Chap001

1

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 1

Strategic Management

2

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter Topics

• The Nature and Value of Strategic Management• Dimensions of Strategic Decisions

• Formality in Strategic Management

• Benefits of Strategic Management

• Risks of Strategic Management

• The Strategic Management Process

• Components of the Strategic Management Model

• Strategic Management as a Process

3

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

What is Strategic Management?

The set of decisions and actions that result in the formulation and implementation ofplans designed to achieve a company’s objectives.

4

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Critical Tasks of Strategic Management

1. Formulate the company’s mission

2. Conduct internal analysis

3. Assess the company’s external environment

4. Analyze company’s options

5. Identify most desirable options

6. Select long-term objectives and grand strategies

7. Develop annual objectives and short-term strategies

8. Implement the strategic choices

9. Evaluate success of the strategic process

5

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

What is Strategy?

• Large-scale, future-oriented plan for interacting with the competitive environment to achieve objectives

• Company’s “game plan”

• Framework for managerial decisions

6

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Dimensions of Strategic Decisions

• Strategic issues• Require top-management decisions

• Require large amounts of the firm’s resources

• Often affect the firm’s long-term prosperity

• Are future oriented

• Usually have multifunctional or multibusiness consequences

• Require considering the firm’s external environment

7

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Three Levels of Strategy

1. Corporate level

2. Business level

3. Functional level

8

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Exhibit 1-3: Single-business Firms

P O M /R & Ds tra te g ies

F in a n c ia l/a cco u n tings tra te g ies

M a rke tings tra te g ies

H u m anre la tio ns

s tra te g ies

C o rp ora te /b u s ine ss le ve l

Fun

ctio

nal

Lev

el

9

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Ex 1-3: Multiple business Firms

Bus

ines

s L

evel

Fun

ctio

nal L

evel

Corporatestrategies

Corporatestrategies

Business 1Business 1 Business 2Business 2 Business 3Business 3

POM/R&Dstrategies

POM/R&Dstrategies

Financial/accountingstrategies

Financial/accountingstrategies

Marketingstrategies

Marketingstrategies

Human relations

strategies

Human relations

strategies

10

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Ex 1-4: Hierarchy of Objectives and Strategies

Ends(What is to be

achieved)

Means(How is to be achieved)

Board ofDirectors

CorporateManagers

BusinessManagers

FunctionalManagers

Strategic Decision Makers

Mission, includingGoals and philosophy

Long-term objectives

Annual objectives

Grand strategy

Short-term strategiesand policies

Note: indicates a principal responsibility; indicates a secondary responsibility

11

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Characteristics of Strategic Management Decisions

Corporate-leveldecisions

Greater risk,cost, and profit potential

Greater need forflexibility

Longer time horizons

12

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Characteristics of Strategic Management Decisions (contd.)

Functional-level

decisions

Functional-level

decisions

Implement overall strategy

Involve action-orientedoperational issues

Are relatively short rangeand low risk

Incur only modest costs

13

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Characteristics of Strategic Management Decisions (contd.)

Business-leveldecisions

Bridge decisions atcorporate and functional

levels

Are less costly, risky, and potentially profitable thancorporate-level decisions

Are more costly, risky, andpotentially profitable than functional-level decisions

14

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Formality in Strategic Management

• Definition• Degree to which participants, responsibilities,

authority, and discretion in decision making are specified

• Forces affecting degree of formality• Size of organization

• Predominant management styles

• Complexity of environment

• Production process

• Problems

• Purpose of planning system

15

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

The Strategy Makers

• The ideal strategic management team includes• Chief executive officer (CEO)• Product managers• Heads of functional areas

• The strategic management team obtains input from• Planning staff• Lower-level management and supervisors

• Role of CEO• Provides long-term direction• Assumes ultimate responsibility for firm’s success• Solicits guidance from Board of Directors

16

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Benefits of Strategic Management

Enhances the firm’s ability to prevent problems

Emphasizes group-based strategic decisions likely to be based on best available alternatives

Improves employees’ understanding of the productivity-rewardrelationship

Reduces gaps/overlaps in activities among employees as theirparticipation clarifies differences in roles

Resistance to change is reduced

17

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Risks of Strategic Management

• Time involved may negatively impact operational responsibilities of managers

• Lack of involvement of strategy makers in strategy implementation may result in shirking of responsibility for strategic decisions

• Potential disappointment of employees over unattained expectations requires managerial time and training

18

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Company missionand social

responsibility

Externalenvironment

Internal analysis

Strategic analysis and choice

Long-termobjectives

Generic and grand strategies

Short-term objectives;reward systems

Functional tacticsPolicies that

empower action

Restructuring, reengineeringand refocusing the organization

Strategic control andcontinuous improvement

Possible?

Desired?

Feedback

Fee

dbac

k

Legend

Major impactMinor impact

Ex 1-6:StrategicManagementProcess

19

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the Strategic Management Model

• Company Mission• Specifies unique purpose of company• Identifies scope of operations• Describes product, market, and technological areas

of emphasis• Reflects values and priorities of decision makers• Expresses approach to social responsibility efforts

• Internal Analysis• Depicts quantity and quality of company’s

financial, human, and physical resources• Assesses company’s strengths and weaknesses• Contrasts past successes and concerns with current

capabilities to identify future capabilities

20

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the Strategic Management Model (contd.)

• External Environment• Consists of all conditions and forces affecting

firm’s strategic options and define its competitive situation

• Includes three interactive segments – remote, industry, and operating environments

• Strategic Analysis and Choice• Involves simultaneous assessment of external

environment and company profile • Incorporates screening process based on mission

to generate possible and desired opportunities• Results in selection of options from which a

strategic choice is made

21

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the StrategicManagement Model (contd.)

• Long-term Objectives Profitability Return on investment Competitive position Technological leadership Productivity Employee relations Public responsibility Employee development

22

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the StrategicManagement Model (contd.)

• Generic Strategies• Low cost

• Differentiation

• Focus

• Grand Strategies• Comprehensive, general plan of major

actions through which the firm intends to achieve its long-term objectives in a dynamic environment

23

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the Strategic Management Model (contd.)

• Action Plans and Short-Term Objectives• Translate generic and grand strategies into

“action”• Identify specific functional tactics to be taken in the

near term

• Establish a clear time frame for completion

• Creates accountability

• Specify one or more immediate objectives as outcomes of the action

24

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the StrategicManagement Model (contd.)

• Functional Tactics• Involve identifying activities unique to the

function to help build competitive advantage

• Specify detailed statements of “means” to be used to achieve short-term objectives

• Policies that Empower Action• Include broad, precedent-setting decisions that

substitute for repetitive or time-sensitive decision making

• Often increase managerial effectiveness by empowering discretion of subordinates in implementing strategies

25

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the StrategicManagement Model (contd.)

• Restructuring, Reengineering, and Refocusing the Organization• Involves an internal focus – getting work done

efficiently and effectively to make the strategy work

• Downsizing, restructuring and reengineering reflect the critical stage in strategy implementation wherein managers attempt to recast their organization.

26

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Components of the StrategicManagement Model (contd.)

• Strategic Control and Continuous Improvement• Control

• Tracks a strategy during implementation

• Detects problems

• Involves making necessary adjustments

• Continuous improvement• Provides another approach to strategic control

• Allows an organization to respond more proactively and timely to rapid developments

27

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Implications of Viewing StrategicManagement as a Process

Changes in any one component will affect other components

Strategy formulation and implementation are sequential

Necessity of feedback from institutionalization, review, and evaluation to early stages of process

Need to regard it as dynamic, involving constant changes in interdependent strategic activities