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Strategic Management

Lecture1

Definition of
Strategic Management
Strategic Management
The set of managerial decisions and actions
that determines the long-run performance
of an organization

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

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

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?

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.

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

Globalization
Regional & Global Trade Agreements
European Union (EU)
North American Free Trade Agreement

(NAFTA)
WTO
Association of South East Asian Nations
(ASEAN)

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 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.

Composition of
Strategic Management
Strategic Management is Composed of
1.
2.
3.
4.

Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control

1.10

Environmental Variables (Fig. 1.3)

Environmental Variables
Societal Environment

TaskTask
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

11

Chapter 1

Communities

Technological
Forces

Prentice Hall, 2000

Societal Environment
Composed of general forces in environment
1. Socio-cultural forces
2. Economic Forces
3. Technological Forces
4. Political-legal forces

Task Environment
Composed of
Groups in environment that directly affect or
are affected by the organizations operations
(Often called industry)
Competitors
Customers
Suppliers
Creditors
Share holders
Trade association
Employees/ labor unions
Communities

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:

Vision & Mission


Objectives
Strategies
Policies

Difference between Vision,


Objectives & Strategy
1. VISION: What is the companys present
situation and where do we want to take it?
2. OBJECTIVES: 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. STRATEGY: How should it get there?

That leaves., a Mission


A Mission describes:
Products which the company is offering
Markets which are being reached
Customers who are being served
How the customers are being served

(Value Proposition)

The unique value proposition by a company

is a result of its Core Competencies (inner


strengths) and comes out as a Competitive
Advantage

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 value proposition that
sets a company apart from rivals and yields a
competitive advantage is a companys most
reliable ticket to above average profitability

Four Best Strategic Approaches to


Building Sustainable Competitive
Advantage

Being the industrys low-cost provider (a costbased 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)
Making a unique value proposition by combining
lower costs with differentiating features (A
best value product)

Some Consolidated Mission


Statements:
"To make the world's information universally

accessible and useful


To inspire and nurture the human spirit
one person, one cup and one neighborhood
at a time
To bring inspiration and innovation to every
athlete*in the world.
*"If you have a body, you are an athlete.
TOBUILD UNIQUE SPORTS CARS DESTINED TO

REPRESENT THE EXCELLENCE OF ITALIAN CARS,


WHETHER ON THE ROAD OR ON RACING
CIRCUITS.

Why Do Strategies Evolve?


A companys 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

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?

Relationship Between
Strategy and Business Model
Strategy . . .
Deals with a
companys
competitive initiatives
and business
approaches
y
eg
t
ra
St

s
es
n
si el
Bu od
M

Business
Model . . .
Concerns whether
revenues and costs
flowing from the
strategy demonstrate
a business can be
amply profitable and
viable

Tests of a Winning Strategy


GOODNESS OF FIT TEST
How well does strategy fit

the firms situation?


COMPETITIVE ADVANTAGE TEST
Does strategy lead to sustainable

competitive advantage?
PERFORMANCE TEST
Does strategy boost firms performance?

The Strategy-Making, Strategy-Executing


Process

Developing a Strategic Vision


Phase 1 of the Strategy-Making Process
Involves thinking strategically about
Future direction of company
Changes in companys

product/market/customer technology to
improve
Current market position
Future prospects

A strategic vision describes the route a company


intends to take in developing and strengthening
its business. It lays out the companys strategic
course in preparing for the future.

Characteristics of well worded


vision statement
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
companys 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
1.

Characteristics of a well worded


vision statement
4.

5.

6.

7.

Flexible : is not a once-and-for-all time


pronouncement; vision about a companys
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

Common shortcomings in
company vision statements
Incomplete : short on specifics about
where the company is headed and what
kind of company management is trying
to create
2. Vague : doesnt provide much indication
of whether or how management needs
to alter the companys 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)
1.

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 doesnt rule out any
opportunity that management might opt to
pursue

Googles Vision Statement


Google believes that an open web benefits all

users and publishers. However, "open" need


not mean free. We believe that content on the
Internet can thrive supported by multiple
business models -- including content available
only via subscription. While we believe that
advertising will likely remain the main source
of revenue for most news content, a paid
model can serve as an important source of
additional revenue. In addition, a successful
paid content model can enhance advertising
opportunities, rather than replace them

Googles Vision Statement


When it comes to a paid content model, there

are two main challenges. First, the content


must offer value to users. Only content
creators can address this. The second is to
create a simple payment model that is
painless for users. Google has experience not
only with our e-commerce products; we have
successfully built consumer products used by
millions around the world. We can use this
expertise to help create a successful ecommerce platform for publishers.

Googles Vision Statement


Beyond the mechanics of any payment

system, users must know the product


exists. Discovery and distribution are just
as, if not more, important to premium
content as they are to free content given
the smaller audience of potential
subscribers. Google is uniquely positioned
to help publishers create a scalable ecommerce system via our Checkout product
and also enable users to find this content
via search -- even if it's behind a paywall.

Googles Vision Statement


Our vision of a premium content :ecosystem includes the
following features:
Single sign-on capability for users to access content and
manage subscriptions
Ability for publishers to combine subscriptions from
different titles together for one price
Ability for publishers to create multiple payment options
and easily include/exclude content behind a paywall
Multiple tiers of access to search including 1) snippets
only with "subscription" label, 2) access to preview
pages and 3) "first click free" access
Advertising systems that offer highly relevant ads for
users, such as interest-based advertising

Vision vs. Mission


A strategic vision

concerns a firms
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 markets and

market offerings
Customer needs being
served
Technological and
business
capabilities (competitive
advantage)

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

Types of Objectives
Required

Financial Objectives

Outcomes focused
on improving
financial
performance

Strategic Objectives

Outcomes focused
on improving
competitive
vitality and
future business
position

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
companys brand appeal
Having stronger sales
and distribution capabilities than
rivals

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 companys 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 deemphasizing the strategic objectives may have merit)

Just tracking financial performance

overlooks the importance of measuring


whether a company is strengthening its
competitiveness
andfuture
market
position.
The
surest path to sustained
profitability
year after
year is to relentlessly pursue strategic outcomes
that strengthen a companys business position and
give it a growing competitive advantage over rivals!

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

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.

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

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

A Companys Strategy-Making Hierarchy

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

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

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

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

Implementing and Executing


Strategy
Phase 4 of the Strategy-Making Process
Operations-oriented activity aimed at

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

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

Evaluating Performance and


Making
Corrective
Adjustments
Phase 5 of the Strategy-Making Process
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

The
The Basis
Basis for
for Good
Good
Strategic
Strategic Decisions
Decisions
Intuition + Analysis

Effective Strategic Decisions


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