Chapter 7 Strategic Management

OUTLINE Strategic Management (SM) Defined/Importance SM Process Types of Strategies Organizational Corporate Business Unit Competitive Functional Customer Service Innovation

Strategic Management The set of managerial decisions and actions that determines the long-run performance of an organization The role that the environment plays has influenced managers in developing a systematic means of analyzing the environment, assessing their organization’s strengths and weaknesses, identifying opportunities that would give the organization a competitive advantage, and incorporating these findings into their planning. The value of thinking strategically has an important impact on organization performance. 1. Strategic management is that set of managerial decisions and actions that determines the long-run performance of an organization. 2. It entails all of the basic management functions—planning, organizing, leading, and controlling.

Why Strategic Management Is Important higher organizational performance requires that managers examine and adapt to business environment changes coordinates diverse organizational units to focus on organizational goals Key to the managerial decision-making process 1. One reason strategic management is important is because it can make a difference in how well an organization performs. 2. Another reason has to do with the fact that organizations of all types and sizes face continually changing situations. 3. Strategic management is also important because of the nature of organizations. They are composed of diverse divisions, units, functions, and work activities that need to be coordinated. 4. Strategic management is also important because it’s involved in many of the decisions that managers make.

Exhibit 7.1 The Strategic Management Process SWOT Analysis Identify the organization's current mission, goals, and strategies Internal Analysis • strengths weaknesses External Analysis opportunities threats Formulate Strategies Implement Evaluate Results The strategic management process is a six-step process that encompasses strategic planning, implementation, and evaluation (see Exhibit 7.1).

Strategic Management Process Step 1: Identify the Organization’s Current Mission, Objectives, and Strategies Mission: the firm’s reason for being The scope of its products and services Goals: the foundation for further planning Measurable performance targets Step 1: Identifying the Organization’s Current Mission, Objectives, and Strategies. 1. Every organization needs a mission, which defines the purpose of the organization. What is the organization’s reason for being in business? Exhibit 7.2 describes some common components found in organizational mission statements. 2. It’s also important to identify the organization’s current objectives and strategies. Step 2: External Analysis. 1. Managers in every organization need to do an external analysis. Factors such as competition, pending legislation, and labour supply could have an impact. 2. After analyzing the environment, managers need to assess what they have learned in terms of opportunities and threats. Opportunities are positive trends in external environmental factors; threats are negative trends. 3. The same environment can present opportunities to one organization and pose threats to another in the same industry because of different resources and capabilities.

Exhibit 7.2 Components of a Mission Statement Customers: Who are the organization’s customers? Products or services: What are the organization’s major products or services? Markets: Where does the organization compete geographically? Technology: How technologically current is the organization? Concern for survival growth, and profitability: Is the organization committed to growth and financial stability? Philosophy: What are the organization’s basic beliefs, values, aspirations, and ethical priorities? Self-concept: What is the organization’s major competitive advantage and core competencies? Concern for public image: How responsive is the organization to societal and environmental concerns? Concern for employees: Does the organization consider employees a valuable asset? Every organization needs a mission, which defines the purpose of the organization. What is the organization’s reason for being in business? Exhibit 7.2 describes some common components found in organizational mission statements. Source: Based on F. David, Strategic Management, 8th ed. (Upper Saddle River, NJ: Prentice Hall, 2001), pp. 65–66.

Strategic Management Process (cont’d) Step 2: Conduct an External Analysis The environmental scanning of specific and general environments Focuses on identifying opportunities and threats Step 3: Conduct an Internal Analysis Assessing organizational resources, capabilities, activities, and culture: Strengths (core competencies) create value for the customer and strengthen the competitive position of the firm Weaknesses (things done poorly or not at all) can place the firm at a competitive disadvantage. Steps 2 and 3 combined are called a SWOT analysis. (Strengths, Weaknesses, Opportunities, and Threats) Step 3: Internal Analysis. 1. Should lead to a clear assessment of the organization’s resources and capabilities. 2. Any activities the organization does well or any unique resources that it has are called strengths. 3. Weaknesses are activities the organization does not do well or resources it needs but does not possess. If any of the organizational capabilities or resources are exceptional or unique, they’re called the organization’s core competencies. 4. Organizational culture is important in internal analysis. It can promote or hinder an organization’s strategic actions. 5. Combined external and internal analyses are called SWOT analysis because it’s an analysis of the organizations’ strengths, weaknesses, opportunities, and threats.

Strategic Management Process (cont’d) Step 4: Formulate Strategies Develop and evaluate strategic alternatives Select appropriate strategies for all levels in the organization that provide relative advantage over competitors Match organizational strengths to environmental opportunities Correct weaknesses and guard against threats Step 5: Implement Strategies Implementation: effectively fitting organizational structure and activities to the environment The environment dictates the chosen strategy; effective strategy implementation requires an organizational structure matched to its requirements Step 6: Evaluate Results How effective have strategies been? What adjustments, if any, are necessary? Step 4: Formulating Strategies. 1. After the SWOT, managers develop and evaluate strategic alternatives and select strategies that are appropriate. 2. Strategies need to be established for corporate, business, and functional levels.

Types of Organizational Strategies Corporate-level Strategies Top management’s overall plan for the entire organization and its strategic business units Types of Corporate Strategies Growth: expansion into new products and markets Stability: maintenance of the status quo Retrenchment: addresses organizational weaknesses that are leading to performance declines Corporate portfolio analysis: involves a number of businesses; guides resource allocation There are three different and distinct levels of strategy: corporate, business, and functional (see Exhibit 7.4). A. Corporate-level Strategy: The corporate-level strategy seeks to determine what businesses a corporation should be in or wants to be in. 1. Growth. A growth strategy seeks to increase the organization’s business by expanding the number of products offered or markets served. 2. Stability. A stability strategy is characterized by an absence of significant change. 3. Retrenchment. Retrenchment strategies are deployed when the organization is in trouble. Retrenchment strategies reduce the company’s activities or operations. 4. Corporate Portfolio Analysis. Corporate portfolio analyses are used when an organization’s corporate strategy involves a number of businesses.

Group Exercise Get into small groups of 3 Think of a local business you know of...and develop a brief SWOT Analysis for that business as if it was your own (12 minutes) Strengths Weaknesses Opportunities Threats

Exhibit 7.4 Levels of Organizational Strategy Research and Development Manufacturing Marketing Human Resources Finance Strategic Business Unit 1 Business Unit 2 Business Unit 3 Multibusiness Corporation Functional Level Business Corporate There are three different and distinct levels of strategy: corporate, business, and functional (see Exhibit 7.4).

Corporate-Level Strategies Growth Strategy Seeking to increase the organization’s business by expansion into new products and markets Types of Growth Strategies Concentration Vertical integration Horizontal integration Diversification 1. Growth. A growth strategy seeks to increase the organization’s business by expanding the number of products offered or markets served. a. Types of Growth Strategies 1) Concentration: Focusing on a primary line of business and increasing the number of products offered or markets served 2) Vertical Integration: Attempting to gain control of inputs or outputs 3) Horizontal Integration: Combining operations with another competitor in the same industry to increase competitive strengths and lower competition among industry rivals. 4) Diversification: Expanding operations

Corporate-Level Strategies (cont’d) Stability Strategy A strategy that seeks to maintain the status quo to deal with the uncertainty of a dynamic environment, when the industry is experiencing slow- or no-growth conditions, or if the owners of the firm elect not to grow for personal reasons A stability strategy is characterized by an absence of significant change.

Corporate-Level Strategies (cont’d) Retrenchment Strategy Reduces the company’s activities or operations Retrenchment strategies include: Cost reductions Layoffs Closing underperforming units Closing entire product lines or services Retrenchment strategies are used when the organization is in trouble. Retrenchment strategies reduce the company’s activities or operations.

Corporate-Level Strategies (cont’d) Corporate Portfolio Analysis BCG Matrix Developed by the Boston Consulting Group Considers market share and industry growth rate Classifies firms as: Cash cows: low growth rate, high market share Stars: high growth rate, high market share Question marks: high growth rate, low market share Dogs: low growth rate, low market share Corporate Portfolio Analysis. Used when an organization’s corporate strategy involves a number of businesses. BCG Matrix helps to identify which businesses offer high potential and which are a drain on organizational resources.

Exhibit 7.5 The BCG Matrix Stars Heavily invest Question Marks Sell off or turn into stars Cash Cows Milk for cash Dogs liquidate High Low Market Share Anticipated Growth Rate The first portfolio matrix—the BCG matrix—developed by the Boston Consulting Group, introduced the idea that an organization’s businesses could be evaluated and plotted using a 2 x 2 matrix (see Exhibit 7.5) to identify which ones offered high potential and which were a drain on organizational resources. The horizontal axis represents market share, which was evaluated as either low or high; and the vertical axis indicates anticipated market growth, which also was evaluated as either low or high. Based on its evaluation, businesses can be placed in one of four categories.

Business-Level Strategy A strategy that seeks to determine how an organization should compete in each of its SBUs (strategic business units) A business-level strategy seeks to determine how an organization should compete in each of its businesses. For organizations in multiple businesses, each division will have its own strategy that defines the products or services it will offer, the customers it wants to reach, and the like. When an organization is in several different businesses, these single businesses that are independent and formulate their own strategies are often called strategic business units (SBUs).

Five Competitive Forces Threat of New Entrants The ease or difficulty with which new competitors can enter an industry Threat of Substitutes The extent to which switching costs and brand loyalty affect the likelihood of customers adopting substitute products and services Bargaining Power of Buyers The degree to which buyers have the market strength to hold sway over and influence competitors in an industry Bargaining Power of Suppliers The relative number of buyers to suppliers and threats from substitutes and new entrants affect the buyer-supplier relationship Current Rivalry Intensity among rivals increases when industry growth rates slow, demand falls, and product prices descend Competitive strategies developed out of the work of Michael Porter. His framework suggests that managers can choose from among three generic strategies. Porter’s major contribution has been to carefully outline how managers can create and sustain a competitive strategy in order to earn above-average profitability. a. Industry analysis is an important step in Porter’s framework. He says there are five competitive forces at work in an industry (see Exhibit 7.6). 1) Threat of new entrants is determined by barriers to entry, which are factors that determine how easy or hard it is for new competitors to enter an industry. 2) Threat of substitutes is a factor that determines whether or not customers will switch their business to a competitor. 3) Bargaining power of buyers is a factor that determines the amount of influence that buyers have in an industry.

Competitive Strategies Cost Leadership Strategy Seeking to attain the lowest total overall costs relative to other industry competitors Differentiation Strategy Attempting to create a unique and distinctive product or service for which customers will pay a premium Focus Strategy Using a cost or differentiation advantage to exploit a particular market segment rather than a larger market Stuck in the Middle Organizations that are unable to develop a cost or differentiation advantage Porter then goes on to state that management must choose a strategy that will give it a competitive advantage over its rivals. There are three generic competitive strategies. Which one managers select depends on the organization’s strengths and core competencies and its competitors’ weaknesses. A. A cost leadership strategy is the strategy an organization follows when it wants to be the lowest-cost producer in the industry. B. The differentiation strategy is the strategy a firm follows when it wants to be unique in its industry along dimensions valued by buyers. C. The focus strategy is the strategy a company follows when it pursues a cost or differentiation advantage in a narrow industry segment. D. Porter proposed that a firm could not successfully pursue a combination of these competitive strategies and used the term stuck in the middle to describe organizations that cannot compete through cost leadership, differentiation, or focus strategies. However, a growing number of research studies have shown that a dual emphasis on low costs and differentiation can result in high performance. This approach isn’t easy to implement, however.

Functional-Level Strategy Functional-level strategies support the business-level strategy i.e., Marketing, human resources, research and development, and finance all support the business-level strategy Problems occur when employees or customers don’t understand a company’s strategy Customer Service Strategies The functional-level strategy seeks to determine how to support the business-level strategy. Giving the customers what they want Communicating effectively with them Providing employees with customer service training

Innovation Strategies Possible Events Radical breakthroughs in products Application of existing technology to new uses Strategic Decisions about Innovation Basic research Product development Process innovation First Mover An organization that brings a product innovation to market or uses a new process innovation Innovation Strategies. Can focus on breakthrough products or then can include the application of existing technology to new uses. An organization that is first to bring a product innovation to the market or to use a new process innovation is called a first mover.

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