Strategic Management
Lecture1
Definition of
Strategic Management
Strategic Management
The 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
(1)They are rare. Strategic decisions are unusual
and typically have no precedent to follow
(2) They are consequential. Strategic decisions
commit substantial resources and demand a
great deal of commitment;
(3) They are directive. Strategic decisions set
precedents for lesser decisions and future
actions throughout the organization
Three Key Strategic
Questions
1. Where is the organization now?
2. If no changes are made, where will the
organization be in one, two, five or ten
years? Are the answers acceptable?
3. If the answers are not acceptable, what
specific actions should management
undertake? What are the risks and payoffs
involved?
Challenges to Strategic
Management
Impact of Electronic Commerce:
1.Internet is forcing companies to transform
themselves. The concept of electronically
networking customers, suppliers, and
partners is now a reality.
2.New channels are changing market access
and branding, causing the
disintermediation of traditional distribution
channels.
3.The balance of power is shifting to the
consumer. Now, having unlimited access to
information on the internet, customers are
much more demanding.
Challenges to Strategic Management
(cont.)
4. Competition is changing. New technology
driven firms as well as the traditional firms
are exploiting internet to become more
innovative and efficient
5. The pace of business is increasing drastically.
Planning horizons, information needs,
customer/supplier expectations are reflecting
the immediacy of internet
6. The internet is pushing corporations out of
their traditional boundaries. The traditional
separation between supplier, manufacturer,
and customer is becoming blurred
7. Knowledge is becoming a key asset and
source of competitive advantage
Globalization
Regional & Global Trade Agreements
European Union (EU)
North American Free Trade Agreement
(NAFTA)
WTO
Association of South East Asian Nations
(ASEAN)
Learning Organization
An organization skilled at creating, acquiring, transferring
knowledge, and at modifying its behavior to reflect new
knowledge and insights
Learning organizations are skilled at four main skills
1.
Solving problem systematically
2.
Experimenting with new approaches
3.
Learning from their own experiences and history as well as
from the experiences of others
4.
Transferring knowledge quickly and efficiently through out
the organization
This means that people at all levels, not just top
management, need to be involved in strategic management
- by helping to scan the environment for critical information
- suggesting changes to strategies and programs to take
advantage of environmental shifts,
- and working with others to continuously improve work
methods, procedures, and evaluation techniques.
Composition of
Strategic Management
Strategic Management is Composed of
1.
2.
3.
4.
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control
1.10
Environmental Variables (Fig. 1.3)
Environmental Variables
Societal Environment
TaskTask
Environment
Environment
(Industry)
Sociocultural
Forces
Shareholders
Governments
Economic
Forces
Suppliers
Internal
Environment
Special
Interest
Groups
Structure
Culture
Resources
Employees/
Labor Unions
Competitors
Customers
Trade Associations
Creditors
Political-Legal
Forces
11
Chapter 1
Communities
Technological
Forces
Prentice Hall, 2000
Societal Environment
Composed of general forces in environment
1. Socio-cultural forces
2. Economic Forces
3. Technological Forces
4. Political-legal forces
Task Environment
Composed of
Groups in environment that directly affect or
are affected by the organizations operations
(Often called industry)
Competitors
Customers
Suppliers
Creditors
Share holders
Trade association
Employees/ labor unions
Communities
Definition of Strategy
Formulation
Strategy Formulation
The process of developing long-range
plans to deal effectively with
environmental opportunities and threats
in light of corporate strengths and
weaknesses
Composed of:
Vision & Mission
Objectives
Strategies
Policies
Difference between Vision,
Objectives & Strategy
1. 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 out
Buyer needs and groups to serve
Direction to head
3. STRATEGY: How should it get there?
That leaves., a Mission
A Mission describes:
Products which the company is offering
Markets which are being reached
Customers who are being served
How 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 Advantage
The heart and soul of any strategy are the
actions and moves in the marketplace that a
company makes to strengthen its competitive
position and gain a competitive advantage
over rivals
A creative-distinctive 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
Advantage
Being the industrys low-cost provider (a costbased 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 useful
To inspire and nurture the human spirit
one person, one cup and one neighborhood
at a time
To 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
progress
Changes may be necessary to react to
Shifting market conditions
Technological breakthroughs
Fresh moves of competitors
Evolving customer preferences
Emerging market opportunities
New ideas to improve strategy
Crisis situations
What is a Business Model?
A business model addresses the question: How
do we make money in this business?
Is the strategy capable of delivering
good bottom-line results?
Do the revenue-cost-profit economics of the
strategy make good business sense?
Look at revenue streams the strategy is
expected to produce
Look at associated cost structure and
potential profit margins
Do resulting earnings streams and ROI indicate
that the strategy makes sense and the
company has a viable business model for
making money?
Relationship Between
Strategy and Business Model
Strategy . . .
Deals with a
companys
competitive initiatives
and business
approaches
y
eg
t
ra
St
s
es
n
si el
Bu od
M
Business
Model . . .
Concerns whether
revenues and costs
flowing from the
strategy demonstrate
a business can be
amply profitable and
viable
Tests of a Winning Strategy
GOODNESS OF FIT TEST
How well does strategy fit
the firms situation?
COMPETITIVE ADVANTAGE TEST
Does strategy lead to sustainable
competitive advantage?
PERFORMANCE TEST
Does strategy boost firms performance?
The Strategy-Making, Strategy-Executing
Process
Developing a Strategic Vision
Phase 1 of the Strategy-Making Process
Involves thinking strategically about
Future direction of company
Changes in companys
product/market/customer technology to
improve
Current market position
Future prospects
A 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 statement
Graphic: Paints a picture of the kind of
company that management is trying to
create and the market position a
company is striving to stake out
2. Directional: says something about
companys journey or destination and
signals the kinds of businesses and
strategic changes that will be
forthcoming
3. Focused: is specific enough to provide
mangers with guidance in making
decisions and allocating resources
1.
Characteristics of a well worded
vision statement
4.
5.
6.
7.
Flexible : is not a once-and-for-all time
pronouncement; vision about a companys
future path may need to change as events
unfold and circumstances change
Feasible: is within the realm of what the
company can reasonably expect to achieve in
due time
Desirable : appeals to the long term
interests of stake holders - particularly
shareowners, employees and customers
Easy to communicate: is explainable in less
than 10 minutes and ideally be reduced to a
simple memorable slogan
Common shortcomings in
company vision statements
Incomplete : short on specifics about
where the company is headed and what
kind of company management is trying
to create
2. Vague : doesnt provide much indication
of whether or how management needs
to alter the companys current product/
market/ customer/ technology focus
3. Bland : lacking in motivational power
4. Not distinctive: could apply to almost
any company (or at-least several others
in the same industry)
1.
Common shortcomings in
company vision statements
5.
Too reliant on such superlatives as best,
most successful, recognized leader, global
or worldwide leader, or first choice of
customers
6.
Too generic fails to identify the
business, or industry, to which it is
supposed to apply. The statement could
apply to companies in any of several
industries
7.So broad that it really doesnt rule out any
opportunity that management might opt to
pursue
Googles Vision Statement
Google 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 Statement
When 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 ecommerce platform for publishers.
Googles Vision Statement
Beyond 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 ecommerce system via our Checkout product
and also enable users to find this content
via search -- even if it's behind a paywall.
Googles Vision Statement
Our 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" access
Advertising systems that offer highly relevant ads for
users, such as interest-based advertising
Vision vs. Mission
A strategic vision
concerns a firms
future business path
- where we are
going
Markets to be pursued
Future product/market/
customer/technology
focus
Kind of company
management is
trying to create
The mission
statement of a firm
focuses on its
present business
purpose - who we
are and what we
do
Current markets and
market offerings
Customer needs being
served
Technological and
business
capabilities (competitive
advantage)
Setting Objectives
Phase 2 of the Strategy-Making Process
Purpose of setting objectives
Creates yardsticks to track performance
Converts vision into specific performance
targets
Well-stated objectives are
Quantifiable
Measurable
Contain a deadline for achievement
Spell-out how much of what kind of performance
by when
Types of Objectives
Required
Financial Objectives
Outcomes focused
on improving
financial
performance
Strategic Objectives
Outcomes focused
on improving
competitive
vitality and
future business
position
Financial Objectives
Strategic Objectives
An 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
Objectives
A balanced scorecard for measuring
company performance is optimal; it entails
Setting financial and strategic objectives
Placing 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 deemphasizing the strategic objectives may have merit)
Just tracking financial performance
overlooks the importance of measuring
whether a company is strengthening its
competitiveness
andfuture
market
position.
The
surest path to sustained
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
Scorecard
Financial Perspective: Increase Returns;
broaden revenue streams
Customer Perspective: Increase customer
satisfaction; strengthen customer loyalty
Internal Perspective : Create innovative
products; improve after-sales service
Learning Perspective: Develop the requisite
skills; provide incentive based on customer
feedback
How the BSC works
Equip our people to,
Build strategic capabilities needed to,
Deliver unique set of benefits to customers
to..,
Achieve financial performance
_________________________________
People, knowledge, skills, systems and
tools develop Internal capabilities,
leading to Customer benefits, driving
Financial results.
Short-Term vs.
Long-Term Objectives
Short-term objectives
Targets to be achieved soon
Milestones or stair steps for reaching long-
range performance
Long-term objectives
Targets to be achieved within
3 to 5 years
Prompt actions now that will
permit reaching targeted
long-range performance later
Crafting a Strategy
Phase 3 of the Strategy-Making Process
Strategy-making involves entrepreneurship
Actively searching for opportunities to do new
things
or
Actively searching for opportunities to do
existing things in new or better ways
Strategizing involves
Developing timely responses to happenings
in the external environment
and
Steering company activities in new directions
dictated by shifting market conditions
A Companys Strategy-Making Hierarchy
Tasks of Corporate Strategy
Moves to achieve diversification
Actions to boost performance of individual
businesses
Capturing valuable cross-business
synergies to provide 1 + 1 = 3 effects!
Establishing investment
priorities and steering
corporate resources into the
most attractive businesses
Tasks of Business Strategy
Initiating approaches to produce successful
performance in a specific business
Crafting competitive moves to build
sustainable competitive advantage
Developing competitively valuable
competencies and capabilities
Uniting strategic activities of functional
areas
Gaining approval of business strategies by
corporate-level officers and directors
Tasks of Functional
Strategies
Game plan for a strategically-relevant
function, activity, or business process
Detail how key activities
will be managed
Provide support for
business strategy
Specify how functional objectives
are to be achieved
Tasks of Operating Strategies
Concern narrow strategic approaches to
manage key operating units and
strategically-relevant operating activities
Add detail to business
and functional strategies
Delegation of responsibility
to frontline managers
Implementing and Executing
Strategy
Phase 4 of the Strategy-Making Process
Operations-oriented activity aimed at
performing core business activities in a
strategy-supportive manner
Tougher and more time-consuming
than crafting strategy
Key tasks include
Improving efficiency of strategy being executed
Showing measurable progress in achieving
targeted results
What Does Strategy
Implementation Involve?
Building a capable organization
Allocating resources to strategy-critical activities
Establishing strategy-supportive policies
Instituting best practices and programs for
continuous improvement
Installing information, communication,|
and operating systems
Motivating people to pursue the target objectives
Tying rewards to achievement of results
Creating a strategy-supportive corporate culture
Exerting the leadership necessary to drive the process
forward and keep improving
Evaluating Performance and
Making
Corrective
Adjustments
Phase 5 of the Strategy-Making Process
Phase 5 of the Strategy-Making Process
Tasks of crafting and implementing the strategy are
not a one-time exercise
Customer needs and competitive conditions change
New opportunities appear; technology
advances; any number of other
outside developments occur
One or more aspects of executing the
strategy may not be going well
New managers with different ideas take over
Organizational learning occurs
All these trigger a need for corrective actions and
adjustments on an as-needed basis
The
The Basis
Basis for
for Good
Good
Strategic
Strategic Decisions
Decisions
Intuition + Analysis
Effective Strategic Decisions
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