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Strategic Management
Fall 2013
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I Like Strategy
And by the way, HOPE is not a strategy!
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STAKEHOLDERS & THE STRATEGIC
MANAGEMENT PROCESS
The Strategic Management Process
Organizational and Environmental Analysis
Strategic Direction
Strategy Formulation
Strategy Implementation and Control Strategic Restructuring
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Concept and Definition
A companys strategy consists of the competitive
moves and business approaches devised bymanagement to produce successful performance.
Strategy is managements game plan for running
the business, strengthening the companys
competitive position, satisfying customers, andachieving performance targets.
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No well-defined business path to follow
No roadmap to manage by
No cohesive, reasoned action plan toproduce successful performance
Without a strategy, managers have:
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Company mission &social responsibility
Long-term objectives Generic & grand strategies
Short-termobjectives; reward
systemFunctional tactics Policies that empower action
Restructuring, reengineering & refocusing the organization
Strategic control & continuous improvement
External Environment Internal analysis
Strategic analysis & choice
Legend
Major impact
Minor impact
Feedbac
kF
eedback
Possible?
Desired?
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The Three Big Strategic Questions
1. Where are we now?
This involves thinking about the companys
external market environment and internal
situation and capabilities
2. Where do we want to go?
This involves thinking about what topmanagement wants the company to be likein 5 to 10 years
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Continued
3. How will we get there?
This involves thinking about what
STRATEGYthe company shouldpursue to perform successfully and getfrom where it is to where it wants to go.
This third step is where companies often:
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SCREW IT UP !!!
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THE FIVE TASKS OF STRATEGIC
MANAGEMENT
1. Defining the business, stating a mission, andforming a strategic vision
2. Setting measurable objectives and performance
targets
3. Crafting a strategy to achieve the objectives
4. Implementing and executing the strategy
5. Evaluating performance, reviewing newdevelopments, and initiating corrective adjustmentsin long-term direction, objectives, strategy, orimplementation approaches
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Definition of Strategic Management
STRATEGIC MANAGEMENT is the process throughwhich organizations:
Analyze and learn from the stakeholders inside and
outside the organization, Establish strategic direction,
Create strategies that are intended to help achieveestablished goals,
Execute strategies,
All in an effort to satisfy KEY STAKEHOLDERS.
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Stakeholder Approach
Stakeholders
are groups or individuals who cansignificantly affect or are significantly affectedby an organizations activities such ascustomers, employees, stockholders,communities, suppliers, etc.
have, orbelieve they have, a legitimate claimon some aspects of the organization or itsactivities
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THE ORGANIZATION AND
ENVIRONMENT
Organizational Environment
Groups, individuals, and forces outside of thetraditional boundaries of the organization that
are significantly influenced by or have a majorimpact on the organization.
This includes both the operating and broadenvironments:
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Continued
OPERATING ENVIRONMENT employees,competitors, customers, suppliers, lenders,
unions, govt agencies, local communities,etc.
BROAD ENVIRONMENT global economicforces, sociocultural forces, technologicalchange, and global political and legal forces.
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How do we deal with the
environment?
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Continued
ADAPTATION The process of respondingto the environment.
ENACTMENT The process of influencingthe environment to make it less hostile and
more conducive to organizational success.
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Strategic Direction
MISSION STATEMENT
Statement describing the organizations
overall purpose, broad goals, and the scope
of its operations.
VISION STATEMENT
Statement expressing managements view ofwhat the organization can or should becomein the future
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Strategy Formulation
1. Corporate-Level Strategy Concerned with the selection of business areas in
which the organization will compete
Referred to as domain definition
2. Business-Level Strategy Concerned with how businesses compete in the
areas they have selected
Referred to as domain direction and navigation
3. Functional-Level Strategy Provides details of how functional areas work
together to achieve business-level strategy
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Strategic Implementation and
Control
Strategy Implementation
Creating the functional strategies, systems,
structures, and processes needed by theorganization to achieve strategic ends
Strategic Control
The processes that lead to adjustments in
strategic direction, strategies, or theimplementation plan, when necessary
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Strategic Restructuring
Restructuring Involves renewed emphasis on the things an
organization does well, combined with a variety oftactics to revitalize the organization and strengthen its
competitive position
*****None of the tasks of strategic management are a
one-time only exercise. Times change. Conditions
change. Events unfold. Better ways to do thingsbecome evident. Things happen that require new
initiatives and actions. New leadership emerges
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Alternative Perspectives on Strategy
Development
ENVIRONMENTAL DETERMINISM
The environment is the primary determinant of
strategy. The most successful organizationwill be the one that bestADAPTS to existingforces.
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STRATEGIC CHOICE
Organizations do not have to submit to forcesin the environment, they can create theirenvironments through relationships withstakeholders and other activities.
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STAKEHOLDER VIEW
Compromise between determinism and choice.Through stakeholder analysis and managementprocesses, organizations can better understand andinfluence their environments.
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DELIBERATE VS EMERGENT
STRATEGY
Deliberate Strategy an intended strategiccourseplannedandpursuedby managers.
Emergent Strategy an unplanned strategy
that emerges from a stream of managerialdecisions.
**** In reality, both processes must be presentfor an organization to truly excel.
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RESOURCE-BASED VIEW OF THE
FIRM
An organization is a bundle of financial, human,physical, and organizational resources. Resourcesthat create value for customers but are difficult forcompetitors to imitate provide the basis for a
sustainable competitive advantage.
What are these resources?
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STAKEHOLDER ANALYSIS AND
MANAGEMENT
STAKEHOLDER ANALYSIS Involves identifying and prioritizing key stakeholders,
assessing their needs, collecting ideas from them, andintegrating this knowledge into strategic management
processes.
STAKEHOLDER MANAGEMENT Includes communicating, negotiating, contracting,
and managing relationships with stakeholders andmotivating them to behave in ways that arebeneficial to the organization and its otherstakeholders.
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The Broad Environment
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Fig. 3-1: The External EnvironmentRemote Environment (Global and Domestic)
Industry Environment (Global and Domestic)
Operating Environment (Global and Domestic)
Economic
Social
Political
Technological
Entry barriers
Supplier power
Buyer power
Substitute availability Competitive rivalry
Competitors
Creditors
Customers
Labor Suppliers
THE FIRM
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The Broad Environment
Sociocultural forces
Global economic forces
Global political forces
Technological forces
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Socio-cultural Trends
Analysis of societal trends is important from atleast four perspectives:
1. The values and beliefs of key stakeholdersare derived from broader societal influences,which can create opportunities and threats
for the firm.
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Major Sociocultural Issues in the U.S.
Declining education Role of government (health & child care) Legality of abortion Crime Pollution
Increase in environmentalism Drug addiction Migration to the Sunbelt Immigration Aids and other health concerns Graying of America
Levels of foreign investment Role of the military Social costs of restructuring
In addition, company strategy must be adapted to each geographic region, not justby country!
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Socio-cultural Trends
2. Awareness of and compliance with the attitudes ofsociety can help an organization avoid problemsassociated with being a bad corporate citizen.
Reputation is important as it cant be imitated! Therefore,
corp orate image can becom e a competit ive advantage.
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Socio-cultural Trends
3. Correct assessment of social trends can helpbusinesses avoid restrictive legislation.
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4. Changes in society can create opportunitiesand threats to an organizations revenue
growth and profit prospects.
These changes can often help to p redict future
demand.
Socio-cultural Trends
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Global Economic Forces
1. Economic growth
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Global Economic Forces
2. Interest rates
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Global Economic Forces
3. Inflation
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Global Economic Forces
4. Exchange rates
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Global Economic Forces
5. Trade deficits
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Technological Forces
Technological change creates new products,processes, and services, and, in some cases,entire new industries. It can also change the
way society behaves and what societyexpects.
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Technological Forces
Technology refers to human knowledgeabout products and services and the way
they are made and delivered. Invention a new idea or technology proven
to work in the laboratory.
Innovation An invention that can bereplicated reliably on a meaningful scale.
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Technological Forces
Radical innovations usuallyoriginate outside of theindustry boundaries!
What are the implications of this?
P li i l/L l F
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Political/Legal Forces
According to some, political/legal forces areoften the most significant determinants oforganizational success.
Do you agree? Why or why not?
P li i l/L l F
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Political/Legal Forces
For example, did you know that lenders areheld liable when their customers are guilty ofpolluting the environment?
P li i l/L l F
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Political/Legal Forces
Even in the U.S., which is considered a free
market economy, no organization is allowed
the privilege of total autonomy fromgovernment regulations.
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The Operating Environment
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The Operating Environment
Includes stakeholders such as:
Customers
Suppliers Competitors
Government Agencies
Local Communities
Activist groups
Unions
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The Operating Environment
Which of these
stakeholders are
primary forces that drive
competition in anindustry?
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Primary Stakeholders
Customers
Suppliers
Competitors
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Stakeholder Analysis
Analysis of these stakeholders can
result in the identification of
opportunities and threats that can
help managers establish, develop
and implement organizational
strategies.
A ll t k h ld f l l
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Are all stakeholders of equal value
to the firm?
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No !!!
One key factor in determining the
priority of a particular stakeholder isthe influence on the environmentaluncertaintyfacing the firm.
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An Important Point
Although environmental uncertainty often
originates in the broad environment,
firms feel most of its influence throughexternal stakeholders in the operating
environment.
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Environmental Uncertainty
Although Political/Legal Influencecontributes greatly to environmental
uncertainty, Economic poweris oftenthe most important influence inunderstanding the nature and level of
environmental uncertainty.
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Porters Five-Forces Model
Customers
Suppliers
Industry Competitors
a) existing competitors
b) potential competitors
c) substitutes
Fig 3 4: Forces Driving Industry
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Fig. 3-4: Forces Driving Industry
CompetitionPotential
entrants
Threat of new
entrants
Suppliers
Bargaining power
of suppliers
Buyers
Bargaining power
of buyers
Substitutes
Threat of substitute
products or services
Industrycompetitors
Rivalry Among
Existing Firms
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Customers are a force when
There are a small number of them
They make high volume purchases
The purchases they make represent a largepercentage of their total costs
The sellers products are plentiful and/or
undifferentiated They earn low profits
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Customers are a force when
They can easily integrate backward andbecome their own suppliers
Sellers products dont have much influenceon the quality of their customers products
Information on sellers costs and demand is
readily available to buyers
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In combination, these forces determine the
bargaining power of customers
Obviously, the greater their power,
the higher the priority customersshould be given in the strategic
management process.
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Suppliers are a force when
There are only a few suppliers
There are few or no substitutes
Suppliers do not sell a large percentage oftheir products to the buying industry
The buying industry must have the product
that suppliers provide in order to manufactureits own product
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Suppliers are a force when
Suppliers have differentiated their products ormade it costly to switch suppliers
Suppliers can easily integrate forward andcompete directly with former buyers
I bi i h f d i h
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In combination, these forces determine the
bargaining power of suppliers
Obviously, the greater their power,
the higher the priority suppliersshould be given in the strategic
management process.
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Competitors
Rivalry among existing competitors WILL inciteretaliation or counter moves. These movestypically include things like:
Advertising programs
Sales force and/or capacity expansions
New product introductions
Long-term contracts with customers
Major Forces That Lead To High
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Major Forces That Lead To High
Levels Of Competition
Slow industry growth
High fixed costs
Lack of product differentiationA large number of competitors
High exit barriers
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Hypercompetition
A condition of rapidly escalating competition.
What would be an industry today that faces
hypercompetition?
Fi ft k t k f th ti iti d
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Firms often keep track of the activities and
capabilities of their competitors through
Competitive benchmarking a tool in whichmanagement uses the best practices ofcompetitors in setting objectives toencourage improvement in performance.
What is the fallacy of benchmarking and how
could it actually harm your strategy?
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Indirect Competitors
If organizations provide goods that are readilysubstitutable for the goods provided by an
industry, these organizations become indirectcompetitors. This leads to
A ceiling on the price for the good
Can create new expectations
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What do we do with this model?
Use it to understand how the firm shouldposition itself relative to these forces(reactive)
Use it to influence the forces by actions suchas erecting high entry barriers througheconomies of scale or differentiation(proactive)
Use it to decide whether or not to enter orleave a particular industry
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Internal Analysis
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From a resource-based perspective -
Strengths are firm resources and capabilitiesthat can lead to a competitive advantage.
Weaknesses are resources and capabilitiesthat the firm does not possess but that arenecessary, resulting in a competitivedisadvantage.
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From a resource-based perspective -
Opportunities are conditions in the broad andoperating environments that allow a firm to takeadvantage of organizational strengths, overcome
organizational weaknesses, and/or neutralizeenvironmental threats.
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From a resource-based perspective -
Threats are conditions in the broad and operatingenvironments that may stand in the way oforganizational competitiveness or the achievement of
stakeholder satisfaction.
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Numerous environmentalopportunities
Major environmental
threats
Substantialinternal
strengths
Criticalinternal
weaknesses
Cell 3: Supports
a turnaround-oriented strategy
Cell 1: Supports
an aggressivestrategy
Cell 4: Supportsa defensive
strategy
Cell 2: Supportsa diversification
strategy
Fig. 6-6: SWOT Analysis Diagram
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Primary Activities
Support
Activities
Research, technology, andsystems development
Human resource management
General administration
Procurement
Inbound
Logistics
Operat
ions
Outbound
logistic
s
Marketing
andsa
les
S
ervice
Fig. 6-7: The Value Chain
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Value can be created -
In any primary or support activity
In the way they are combined
In the way internal activities are linked to the
external environment
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Value Chain Analysis
Value chain analysis may be combined with stakeholderanalysis to identify strengths and weaknesses and touncover opportunities for savings or ways to add
value for customers.
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Plus
The combination of stakeholder analysis with valuechain analysis holds great potential for developingstrategies that are both efficientand effective.
i i i
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Strategic Direction
h h h k i ?
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Where the heck are we going?
T f h i hi
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To often the answer is this
S i Di i
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Strategic Direction
Strategic direction requires managers to provide
long-term direction while balancing thecompeting interests of key stakeholders.
S i Di i
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Strategic Direction
Strategic direction is established and communicatedthrough tools such as visions, missions, businessdefinitions, enterprise strategies, and long-term
goals.
Fi ll
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Finally
This is where the rubber meets the road!
U l
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Unless
Of course, you are Firestone. ;-)
St t l I ti
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Structural Inertia
forces within the organization that work to maintain
the status quo.
B i D fi iti
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Business Definition
What is our business?
Should be addressed from four perspectives:
1. Who is being satisfied?
2. What is being satisfied?
3. How are customer needs satisfied?
4. What are our products and/or services?
Plus
Wh t d t d f ?
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What do we stand for?
I t t i t
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Important point
This is the critical link between ethics and strategy andis referred to as enterprise strategy.
Th ti l M d l
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Theoretical Models
Economic foundations
Legal foundations
Religious foundations Utilitarian foundations
A i ti i i
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An organizations mission
Reflects managements vision of what the
organization seeks to do and to become
Provides a clear view of what theorganization is trying to accomplish
Indicates an intent to stake out a particularposition
Specific questions that help form
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p q p
strategic vision -
What business are we in now?
What business do we want to be in?
What will our customers want in the future? What are the expectations of our
stakeholders?
Q estions cont
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Questions, cont.
Who will be our future competitors?Suppliers? Partners?
What should our competitive scope be? How will technology impact our industry?
What environmental scenarios are possible?
Examples
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Examples
AVIS
Our business is renting cars. Our mission is
total customer satisfaction.
Eastman Kodak
To be the worlds best in chemicals and
electronic imaging.
Examples
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Examples
SATURN
To market vehicles developed and
manufactured in the United States that are
world leaders in quality, cost, and customersatisfaction through the integration of people,
technology, and business systems and to
transfer knowledge, technology, and
experience throughout General Motors.
Formula
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Formula
Key Market: To offer the fast foodcustomer
Contr ibut ion: food prepared in the samehigh-quality manner world-wide, tasty andreasonably priced,
Dist inct ion: delivered in a consistent, low-key dcor and friendly atmosphere.
Goals in most companies
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Goals in most companies
Maximize long-term shareholder wealth
Optimize employee potential
Customer orientation Build competencies
Global
Citizenship
Technology Productivity
Corporate Level Strategy
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Corporate-Level Strategy
Corporate Level Strategy
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Corporate-Level Strategy
Selection of business areas in which theorganization will compete.
Concentration
Vertical Integration
Diversification
Concentration
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Concentration
the organization produces a single or a small group ofproducts or services.
Concentration Positives
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Concentration Positives
Allows the firm to master the business
Better positioned to develop sustainable
competitive advantages Places organizational resources under less
strain
Clear strategic direction
Easier for external stakeholders tounderstand the firms mission
Concentration Negatives
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Concentration Negatives
Is risky when environments are unstable
Makes the firm vulnerable to product
obsolescence and industry maturity Can lead to cash problems, both negative
and positive
May not provide stimulation for management
Vertical Integration
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Vertical Integration
The extent to which a firm is involved in several stagesof the industry supply chain.
Market Failure
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Market Failure
occurs when transaction costs are highenough to encourage an organization to
produce a good or service in-house instead ofbuying from the open market.
Taper Integration
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Taper Integration
- Occurs when an organization produces part of itsrequirements in-house and buys the rest of what itneeds on the open market.
Diversification
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Diversification
Related Diversificationfirms involvement inother businesses related to its core business.
Unrelated Diversificationfirms involvementin businesses not related to its core business.
Business-Level Strategy
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Business-Level Strategy
Generic Business Strategies
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Generic Business Strategies
1. Cost Leadership
2. Differentiation3. Best Cost
4. Cost Focus
5. Differentiation Focus
Creating Low-Cost Positions
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Creating Low-Cost Positions
Capacity utilization
Economies of scaleCost-saving technologies
Learning/experience curve effects
Creating Low Cost Positions
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Creating Low-Cost Positions
*** A cost leader does no t
have to be a price leader !
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Best Cost Strategy
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Best Cost Strategy
*** The essence of a best cost
strategy is to find a level ofdifferentiation that will bring a
premium price while doing so at
a reasonable cost.
Focus Strategies
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g
*** The key to a focus strategy is catering
to a particular segment in the market.
Low-cost focus
Differentiation focus
The Issue of Tradeoffs
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The Issue of Tradeoffs
A sustainable strategic position requires tradeoffs. If acompany moves upscale, it repositions itself awayfrom its current customer base.
Tradeoffs arise for three reasons
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Tradeoffs arise for three reasons
Inconsistency of image or reputation - a firm cantgo in different directions without confusing thecustomers.
Need for different types of resources - differentpositions require different equipment, employeebehaviors, skills, product configurations, andmanagement systems.
Overall costs - internal coordination and control canbe very expensive.
Five Fatal Strategy Flaws
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Five Fatal Strategy Flaws
Misreading Industry Attractiveness Possessing No True Competitive
Advantage
Pursuing A Competitive Advantage That IsNot Sustainable
Compromising A Strategy In Order To GrowFaster
Not Making Your Strategy Explicit And NotCommunicating It To Your Employees
Growth Strategies
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Growth Strategies
Internal Market penetration
Market/applications development
Product/service development
External
Mergers/integration Joint ventures/strategic alliances
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Industry Life Cycle
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Industry Life Cycle
Introduction
GrowthMaturity
Decline (commodity)
Functional-Level Strategies
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Functional Level Strategies
Functional Strategies
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Functional Strategies
Collective patterns of decisions made and actionstaken by employees that implement the growth andcompetitive strategies of the organization.
Do you see any potential conflict in this statement?
Marketing Strategy
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e g S egy
a plan to promote, price, and distribute the productsand services of an organization, as well as how toidentify and service customer groups.
Operations Strategy
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p gy
- a plan to design and manage the processes needed tocreate the products and services of the organization.
Research and Development Strategy
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p gy
a plan that guides basic research of the organizationas well as its development of more effective andefficient applications, products, and processes.
Information Systems Strategy
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y gy
a plan to provide the organization with the informationtechnology necessary for the operation, planning,and control of business activities.
Human Resources Strategy
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gy
a plan that guides the recruiting, hiring, training, andcompensating of employees as well as organizationalchange efforts.
Financial Strategy
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gy
a plan to provide the organization with the capitalstructure and funds appropriate for implementinggrowth and competitive strategies.
Functional Strategies MUST
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g
be consistent in three important areas:
1. Within function2. Between function
3. With the generic-level strategy
Example
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p
MISSION/VISION
FCS will be the lender and employer of
choice in our marketplace.
GOAL
Optimizing employee potential
Example, cont.
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p ,
OBJECTIVE
Increase employee morale through continuoustraining and increased incentive opportunities.
STRATEGIES Implement a quarterly pay-for-performance plan for
every position in the organization.
Implement training and educational development
standards and opportunities for every position in theorganization.
Example, cont.
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p ,
POLICIES/TACTICS
Finance designate $3.8 million foremployee training for year 2008.
Marketing offer a quarterly rotation ofeffective sales training programs for all salespersonnel.
Strategic Control
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g
STRATEGIC CONTROL
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Strategic Control System organizationalsystem by which top management canevaluate the progress of the organization inaccomplishing its goals, as well as point outareas in need of attention.
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STRATEGIC CONTROL
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Control systems should be comprehensive anddesigned to include input from internal andexternal stakeholders and from organizationalprocesses.
STRATEGIC CONTROL
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Financial ROI
Cash flow
Stock price Earnings stability
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STRATEGIC CONTROL
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Internal Business Cost controls
Skill levels
Product line breadth
Safety
On-time delivery
Quality
STRATEGIC CONTROL
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Innovation and Learning Workforce morale
Innovation
Investments in R & D Continuous improvement
CRITICAL RESULT AREAS
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Organizational areas that are key to ensuringthat the organization accomplishes its goalsand its vision.
Examples:
Improvement in worker skill levels
Product redesign
Creation of new process controls
Continued
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Once identified, the critical result areas
become the objectives and targets that
pace strategy implementation.
GOAL SETTING
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Bottom-Up Approach goal settingbegins in functional areas, which
translates into business-level goals ofthe various divisions that are combinedto form the corporate-level goals.
Continued
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Top-Down Approach the corporatelevel essentially determines and thendictates what lower-level goals should
be.
FEEDBACK CONTROL
SYSTEMS
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SYSTEMS
Budgets feedback controls that providerevenue and expense targets.
Financial Ratios feedback controls used to
control organizational processes andbehavior (Current ratio, quick ratio, etc.).
Audits a type of feedback control systemused to provide information to support
financial, customer, or internal perspectives.Firm conduct and outcomes are measuredagainst established guidelines.
FEEDBACK CONTROL
SYSTEMS
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SYSTEMS
Customer Surveys a type of feedbackcontrol system used to measure how wellestablished standards for customer
satisfaction are being met.
See any problems with these?
FEEDBACK CONTROL
SYSTEMS
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SYSTEMS
Concurrent Controls very similar tofeedback controls, except that the timehorizon is shortened to real time.
Process Control controls associated withproduction and service processes and withquality standards (i.e., making sure things
meet specifications).
ORGANIZATIONAL CRISES
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A better definition:
When the feces hits the fast-moving, rotarybladed instrument. In other words, when the@$%&*# hits the fan!
CRISIS-PRONE
ORGANIZATIONS
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ORGANIZATIONS
If they prepare at all, they prepare for too fewcontingencies. Further, preparation isfragmented.
They focus on only one aspect of a crisis, andonly after it has occurred.
They only consider technical factors in thecause or prevention of crises.
They dont explicitly consider theramifications to ke stakeholders