Part Three: Management Strategy and Decision Making Chapter 7: Strategic Management Chapter 8: Managing the Planning Process Chapter 9: Decision Making

Chapter 7 Strategic Management

7-3Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Management Challenges After reading this chapter, you should be able to: Understand how to implement the steps in the strategic management process. Understand how to implement the steps in the strategic management process. Identify the factors that account for a firm’s sustained superior performance. Identify the factors that account for a firm’s sustained superior performance. Link external and internal environment data to determine a firm’s strategic intent and mission. Link external and internal environment data to determine a firm’s strategic intent and mission.

7-4Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Management Challenges (continued) Conduct an analysis of the firm’s strengths, weaknesses, opportunities, and threats. Conduct an analysis of the firm’s strengths, weaknesses, opportunities, and threats. Evaluate the firm’s internal resources and capabilities. Evaluate the firm’s internal resources and capabilities. Chose an appropriate business strategy at the corporate and business-unit level of analysis. Chose an appropriate business strategy at the corporate and business-unit level of analysis.

7-5Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Strategic Management Process Strategic management involves the major decisions, business choices, and actions that chart the course of the entire enterprise. Strategic management involves the major decisions, business choices, and actions that chart the course of the entire enterprise. It consists of: It consists of:  Analysis of the internal and external environment of the firm.  Definition of the firm’s mission.  Formulation and implementation of strategies to provide a competitive advantage.

7-6Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Strategic Management Process (continued) Strategic management involves both long- range thinking and adaptation to changing conditions. Strategic management involves both long- range thinking and adaptation to changing conditions. A strategy is successful if it provides the firm with sustainable competitive advantage. A strategy is successful if it provides the firm with sustainable competitive advantage.  Competitors will be unable to duplicate what the firm has done or will find it too difficult or expensive.

7-7Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyze internal and external environment Define strategic intent and mission Formulate strategies Implement strategies Assess strategic outcomes Components of the Strategic Management Process:

7-8Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Skills for strategic management: Environmental assessment and scanning skills. Environmental assessment and scanning skills. Strategy formulation skills. Strategy formulation skills. Mapping strategic intent and defining mission skills. Mapping strategic intent and defining mission skills. Strategy implementation skills. Strategy implementation skills.

7-9Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. SWOT Analysis Commonly used strategy tool: Commonly used strategy tool:  Strengths  Weaknesses  Opportunities  Threats

7-10Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. SWOT Analysis (continued) Step 1: Analyze the organization’s internal environment, identifying its strengths and weaknesses. Step 1: Analyze the organization’s internal environment, identifying its strengths and weaknesses. Step 2: Analyze the organization’s external environment, identifying its opportunities and threats. Step 2: Analyze the organization’s external environment, identifying its opportunities and threats. Step 3: Cross-match Step 3: Cross-match  Strengths with opportunities  Weaknesses with threats  Strengths with threats  Weaknesses with opportunities

7-11Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing the external environment: Firms study the external environment in order to: Firms study the external environment in order to:  Identify opportunities and threats in the marketplace.  Avoid surprises.  Respond appropriately to competitors’ moves. A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage over other firms. A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage over other firms.

7-12Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Components of External Analysis: ScanningMonitoring ForecastingAssessing

7-13Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Scope of the External Analysis: General Environment Industry Environment Strategic Groups Competitor Analysis

7-14Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Porter’s framework for analyzing the industry environment: Threat of new entrants Threat of substitutes Suppliers Customers Intensity of rivalry among competitors

7-15Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing the Internal Environment Each firm possesses core competence (internal resources) that are unique to it. Each firm possesses core competence (internal resources) that are unique to it. A firm should identify what resources, capabilities, and knowledge it has that may be used to exploit market opportunities and avoid potential threats. A firm should identify what resources, capabilities, and knowledge it has that may be used to exploit market opportunities and avoid potential threats. Resource-based view. Resource-based view.

7-16Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Resources Capabilities Strategy Potential for sustainable competitive advantage 1.Identify the firm’s resources and locate areas of strength and weakness relative to competitors. 2.Identify the firm’s capabilities (What can the firm do?) 3.Appraise the profit generating potential of resources/capabilities in terms of creating, sustaining, and exploiting competitive advantage. 4.Select a strategy that best exploits the firm’s capabilities relative to external opportunities. 5.Identify resource gaps that need to be filled. Invest in replenishing and augmenting the firm’s resource base. Core Competencies and Market Opportunities

7-17Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Resource Types: Tangible Resources Assets that can be quantified and observed. Assets that can be quantified and observed. Include financial resources, physical assets, and workers. Include financial resources, physical assets, and workers. Strategic assessment of tangible resources should enable a firm to use fewer tangible resources to support the same level of business or to use the same resources to expand the volume of business. Strategic assessment of tangible resources should enable a firm to use fewer tangible resources to support the same level of business or to use the same resources to expand the volume of business.

7-18Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Resource Types: Intangible Resources Difficult to quantify. Difficult to quantify. Often provide the firm with strong competitive advantage. Often provide the firm with strong competitive advantage. Competitors find it difficult to purchase or imitate these resources. Competitors find it difficult to purchase or imitate these resources. Most strategically important intangibles: Most strategically important intangibles:  Reputation  Technology  Human Capital

7-19Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing the firm’s capabilities: Functional Analysis Value Chain Analysis Benchmarking

7-20Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing Capabilities by Functional Areas Functional Area Capability Corporate Management Effective financial control systems Expertise in strategic control of diversified corporation Effectiveness in motivating and coordinating divisional and business-unit management Management of acquisitions Values-driven, in-touch corporate leadership Information Management Comprehensive and effective MIS network, with strong central coordination Research and Development Capability in basic research Ability to develop innovative new products Speed of new product development

7-21Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing Capabilities by Functional Areas (continued) Functional Area CapabilityManufacturing Efficiency in volume manufacturing Capacity for continual improvements in production processes Flexibility and speed of response Product Design Design capability Marketing Brand management and brand promotion Promoting and exploiting reputation for quality Responsive to market trends Sales and Distribution Effectiveness in promoting and executing sales Efficiency and speed of distribution Quality and effectiveness of customer service

7-22Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. A Simple Value Chain Technology Product Design ManufacturingMarketingDistributionService SourceSophisticationPatents Product Process Product Choices Function Physical Characteristics AestheticsQualityIntegration Raw Materials CapacityLocationProcurement Parts Production AssemblyPricesAdvertisingPromotion Sales Force PackageBrandChannelsIntegrationInventoryWarehousingTransportWarranty Dealer Support AvailabilitySpeedPrices

7-23Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Benchmarking involves four stages: 1. Identifying activities or functions that are weak and need improvement. 2. Identifying firms that are known to be at the leading edge of these activities or functions. 3. Studying the leading-edge firms by visiting them, talking to managers and employees, and reading trade publications. 4. Using the information gathered to redefine goals, modify processes, and acquire new resources to improve the firm’s functions.

7-24Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Strategic Intent and Mission Based on analysis of the external and internal environment. Based on analysis of the external and internal environment. Strategic intent is internally focused, defining how the firm intends to use its resources, capabilities, and core competencies to win competitive battles. Strategic intent is internally focused, defining how the firm intends to use its resources, capabilities, and core competencies to win competitive battles. Strategic mission is externally focused, defining what the firm plans to produce and market, utilizing its internal core competence. Strategic mission is externally focused, defining what the firm plans to produce and market, utilizing its internal core competence.

7-25Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Strategy Formulation The design of an approach to achieve the firm’s mission. The design of an approach to achieve the firm’s mission. Takes place at: Takes place at:  Corporate-Level  Business-Level

7-26Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate-Level Strategy The corporation’s overall plan concerning the: The corporation’s overall plan concerning the:  Number of businesses the corporation holds  Variety of markets or industries it serves  Distribution of resources among those businesses Diversification strategy Diversification strategy  Type of diversification  Process of diversification

7-27Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Diversification Strategy Type of Diversification Concentration strategy Concentration strategy Vertical integration strategy Vertical integration strategy Concentric diversification strategy Concentric diversification strategy Conglomerate diversification Conglomerate diversification Process of Diversification Acquisition and restructuring strategies Acquisition and restructuring strategies  Acquisition  Merger International strategy International strategy

7-28Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Business-Level Strategy How the firm will compete in each business area or market segment. How the firm will compete in each business area or market segment. Firms have two basic choices: Firms have two basic choices:  Cost leadership strategy  Differentiation strategy

7-29Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Strategy Implementation Organizational Structure and Controls Cooperative Strategies Functional Strategies Strategic Leadership Corporate Entrepreneurship and Innovation

7-30Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Strategic Outcomes Firms need to periodically assess whether the outcomes meet expectations. Firms need to periodically assess whether the outcomes meet expectations. A firm must first and foremost cater to the desires of its primary stakeholders. A firm must first and foremost cater to the desires of its primary stakeholders. The firm should also consider the desires of other stakeholders affected by its performance. The firm should also consider the desires of other stakeholders affected by its performance.

7-31Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Applications of Management Perspectives: For the Manager An effective manager must be proactive in responding to evolving challenges and opportunities rather than being overtaken by events. An effective manager must be proactive in responding to evolving challenges and opportunities rather than being overtaken by events. Learning to think strategically forces managers to: Learning to think strategically forces managers to:  Be alert for changes in the external and internal environments.  Modify the firm’s strategic intent, mission, and formulated strategy when necessary.  Effectively implement the new or redesigned strategies.

7-32Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Applications of Management Perspectives: For Managing Teams The strategic management process generally involves teams of managers and employees from different areas who bring their perspectives and expertise to bear on issues facing the firm. The strategic management process generally involves teams of managers and employees from different areas who bring their perspectives and expertise to bear on issues facing the firm. A key factor is how well the firm can mobilize and integrate the efforts of team members. A key factor is how well the firm can mobilize and integrate the efforts of team members.

7-33Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Applications of Management Perspectives: For Individuals Individual employees are more likely to make greater contributions to the firm if they engage in activities that have strategic value. Individual employees are more likely to make greater contributions to the firm if they engage in activities that have strategic value. Employees can be attuned to changes in their area of expertise and advise management on the strategic implications of those changes. Employees can be attuned to changes in their area of expertise and advise management on the strategic implications of those changes. Employee success depends on the ability to adapt to the firm’s strategic change. Employee success depends on the ability to adapt to the firm’s strategic change.