Strategic Management

Fall 2013

I Like Strategy
And by the way, HOPE is not a strategy!

STAKEHOLDERS & THE STRATEGIC MANAGEMENT PROCESS

The Strategic Management Process
Organizational and Environmental Analysis

Strategic Direction
Strategy Formulation Strategy Implementation and Control Strategic Restructuring

Concept and Definition

A companys strategy consists of the competitive

moves and business approaches devised by management to produce successful performance.

Strategy is managements game plan for running

the business, strengthening the companys competitive position, satisfying customers, and achieving performance targets.

Without a strategy, managers have:

No well-defined business path to follow No roadmap to manage by No cohesive, reasoned action plan to

produce successful performance

Company mission & social responsibility

External Environment Possible? Desired? Internal analysis

Strategic analysis & choice

Feedback

Feedback

Long-term objectives

Generic & grand strategies

Short-term objectives; reward system

Functional tactics

Policies that empower action

Restructuring, reengineering & refocusing the organization

Legend Major impact Minor impact

Strategic control & continuous improvement

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 top management wants the company to be like in 5 to 10 years

Continued
3. How will we get there?

This involves thinking about what STRATEGY the company should pursue to perform successfully and get from where it is to where it wants to go.
This third step is where companies often:

SCREW IT UP !!!

THE FIVE TASKS OF STRATEGIC MANAGEMENT

1.
2.

3.
4. 5.

Defining the business, stating a mission, and forming a strategic vision Setting measurable objectives and performance targets Crafting a strategy to achieve the objectives Implementing and executing the strategy Evaluating performance, reviewing new developments, and initiating corrective adjustments in long-term direction, objectives, strategy, or implementation approaches

Definition of Strategic Management

STRATEGIC MANAGEMENT is the process through which organizations:

Analyze and learn from the stakeholders inside and outside the organization, Establish strategic direction, Create strategies that are intended to help achieve established goals, Execute strategies,

All in an effort to satisfy

KEY STAKEHOLDERS.

Stakeholder Approach
Stakeholders
are groups or individuals who can

significantly affect or are significantly affected by an organizations activities such as customers, employees, stockholders, communities, suppliers, etc. have, or believe they have, a legitimate claim on some aspects of the organization or its activities

THE ORGANIZATION AND ENVIRONMENT

Organizational Environment
Groups, individuals, and forces outside of the

traditional boundaries of the organization that are significantly influenced by or have a major impact on the organization.
This includes both the operating and broad

environments:

Continued
OPERATING ENVIRONMENT employees,

competitors, customers, suppliers, lenders, unions, govt agencies, local communities, etc.
BROAD ENVIRONMENT global economic

forces, sociocultural forces, technological change, and global political and legal forces.

How do we deal with the environment?

Continued
ADAPTATION The process of responding to the environment.
ENACTMENT The process of influencing the environment to make it less hostile and more conducive to organizational success.

Strategic Direction
MISSION STATEMENT Statement describing the organizations overall purpose, broad goals, and the scope of its operations. VISION STATEMENT Statement expressing managements view of what the organization can or should become in the future

Strategy Formulation
1. Corporate-Level Strategy

Concerned with the selection of business areas in which the organization will compete Referred to as domain definition Concerned with how businesses compete in the areas they have selected Referred to as domain direction and navigation
Provides details of how functional areas work together to achieve business-level strategy

2. Business-Level Strategy

3. Functional-Level Strategy

Strategic Implementation and Control

Strategy Implementation

Creating the functional strategies, systems, structures, and processes needed by the organization to achieve strategic ends The processes that lead to adjustments in strategic direction, strategies, or the implementation plan, when necessary

Strategic Control

Strategic Restructuring
Restructuring

Involves renewed emphasis on the things an organization does well, combined with a variety of tactics 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 things become evident. Things happen that require new initiatives and actions. New leadership emerges

Alternative Perspectives on Strategy Development

ENVIRONMENTAL DETERMINISM
The environment is the primary determinant of strategy. The most successful organization will be the one that best ADAPTS to existing forces.

STRATEGIC CHOICE
Organizations do not have to submit to forces in the environment, they can create their environments through relationships with stakeholders and other activities.

STAKEHOLDER VIEW
Compromise between determinism and choice. Through stakeholder analysis and management processes, organizations can better understand and influence their environments.

DELIBERATE VS EMERGENT STRATEGY

Deliberate Strategy an intended strategic

course planned and pursued by managers. Emergent Strategy an unplanned strategy that emerges from a stream of managerial decisions.
**** In reality, both processes must be present for an organization to truly excel.

RESOURCE-BASED VIEW OF THE FIRM

An organization is a bundle of financial, human, physical, and organizational resources. Resources that create value for customers but are difficult for competitors to imitate provide the basis for a sustainable competitive advantage.

What are these resources?

STAKEHOLDER ANALYSIS AND MANAGEMENT

STAKEHOLDER ANALYSIS

Involves identifying and prioritizing key stakeholders, assessing their needs, collecting ideas from them, and integrating this knowledge into strategic management processes.

STAKEHOLDER MANAGEMENT Includes communicating, negotiating, contracting, and managing relationships with stakeholders and motivating them to behave in ways that are beneficial to the organization and its other stakeholders.

The Broad Environment

Fig. 3-1: The External Environment

Remote Environment (Global and Domestic)
Economic Social Political Technological

Industry Environment (Global and Domestic) Entry barriers Buyer power Supplier power Substitute availability Competitive rivalry Operating Environment (Global and Domestic) Competitors Customers Creditors Labor Suppliers

THE FIRM

The Broad Environment

Sociocultural forces Global economic forces Global political forces Technological forces

Socio-cultural Trends
Analysis of societal trends is important from at least four perspectives:
1. The values and beliefs of key stakeholders

are derived from broader societal influences, which can create opportunities and threats for the firm.

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 just by country!

Socio-cultural Trends
2. Awareness of and compliance with the attitudes of society can help an organization avoid problems associated with being a bad corporate citizen.

Reputation is important as it cant be imitated! Therefore, corporate image can become a competitive advantage.

Socio-cultural Trends
3. Correct assessment of social trends can help

businesses avoid restrictive legislation.

Socio-cultural Trends
4. Changes in society can create opportunities

and threats to an organizations revenue growth and profit prospects. These changes can often help to predict future demand.

Global Economic Forces

1. Economic growth

Global Economic Forces

2. Interest rates

Global Economic Forces

3. Inflation

Global Economic Forces

4. Exchange rates

Global Economic Forces

5. Trade deficits

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 society expects.

Technological Forces

Technology refers to human knowledge

about 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 be replicated reliably on a meaningful scale.

Technological Forces
Basic Innovation An invention that
impacts more than one product category or industry. What would be some basic innovations?

Technological Forces

Radical innovations usually originate outside of the industry boundaries!

What are the implications of this?

Political/Legal Forces
According to some, political/legal forces are

often the most significant determinants of organizational success.

Do you agree? Why or why not?

Political/Legal Forces
For example, did you know that lenders are

held liable when their customers are guilty of polluting the environment?

Political/Legal Forces
Even in the U.S., which is considered a free market economy, no organization is allowed the privilege of total autonomy from government regulations.

The Operating Environment

The Operating Environment

Includes stakeholders such as:

Customers Suppliers Competitors Government Agencies Local Communities Activist groups Unions

The Operating Environment

Which of these stakeholders are primary forces that drive competition in an industry?

Primary Stakeholders
Customers
Suppliers Competitors

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.

Are all stakeholders of equal value to the firm?

No !!!
One key factor in determining the priority of a particular stakeholder is the influence on the environmental uncertainty facing the firm.

An Important Point
Although environmental uncertainty often originates in the broad environment, firms feel most of its influence through external stakeholders in the operating environment.

Environmental Uncertainty
Although Political/Legal Influence contributes greatly to environmental uncertainty, Economic power is often the most important influence in understanding the nature and level of environmental uncertainty.

Porters Five-Forces Model

Customers
Suppliers Industry Competitors

a) b) c)

existing competitors potential competitors substitutes

Fig. 3-4: Forces Driving Industry Competition

Potential entrants
Threat of new entrants Bargaining power of suppliers

Industry competitors

Bargaining power of buyers

Suppliers Rivalry Among Existing Firms

Threat of substitute products or services

Buyers

Substitutes

Customers are a force when

There are a small number of them
They make high volume purchases The purchases they make represent a large

percentage of their total costs The sellers products are plentiful and/or undifferentiated They earn low profits

Customers are a force when

They can easily integrate backward and

become their own suppliers Sellers products dont have much influence on the quality of their customers products Information on sellers costs and demand is readily available to buyers

In combination, these forces determine the bargaining power of customers

Obviously, the greater their power, the higher the priority customers should be given in the strategic management process.

Suppliers are a force when

There are only a few suppliers
There are few or no substitutes Suppliers do not sell a large percentage of

their products to the buying industry The buying industry must have the product that suppliers provide in order to manufacture its own product

Suppliers are a force when

Suppliers have differentiated their products or

made it costly to switch suppliers Suppliers can easily integrate forward and compete directly with former buyers

In combination, these forces determine the bargaining power of suppliers

Obviously, the greater their power, the higher the priority suppliers should be given in the strategic management process.

Competitors
Rivalry among existing competitors WILL incite retaliation or counter moves. These moves typically 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 Levels Of Competition

Slow industry growth
High fixed costs Lack of product differentiation A large number of competitors High exit barriers

Hypercompetition
A condition of rapidly escalating competition.
What would be an industry today that faces hypercompetition?

Firms often keep track of the activities and capabilities of their competitors through
Competitive benchmarking a tool in which management uses the best practices of competitors in setting objectives to encourage improvement in performance.
What is the fallacy of benchmarking and how could it actually harm your strategy?

Potential Competitors
Entry barriers prevent firms from freely moving into an industry. They include: Economies of scale Capital requirements Product differentiation Switching costs Access to distribution channels Other cost advantages such as proprietary technology Government policy

Indirect Competitors
If organizations provide goods that are readily substitutable for the goods provided by an industry, these organizations become indirect competitors. This leads to A ceiling on the price for the good Can create new expectations

What do we do with this model?

Use it to understand how the firm should

position itself relative to these forces (reactive) Use it to influence the forces by actions such as erecting high entry barriers through economies of scale or differentiation (proactive) Use it to decide whether or not to enter or leave a particular industry

Basic Postures
Firms use two primary postures when dealing with external stakeholders:

Buffering techniques designed to stabilize and predict environmental influences (PR, market research, lobbying, etc.) Bridging (also referred to as boundary spanning) techniques that build on interdependencies (joint ventures, strategic alliances, partnering, industry level lobbying, extranets, etc.)

Internal Analysis

From a resource-based perspective Strengths are firm resources and capabilities that can lead to a competitive advantage. Weaknesses are resources and capabilities that the firm does not possess but that are necessary, resulting in a competitive disadvantage.

From a resource-based perspective Opportunities are conditions in the broad and operating environments that allow a firm to take advantage of organizational strengths, overcome organizational weaknesses, and/or neutralize environmental threats.

From a resource-based perspective Threats are conditions in the broad and operating environments that may stand in the way of organizational competitiveness or the achievement of stakeholder satisfaction.

Fig. 6-6: SWOT Analysis Diagram

Numerous environmental opportunities

Critical internal weaknesses

Cell 3: Supports a turnaroundoriented strategy Cell 4: Supports a defensive strategy

Cell 1: Supports an aggressive strategy Cell 2: Supports a diversification strategy

Substantial internal strengths

Major environmental threats

Fig. 6-7: The Value Chain

General administration
Support Activities

Human resource management Research, technology, and systems development Procurement

Operations

Outbound logistics

Primary Activities

Marketing and sales

Inbound Logistics

Service

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

Value Chain Analysis

Value chain analysis may be combined with stakeholder analysis to identify strengths and weaknesses and to uncover opportunities for savings or ways to add value for customers.

Plus
The combination of stakeholder analysis with value chain analysis holds great potential for developing strategies that are both efficient and effective.

Strategic Direction

Where the heck are we going?

To often the answer is this

Strategic Direction

Strategic direction requires managers to provide long-term direction while balancing the competing interests of key stakeholders.

Strategic Direction
Strategic direction is established and communicated through tools such as visions, missions, business definitions, enterprise strategies, and long-term goals.

Finally
This is where the rubber meets the road!

Unless

Of course, you are Firestone. ;-)

Structural Inertia
forces within the organization that work to maintain the status quo.

Business Definition
What is our business? Should be addressed from four perspectives:

Who is being satisfied? 2. What is being satisfied? 3. How are customer needs satisfied? 4. What are our products and/or services?
1.

Plus

What do we stand for?

Important point
This is the critical link between ethics and strategy and is referred to as enterprise strategy.

Theoretical Models
Economic foundations
Legal foundations Religious foundations Utilitarian foundations

An organizations mission
Reflects managements vision of what the

organization seeks to do and to become Provides a clear view of what the organization is trying to accomplish Indicates an intent to stake out a particular position

Specific questions that help form 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?

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
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
SATURN To market vehicles developed and manufactured in the United States that are world leaders in quality, cost, and customer satisfaction through the integration of people, technology, and business systems and to transfer knowledge, technology, and experience throughout General Motors.

Formula
Key Market:

To offer the fast food

customer
Contribution: food prepared in the same

high-quality manner world-wide, tasty and reasonably priced,

Distinction:

delivered in a consistent, lowkey dcor and friendly atmosphere.

Goals in most companies

Maximize long-term shareholder wealth Optimize employee potential Customer orientation Build competencies Global Citizenship Technology Productivity

Corporate-Level Strategy

Corporate-Level Strategy
Selection of business areas in which the organization will compete.
Concentration
Vertical Integration Diversification

Concentration
the organization produces a single or a small group of products or services.

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 to understand the firms mission

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
The extent to which a firm is involved in several stages of the industry supply chain.

Market Failure
occurs when transaction costs are high enough to encourage an organization to produce a good or service in-house instead of buying from the open market.

Taper Integration
- Occurs when an organization produces part of its requirements in-house and buys the rest of what it needs on the open market.

Diversification
Related Diversification firms involvement in

other businesses related to its core business.

Unrelated Diversification firms involvement

in businesses not related to its core business.

Business-Level Strategy

Generic Business Strategies

1. Cost Leadership 2. Differentiation

3. Best Cost
4. Cost Focus

5. Differentiation Focus

Creating Low-Cost Positions

Capacity utilization Economies of scale Cost-saving technologies Learning/experience curve effects

Creating Low-Cost Positions

*** A cost leader does not have to be a price leader !

Differentiation Tactics
Quality
Innovation and research

Speed and flexibility

Organizational reputation and

brand name

Best Cost Strategy

*** The essence of a best cost strategy is to find a level of differentiation that will bring a premium price while doing so at a reasonable cost.

Focus Strategies
*** The key to a focus strategy is catering to a particular segment in the market.

Low-cost focus Differentiation focus

The Issue of Tradeoffs

A sustainable strategic position requires tradeoffs. If a company moves upscale, it repositions itself away from its current customer base.

Tradeoffs arise for three reasons

Inconsistency of image or reputation - a firm cant go in different directions without confusing the customers. Need for different types of resources - different positions require different equipment, employee behaviors, skills, product configurations, and management systems. Overall costs - internal coordination and control can be very expensive.

Five Fatal Strategy Flaws

Misreading Industry Attractiveness

Possessing No True Competitive

Advantage Pursuing A Competitive Advantage That Is Not Sustainable Compromising A Strategy In Order To Grow Faster Not Making Your Strategy Explicit And Not Communicating It To Your Employees

Growth Strategies
Internal Market penetration Market/applications development Product/service development External Mergers/integration Joint ventures/strategic alliances

Positioning Competitive Strategies in a Dynamic Environment

Industry Life Cycle

Introduction
Growth

Maturity
Decline (commodity)

Functional-Level Strategies

Functional Strategies
Collective patterns of decisions made and actions

taken by employees that implement the growth and competitive strategies of the organization.
Do you see any potential conflict in this statement?

Marketing Strategy
a plan to promote, price, and distribute the products and services of an organization, as well as how to identify and service customer groups.

Operations Strategy
- a plan to design and manage the processes needed to create the products and services of the organization.

Research and Development Strategy

a plan that guides basic research of the organization as well as its development of more effective and efficient applications, products, and processes.

Information Systems Strategy

a plan to provide the organization with the information technology necessary for the operation, planning, and control of business activities.

Human Resources Strategy

a plan that guides the recruiting, hiring, training, and compensating of employees as well as organizational change efforts.

Financial Strategy
a plan to provide the organization with the capital structure and funds appropriate for implementing growth and competitive strategies.

Functional Strategies MUST

be consistent in three important areas:
1. Within function 2. Between function 3. With the generic-level strategy

Example
MISSION/VISION FCS will be the lender and employer of choice in our marketplace.
GOAL Optimizing employee potential

Example, cont.
OBJECTIVE Increase employee morale through continuous training 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 the organization.

Example, cont.
POLICIES/TACTICS
Finance designate $3.8 million for

employee training for year 2008.

Marketing offer a quarterly rotation of

effective sales training programs for all sales personnel.

Strategic Control

STRATEGIC CONTROL
Strategic Control System organizational system by which top management can evaluate the progress of the organization in accomplishing its goals, as well as point out areas in need of attention.

STRATEGIC CONTROL
These are often accounting-based measures. Why can accounting-based measures be problematic?

STRATEGIC CONTROL
Control systems should be comprehensive and designed to include input from internal and external stakeholders and from organizational processes.

STRATEGIC CONTROL
Financial
ROI Cash flow Stock price Earnings stability

STRATEGIC CONTROL
Customer
Pricing Innovation Quality Value Customer service

STRATEGIC CONTROL
Internal Business
Cost controls

Skill levels
Product line breadth Safety

On-time delivery
Quality

STRATEGIC CONTROL
Innovation and Learning
Workforce morale Innovation Investments in R & D Continuous improvement

CRITICAL RESULT AREAS

Organizational areas that are key to ensuring that the organization accomplishes its goals and its vision.

Examples: Improvement in worker skill levels Product redesign Creation of new process controls

Continued
Once identified, the critical result areas become the objectives and targets that pace strategy implementation.

GOAL SETTING
Bottom-Up Approach goal setting

begins in functional areas, which translates into business-level goals of the various divisions that are combined to form the corporate-level goals.

Continued
Top-Down Approach the corporate

level essentially determines and then dictates what lower-level goals should be.

FEEDBACK CONTROL SYSTEMS

Budgets feedback controls that provide

revenue and expense targets. Financial Ratios feedback controls used to control organizational processes and behavior (Current ratio, quick ratio, etc.). Audits a type of feedback control system used to provide information to support financial, customer, or internal perspectives. Firm conduct and outcomes are measured against established guidelines.

FEEDBACK CONTROL SYSTEMS

Customer Surveys a type of feedback control system used to measure how well established standards for customer satisfaction are being met.
See any problems with these?

FEEDBACK CONTROL SYSTEMS

Concurrent Controls very similar to

feedback controls, except that the time horizon is shortened to real time. Process Control controls associated with production and service processes and with quality standards (i.e., making sure things meet specifications).

ORGANIZATIONAL CRISES
A better definition:
When the feces hits the fast-moving, rotary bladed instrument. In other words, when the @$%&*# hits the fan!

CRISIS-PRONE ORGANIZATIONS
If they prepare at all, they prepare for too few

contingencies. Further, preparation is fragmented. They focus on only one aspect of a crisis, and only after it has occurred. They only consider technical factors in the cause or prevention of crises. They dont explicitly consider the ramifications to key stakeholders.