chapter 1 of st. manag

7/26/2019 chapter 1 of st. manag.

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STRATEGIC MANAGEMENT & BUSINESS POLICY13THEDITION

THOMAS L. WHEELEN J. DAVID HUNGER


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Course Objectives

1. Understand the Strategic managementconcepts.

2. How to be a strategic thinker .

3. How to create a competitive advantages toyour business.

4. Develop students skills in strategy design,implementation and evaluation.

5. How culture differences affect management.

6. Develop the knowledge on the influence ofsocial responsibility on business strategy.

Prentice Hall, 2012 212/5/2014Prentice Hall, Inc. 2012


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Strategic Management: a set of managerial decisions andactions that determines the long-run performance of acorporation. Originally called business policy.

Includes: Internal and external environment scanning: the monitoring

and evaluating of external opportunities and threats in lightof a corporations strengths andweaknesses.

Strategy formulation

Strategy implementation

Evaluation and control


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Phases of Strategic Management:Basic Concepts of Strategic Management

1. Phase 1: Basic financial planning: initiate some planningwhen they requested to set up their budgets; considers

activities for one year.

2. Phase 2 Forecast-based planning:As annual budgetsbecome less useful at stimulating long-term planning,managers consider projects for more than a year. The

time horizon is usually 3-5 years. Extrapolate currenttrends in the future.This phase is also time consuming

3. Phase 3 Externally-oriented planning: conduct strategicplanning by top management and they leaveimplementation to low level.

4. Phase 4 Strategic management: planning by forming ateam from all levels in the company. input andcommitment of lower-level managers They develop andintegrate a series of strategic plans aimed at achievingthe companys primary objectives

2. How does strategic management typically evolve in a corporation?


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Benefits of Strategic Management:

Strategic management emphasizes long-term performance.sustain short-term bursts of high performance over a

longer period of time. The attainment of an appropriatefit, between an organizations environment and itsstrategy, structure, and processes has positive effects onthe organizations performance.

Clearer sense of strategic vision for the firm Sharper focus on what is strategically important

Improved understanding of a rapidly changingenvironment

1. Why has strategic management become so important to todays corporations?


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Improved organizationalperformance

Achieves a match

between theorganizationsenvironment and itsstrategy, structure andprocesses

Strategic planningbecomes increasinglyImportant in unstableenvironments

Strategic planning isparticularly effective atidentifying new opportunities

for growth and in ensuringthat all managers have thesame goals

real value of modern strategicplanning is more in the

Strategic thinking and

Organizational learning that ispart of a future-orientedplanning process than in any

resulting written strategic plan.

Additional Benefits of Strategic Management:


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Benefits of Strategic Management:

Planning the strategy of large, multidivisional corporationscan be complex and time consuming. It often takes slightly

more than a year for a large company to move fromsituation assessment to a final decision agreement.Because of the relatively large number of people affectedby a strategic decision in a large firm, a formalized, moresophisticated system is needed to ensure that strategic

planning leads to successful performance. Otherwise, topmanagement becomes isolated from developments in thebusiness units, and lower-level managers lose sight of thecorporate mission and objectives.


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Not too long ago, a business corporation could be successful byfocusing only on making and selling goods and services within itsnational boundaries. International considerations were minimal.

Similarly, until the later part of the 20th century, a business firm could

be very successful without being environmentally sensitive.Companies dumped their waste products in nearby streams or lakesand freely polluted the air with smokes. Responding to complaints,governments eventually passed laws restricting the freedom topollute the environment. Lawsuits forced companies to stop old

practices. Nevertheless, until the dawn of the 21st century, mostexecutives considered pollution abatement measures to be a cost ofbusiness that should be either minimized or avoided. Rather thanclean up a polluting manufacturing site, they often closed the plantand moved manufacturing offshore to a developing nation with

fewer environmental restrictions. Sustainability, as a term, was usedto describe competitive advantage, not the environment.


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1. Impact of Globalization:Today, everything has changed. Globalization, the integrated internationalization of

markets and corporations, has changed the way modern corporations do business;

The World Is Flat: jobs, knowledge, and capital are now able to move across borderswith far greater speed and far less friction than was possible only a few years ago.For example, the inter-connected nature of the global financial community meant

that the mortgage lending problems of U.S. banks led to a global financial crisis in2008.

The worldwide availability of the Internet and supply-chain logistical improvements,such as containerized shipping, mean that companies can now locate anywhere andwork with multiple partners to serve any market.

To reach the economies of scale necessary to achieve the low costs, and thus the lowprices, needed to be competitive, companies are now thinking of a globalmarkets

rather than national markets. Many companies in North America and Western Europeare outsourcing their manufacturing, software development, or customer service tocompanies in China, Eastern Europe, or India. Large pools of talented softwareprogrammers, English language proficiency, and lower wages in India enables IBM toemploy 75,000 people in its global delivery centers in Bangalore. Instead of using oneinternational division to manage everything outside the home country, large corporations


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1. Impact of Globalization cont..:As more industries become global, strategic management is becoming an

increasingly important way to keep track of international developments andposition a company for long-term competitive advantage. For example,General Electric moved a major R&D lab for its medical systems division fromJapan to China in order to learn more about developing new products fordeveloping economies. Microsofts largest research center outside Redmond,Washington, is in Beijing.

The formation of regional trade associations and agreements, such as theEuropean Union, NAFTA, CAFTA, and ASEAN, is changing how international

business is being conducted. Regional trade associations are forcingcorporations to establish a manufacturing presence wherever they wish tomarket goods or else face significant tariffs. These associations have led to theincreasing harmonization of standards so that products can more easily be soldand moved across national boundaries. International considerations have ledto the strategic alliance between British Airways and American Airlines and to

the acquisition of the Miller Brewing Company by South African Breweries(SAB), among others.


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2. Impact of Environmental Sustainability:

Environmental Sustainability: the use of businesspractices to reduce a companys impact on the natural,

physical environmentThere is a growing consensus among corporate leaders that taking

action on climate change is a responsible business decision. Frommarket shifts to regulatory constraints, climate change poses realrisks and opportunities that companies must begin planning for

today, or risk losing ground to their more forward-thinkingcompetitors. With more and more action at the state level andincreasing scientific clarity, it is time for businesses to craftcorporate strategies that address climate change


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Impact of Environmental Sustainability:

Every firm needs to evaluate its vulnerability to climate-related effects such as regional shifts in the availability of

energy and water, the reliability of infrastructures andsupply chains, and the prevalence of infectious diseases.Swiss Re, the worlds second-largest reinsurer, estimatedthat the overall economic costs of climate catastrophesrelated to climate change threatens to double to $150

billion per year. Spicily insurance industrys.

The effects of climate change on industries and companiesthroughout the world can be grouped into six categories ofrisks: regulatory, supply chain, product and technology,

litigation, reputational, and physical.


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Impact of Environmental Sustainability:1. Regulatory Risk: Companies in much of the world are already subject to the Kyoto

Protocol, which requires the developed countries (and thus the companiesoperating within them) to reduce carbon dioxide and other greenhouse gases byan average of 6% from 1990 levels by 2012. and many others.

2. Supply Chain Risk: Suppliers will be increasingly vulnerable

to governmentregulationsleading to higher component and energy costs as they pass alongincreasing carbon-related costs to their customers. Global supply chains will be atrisk from an increasing intensity of major storms and flooding. Higher sea levelsresulting from the melting of polar ice will create problems for seaports.. In 2006,

12 Chinese ministries produced a report on global warming foreseeing a 5%10%reduction in agricultural output by 2030; more droughts, floods, typhoons, andsandstorms; and a 40% increase in population threatened by plague.

The increasing scarcity of fossil-based fuel is already boosting transportation costssignificantly. For example, Tesla Motors, the maker of an electric-powered sportscar, transferred assembly of battery packs from Thailand to California because

Thailands low wages were more than offset by the costs of shipping thousand-ound batter acks across the Pacific Ocean.


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Impact of Environmental Sustainability:3. Product and Technology Risk: Environmental sustainability can be a

prerequisite to profitable growth. For example, worldwide investments insustainable energy (including wind, solar, and water power) more than

doubled to $70.9 billion from 2004 to 2006. Sixty percent of U.S.respondents to an Environics study stated that knowing a company ismindful of its impact on the environment and society makes them morelikely to buy their products and services. Carbon-friendly products usingnew technologies are becoming increasingly popular with consumers.

Those automobile companies, for example, that were quick to introducehybrid or alternative energy cars gained a competitive advantage.

4. Litigation Risk: Companies that generate significant carbonemissions face the threat of lawsuits similar to those in the tobacco,pharmaceutical, and building supplies (e.g., asbestos) industries.


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Impact of Environmental Sustainability:5- Reputational Risk: A companys impact on the environment can heavily affect its overall

reputation. In some sectors the value of a companys brand could be at risk because ofnegative perceptions related to climate change. In contrast, a company with a good recordof environmental sustainability may create a competitive advantage in terms of attracting

and keeping loyal consumers, employees, and investors. Tools have recently beendeveloped to measure sustainability on a variety of factors. For example, the SAM(Sustainable Asset Management) Group of Zurich, Switzerland, has been assessing anddocumenting the sustainability performance of over 1,000 corporations annually since 1999.SAM lists the top 15% of firms in its Sustainability Yearbook and classifies them into gold,silver, and bronze categories.

6. Physical Risk: The direct risk posed by climate change includes the physical effects ofdroughts, floods, storms, and rising sea levels. Industries most likely to be affected areinsurance, agriculture, fishing, forestry, real estate, and tourism. Physical risk can also affectother industries, such as oil and gas, through higher insurance premiums paid on facilities invulnerable areas. Coca-Cola, for example, studies the linkages between climate change andwater availability in terms of how this will affect the location of its new bottling plants.

B i C t f St t i M t


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BasicConcepts of Strategic Management

Electronic Commerce

Use of the Internet to conduct businesstransactions

Basis for competition on a morestrategic level rather than traditionalfocus on product features and costs.

AMR Research indicated that industry

leaders are in the process of moving60-100% of their B2B transactions tothe internet.



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Basic Concepts of Strategic Management

Electronic Commerce Trends

Forcing company transformation to useinternet in their business.

Market access & branding changing

disintermediationof traditional distributionchannels; dealing direct with end consumer.

Balance of power shift to consumer:customer became more knowledgeable.

Competition changing; exploiting theinternet to become more innovative.



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Basic Concepts of Strategic Management

Electronic Commerce -- Trends

Pace\speed of business increasing;time is compressed into dog years.

Internet purchasing beyond traditional

boundaries. Separation betweenbusinesssupplier-customer becameblurred.

Knowledge key assetsource ofcompetitive advantage


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Globalization and environmental sustainability present realchallenges to the strategic management of businesscorporations. How can a company keep track of all thechanging technological, economic, politicallegal, and

sociocultural trends around the world and make the necessaryadjustments? Various theories have been proposed to accountfor how organizations obtain fit with their environment.

Population ecology : proposes that once an organization

is successfully established in a particular environmental niche,it is unable to adapt to change

Institution theory: organizations can adapt to changingconditionsby imitating successful organizations


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Strategic choice perspective: not only do organizationsadapt to change but have the ability to reshape theirenvironment. This perspective is supported by researchindicating that the decisions of a firms management have at

least as great an impact on firm performance as overallindustry factors. Because of its emphasis on managersmaking rational strategic decisions, the strategic choiceperspective is the dominant one taken in strategicmanagement

Organizational learning theory: organizations adaptdefensively and use knowledge to improve their relationshipwith the environment. This perspective expands thestrategic choice perspective to include people at all levels

becoming involved in providing input into strategic decisions


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Strategic management has now evolved to the point that its primary value

is in helping an organization operate successfully in a dynamic,complex environment.

To be competitive in dynamic environments, corporations are becomingless bureaucratic and more flexible. Companies are finding that there isno such thing as a permanent competitive advantage. This means thatcorporations must develop strategic flexibilitythe ability to shiftfrom one dominant strategy to another.

Strategic flexibility demands

a long-term commitment to the development and nurturing of criticalresources.

the company become a learningorganizationan organizationskilled at creating, acquiring, and transferring knowledge and atmodifying its behavior to reflect new knowledge and insights.

3. What is a learning organization? Is this approach to strategic management

better than the more traditional top-down approach in which strategicplanning is primarily done by top management?


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Organizational learning is a critical component of competitiveness in a

dynamic environment. It is particularly important to innovation andnew product development. For example, both Hewlett-Packard andBritish Petroleum (BP) use an extensive network of informalcommittees to transfer knowledge among their cross-functional teamsand to help spread new sources of knowledge quickly.

3. What is a learning organization? Is this approach to strategic management

better than the more traditional top-down approach in which strategicplanning is primarily done by top management?


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Main activities of a learning organization include:Learning organizations are skilled at four main activities:

Solving problems systematically

Experimenting with new approaches Learning from past experience, history and experiences of

others Transferring knowledge quickly and easily throughout the

organization


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Strategic management is essential for learning organizations to

avoid stagnation through continuous self-examination andexperimentation. People at all levels, not just topmanagement, participate in strategic managementhelpingto scan the environment for critical information,suggesting changes to strategies and programs to takeadvantage of environmental shifts, and working with others to

continuously improve work methods, procedures, andevaluation techniques. For example, Motorola developed anaction learning format in which people from marketing,product development, and manufacturing meet to argue andreach agreement about the needs of the market, the bestnew product, and the schedules of each group producing it.

This action learning approach overcame the problems thatarose previously when the three departments met andformally agreed on plans but continued with their work as ifnothing had happened. Research indicates that involvingmore people in the strategy process results in people not onlyviewing the process more positively, but also acting in waysthat make the process more effective


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Basic Elements of Strategic Management

1. Environmental scanning

2. Strategy formulation3. Strategy implementation

4. Evaluation and control


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1. Environmental Scanningis the monitoring,evaluating and disseminating of information from theexternal and internal environments to key peoplewithin the organization. Its purpose is to identifystrategic factorsthose external and internalelements that will determine the future of the

corporation. The simplest way to conductenvironmental scanning is through SWOT analysis.SWOT is an acronym used to describe the particularStrengths, Weaknesses, Opportunities, and Threats

that are strategic factors for a specific company.


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2. Strategy Formulation: the development of long-rangeplans for the effective management of environmentalopportunities and threats in light of organizationalstrengths and weaknesses (SWOT). It includes defining thecorporate mission, specifying achievable objectives,developing strategies, and setting policy guidelines.



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Mission- the purpose or reason for the organizationsexistence

Vision- describes what the organization would like tobecome

Objectives- the end results of planned activity



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Some of the areas in which a corporation

might establish its goals and objectives are: Profitability (net profits)

Efficiency (low costs, etc.)

Growth (increase in total assets, sales, etc.)

Shareholder wealth (dividends plus stock price appreciation)

Utilization of resources (ROE or ROI)

Reputation (being considered a top firm)

Contributions to employees (employment security, wages, diversity)

Contributions to society (taxes paid, participation in charities, providing a needed product or

service)

Market leadership (market share) Technological leadership (innovations, creativity)

Survival (avoiding bankruptcy)

Personal needs of top management (using the firm for personal purposes, such as

providing jobs for relatives)


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Strategies- form a comprehensive master plan that stateshow the corporation will achieve its mission and objectives

Corporate:describes a companys overall direction in terms of itsgeneral attitude toward growth and the management of its variousbusinesses and product lines. Corporate strategies typically fit withinthe three main categories of stability, growth, and retrenchment

Business: occurs at the business unit or product level, and itemphasizes improvement of the competitive position of a corporationsproducts or services in the specific industry or market segment served

by that business unit. Business strategies may fit within the twooverall categories, competitive and cooperative strategies.

Functional: is the approach taken by a functional area to achievecorporate and business unit objectives and strategies by maximizingresource productivity.



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Business firms use all

three types of strategy

simultaneously. A

hierarchy of strategy is

a grouping of strategy

types by level in the

organization.


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Policies- the broad guidelines for decision making that linksthe formulation of a strategy with its implementation.Companies use policies to make sure that employeesthroughout the firm make decisions and take actions that

support the corporations mission, objectives, andstrategies. E.g., 3M says researchers should spend 15% oftheir time working on something other than their primaryproject. (This supports 3Ms strong product developmentstrategy.)



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Strategy implementation: the process by which strategies

and policies are put into action through the development of: Programs: a statement of the activities or steps needed to

accomplish a single-use plan e.g., restructuring thecorporation

Budgets: Used in planning and control, a budget lists thedetailed cost of each program.

Procedures: a system of sequential steps or techniques thatdescribe in detail how a particular task or job is to be done.


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Evaluation and control:the process in whichcorporate activities and performance results are

monitored so that actual performance can becompared to desired performance

Performance:the end result of organizational activities.

It includes the actual outcomes of the strategicmanagement process.


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Feedback/Learning Process: revise or correctdecisions based on performance

Arrows are drawn coming out of each part of the modeland taking information to each of the previous parts

of the model.


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Triggering event:something that acts as a stimulus fora change in strategy and can include:

New CEO

External intervention

Threat of change of ownership

Performance gap Strategic inflection point


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What Makes a Strategic Decision?

Strategic decision making:Unlike many other decisions,

strategic decisions focuses on the long-run future of theorganization

Characteristics of strategic decision making include:

Rare: unusual and typically have no precedent to follow. Consequential=important: require substantial resources and

demand a great deal of commitment from people at all levels.

Directive: set precedents for lesser decisions and future actions

4. Why are strategic decisions different from other kinds of decisions?


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Mintzbergs Modes of Strategic Decision Making

Entrepreneurial

Adaptive Planning

Logical incrementalism (Quinn)


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Mintzbergs Modes

Entrepreneurial mode: the strategy is madeby powerful individual. The focus onopportunities.

Adaptive mode: using reactive solution ratherthan proactive.

Planning mode: it uses reactive and proactivemode. Data gathering and analysis and selectstrategies.

Logical incrementalism: strategy is set basedon a series of incremental commitment ratherthan through global formulation of total

strategies. This suitable when environment ischan in ra idl .41


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Strategic Decision Making Process:

1. Evaluate currentperformance results

2. Review corporategovernance

3. Scan and assess theexternal environment

4. Scan and assess theinternal corporateenvironment

5. Analyze strategic(SWOT) factors

6. Generate, evaluate andselect the bestalternative strategy

7. Implement selected

strategies8. Evaluate implemented

strategies


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Strategic auditprovides a checklist of questions, by

area or issue, that enables a systematic analysis to bemade of various corporate functions and activities


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1. Why has strategic management become so important to todays corporations?2. How does strategic management typically evolve in a corporation?

3. What is a learning organization? Is this approach tostrategic management better than the more traditionaltop-down approach in which strategic planning is primarilydone by top management?


5. When is the planning mode of strategic decision makingsuperior to the entrepreneurial and adaptive modes?

The planning mode is generally superior to the entrepreneurial and adaptive modes

when the organization is fairly large, when knowledge is spread throughout theorganization, and when the organization has at least a moderate amount of time

to engage in strategic planning. The book proposes that the planning mode is

more rational and thus a better way of making most strategic decisions. It

may not, however, always be possible. The entrepreneurial mode can be very

useful when time is short, one person or group is able to grasp the essentials of

the business and its environment, and that person or group is able to influence

the rest of the organization to accept its strategic decision. The adaptive mode

is generally not considered to be very effective in most situations, but seems to

be the fallback mode when entrepreneurial or planning modes can't operate

effectively because of political infighting or lethargy


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ADDITIONAL DISCUSSION QUESTIONS

A3.What information is needed for the proper formulation of strategy? Why?

It is essential to have information on the important variables in both the externaland internal environments of the corporation. This includes general forces in the

societal environment as well as the more easy-to-identify groups such as

customers and competitors in the task environment. A corporation needs to have

this information in order to identify a need it can fulfill via its corporate mission. It is

also important to have information on the corporation's structure, culture, and

resources. A corporation needs to have this information in order to assess itscapabilities to satisfy a customer's need by making and/or distributing a product

or service. Information on both the internal and external environments can also

help a corporation to predict likely opportunities and threats. Long-term strategies

can be designed with these in mind.

A4.Reconcile the strategic decision-making process depicted in Fig. 1.5 with

the strategic management model depicted in Fig. 1.2.

The strategic management model depicts the key input variables (internal and

external environments) and the key output factors (mission, objectives, strategy,

and policies). It show show strategy formulation, implementation, and evaluation

and control are related and how a change in any one factor (e.g., corporate

objectives) affects other factors (e.g., strategies, policies, programs,budgets, procedures, evaluation and control techniques). This model,however,


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1. Why has strategic management become so important to todays corporations?2. How does strategic management typically evolve in a corporation?

3. What is a learning organization? Is this approach tostrategic management better than the more traditionaltop-down approach in which strategic planning is primarilydone by top management?


5. When is the planning mode of strategic decision makingsuperior to the entrepreneurial and adaptive modes?

The planning mode is generally superior to the entrepreneurial and adaptive modes

when the organization is fairly large, when knowledge is spread throughout theorganization, and when the organization has at least a moderate amount of time

to engage in strategic planning. The book proposes that the planning mode is

more rational and thus a better way of making most strategic decisions. It

may not, however, always be possible. The entrepreneurial mode can be very

useful when time is short, one person or group is able to grasp the essentials of

the business and its environment, and that person or group is able to influencethe rest of the organization to accept its strategic decision. The adaptive mode

is generally not considered to be very effective in most situations, but seems to

be the fallback mode when entrepreneurial or planning modes can't operate

effectively because of political infighting or lethargy

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chapter 1 of st. manag