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Chapter 1 The Nature of Strategic Management

Strategic Management: Concepts & Cases 12th Edition Fred David

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Ch 1 -1

What is Strategy?
Characteristics of a Strategy and Strategic Decisions:
1. 2. 3. 4. 5. 6.

Long-term direction of the organization Scope of the organization Gaining advantage over competitors Addressing changes in the business environment Building on resources and competencies Affected by values and expectations

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Ch 1 -2

What is Strategy?
Strategy could be defined as: It is the direction and scope of an organization over the long-term which achieves advantage in a changing environment through its resources and competencies, with the aim of fulfilling stakeholders’ expectations.

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Ch 1 -3

What is Strategy? The vocabulary of strategy Vision. Objective. Control. Mission. Strategies. Copyright © 2009 Pearson Education. Models and Tools. Publishing as Prentice Hall Ch 1 -4 . …etc. Inc.

they quickly discovered that ballpoint pens would not work in zero gravity. NASA scientists spent a decade and $12 million developing a pen that writes in zero gravity. Publishing as Prentice Hall Ch 1 -5 . upside down. To combat this problem. and at a temperature ranging from below freezing to over 300 C Copyright © 2009 Pearson Education.Strategic Thinking When NASA first started sending up astronauts. on almost any surface. Inc.

4. 6. Inc. 2.Strategic Thinking Strategic thinking should take into consideration: 1. Competencies and Skills Products and Offerings Environment and Industry Markets and Customers Competitors and Substitutes Suppliers and Buyers Copyright © 2009 Pearson Education. 3. Publishing as Prentice Hall Ch 1 -6 . 5.

both Now and in the Future Copyright © 2009 Pearson Education.Strategic Thinking States how the functions of the whole organization relate to each other within their internal and external environments. Publishing as Prentice Hall Ch 1 -7 . Inc.

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Inc. Publishing as Prentice Hall Ch 1 -9 . implementing. and evaluating.Strategic Management – Defined Art & science of formulating. cross-functional decisions that enable an organization to achieve its objectives Copyright © 2009 Pearson Education.

If you do not know where you are going.Strategic Management In essence. Inc. Publishing as Prentice Hall Ch 1 -10 . the strategic plan is a company’s game plan. then any road will take you there Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 1 -11 .Strategic management achieves a firm’s success through integration –– Management Finance/Accounting Research & Development Marketing Production/Operations MIS Copyright © 2009 Pearson Education. Inc.

Strategy Formulation Vision & Mission External Opportunities & Threats Internal Strengths & Weaknesses Long-Term Objectives Alternative Strategies Strategy Selection Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -12 . Inc.

Issues in Strategy Formulation New business opportunities Businesses to abandon Allocation of resources Expansion or diversification International markets Mergers or joint ventures Avoidance of hostile takeover Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -13 . Inc.

Strategy Implementation Annual Objectives Policies Employee Motivation Resource Allocation Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -14 .

Inc. Publishing as Prentice Hall Ch 1 -15 .Strategy Implementation Action Stage of Strategic Management Most difficult stage Mobilization of employees & managers Interpersonal skills critical Consensus on goal pursuit Copyright © 2009 Pearson Education.

Inc. Publishing as Prentice Hall Ch 1 -16 .Strategy Evaluation Internal Review External Review Performance Metrics Corrective Actions Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 1 -17 .Strategy Evaluation Final Stage of Strategic Management Subject to future modification Today’s success no guarantee of future success New & different problems Complacency leads to demise Copyright © 2009 Pearson Education. Inc.

Inc.Prime Task of Strategic Management Peter Drucker: Think through the overall mission of a business. Publishing as Prentice Hall Ch 1 -18 . Ask the key question: “What is our Business?” Copyright © 2009 Pearson Education.

Inc.Integrating Intuition & Analysis The strategic management process attempts to organize quantitative and qualitative information under conditions of uncertainty. Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -19 .

Inc.Integrating Intuition & Analysis Intuition is based on:  Past experiences  Judgment  Feelings Intuition is useful for decision making in:  Conditions of great uncertainty  Conditions with little precedent Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -20 .

Publishing as Prentice Hall Ch 1 -21 .Integrating Intuition & Analysis Intuition & Judgment Involve management at all levels Influence all analyses Copyright © 2009 Pearson Education. Inc.

Integrating Intuition & Analysis Analytical Thinking Intuitive Thinking Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -22 . Inc.

Publishing as Prentice Hall Ch 1 -23 . Inc.Adapting to Change Organizations must monitor events Ongoing process  Internal and external events  Timely changes  Copyright © 2009 Pearson Education.

Inc.Strategic Management is Gaining and Maintaining Competitive Advantage “Anything that a firm does especially well compared to rival firms” Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -24 .

Publishing as Prentice Hall Ch 1 -25 .Achieving Sustained Competitive Advantage 1. and resources 2. implementing. Inc. internal capabilities. Adapting to change in external trends. Effectively formulating. and evaluating strategies Copyright © 2009 Pearson Education.

Inc. Publishing as Prentice Hall Ch 1 -26 .Adapting to Change Rate & magnitude of change increasing dramatically E-commerce Demographics Technology Copyright © 2009 Pearson Education.

Inc. Publishing as Prentice Hall Ch 1 -27 .Adapting to Change Effective Adaptation Requires long-term focus Copyright © 2009 Pearson Education.

Inc. Publishing as Prentice Hall .Adapting to Change – Key Strategic Management Questions      What kind of business should we become? Are we in the right fields? Are there new competitors? What strategies should we pursue? How are our customers changing? Ch 1 -28 Copyright © 2009 Pearson Education.

Inc.Key Terms Strategists – Firm’s success/failure Various Job Titles: •Chief Executive Officer (CEO) •Chief Strategy Officer (CSO) •President •Owner •Board Chair •Executive Director Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -29 .

Key Terms Vision Statement – What do we want to become? Mission Statement – What is our business? Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -30 .

Key Terms Opportunities & Threats (External)  Largely beyond the control of a single organization Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -31 .

Publishing as Prentice Hall Ch 1 -32 . Governmental Technological Competitors Copyright © 2009 Pearson Education. Inc.Key Terms Opportunities & Threats (External) Analysis of Trends: • • • • • • • Economic Social Cultural Demographic/Environmental Political. Legal.

Inc.Key Terms Opportunities & Threats Environmental Scanning (Industry Analysis)  Process of conducting research and gathering and assimilating external information Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -33 .

Key Terms Opportunities & Threats Basic Tenet of Strategic Management Take advantage of External Opportunities Strategy Formulation Avoid/minimize impact of External Threats Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -34 . Inc.

Key Terms Strengths & Weaknesses (Internal)  Controllable activities performed especially well or poorly Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -35 .

Key Terms Strengths & Weaknesses (Internal) Typically located in functional areas of the firm • • • • • Management Marketing Finance/Accounting Production/Operations Research & Development • Computer Information Systems Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -36 .

Inc. Publishing as Prentice Hall Ch 1 -37 .Key Terms Strengths & Weaknesses Assessing the Internal Environment Financial Ratios Performance Metrics Internal Factors Industry Averages Survey Data Copyright © 2009 Pearson Education.

Key Terms Long-term Objectives  Mission-driven pursuit of specified results more than one year out Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -38 .

Publishing as Prentice Hall Ch 1 -39 . and controlling Copyright © 2009 Pearson Education. Inc. motivating.Key Terms Long-term Objectives Essential for ensuring the firm’s success • • • • • Provide direction Aid in evaluation Create synergy Focus coordination Basis for planning.

Inc.Key Terms Strategies  Means by which long-term objectives are achieved Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -40 .

Key Terms Strategies Some Examples • • Geographic expansion Diversification • • • • • Acquisition Market penetration Retrenchment Liquidation Joint venture Ch 1 -41 Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall .

Key Terms Annual Objectives  Short-term milestones that firms must achieve to attain long-term objectives Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -42 .

Publishing as Prentice Hall Ch 1 -43 .Key Terms Policies  Means by which annual objectives will be achieved Copyright © 2009 Pearson Education. Inc.

Japan. McDonald’s began opening drive-through restaurants in China. In past months. Big Mac in 2007 opened 800 new restaurants in China. Shares of McDonald’s stock increased 42 percent in 2006 as sales for the year eclipsed $41 billion.Example Strategies in Action in 2007 McDonald’s Corp The world’s largest restaurant chain by number of outlets. and disposed of a supply-chain operation in Russia. Big Mac is doing fantastic both in the United States and abroad.300 restaurants in Canada and the United Kingdom over to licensees. Big Mac is working to eliminate trans fats from their food (New York City is requiring this of all restaurants in 2007). Inc. McDonald’s plans in 2008 to turn ownership of about 2. closed 25 sites in the United Kingdom. and Russia. Publishing as Prentice Hall Ch 1 -44 . Copyright © 2009 Pearson Education.

Example Strategies in Action in 2007 American General A Fortune 500 company based in Piscataway. The firm also is renaming itself Trane. Publishing as Prentice Hall Ch 1 -45 . New Jersey. Led by CEO Fred Poses.000 persons and has manufacturing operations in 28 countries. Copyright © 2009 Pearson Education. after its flagship air-conditioning brand name. Bath-and-kitchen business. American General split into three businesses in 2007: Air-conditioning systems. The company plans to divest the bath-and-kitchen division and to spin off its vehicle control division into a publicly traded company named Wabco. and vehicle-control systems. American General employs about 62. Inc.

Inc. CIS Measure & Evaluate Performance Chapter 2 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Internal Audit Chapter 4 Copyright © 2009 Pearson Education. Fin/Acct. Select Strategies Implement Strategies: Mgmt Issues Implement Strategies: Marketing.1 Comprehensive Strategic-Management Model External Audit Chapter 3 Vision & Mission Long-Term Objectives Generate. R&D. Publishing as Prentice Hall Ch 1 -46 .Figure 1. Evaluate.

Strategic Management Model Strategic Management Process   Dynamic & continuous More formal in larger organizations Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -47 . Inc.

Inc.Strategic Management Model 1. Publishing as Prentice Hall Ch 1 -48 . Identify Existing Vision Mission • • • • Objectives Strategies Copyright © 2009 Pearson Education.

3. Publishing as Prentice Hall Ch 1 -49 . Inc.Strategic Management Model 2. 4. 6. Audit external environment Audit internal environment Establish long-term objectives Generate. 5. and select strategies Implement selected strategies Measure & evaluate performance Copyright © 2009 Pearson Education. evaluate. 7.

Publishing as Prentice Hall Ch 1 -50 .Benefits of Strategic Management • Proactive in shaping firm’s future • Initiate and influence firm’s activities • Formulate better strategies •Systematic. rational Copyright © 2009 Pearson Education. Inc. logical.

Inc.Benefits of Strategic Management Financial Benefits • Improvement in sales • Improvement in profitability • Productivity improvement Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -51 .

Publishing as Prentice Hall Ch 1 -52 . Inc.Benefits of Strategic Management Nonfinancial Benefits • Improved understanding of competitors’ strategies • Enhanced awareness of threats • Reduced resistance to change • Enhanced problem-prevention capabilities Copyright © 2009 Pearson Education.

Identification of opportunities 2. Inc. Improved coordination & control 4. Minimizes adverse conditions & changes 5.Benefits of Strategic Management (Greenley) 1. Decisions that better support objectives Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -53 . Objective view of management problems 3.

Effective allocation of time & resources 7. Internal communication among personnel 8. Clarify individual responsibilities 10.Benefits of Strategic Management (Greenley – cont’d) 6. Inc. Encourage forward thinking Copyright © 2009 Pearson Education. Integration of individual behaviors 9. Publishing as Prentice Hall Ch 1 -54 .

Inc.Benefits of Strategic Management (Greenley – cont’d) 11. Encourages favorable attitude toward change 12. Publishing as Prentice Hall Ch 1 -55 . Provides discipline and formality to the management of the business Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 1 -56 . Inc.Why Some Firms Do No Strategic Planning Poor reward structures Fire-fighting Waste of time Too expensive Laziness Content with success Copyright © 2009 Pearson Education.

Why Some Firms Do No Strategic Planning Fear of failure Overconfidence Prior bad experience Self-interest Fear of the unknown Suspicion Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -57 .

Business Ethics & Strategic Management

Business ethics defined –

Principles of conduct within organizations that guide decision making and behavior

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Ch 1 -58

Business Ethics & Strategic Management

Good business ethics –

Prerequisite for good strategic management

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Ch 1 -59

Business Ethics & Strategic Management

Code of business ethics –

Provides basis on which policies can be devised to guide daily behavior and decisions in the workplace

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Ch 1 -60

Publishing as Prentice Hall . Inc.Business Ethics & Strategic Management Business practices always considered unethical –        Misleading advertising Misleading labeling Harm to the environment Insider trading Dumping flawed products on foreign markets Poor product or service safety Padding expense accounts Ch 1 -61 Copyright © 2009 Pearson Education.

Natural Environment Perspective Using ISO 14000 Certification to Gain Strategic Advantage  What are ISO 14000 & 14001? Requirements for ISO 14001 Environmental Management Systems (EMS)   Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -62 . Inc.

The Nature of Global Competition International/multinational corporations   Parent company Host country Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 1 -63 .

Inc.The Nature of Global Competition Strategy implementation may be difficult  Cultural differences    Norms Values Work ethic Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -64 .

Advantages of International Operations Absorb excess capacity Reduce unit costs Spread risk over wider markets Low-cost production facilities Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 1 -65 . Inc.

Inc. Publishing as Prentice Hall Ch 1 -66 .Advantages of International Operations (cont’d) Less intense competition Lower taxes Economies of scale Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 1 -67 . Inc.Disadvantages of International Operations Difficult communications Underestimate foreign competition Cultural barriers to effective management Complications arising from currency differences Copyright © 2009 Pearson Education.

in that case… Next day Jack approaches Bill Gates Jack: I have a husband for your daughter Bill Gates: But my daughter is too young to marry Jack: But this young man is the Vice-President of the World Bank Bill Gates: Ah…in that case… Copyright © 2009 Pearson Education. talking to his son.How Business is Done? Jack. Inc. Jack: I want you to marry a girl of my choice Son: I will choose my own bride Jack: But the girl is Bill Gates’ daughter Son: Well. a smart successful businessman. Publishing as Prentice Hall Ch 1 -68 .

and became the vice-president of the World Bank ……. This is how business is done!!! Copyright © 2009 Pearson Education.How Business is Done? Finally Jack goes to see the president of the World Bank Jack: I have a young man to be recommended as a vicepresident President: But I already have more vice-presidents than I need Jack: But this young man is Bill Gates’ son-in-law President: Ah…in that case… Finally Jack’s son married Bill Gates’ daughter.. Inc. Publishing as Prentice Hall Ch 1 -69 .