Strategic Management

Strategic Management

Chapter 1

Definition of Strategic Management

Strategic Management

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

Sequential Phases of Strategic Planning

1. Basic Financial Planning

2. Forecast-Based Planning

3. Externally-Oriented Planning (Strategic Planning)

4. Strategic Management

Benefits of Strategic Management

• Clearer sense of strategic vision

• Sharper focus on what is strategically important

• Improved understanding of rapidly changing environment

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 OrganizationAn 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 skills1. Solving problem systematically2. Experimenting with new approaches3. Learning from their own experiences and past history as well as

from the experiences of others4. 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.Environmental Scanning

2.Strategy Formulation

3.Strategy Implementation

4.Evaluation and Control

Chapter 1 13

Environmental Variables1.10 Environmental Variables (Fig. 1.3)

Societal Environment

Economic

Forces

Technological

Forces

Political-Legal

Forces

Sociocultural

Forces

Internal

Environment

Structure

Culture

Resources

Shareholders

Governments

Customers

Creditors

Communities

Competitors

Employees/

Labor Unions

Suppliers

Special

Interest

Groups

Trade Associations

TaskEnvironment

(Industry)

Task Environment

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 organization’s operations• (Often called industry) Competitors Customers Suppliers Creditors Share holders Trade association Employees/ labor unions Communities

Definition of Strategy Formulation

Strategy FormulationThe process of developing long-range plans to

deal effectively with environmental opportunities and threats in light of corporate strengths and weaknesses

Composed of• Mission / Vision• Objectives• Strategies• Policies

• What Is Strategy and Why Is It Important?

Thinking Strategically: The Three Big Strategic Questions1. What is the company’s present situation?

2. 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. How should it get there?

– A company’s answer to “how will we get there?” is its strategy

What Do We Mean By “Strategy”?• Consists of competitive moves and business

approaches used by managers to run the company

• Management’s “action plan” to– Grow the business

– Attract and please customers

– Compete successfully

– Conduct operations

– Achieve target levels oforganizational performance

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 strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reliable ticket to above average profitability– Competing with a competitive advantage is more profitable

than competing with no advantage– Competing with a competitive disadvantage nearly always

results in below-average profitability

Four “Best” Strategic Approaches to Building Sustainable Competitive

Advantage• Being the industry’s low-cost provider (a cost-based

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)

• Developing expertise and resource strengths not easily imitated or matched by rivals (a capabilities-based competitive advantage)

Identifying a Company’s Strategy

Why Do Strategies Evolve?

• A company’s 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 company’s competitive initiatives

and business approaches

Business Model . . . Concerns whether

revenues and costs flowing from the

strategy demonstrate a business can be amply

profitable and viableStra

tegy

Business

Model

Tests of a Winning Strategy

• GOODNESS OF FIT TEST

– How well does strategy fitthe firm’s situation?

• COMPETITIVE ADVANTAGE TEST

– Does strategy lead to sustainablecompetitive advantage?

• PERFORMANCE TEST

– Does strategy boost firm’s performance?

Why Is Strategy Important?

• A compelling need exists for managersto proactively shape how a firm’sbusiness will be conducted

• A strategy-focused firm is more likelyto be a strong bottom-line performerthan one that views strategy as secondary

The Strategy-Making, Strategy-Executing Process

Developing a Strategic Vision

• Involves thinking strategically about

– Future direction of company

– Changes in company’s product/market/customer technology to improve

• Current market position

• Future prospects

Phase 1 of the Strategy-Making ProcessPhase 1 of the Strategy-Making Process

A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the company’s strategic

course in preparing for the future.

Characteristics of well worded vision statement

1. 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 company’s 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

Characteristics of a well worded vision statement

4. Flexible : is not a once-and-for-all time pronouncement; vision about a company’s future path may need to change as events unfold and circumstances change

5. Feasible: is within the realm of what the company can reasonably expect to achieve in due time

6. Desirable : appeals to the long term interests of stake holders - particularly shareowners, employees and customers

7. 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

1. Incomplete : short on specifics about where the company is headed and what kind of company management is trying to create

2. Vague : doesn’t provide much indication of whether or how management needs to alter the company’s current product/ market/ customer/ technology focus

3. Bland ; lacking in motivational power4. Not distinctive: could apply to almost any

company (or at-least several others in the same industry)

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 doesn’t rule out any opportunity that management might opt to pursue

Exelon’s Strategic Vision

• Exelon Strives to build exceptional value by becoming the best and most consistently profitable electricity and gas utility company in the United States. To succeed, we must

1. Live up to our commitments• Keep the lights on • Perform safely – especially our nuclear operations• Consistently improve our environmental performance• Act honorably and treat everyone with respect, decency,

and integrity• Continue building a high performance culture that reflects

the diversity of our communities• Respect our results, opportunities, and problems honestly

and reliably


2. Perform at world class levels• Relentlessly pursue greater productivity, quality, and

innovation• Understand the relationships among our businesses and

optimize the whole• Promote and implement policies that build effective

markets• Adapt rapidly to changing markets, politics, economies,

and technology to meet our customer needs• Maximize the earnings and cash flow from our assets

and businesses and sell those that do not meet our goals


3. Invest in our consolidating industry• Develop strategies based on learning from past

successes and failures• Implement systems and best practices that can be

applied to future acquisitions• Prioritize acquisition opportunities based on synergies

from scale, scope, generation and delivery integration, and our ability to profitably satisfy regulatory obligations

• Makes acquisitions that will best employ our limited investment resources to produce the most consistent cash flow and earnings accretion

• Return earnings to share holders when higher returns are not available from acquisition opportunities

Critique on Exelon’s Vision

• The one sentence vision is definitely overly general and void of directions

• What rescues it and makes overall vision statement managerially useful are the specifics that follow it

• The three points that management says the company must do to succeed convey a reasonably clear sense where management intends to take the company and what the company is endeavoring to do in order to deliver exceptional values to stakeholders

• But Exelon’s vision statement is still somewhat vague on where the management is trying to take the company in terms of its future product/market-customer technology focus

Strategic Vision vs. Mission• A strategic vision

concerns a firm’s future business path - “wherewe 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 product and

service offerings– Customer needs being

served– Technological

and businesscapabilities

Characteristics of a Mission Statement

• Identifies the boundaries of the current business and highlights:– Present products and services– Types of customers served– Geographic coverage

• Conveys– Who we are,– What we do, and– Why we are hereA well-conceived mission statement distinguishes a company’s

business makeup from that of other profit-seeking enterprises in language specific enough to give the company its own identify!

Setting Objectives

• 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 kindof performance by when


Types of Objectives Required

Outcomes focused

on improving financial

performance

Outcomes focused on improving

competitive vitality and future business

position

Financial Objectives Strategic Objectives

$

Financial ObjectivesFinancial Objectives Strategic ObjectivesStrategic Objectives

An x percent increase in annual An x percent increase in annual revenues revenues Annual increases in after tax Annual increases in after tax profits profits Annual increases in earnings per Annual increases in earnings per share of x percent share of x percent Annual dividend increases of x Annual dividend increases of x percent percent Profit margin of x percent Profit margin of x percent An x percent return on ROE An x percent return on ROE Strong bond and credit ratings Strong bond and credit ratings Stable earnings during periods Stable earnings during periods of recessionof recession

Winning an x percent market share Winning an x percent market share Achieving lower overall costs than Achieving lower overall costs than rivals rivals Overtaking key competitors on Overtaking key competitors on product performance or quality or product performance or quality or customer service customer service Deriving x percent of revenues Deriving x percent of revenues from sale of new products from sale of new products introduced within five years introduced within five years Achieving technological Achieving technological leadership Strengthening the leadership Strengthening the company’s brand appeal company’s brand appeal Having stronger sales Having stronger sales and distribution capabilities than and distribution capabilities than rivals rivals

• A balanced scorecard for measuringcompany performance is optimal; it entails– Setting financial and strategic objectives– Placing balanced emphasis on achieving

both types of objectives(However, if a company’s 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 de-emphasizing the strategic objectives may have merit)

• Just tracking financial performance overlooks the importance of measuring whether a company is strengthening its competitiveness and market position.

The surest path to sustained future profitability year afteryear is to relentlessly pursue strategic outcomes

that strengthen a company’s business position andgive it a growing competitive advantage over rivals!

A Balanced Scorecard Approach –Setting Strategic and Financial Objectives

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 within3 to 5 years

– Prompt actions now that willpermit reaching targetedlong-range performance later

Crafting a Strategy

• 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 Company’s 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

• Initiating approaches to produce successful performance in a specific business

• Crafting competitive moves to build sustainable competitive advantage

• Developing competitively valuablecompetencies and capabilities

• Uniting strategic activities of functional areas

• Gaining approval of business strategies by corporate-level officers and directors

Tasks of Business Strategy

• Game plan for a strategically-relevantfunction, activity, or business process

• Detail how key activitieswill be managed

• Provide support forbusiness strategy

• Specify how functional objectivesare to be achieved

Tasks of Functional Strategies

Tasks of Operating Strategies

• Concern narrow strategic approaches to manage key operating units and strategically-relevant operating activities

• Add detail to businessand functional strategies

• Delegation of responsibilityto frontline managers

What Is a Strategic Plan?

Its strategic vision and business mission

Its strategy

Its strategic andfinancial objectives

A

Company’s

Strategic Plan

Consists of

Implementing and Executing Strategy

• Operations-oriented activity aimed atperforming core business activities in astrategy-supportive manner

• Tougher and more time-consumingthan crafting strategy

• Key tasks include

– Improving efficiency of strategy being executed

– Showing measurable progress in achieving targeted results


• Building a capable organization

• Allocating resources to strategy-critical activities

• Establishing strategy-supportive policies

• Instituting best practices and programs forcontinuous 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

What Does Strategy Implementation Involve?

Evaluating Performance andMaking Corrective Adjustments

• 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 thestrategy 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


• Exercise strong oversight to ensure five tasks of strategic management are executed to benefit– Shareholders or

– Stakeholders

• Make sure executive actions are not only proper but also aligned with interests of stakeholders

Corporate Governance:Strategic Role of a Board of

Directors

Obligations of a Board of Directors

• Be inquiring critics and overseers

• Evaluate caliber of senior executives’ strategy-making and strategy-executing skills

• Institute a compensation plan fortop executives rewarding them forresults that serve interests of

– Stakeholders and

– Shareholders

• Oversee a company’sfinancial accountingand reporting practices

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The Basis for Good Strategic DecisionsThe Basis for Good Strategic Decisions

Intuition + Analysis

Effective Strategic Decisions

Actual Vs Planned Strategy

Company Experience know-how, strengths, weaknesses, and

Competitive

position

Actual company strategy

Planned Strategy

Adaptive reactions to challenging circumstances

Reactive strategy