Strategic Management

Organizations
A systematic arrangement of people brought together to
accomplish some specific purpose; applies to all
organizations—for-profit as well as not-for-profit
organizations.
Where managers work (manage)
 Common characteristics
Goals
Structure
People

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Common Characteristics of Organizations

1–3
People Differences
Operatives
 People who work directly on a job or task and have no
responsibility for overseeing the work of others
Managers
 Individuals in an organization who direct the activities
of others
 Authority and Responsibility

1–4
 Why Management?

We all have a vested interest in improving the way

organizations are managed.
 Better organizations are, in part, the result of good
management.
You will eventually either manage or be managed
 Gaining an understanding of the management process
provides the foundation for developing management
skills and insight into the behavior of individuals and the
organizations.

1–5
Management Defined
 The process of getting things done, effectively and efficiently,
through and with other people in a changing environment.

 Efficiency
 Means doing the thing correctly; refers to the relationship
between inputs and outputs; seeks to minimize resource costs
 A measure of how well or how productively resources are used
to achieve a goal

 Effectiveness
 A measure of the appropriateness of the goals an organization
is pursuing and the degree to which they are achieved.
 Means doing the right things; goal attainment.
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Efficiency and Effectiveness

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The Importance of Management
Achieving objectives requires skilled
management

Management –
planning, organizing, leading, & controlling

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 WHAT IS STRATEGY
AND
WHY IS IT IMPORTANT?
CORE CONCEPT
WHAT IS STRATEGY ?
A company’s strategy is its action plan
for outperforming its competitors and
achieving superior performance
♦Management’s “action plan” to
● Grow the business
● Attract and please customers
● Compete successfully
● Conduct operations
● Achieve target levels of organizational performance
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 WHAT DO WE MEAN BY STRATEGY ?

♦ What is our present situation?

● Business environment and industry conditions
● Firm’s financial and competitive capabilities
♦ Where do we want to go from here?
● Creating a vision for the firm’s future direction
♦ How are we going to get there?
● Crafting actions that will get us there

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 WHAT IS STRATEGY ABOUT?

♦ Strategy is all about How:

● How to outcompete rivals.
● How to respond to economic and market
conditions and growth opportunities.
● How to manage functional pieces of the
business.
● How to improve the firm’s financial and
market performance.

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 WHY DO STRATEGY ?

♦ A firm does strategy:

● To improve its financial performance.
● To strengthen its competitive position.
● To gain a sustainable competitive.
advantage over its market rivals.
♦ A creative, distinctive strategy:
● Can yield above-average profits.
● Makes competition difficult for rivals.

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 STRATEGY AND COMPETITORS

♦ Strategy is about competing differently

from rivals—
● Doing what they don’t do or doing it better!
● Doing what they can’t do!
● Doing that which sets the firm apart and
attracts customers.
● Doing what we should or should not do to
produce a competitive edge.

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 Strategy

• What is Strategy?

 A set of goal-directed actions that a firm takes to gain

and sustain superior performance.

 It is not necessarily a zero-sum game

 Win – win scenarios – coopetition (i.e., collaborative
efforts among competitors for mutual gain)

 Requires tradeoffs for strategic positioning

 (low cost) WALMART vs. (upscale) Neiman Marcus
 (low cost) Southwest Airlines vs. (stuck in the middle)
Delta Song
 Strategy
• To achieve superior performance, organizations
compete for resources:

 New ventures: for financial and human capital

 Charities: for donations
 Sports teams: athletic talent
 Universities: for the best students and professors
Strategists

Gather Information

Analyze Information

Organize Information

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Three Key Elements of a Good Strategy -- AFI

•Analysis
 Diagnosis of the competitive challenge

•Formulation
 Guiding policy to address the competitive
challenge

•Implementation
 A set of coherent actions to implement the firm’s
guiding policy

18
 Three Key Elements of a Good Strategy -- AFI
• Analysis
 A diagnosis of the competitive challenge, which is
accomplished through strategy analysis of the firm’s
external and internal environments

• Formulation
 A guiding policy, providing an overarching approach
that addresses the competitive challenge, and which is
accomplished through strategy formulation, resulting in
the firm’s corporate, business, and functional strategies

• Implementation
 A set of coherent actions to implement the firm’s guiding
policy, which is accomplished through clear
communication, organizational structure, organizational
culture, and control.
 Gaining and Sustaining Competitive Advantage
• What is Competitive Advantage?

 Superior performance relative to competitors

 In digital advertising: Google has a competitive
advantage over Facebook, Twitter, and Yahoo
 In smartphones: Apple has a competitive advantage
over Samsung, Microsoft, and BlackBerry

• What is Sustainable Competitive Advantage?

 Sustainable competitive advantage occurs when a firm

implements a value-creating strategy of which other companies
are unable to duplicate the benefits over a prolonged period of
time or find it too costly to imitate.

 To assess sustainable competitive advantage compare firm

performance to a benchmark such as industry average
performance in the same industry or opportunity cost.
 Competitive Advantage Examples

 Strive to be the industry’s low-cost provider

 Wal-Mart
 Southwest Airlines
 Outcompete rivals on a key differentiating feature
 Johnson & Johnson – Reliability in baby products
 Harley-Davidson – King-of-the-road styling
 Rolex – Top-of-the-line prestige
 Mercedes-Benz – Engineering design and performance
 Amazon.com – Wide selection and convenience

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Competitive Advantage Examples (cont)
 Focus on a narrow market niche
 eBay – Online auctions
 Jiffy Lube International – Quick oil changes
 McAfee – Virus protection auctions
 Starbucks – Premium coffees and coffee drinks
 Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
 FedEx – Next-day delivery of small packages
 Walt Disney – Theme park management and family entertainment
 Toyota – Sophisticated production system
 Ritz-Carlton – Personalized customer service

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 Strategy as a Theory of How to Compete to Create
Superior Value, While Containing the Cost to Create It

The greater the difference between the value creation and cost,
the greater the firm’s economic contribution and the more
likely it will achieve sustainable competitive advantage (SCA).

 Wal-mart's Sam Walton's assumptions about low costs,

low prices, and high volume to drive profitability
 Apple’s Steve Jobs wanted to “put a ding in the universe”
 Facebook’s Mark Zukerberg wanted to “make the world open
and connected”
 Google’s Larry Page and Sergio Brin wanted to make
information accessible.
 24

Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 25

Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 26

Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Identifying a Company’s Strategy—What to Look For

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 Basic concepts
 Strategic Competitiveness
● Achieved when a firm formulate & implements a value-creating
strategy
 Strategy
● Integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive
advantage
 Competitive Advantage (CA)
● Implemented strategy that competitors are unable to duplicate or
find too costly to imitate
 Above Average Returns
● Returns in excess of what investor expects in comparison to
other investments with similar risk

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 Basic concepts (Cont’d)

 Risk

● Investor’s uncertainty about economic

gains/losses resulting from a particular investment
 Average Returns
● Returns equal to what investor expects in
comparison to other investments with similar risk

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 What is Performance?
 Performance is central to the study and practice of strategy
 Organizational performance is complicated
 Numerous definitions, approaches, and types of performance
 Can be an intangible concept
 Examples:
● Goal attainment - Vision/mission, objectives
● Effectiveness – A hospital curing sick people
● Quality – Customer service
● Efficiency - Inputs to outputs
● Financial/accounting/economic returns – ROA, EPS
 Can also vary by type of firm
● For-profit versus not-for-profit
● Publicly traded?
● Government
30

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 Measuring Performance
 Stakeholders View
● An organization’s performance should be evaluated
relative to the preferences and desires of stakeholders
that provide resources to a firm
● Different stakeholders can have different interests and
different criteria for evaluating performance
● May need to choose which stakeholders to satisfy
● Must minimally satisfy the interests of each stakeholder
group

31

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 Measuring Performance
 Simple Accounting Measures
● Most popular approach
● Publicly available for many firms
● They communicate a great deal of information
● Most often rely on ratio analysis
● 4 Major categories of ratios
 Profitability
 Liquidity
 Leverage
 Activity
32

1–32
 Measuring Performance
 Profitability Ratios
● Ratios with some measure of profit in the
numerator and some measure of firm size or
assets in the denominator
 ROA, ROE, margins, EPS, p/e ratio
 Liquidity Ratios
● Ratios that focus on the ability of a firm to meet
its short–term financial obligations
 Current ratio, quick ratio
33

1–33
 Measuring Performance
 Leverage Ratios
● Ratios that focus on the level of a firm’s
indebtedness
 Debt to assets, debt to equity, times interest
earned
 Activity Ratios
● Ratios that focus on the level of activity in a firm’s
business
 Inventory turnover, average collection period

34

1–34
 The Relative Nature of
Performance
 Performance is always relative to other firms
 Performance should be compared to industry average(s)
● AAR are above industry average
 Normal and below normal returns
 Industry adjustments
● Some industries are more profitable than others
● Can adjust for industry performance and compare
performance levels across industries
 Looking at trends can also be useful
 From earlier
● I/O Model - Pick attractive industry(ies) to compete in
● Resource-Based Model - Develop unique bundles of
resources and capabilities
35

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 STRATEGIC APPROACH CHOICES

Building Competitive Advantage

Low-cost Differentiation Focus on Best-cost

provider on features market niche provider

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 STRATEGIC APPROACHES

♦ Building a competitive advantage by:

1. Striving to become the industry’s low-cost
provider (efficiency).
2. Outcompeting rivals on differentiating
features (effectiveness).
3. Focusing on better serving a niche market’s
needs (efficiency and\or effectiveness).
4. Offering the lowest (best) prices for
differentiated goods (best-cost provider).

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 GAINING SUSTAINABLE COMPETITIVE
ADVANTAGE

♦ How to create a sustainable competitive

advantage:
● Develop valuable expertise and competitive
capabilities over the long-term that rivals
cannot readily copy, match or best.
● Put the constant quest for sustainable
competitive advantage at center stage in
crafting your strategy.

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 Why a Firm’s Strategy Evolves over Time

♦ Managers modify strategy in response to:

● Changing market conditions
● Advancing technology
● Fresh moves of competitors
● Shifting buyer needs
● Emerging market opportunities
● New ideas for improving the strategy

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 Planned, Deliberate, Emergent
and Realized Strategies
Deliberate Strategy
Planned Realised
Strategy Strategy

Unprecedented Unplanned
change Emergent shift by top
Unrealised
Strategy level
Strategy
Managers

Serendipity Autonomous
(by chance) action by
lower level
Managers 1 | 40
Intended and Emergent Strategies
 Intended or Planned Strategies
• Strategies an organization plans to put into action
• Typically the result of a formal planning process
• Unrealized strategies are the result of unprecedented
changes and unplanned events after the formal planning is
completed
 Emergent Strategies
• Unplanned responses to unforeseen circumstances
• Serendipitous discoveries and events may emerge that can
open up new unplanned opportunities
• Must assess whether the emergent strategy fits the
company’s needs and capabilities
 Realized Strategies
• The product of whatever intended strategies are actually put
into action and of any emergent strategies that evolve
1 | 41
 IS OUR STRATEGY A WINNER?

The Strategic
Fit Test

The Competitive Winning The Performance

Advantage Test Test
Strategy

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 WHAT MAKES A STRATEGY
A WINNER?

♦ A winning strategy must pass three tests:

● The Fit Test
 Does it exhibit dynamic fit with the external and

internal aspects of the firm’s overall situation?

● The Competitive Advantage Test
 Can it help the firm achieve a significant and

sustainable competitive advantage (AAR)?

● The Performance Test
 Can it produce good performance as measured

by the firm’s profitability, financial and

competitive strengths, and market standing?

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 WHY CRAFTING AND EXECUTING
STRATEGY ARE IMPORTANT TASKS

♦ Strategy provides:
● A prescription for doing business.
● A road map to competitive advantage.
● A game plan for pleasing customers.
● A formula for attaining long-term standout
marketplace performance.

Good Strategy + Good Strategy Execution =

Good Management
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Strategic Management –Defined

Art & science of formulating,

implementing, and evaluating, cross-
functional decisions that enable an
organization to achieve its objectives.

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 Strategic Management is Gaining and
Maintaining Competitive Advantage

Anything that a firm does especially well

compared to rival firms

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 TWO MODELS OF STRATEGIC
DECISION MAKING

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Industrial
Organizational
(I/O) Model of

Above-
Average
Returns
(AAR)
48
 The
Resource-
Based
Model of
AAR

49
 The Resource-Based Model of AAR
(Cont’d)
 BasicPremise - a firm's unique [internal]
resources & capabilities, in combination,
are the basis for firm strategy and AAR
● Each firm’s performance difference across
time emerges (vs industry’s structural
characteristics)
● Combined uniqueness should define the
firms’ strategic actions
● Resources are tangible and intangible

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 The Resource-Based Model of AAR…
 Resources
● Inputs into a firm's production process
 Includes capital equipment, employee skills, patents, high-
quality managers, financial condition, etc.
● Basis for competitive advantage: When resources are valuable,
rare, costly to imitate and nonsubstitutable
● Internal/firm-specific resources can be classified into three
categories:
 Physical
 Things you can touch/feel = tangible

 Human
 People / employees

 Organizational capital
 Relative to the firm itself

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 The Resource-Based Model of AAR…
 Capability

● Capacity for a set of resources to perform a task

or activity in an integrative manner
 Core Competency
● A firm’s resources and capabilities that serve as
sources of competitive advantage over its rival
 Summary

● A firm has superior performance because of

 Unique resources and capabilities, and the
combination makes them different, and better,
than their competition – driving the competitive
advantage
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 Stakeholders
 BasicPremise – a firm can effectively
manage stakeholder relationships to create a
competitive advantage and outperform its
competitors
 Stakeholders are both individuals and groups

● They can affect, and are affected by, the strategic

outcomes/performance a firm achieves
 Firmsare not equally dependent on all
stakeholders

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The Three Stakeholder Groups

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 Stakeholders (Cont’d)
 Classifications of Stakeholders
● Capital Market
 Expect returns commiserate with risk accepted
by investments
 Higher the dependency relationship, the more
direct and significant firm’s response
● Product Market
 Customers, suppliers, host communities, unions
● Organizational
 The employees


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 Strategic Leadership
Good leaders of the strategy-making process
have a number of key attributes:
 Vision, eloquence (articulate), and consistency
 Commitment
 Being well informed
 Willingness to delegate and empower
 The astute use of power
 Emotional intelligence
• Self-awareness
• Self-regulation
• Motivation
• Empathy
• Social skills
Copyright © Houghton Mifflin Company. All rights reserved. 1 | 56
 Strategic Leaders
 People located in different parts of the firm
using the strategic management process to
help the firm reach its vision and mission
● Decisive and committed to nurturing those around
them
● Organizational culture emerges from & sustained
by leaders
 Complex set of ideologies, symbols and core
values shared throughout the firm
 Affects leaders/their work which in-turn shapes
culture
 Influences how the firm conducts business

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 Strategic Leaders (Cont’d)
 The Work of Effective Strategic Leaders
● Hard work, thorough analysis, desire for
accomplishment, tenacity (Drive).
● Must be able to “think seriously and deeply…about
the purposes of the organizations they head or
functions they perform, about strategies, tactics,
…..and people…and about the important questions …
they need to ask.”
 Predicting Outcomes: Profit Pools (PP)
● Anticipates their decisions relative to the PP
● PP entails the total profits earned in an industry at all
points along the value chain

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THE RELATIONSHIP BETWEEN A
FIRM’S STRATEGY AND ITS BUSINESS
MODEL

Realized Business
Strategy $$$? Model
Competitive Value
Initiatives Proposition

Business
Profit Formula
Approaches

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 A Company’s Business Model

♦ How the business will make money :

● By providing customers with value.
 The firm’s customer value proposition

● By generating revenues sufficient to cover

costs and produce attractive profits.
 The firm’s profit formula

It takes a proven business model—one that

yields appealing profitability—to demonstrate
viability of a firm’s strategy.

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 Business Model Elements

♦ The Customer Value Proposition

● Satisfying buyer wants and needs at a price
customers will consider a good value.
 The greater the value provided (V) and
the lower the price (P), the more
attractive the value proposition is to
customers.

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 Business Model Elements (cont’d)

♦ The Profit Formula

● Creating a cost structure that allows for
acceptable profits, given that pricing is
tied to the customer value proposition.
 V—the value provided to customers
 P—the price charged to customers
 C—the firm’s costs
● The lower the costs (C) for a given customer
value proposition (V–P), the greater the ability
of the business model to be a moneymaker.

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3 Stages of the Strategic Management
Process

Strategy formulation

Strategy implementation

Strategy evaluation

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Strategy Formulation

Vision & Mission

External Opportunities & Threats

Internal Strengths & Weaknesses

Long-Term Objectives

Alternative Strategies

Strategy Selection

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Strategy Implementation

Annual Objectives

Policies

Employee Motivation

Resource Allocation

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Strategy Evaluation

Internal Review

External Review

Performance Measurement

Corrective Action

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 Strategic Management Process

 Strategic Management Process (SMP)

● Full set of commitments, decisions and actions
required for a firm to achieve strategic
competitiveness and earn above average returns
 Rational approach used by firms to achieve
strategic competitiveness and earn above-
average returns (AAR)
● Part 1: Strategic Mgmt Inputs
● Part 2: Strategic Actions: Strategy Formulation
● Part 3: Strategic Actions: Strategy Implementation

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 Figure 1.4 

 

Main
Components
of the 
Strategy-
Making
Process 

1–68
1–69
The Strategic Management Process

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The Strategy-Making, Strategy-Executing Process

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 Return on Invested Capital
in Selected Industries, 1997–2003
Figure 1.2

Data Source: Value Line Investment Survey

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