: Threat of Substitute Products
v What is the relative price performance of substitutes?
ü What are the prices of my products comparatively?
ü Are the substitute prices stable? (increase or decrease)
v How high are the switching costs?
ü What are the differences relative to my products?
ü What would the costs incurred be to change my products?
v What is the buyer propensity to substitute?
ü What are the buyers preferences on the product category?
ü What are the differences regarding my products? (quality,
prices)
 5.4 Competitive Strategies
5.4.3 Choosing a Competitive Strategy
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5.4 Competitive Strategies
5.4.3 Choosing a Competitive Strategy
ü Focus Strategy: A company pursues a cost or
differentiation advantage in a narrow industry
segment.
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Source: This is an expanded version of a three-strategy classification discussed in Michael E. Porter, Competitive
Strategy (New York: Free Press, 1980).
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Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New
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 Value Drivers: The Keys to Creating a Differentiation Advantage

Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New
York: Free Press, 1985).
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5.5 Functional Strategies
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Functional Strategies 0
day

The strategies used in an organization’s various

functional departments to support the competitive
strategy