Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin

Management A Practical Introduction

Third Edition

Angelo Kinicki &Brian K. Williams

Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin 2

Chapter 6: Strategic Management

How Star Managers Realize a Grand Design

The Dynamics of Strategic PlanningThe Strategic Management ProcessEstablishing the Grand StrategyFormulating StrategyExecution

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Manager’s Toolbox

Lesson #1: in an era of management fads, strategic planning is still tops

Lesson #2: a manager’s most valuable character trait: be willing to make large, painful decisions to suddenly alter strategy

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6.1 The Dynamics Of Strategic Planning

WHY IS IT IMPORTANT TO HAVE A STRATEGY?

Organizations need to know where they are going and how they will get thereA large scale action plan that sets the direction for an organization is a strategy - it is an educated guess about what the organization has to do to surviveThe process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals is strategic managementStrategic planning determines the organization’s long term goals and how the organization should achieve them

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Strategy, Strategic Management, Strategic Planning

Strategy: is a large scale action plan that sets the direction for the organization.

Strategic Management: is a process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals. (Middle managers)

Strategic Planning: determines not only the organization’s long-term goals for the next 1-5 year regarding growth and profits, but also the ways the organization should achieve them

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6.1 The Dynamics Of Strategic Planning

There are three reasons to adopt strategic management and strategic planning:

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Why Strategic Management and Strategic Planning are Important

1) Providing direction & momentum1) Focuses on most critical problems, choices, & opportunities

2) Creates teamwork, promotes learning, & builds commitment

2) Encouraging new ideas1) Stresses importance of innovation

3) Developing a sustainable competitive advantage1) Ability to produce goods and services more effectively than

competitors

2) Sustainable competitive advantage is staying ahead in:

1) Being responsive to customers

2) Innovating

3) Quality

4) Effectiveness

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6.1 The Dynamics Of Strategic Planning

WHAT IS AN EFFECTIVE STRATEGY?

Michael Porter argues strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company

Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin 9

6.1 The Dynamics Of Strategic Planning

There are three key principles of strategic positioning:1. An organization’s strategic position comes from serving few needs to many customers like Jiffy Lube, serving broad needs of a few customers like Bessemer Trust, or serving broad needs of many customers 2. Companies have to choose what strategy to follow and also what strategy not to follow – they have to make trade-offs 3. Creating a “fit” among activities is important - a company’s activities should interact and reinforce one another

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Does Strategic Management Work for Small as Well as Large?

1) Also appropriate for companies with fewer than 100 employees

2) Improvement in financial performance for these companies was small and may not be worth the effort

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The Five Steps of the Strategic Management Process

1. Establish

the mission

and vision

2. Establish the grand strategy (using SWOT and forecasting)

3. Formulate the strategic plans (using e.g. Porter)

4. Carry out the strategic plan

5. Maintain strategic control

Feedback: Revise actions, if necessary, based on feedback

WHAT IS THE STRATEGIC MANAGEMENT PROCESS?

The strategic management process has five steps plus a feedback loop

Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin 13

6.2 The Strategic-Management Process

Step 1: Establish The Mission & The VisionA good mission statement expresses the organization’s purpose or reason for beingA good vision statement describes the long-term goal of what the organization wants to become

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Mission Statements

Does your company’s mission statement answer the following questions?

Who are our customers? What are our major products and services? In what geographical areas do we compete? What is our basic technology? What is our commitment to economic objectives? What are our basic beliefs, values, aspirations, and philosophical

priorities? What are our major strengths and competitive advantages? What are our public responsibilities? What is our attitude toward our employees?

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Vision Statements

Does your company’s vision statement answer “yes” to the following questions?

Is it appropriate for the organization and for the times? Does it set standards of excellence that reflect high ideals? Does it clarify purpose and direction? Does it inspire enthusiasm and encourage commitment? Is it well articulated and easily understood? Does it reflect the uniqueness of the organization, its distinctive

competence, what it stands for, what it’s able to achieve? It is ambitious?

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6.2 The Strategic-Management Process

Step 2: Establish The Grand StrategyThe grand strategy explains how the organization’s mission is to be accomplishedThree common grand strategies are growth (involves expansion of sales revenue, market share, number of employees, or number of customers served), stability (involves little or no significant change), and defensive (involves reduction in the organization’s efforts)

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How Companies Can Implement Grand Strategies

Growth Strategy It can improve an existing product or service to attract more

buyers It can increase its promotion and marketing efforts to try to

expand its market share It can expand its operations, as in taking over distribution or

manufacturing previously handled by someone else It can expand into new products or services It can acquire similar or complementary businesses It can merge with another company to form a larger company

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How Companies Can Implement Grand Strategies (Cont.)

Stability Strategy It can go for a no-change strategy It can go for a little-change strategy

Defensive Strategy It can reduce costs

It can sell off assets

It can gradually phase out product lines or services

It can divest part of its business

It can declare bankruptcy

It can attempt a turnaround

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6.2 The Strategic-Management Process

Step 3: Formulate Strategic PlansThe process of choosing among different strategies and altering them to best fit the organization’s needs is strategy formulationThe strategy formulation process can be completed using techniques like Porter’s competitive forces and strategies, and product life cycles

Step 4: Carry Out The Strategic PlanStrategy implementation involves putting strategic plans into effectManagers need to ensure that the right people and control systems are in place to execute the plans

Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin 21

6.2 The Strategic-Management Process

Step 5: Maintain Strategic Control: The Feedback LoopMonitoring the execution of strategy and making necessary adjustments is strategic controlTo keep strategic plans on track, managers need to encourage people, keep planning simple, stay focused, and keep moving

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6.3 Establishing The Grand Strategy

HOW CAN A SWOT ANALYSIS HELP WITH STRATEGY?

The starting point for a grand analysis is the SWOT analysis (a search for the Strengths, Weaknesses, Opportunities, and Threats affecting an organization)A SWOT analysis provides managers with a realistic understanding of where the organization is relative to its internal and external environments

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6.3 Establishing The Grand Strategy

Organizational strengths include the skills and capabilities that give the organization special competencies and competitive advantages in executing strategies in pursuit of its mission Organizational weaknesses include the drawbacks that hinder an organization in executing strategies in pursuit of its missionOrganizational opportunities include environmental factors that the organization may exploit for competitive advantageOrganizational threats include environmental factors that hinder an organization’s achieving a competitive advantage

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6.3 Establishing The Grand Strategy

Figure 6.2: SWOT Analysis

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6.3 Establishing The Grand Strategy

After completing the SWOT analysis, managers need to make forecasts (visions or projections of the future)

There are two types of forecasts:A hypothetical extension of a past series of events into the future is a trend analysis The creation of alternative hypothetical but equally likely future conditions is contingency planning or scenario planning

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6.4 Formulating Strategy

HOW IS STRATEGY FORMULATED?

Organizations can use many techniques to formulate strategy including Porter’s five competitive forces, Porter’s four competitive strategies, the product life cycle, diversification and synergy, and competitive intelligence

Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin 29

6.4 Formulating Strategy

Porter’s Five Competitive Forces include:

1. The threat of new entrants• New competitors can shake-up an industry virtually

overnight

2. The bargaining power of suppliers• Companies that rely on a single supplier are vulnerable

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6.4 Formulating Strategy

3. The bargaining power of buyers• Major customers, and customers that shop around can

negotiate better prices

4. The threat of substitute products or services• When there are substitute products or services available,

firms have less power

5. Rivalry among competitors• Intense rivalry is a threat to companies

Kinicki/Williams, Management: A Practical Introduction 3e ©2008, McGraw-Hill/Irwin 31

6.4 Formulating Strategy

Porter’s four competitive strategies or generic strategies include:1. The cost leadership strategy - involves trying to keep costs and prices below those of competitors and targeting a wide marketExamples of companies with this strategy include Bic, Home Depot, and Dell2. The differentiation strategy - offer products or services that are of unique and superior value compared to those of competitors, and sell to a wide marketExamples of companies using a differentiation strategy include Ritz-Carlton Hotels

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6.4 Formulating Strategy

3. The cost-focus strategy - keep costs and prices below those of competitors and target a narrow marketExamples of companies with a cost-focus strategy include regional gas stations 4. The focused-differentiation strategy - offer products or services that are of unique and superior value compared to those of competitors, and sell to a narrow marketExamples of companies with this strategy include Ferrari and Lamborghini

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The Product Life Cycle

3. Formulate the strategic plans (using e.g. Porter)

4. Carry out the strategic plan

Stage 1 Introduction Stage 2 Growth Stage 3 Maturity Stage 4 Decline

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6.4 Formulating Strategy

The four stages a product or service goes through over its life are known as the product life cycle In the introduction stage, the product is introduced to the marketplaceIn the growth stage, customer demand increases, sales grow, and competitors may enter the market In the maturity stage, the product starts to fall out of favor and sales and profits dropIn the decline stage, the product falls out of favor and is withdrawn from the marketplace

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6.4 Formulating Strategy

A company that makes and sells only one product in its market follows a single-product strategyThis strategy has both benefits (the firm can focus on just one product) and risks (the firm is vulnerable to competitors) The diversification strategy involves operating several businesses in order to spread the riskThere are two kinds of diversification: unrelated (operating several businesses that are not related to each other) and related (operating several businesses that are related)

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6.4 Formulating Strategy

There are three advantages to related diversification:

1. reduced risk because the firm sells more than one product

2. management efficiencies because administration is spread over several businesses

3. synergy because the economic value of separate, related companies operating under one roof is greater than the companies are worth separately

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6.4 Formulating Strategy

When companies gain information about their competitors so that they can anticipate their moves and react appropriately, the companies are practicing competitive intelligence

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Competitive Intelligence

Gaining Competitive Intelligence: Public and print advertising Investor information Informal sources

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6.5 Implementing & ControllingStrategy: Execution

WHY IS EFFECTIVE EXECUTION IMPORTANT?

The execution stage of strategy involves getting things done Execution is a central part of strategy that consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve promised results

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6.5 Implementing & ControllingStrategy: Execution

There are three building blocks underlying effective execution:

1. Develop seven essential behaviors Effective leaders:1. know their people and their business2. insist on realism3. set clear goals and priorities4. follow through5. reward the doers6. expand people’s capabilities7. know themselves

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6.5 Implementing & ControllingStrategy: Execution

The three building blocks are the foundation for the three core processes of execution

The First Core Process: PeopleEffective leaders evaluate talent using specific milestones, develop future leaders, and deal with non-performers—they get the people part right

The Second Core Process: StrategyA good strategic plan considers the “how” of execution

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6.5 Implementing & ControllingStrategy: Execution

The Third Core Process: OperationsStrategy defines where the organization wants to go, the people process assigns responsibility for getting there, and the operating plan shows how to get there

The success of strategy execution depends on how well leaders manage the three processes of strategy, people, and operations