Lecture1Strategic Management

Definition of Strategic ManagementStrategic ManagementThe set of managerial decisions and actions that determines the long-run performance of an organization

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 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 Questions1. 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 ManagementImpact of Electronic Commerce:Internet is forcing companies to transform themselves. The concept of electronically networking customers, suppliers, and partners is now a reality.New channels are changing market access and branding, causing the disintermediation of traditional distribution channels. 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 efficient5.The pace of business is increasing drastically. Planning horizons, information needs, customer/supplier expectations are reflecting the immediacy of internetThe internet is pushing corporations out of their traditional boundaries. The traditional separation between supplier, manufacturer, and customer is becoming blurred Knowledge is becoming a key asset and source of competitive advantage

GlobalizationRegional & Global Trade AgreementsEuropean Union (EU)North American Free Trade Agreement (NAFTA)WTOAssociation 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 insightsLearning organizations are skilled at four main skillsSolving problem systematicallyExperimenting with new approachesLearning from their own experiences and history as well as from the experiences of othersTransferring knowledge quickly and efficiently through out the organizationThis 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 ManagementStrategic Management is Composed of1.Environmental Scanning2.Strategy Formulation3.Strategy Implementation4.Evaluation and Control

Environmental VariablesPrentice Hall, 2000Chapter 1*Task Environment

Chapter 1

Societal EnvironmentComposed of general forces in environmentSocio-cultural forcesEconomic ForcesTechnological ForcesPolitical-legal forces

Task EnvironmentComposed ofGroups in environment that directly affect or are affected by the organizations operations(Often called industry)CompetitorsCustomersSuppliersCreditorsShare holdersTrade associationEmployees/ labor unionsCommunities

Definition of Strategy FormulationStrategy FormulationThe process of developing long-range plans to deal effectively with environmental opportunities and threats in light of corporate strengths and weaknessesComposed of: Vision & Mission Objectives Strategies Policies

Difference between Vision, Objectives & Strategy1. VISION: What is the companys present situation?2. OBJECTIVES: Where does the company need to go from here?Business(es) to be in and market positions to stake outBuyer needs and groups to serveDirection to head3. STRATEGY: How should it get there?

That leaves., a MissionA Mission describes:Products which the company is offeringMarkets which are being reachedCustomers who are being servedHow the customers are being served (Value Proposition)The unique value proposition by a company is a result of its Core Competencies (inner strengths) and comes out as a Competitive Advantage

Strategy and the Quest for Competitive AdvantageThe 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 value proposition that sets a company apart from rivals and yields a competitive advantage is a companys most reliable ticket to above average profitability

Four Best Strategic Approaches to Building Sustainable Competitive AdvantageBeing the industrys 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)Making a unique value proposition by combining lower costs with differentiating features (A best value product)

Some Consolidated Mission Statements:"To make the world's information universally accessible and usefulTo inspire and nurture the human spirit one person, one cup and one neighborhood at a timeTo bring inspiration and innovation to every athlete*in the world. *"If you have a body, you are an athlete.TOBUILD UNIQUE SPORTS CARS DESTINED TO REPRESENT THE EXCELLENCE OF ITALIAN CARS, WHETHER ON THE ROAD OR ON RACING CIRCUITS.

Why Do Strategies Evolve?A companys strategy is a work in progressChanges may be necessary to react toShifting market conditionsTechnological breakthroughsFresh moves of competitorsEvolving customer preferencesEmerging market opportunitiesNew ideas to improve strategyCrisis 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 produceLook at associated cost structure and potential profit marginsDo 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 ModelStrategy . . . Deals with a companys competitive initiatives and business approachesBusiness Model . . . Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable

Tests of a Winning StrategyGOODNESS OF FIT TESTHow well does strategy fit the firms situation?COMPETITIVE ADVANTAGE TESTDoes strategy lead to sustainable competitive advantage?PERFORMANCE TESTDoes strategy boost firms performance?

The Strategy-Making, Strategy-Executing Process

Developing a Strategic VisionInvolves thinking strategically aboutFuture direction of companyChanges in companys product/market/customer technology to improveCurrent market positionFuture prospectsPhase 1 of the Strategy-Making ProcessA strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the companys strategic course in preparing for the future.

Characteristics of well worded vision statementGraphic: Paints a picture of the kind of company that management is trying to create and the market position a company is striving to stake outDirectional: says something about companys journey or destination and signals the kinds of businesses and strategic changes that will be forthcomingFocused: is specific enough to provide mangers with guidance in making decisions and allocating resources

Characteristics of a well worded vision statementFlexible : is not a once-and-for-all time pronouncement; vision about a companys future path may need to change as events unfold and circumstances changeFeasible: is within the realm of what the company can reasonably expect to achieve in due timeDesirable : appeals to the long term interests of stake holders - particularly shareowners, employees and customersEasy to communicate: is explainable in less than 10 minutes and ideally be reduced to a simple memorable slogan

Common shortcomings in company vision statementsIncomplete : short on specifics about where the company is headed and what kind of company management is trying to createVague : doesnt provide much indication of whether or how management needs to alter the companys current product/ market/ customer/ technology focusBland : lacking in motivational powerNot distinctive: could apply to almost any company (or at-least several others in the same industry)

Common shortcomings in company vision statements5.Too reliant on such superlatives as best, most successful, recognized leader, global or worldwide leader, or first choice of customers6.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 industriesSo broad that it really doesnt rule out any opportunity that management might opt to pursue

Googles Vision StatementGoogle believes that an open web benefits all users and publishers. However, "open" need not mean free. We believe that content on the Internet can thrive supported by multiple business models -- including content available only via subscription. While we believe that advertising will likely remain the main source of revenue for most news content, a paid model can serve as an important source of additional revenue. In addition, a successful paid content model can enhance advertising opportunities, rather than replace them

Googles Vision StatementWhen it comes to a paid content model, there are two main challenges. First, the content must offer value to users. Only content creators can address this. The second is to create a simple payment model that is painless for users. Google has experience not only with our e-commerce products; we have successfully built consumer products used by millions around the world. We can use this expertise to help create a successful e-commerce platform for publishers.

Googles Vision StatementBeyond the mechanics of any payment system, users must know the product exists. Discovery and distribution are just as, if not more, important to premium content as they are to free content given the smaller audience of potential subscribers. Google is uniquely positioned to help publishers create a scalable e-commerce system via our Checkout product and also enable users to find this content via search -- even if it's behind a paywall.

Googles Vision StatementOur vision of a premium content :ecosystem includes the following features: Single sign-on capability for users to access content and manage subscriptions Ability for publishers to combine subscriptions from different titles together for one price Ability for publishers to create multiple payment options and easily include/exclude content behind a paywall Multiple tiers of access to search including 1) snippets only with "subscription" label, 2) access to preview pages and 3) "first click free" accessAdvertising systems that offer highly relevant ads for users, such as interest-based advertising

Vision vs. MissionA strategic vision concerns a firms future business path - where we are going Markets to be pursuedFuture product/market/ customer/technology focusKind 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 doCurrent markets and market offeringsCustomer needs being servedTechnological and business capabilities (competitive advantage)

Setting ObjectivesPurpose of setting objectivesCreates yardsticks to track performanceConverts vision into specific performance targetsWell-stated objectives areQuantifiableMeasurableContain a deadline for achievementSpell-out how much of what kind of performance by whenPhase 2 of the Strategy-Making Process

Types of Objectives RequiredOutcomes focused on improving financial performanceOutcomes focused on improving competitive vitality and future business positionFinancial Objectives Strategic Objectives

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

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

A Balanced Scorecard Approach Setting Strategic and Financial ObjectivesA balanced scorecard for measuring company performance is optimal; it entailsSetting financial and strategic objectivesPlacing balanced emphasis on achieving both types of objectives(However, if a companys 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 after year is to relentlessly pursue strategic outcomes that strengthen a companys business position and give it a growing competitive advantage over rivals!

Components of a Balanced ScorecardFinancial Perspective: Increase Returns; broaden revenue streamsCustomer Perspective: Increase customer satisfaction; strengthen customer loyaltyInternal Perspective : Create innovative products; improve after-sales serviceLearning Perspective: Develop the requisite skills; provide incentive based on customer feedback

How the BSC worksEquip 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 ObjectivesShort-term objectivesTargets to be achieved soonMilestones or stair steps for reaching long-range performanceLong-term objectivesTargets to be achieved within 3 to 5 yearsPrompt actions now that will permit reaching targeted long-range performance later

Crafting a StrategyStrategy-making involves entrepreneurship Actively searching for opportunities to do new things orActively searching for opportunities to do existing things in new or better waysStrategizing involvesDeveloping timely responses to happenings in the external environment andSteering company activities in new directions dictated by shifting market conditionsPhase 3 of the Strategy-Making Process

A Companys Strategy-Making Hierarchy

Tasks of Corporate StrategyMoves to achieve diversificationActions to boost performance of individual businessesCapturing valuable cross-business synergies to provide 1 + 1 = 3 effects!Establishing investment priorities and steering corporate resources into the most attractive businesses

Tasks of Business StrategyInitiating approaches to produce successful performance in a specific businessCrafting competitive moves to build sustainable competitive advantageDeveloping competitively valuable competencies and capabilitiesUniting strategic activities of functional areasGaining approval of business strategies by corporate-level officers and directors

Tasks of Functional StrategiesGame plan for a strategically-relevant function, activity, or business processDetail how key activities will be managedProvide support for business strategySpecify how functional objectives are to be achieved

Tasks of Operating StrategiesConcern narrow strategic approaches to manage key operating units and strategically-relevant operating activitiesAdd detail to business and functional strategiesDelegation of responsibility to frontline managers

Implementing and Executing StrategyOperations-oriented activity aimed at performing core business activities in a strategy-supportive manner Tougher and more time-consuming than crafting strategyKey tasks includeImproving efficiency of strategy being executedShowing measurable progress in achieving targeted resultsPhase 4 of the Strategy-Making Process

What Does Strategy Implementation Involve?Building a capable organizationAllocating resources to strategy-critical activitiesEstablishing strategy-supportive policiesInstituting best practices and programs for continuous improvementInstalling information, communication,| and operating systemsMotivating people to pursue the target objectivesTying rewards to achievement of resultsCreating a strategy-supportive corporate cultureExerting the leadership necessary to drive the process forward and keep improving

Evaluating Performance andMaking Corrective AdjustmentsTasks of crafting and implementing the strategy are not a one-time exerciseCustomer needs and competitive conditions changeNew opportunities appear; technology advances; any number of other outside developments occurOne or more aspects of executing the strategy may not be going wellNew managers with different ideas take overOrganizational learning occursAll these trigger a need for corrective actions and adjustments on an as-needed basisPhase 5 of the Strategy-Making Process

*The Basis for Good Strategic DecisionsIntuition + AnalysisEffective Strategic Decisions

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