STRATEGIC MANAGEMENT (MIDTERMS!!

) structure, planning processes, information

CHAPTER 4
Key Internal Forces
 Distinctive competencies
 A firm’s strengths that cannot be
easily matched or imitated by
competitors
 Building competitive advantages involves
taking advantage of distinctive competencies.
systems, patents, trademarks, copyrights,
databases, and so on.
 For a resource to be valuable, it must be
either (1) rare, (2) hard to imitate, or (3) not
easily substitutable
 These three characteristics of resources
enable a firm to implement strategies that
improve its efficiency and effectiveness and
lead to a sustainable competitive advantage

The Process of Performing an Internal Audit

 The internal audit

 Requires gathering and assimilating

information about the firm’s
management, marketing,
finance/accounting,
production/operations, research and
development (R&D), and
management information systems
operations
 Provides more opportunity for
participants to understand how their
jobs, departments, and divisions fit
into the whole organization
The Resource-Based View (RBV)
 The Resource-Based View (RBV) approach
 contends that internal resources are
more important for a firm than
external factors in achieving and
sustaining competitive advantage
 Proponents of the RBV contend that
organizational performance will primarily be
determined by internal resources that can be
grouped into three all-encompassing
categories: physical resources, human
resources, and organizational resources
Integrating Strategy and Culture
 Organizational culture significantly affects
business decisions and thus must be
evaluated during an internal strategic-
management audit.
 If strategies can capitalize on cultural
strengths, such as a strong work ethic or
highly ethical beliefs, then management often
can swiftly and easily implement changes.
Management
 The functions of management consist of five
basic activities: planning, organizing,
motivating, staffing, and controlling.
 These activities are important to assess in
strategic planning because an organization
should continually capitalize on its
management strengths and improve on its
management weaknesses.

 Physical resources include all plant and

equipment, location, technology, raw
materials, machines; human resources include
all employees, training, experience,
intelligence, knowledge, skills, abilities; and
organizational resources include firm
  involves administering customer
surveys, analyzing consumer
information, evaluating market
positioning strategies, developing
customer profiles, and determining
optimal market segmentation
strategies

 essential in developing an effective

mission statement

Management Audit Checklist of Questions

1. Does the firm use strategic-management

concepts?

2. Are company objectives and goals measurable

and well communicated?

3. Do managers at all hierarchical levels plan

effectively?
Product and Service Planning
4. Do managers delegate authority well?
 includes activities such as test
5. Is the organization’s structure appropriate?
marketing; product and brand
6. Are job descriptions and job specifications positioning; devising warranties;
clear? packaging; determining product
options, features, style, and quality;
7. Is employee morale high?
deleting old products; and providing
8. Are employee turnover and absenteeism low? for customer service

9. Are organizational reward and control  important when a company is

mechanisms effective? pursuing product development or
diversification
Marketing
Pricing
 the process of defining, anticipating,
creating, and fulfilling customers’  Five major stakeholders affect pricing
needs and wants for products and decisions: consumers, governments, suppliers,
services distributors, and competitors

Functions of Marketing  Sometimes an organization will pursue a

forward integration strategy primarily to gain
• Customer analysis better control over prices charged to
• Selling products/services consumers

• Product and service planning Distribution

• Pricing Distribution  includes warehousing, distribution channels,

distribution coverage, retail site locations,
• Marketing research sales territories, inventory levels and location,
transportation carriers, wholesaling, and
• Opportunity analysis
retailing
 Customer analysis  especially important when a firm is striving to
implement a market development or forward
 the examination and evaluation of integration strategy
consumer needs, desires, and wants
Marketing research The functions of finance/accounting comprise three
decisions:
 the systematic gathering, recording, and
analyzing of data about problems relating to 1. the investment decision
the marketing of goods and services
 the allocation and reallocation of
 can uncover critical strengths and weaknesses capital and resources to projects,
products, assets, and divisions of an
organization

Cost/Benefit Analysis
2. the financing decision
Three steps are required to perform a cost/benefit
 determines the best capital structure
analysis:
for the firm and includes examining
1. compute the total costs associated with a various methods by which the firm
decision, can raise capital

2. estimate the total benefits from the decision, 3. the dividend decision

3. compare the total costs with the total
benefits.
Marketing Audit Checklist of Questions
1. Are markets segmented effectively?
 concern issues such as the percentage
of earnings paid to stockholders, the
stability of dividends paid over time,
and the repurchase or issuance of
stock

2. Is the organization positioned well among  determine the amount of funds that
competitors? are retained in a firm compared to the
amount paid out to stockholders
3. Has the firm’s market share been increasing?

4. Are present channels of distribution reliable

and cost effective?

5. Does the firm have an effective sales

organization?

6. Does the firm conduct market research?

7. Are product quality and customer service

good?

8. Are the firm’s products and services priced

appropriately?

9. Does the firm have an effective promotion,

advertising, and publicity strategy?

10. Are marketing, planning, and budgeting

effective?

11. Do the firm’s marketing managers have

adequate experience and training?

12. Is the firm’s Internet presence excellent as

compared to rivals?

Finance/Accounting Functions
  Production/operations management deals
with inputs, transformations, and outputs that
vary across industries and markets.

Finance/Accounting Functions

1. How has each ratio changed over time?

2. How does each ratio compare to industry

norms?

3. How does each ratio compare with key

competitors?
Production/Operations Audit Checklist
Finance/Accounting Audit Checklist
1. Are supplies of raw materials, parts, and
1. Where is the firm financially strong and weak subassemblies reliable and reasonable?
as indicated by financial ratio analyses?
2. Are facilities, equipment, machinery, and
2. Can the firm raise needed short-term capital? offices in good condition?
3. Can the firm raise needed long-term capital 3. Are inventory-control policies and procedures
through debt and/or equity? effective?
4. Does the firm have sufficient working capital? 4. Are quality-control policies and procedures
effective?
5. Are capital budgeting procedures effective?
5. Are facilities, resources, and markets
6. Are dividend payout policies reasonable?
strategically located?
7. Does the firm have good relations with its
6. Does the firm have technological
investors and stockholders?
competencies?
8. Are the firm’s financial managers experienced
Research and Development Audit
and well trained?
1. Does the firm have R&D facilities? Are they
9. Is the firm’s debt situation excellent?
adequate?
Production/Operations
2. If outside R&D firms are used, are they cost-
 Production/operations function effective?
 consists of all those activities that 3. Are the organization’s R&D personnel well
transforms inputs into goods and qualified?
services
4. Are R&D resources allocated effectively?
 5. Are management information and computer manufacturing product(s) to
systems adequate? marketing those products

6. Is communication between R&D and other  aims to identify where low-cost

organizational units effective? advantages or disadvantages exist
anywhere along the value chain from
7. Are present products technologically
raw material to customer service
competitive?
activities
Management Information Systems
Benchmarking
 A management information system’s purpose
 an analytical tool used to determine
is to improve the performance of an
whether a firm’s value chain activities
enterprise by improving the quality of
are competitive compared to rivals
managerial decisions
and thus conducive to winning in the
 An effective information system thus collects, marketplace
codes, stores, synthesizes, and presents
 entails measuring costs of value chain
information in such a manner that it answers
activities across an industry to
important operating and strategic questions
determine “best practices”
Management Information Systems Audit

1. Do all managers in the firm use the

information system to make decisions?

2. Is there a chief information officer or director

of information systems position in the firm?

3. Are data in the information system updated

regularly?

4. Do managers from all functional areas of the

The Internal Factor Evaluation (IFE) Matrix
firm contribute input to the information
system? 1. List key internal factors as identified in the
internal-audit process
5. Are there effective passwords for entry into
the firm’s information system? 2. Assign a weight that ranges from 0.0 (not
important) to 1.0 (all-important) to each
6. Are strategists of the firm familiar with the
factor
information systems of rival firms?
3. Assign a 1-to-4 rating to each factor to
7. Is the information system user-friendly?
indicate whether that factor represents a
8. Do all users of the information system strength or weakness
understand the competitive advantages that
4. Multiply each factor’s weight by its rating to
information can provide firms?
determine a weighted score for each variable
9. Are computer training workshops provided for
5. Sum the weighted scores for each variable to
users of the information system?
determine the total weighted score for the
10. Is the firm’s information system continually organization
being improved in content- and user-
friendliness?

Value Chain Analysis (VCA)

 refers to the process whereby a firm

determines the costs associated with
organizational activities from
purchasing raw materials to

CHAPTER 5
The Nature of Long-Term Objectives
 Objectives should be:
 quantitative, measurable, realistic,
understandable, challenging,
hierarchical, obtainable, and
congruent among organizational units
 Objectives
 provide direction
 aid in evaluation
 establish priorities
 reduce uncertainty
 minimize conflicts
 aid in both the allocation of resources
and the design of jobs
Not Managing by Objectives
• Managing by Extrapolation
• Managing by Crisis
• Managing by Subjectives
• Managing by Hope
The Balanced Scorecard
 derives its name from the perceived
need of firms to “balance” financial
measures that are oftentimes used
exclusively in strategy evaluation and
control with nonfinancial measures
such as product quality and customer
service
Types of Strategies
 Most organizations simultaneously pursue a
combination of two or more strategies, but a
combination strategy can be exceptionally
risky if carried too far.
 No organization can afford to pursue all the
strategies that might benefit the firm.
 Difficult decisions must be made and priorities
must be established.

Horizontal Integration Guidelines
Integration Strategies
 Forward integration
 involves gaining ownership or
Intensive Strategies
increased control over distributors or
retailers
Forward Integration Guidelines
 When an organization’s present distributors
are especially expensive
 When the availability of quality distributors is
so limited as to offer a competitive advantage
 When an organization competes in an industry
that is growing
 When present distributors or retailers have
high profit margins
 Backward integration
Market Penetration Guidelines
 strategy of seeking ownership or
increased control of a firm’s suppliers
Backward Integration Guidelines
 When an organization’s present suppliers are
especially expensive or unreliable
 When the number of suppliers is small and
the number of competitors is large
 When the advantages of stable prices are
particularly important
 When an organization needs to quickly
acquire a needed resource
 Horizontal integration
 a strategy of seeking ownership of or
increased control over a firm’s
competitors
 When an organization can gain monopolistic
characteristics in a particular area or region
without being challenged by the federal
government
 When an organization competes in a growing
industry
 When increased economies of scale provide
major competitive advantages
 When competitors are faltering due to a lack
of managerial expertise
 Market penetration strategy
 seeks to increase market share for
present products or services in
present markets through greater
marketing efforts
 Market development
 involves introducing present products
or services into new geographic areas
 Product development strategy
 seeks increased sales by improving or
modifying present products or
services
 When current markets are not saturated with
a particular product or service
 When the usage rate of present customers
could be increased significantly
 When the market shares of major competitors
have been declining while total industry sales
have been increasing
  When increased economies of scale provide
major competitive advantages
Market Development Guidelines
 When new channels of distribution are
available that are reliable, inexpensive, and of
good quality
 When an organization is very successful at
what it does
 When new untapped or unsaturated markets
exist
 When an organization has excess production
capacity
Product Development Guidelines
 When an organization has successful products
that are in the maturity stage of the product
life cycle
 When an organization competes in an industry
that is characterized by rapid technological
developments
 When major competitors offer better-quality
products at comparable prices
 When an organization competes in a high-
growth industry
Diversification Strategies
 Related diversification
 value chains possess competitively
valuable cross-business strategic fits
 Unrelated diversification
 value chains are so dissimilar that no
competitively valuable cross-business
relationships exist
Synergies of Related Diversification
 Transferring competitively valuable expertise,
technological know-how, or other capabilities
from one business to another
 Combining the related activities of separate
businesses into a single operation to achieve
lower costs
 Exploiting common use of a well-known brand
name
Related Diversification Guidelines
 When an organization competes in a no-
growth or a slow-growth industry
 When adding new, but related, products
would significantly enhance the sales of
current products
 When new, but related, products could be
offered at highly competitive prices
 When an organization has a strong
management team
Unrelated Diversification Guidelines
 When revenues derived from an organization’s
current products would increase significantly
by adding the new, unrelated products
 When an organization’s present channels of
distribution can be used to market the new
products to current customers
 When an organization’s basic industry is
experiencing declining annual sales and profits
 When an organization has the opportunity to
purchase an unrelated business that is an
attractive investment opportunity
 When existing markets for an organization’s
present products are saturated
 When antitrust action could be charged
against an organization that historically has
concentrated on a single industry
Defensive Strategies
 Retrenchment
 occurs when an organization regroups
through cost and asset reduction to
reverse declining sales and profits
 also called a turnaround or
reorganizational strategy
 designed to fortify an organization’s
basic distinctive competence
Retrenchment Guidelines
 When an organization is one of the weaker
competitors in a given industry
 When an organization is plagued by
inefficiency, low profitability, and poor
employee morale
  When an organization has grown so large so
quickly that major internal reorganization is
needed

Divestiture

 Selling a division or part of an organization

 often used to raise capital for further strategic
acquisitions or investments

Divestiture Guidelines

 When an organization has pursued a

retrenchment strategy and failed to
accomplish needed improvements
Michael Porter’s Five Generic Strategies
 When a division needs more resources to be
competitive than the company can provide Cost leadership

 When a division is responsible for an  emphasizes producing standardized

organization’s overall poor performance
 When a division is a misfit with the rest of an
organization
Liquidation
 selling all of a company’s assets, in parts, for
their tangible worth
 can be an emotionally difficult strategy
products at a very low per-unit cost
for consumers who are price-sensitive
 Type 1
 low-cost strategy that offers products
or services to a wide range of
customers at the lowest price
available on the market
 Type 2

 best-value strategy that offers

products or services to a wide range
of customers at the best price-value
Liquidation Guidelines
available on the market
 When an organization has pursued both a
Differentiation
retrenchment strategy and a divestiture
strategy, and neither has been successful  strategy aimed at producing products
and services considered unique
 When an organization’s only alternative is
industry-wide and directed at
bankruptcy
consumers who are relatively price-
 When the stockholders of a firm can minimize insensitive
their losses by selling the organization’s assets
 When there are many ways to
differentiate the product

 When buyer needs and uses are

diverse

 When few rival firms are following a

similar differentiation approach

 When technological change is fast

paced

Differentiation Strategies
  Differentiation strategy should be pursued
only after a careful study of buyers’ needs and
preferences to determine the feasibility of
incorporating one or more differentiating
features into a unique product that features
the desired attributes
 Type 4
 low-cost focus strategy that offers
products or services to a niche group
of customers at the lowest price
available on the market
 Type 5
 best-value focus strategy that offers
products or services to a small range
of customers at the best price-value
available on the market
Cost Leadership Strategies
 To employ a cost leadership strategy
successfully, a firm must ensure that its total
costs across its overall value chain are lower
than competitors’ total costs
Two ways:
 Most effective when consumers have
distinctive preferences
Focus Strategy Guidelines
 When the target market niche is large,
profitable, and growing
 When industry leaders do not consider the
niche to be crucial to their own success
 When the industry has many different niches
and segments
 When few, if any, other rivals are attempting
to specialize in the same target segment
Means for Achieving Strategies
 Cooperation Among Competitors
 Joint Venture/Partnering
 Merger/Acquisition
 Private-Equity Acquisitions
 First Mover Advantages
 Outsourcing

1. Perform value chain activities more efficiently

than rivals and control the factors that drive
the costs of value chain activities

2. Revamp the firm’s overall value chain to

eliminate or bypass some cost-producing
activities

Cost Leadership Guidelines

 When price competition among rival sellers is

especially vigorous

 When there are few ways to achieve product

differentiation that have value to buyers

 When most buyers use the product in the

same ways

 When buyers incur low costs in switching their

purchases from one seller to another

Focus Strategies

 Successful focus strategy depends on an

industry segment that is of sufficient size, has
good growth potential, and is not crucial to
the success of other major competitors
 and Action Evaluation (SPACE) Matrix,
the Boston Consulting Group (BCG)
Matrix, the Internal-External (IE)
Matrix, and the Grand Strategy Matrix

 Stage 3 - Decision Stage

 involves the Quantitative Strategic

Planning Matrix (QSPM)
Chapter 6
 reveals the relative attractiveness of
The Process of Generating and Selecting Strategies alternative strategies and thus
 A manageable set of the most attractive provides objective basis for selecting
alternative strategies must be developed specific strategies

 The advantages, disadvantages, trade-offs,

costs, and benefits of these strategies should
be determined

 Identifying and evaluating alternative

strategies should involve many of the
managers and employees who earlier
assembled the organizational vision and
The Matching Stage
mission statements, performed the external
audit, and conducted the internal audit.  The Strengths-Weaknesses-Opportunities-
Threats (SWOT) Matrix helps managers
 Alternative strategies proposed by
develop four types of strategies:
participants should be considered and
discussed in a series of meetings.  SO (strengths-opportunities)
Strategies
 Proposed strategies should be listed in
writing.  WO (weaknesses-opportunities)
 When all feasible strategies identified by Strategies
participants are given and understood, the  ST (strengths-threats) Strategies
strategies should be ranked in order of
attractiveness.  WT (weaknesses-threats) Strategies

A Comprehensive Strategy-Formulation Framework  SO Strategies

 Stage 1 - Input Stage  use a firm’s internal strengths to take

advantage of external opportunities
 summarizes the basic input
information needed to formulate
strategies

 consists of the EFE Matrix, the IFE

 WO Strategies
Matrix, and the Competitive Profile
Matrix (CPM)  aim at improving internal weaknesses
by taking advantage of external
 Stage 2 - Matching Stage
opportunities
 focuses on generating feasible
 ST Strategies
alternative strategies by aligning key
external and internal factors  use a firm’s strengths to avoid or
reduce the impact of external threats
 techniques include the Strengths-
Weaknesses-Opportunities-Threats
(SWOT) Matrix, the Strategic Position
  WT Strategies
 defensive tactics directed at reducing
internal weakness and avoiding
external threats
SWOT Matrix
1. List the firm’s key external opportunities
2. List the firm’s key external threats
3. List the firm’s key internal strengths
4. List the firm’s key internal weaknesses
5. Match internal strengths with external
opportunities
6. Match internal weaknesses with external
opportunities, and record the resultant WO
Strategies
7. Match internal strengths with external
threats, and record the resultant ST Strategies
8. Match internal weaknesses with external
threats, and record the resultant WT
Strategies
Steps to Develop a SPACE Matrix
 Strategic Position and Action Evaluation
(SPACE) Matrix
 four-quadrant framework indicates
whether aggressive, conservative,
defensive, or competitive strategies
are most appropriate for a given
organization
 Two internal dimensions (financial position
[FP] and competitive position [CP])
 Two external dimensions (stability position
[SP] and industry position [IP])
 Most important determinants of an
organization’s overall strategic position
1. Select a set of variables to define financial
position (FP), competitive position (CP),
stability position (SP), and industry position
(IP)
2. Assign a numerical value ranging from +1
(worst) to +7 (best) to each of the variables
that make up the FP and IP dimensions. Assign
a numerical value ranging from –1 (best) to –7
(worst) to each of the variables that make up
the SP and CP dimensions
3. Compute an average score for FP, CP, IP, and
SP
4. Plot the average scores for FP, IP, SP, and CP on
the appropriate axis in the SPACE Matrix
5. Add the two scores on the x-axis and plot the
resultant point on X. Add the two scores on
 the y-axis and plot the resultant point on Y.
Plot the intersection of the new xy point
6. Draw a directional vector from the origin of
the SPACE Matrix through the new
intersection point
 This vector reveals the type of
strategies recommended for the
organization: aggressive, competitive,
defensive, or conservative
The Boston Consulting Group (BCG) Matrix
 BCG Matrix
 graphically portrays differences
among divisions in terms of relative
market share position and industry
growth rate
 allows a multidivisional organization
to manage its portfolio of businesses
by examining the relative market
share position and the industry
growth rate of each division relative to
all other divisions in the organization
 Question marks – Quadrant I
 Organization must decide whether to
strengthen them by pursuing an
intensive strategy (market
penetration, market development, or
product development) or to sell them
 Stars – Quadrant II
 represent the organization’s best long-
run opportunities for growth and
profitability
 Cash Cows – Quadrant III
 generate cash in excess of their needs
 should be managed to maintain their
strong position for as long as possible
 Dogs – Quadrant IV
 compete in a slow- or no-market-
growth industry
 businesses are often liquidated,
divested, or trimmed down through
retrenchment
 The major benefit of the BCG Matrix is that it
draws attention to the cash flow, investment
characteristics, and needs of an organization’s
various divisions
The Internal-External (IE) Matrix
 The IE Matrix is based on two key dimensions:
the IFE total weighted scores on the x-axis and
the EFE total weighted scores on the y-axis
 Three major regions
 Grow and build
 Hold and maintain
 Harvest or divest
The Grand Strategy Matrix
 Grand Strategy Matrix
 based on two evaluative dimensions:
competitive position and market
(industry) growth
 Quadrant I
 continued concentration on current
markets (market penetration and
market development) and products
(product development) is an
appropriate strategy
 Quadrant II
 unable to compete effectively
 need to determine why the firm’s
current approach is ineffective and
how the company can best change to
improve its competitiveness
 Quadrant III
 must make some drastic changes
quickly to avoid further decline and
possible liquidation
 Extensive cost and asset reduction
(retrenchment) should be pursued
first
 Quadrant IV
 have characteristically high cash-flow
levels and limited internal growth
needs and often can pursue related or
unrelated diversification successfully
The Quantitative Strategic Planning Matrix (QSPM)
 Quantitative Strategic Planning Matrix
(QSPM)
 objectively indicates which alternative
strategies are best
 uses input from Stage 1 analyses and
matching results from Stage 2
analyses to decide objectively among
alternative strategies
Steps in a QSPM
1. Make a list of the firm’s key external
opportunities/threats and internal
strengths/weaknesses in the left column of
the QSPM
2. Assign weights to each key external and
internal factor
 The hierarchy of command in an organization,
combined with the career aspirations of
different people and the need to allocate
scarce resources, guarantees the formation of
coalitions of individuals who strive to take
care of themselves first and the organization
second, third, or fourth
Tactics to Aid Strategists
• Equifinality
• Satisfying
• Generalization
• Focus on Higher-Order Issues
• Provide Political Access on Important Issues
Governance Issues
 Board of directors

3. Examine the Stage 2 (matching) matrices, and  a group of individuals who are elected
identify alternative strategies that the by the ownership of a corporation to
organization should consider implementing have oversight and guidance over
management and who look out for
4. Determine the Attractiveness Scores (AS)
shareholders’ interests
5. Compute the Total Attractiveness Scores

6. Compute the Sum Total Attractiveness Score

Positive Features of the QSPM

 Sets of strategies can be examined

sequentially or simultaneously

 Requires strategists to integrate pertinent

external and internal factors into the decision
process

 Can be adapted for use by small and large for-

profit and nonprofit organizations
Board of Director Duties and Responsibilities
Limitations of the QSPM

 Always requires intuitive judgments and

educated assumptions

 Only as good as the prerequisite information

and matching analyses upon which it is based

The Politics of Strategy Choice

 Political maneuvering consumes valuable

time, subverts organizational objectives,
diverts human energy, and results in the loss
of some valuable employees

 Political biases and personal preferences get

unduly embedded in strategy choice decisions
Principles of Good Governance

1. No more than two directors are current or

former company executives

2. The audit, compensation, and nominating

committees are made up solely of outside
directors

3. Each director owns a large equity stake in the

company, excluding stock options

4. Each director attends at least 75 percent of all

meetings

5. The board meets regularly without

management present and evaluates its own
performance annually

6. The CEO is not also the chairperson of the

board

7. Stock options are considered a corporate

expense

8. There are no interlocking directorships (where

a director or CEO sits on another director’s
board)