Chapter# 8 Strategic Management Chapter# 8 Strategic Management Presented By: Farhan Khalid MBA –Section E (Elite)

L E A R N I N G O U T L I N E Follow this Learning Outline as you read and study this chapter. The Importance of Strategic Management Define strategic management, strategy, and business model.Define strategic management, strategy, and business model. Explain why strategic management is important.Explain why strategic management is important. The Strategic Management Process List the six steps in the strategic management process.List the six steps in the strategic management process. Describe what managers do during external and internal analyses.Describe what managers do during external and internal analyses. Explain the role of resources, capabilities, and core competencies.Explain the role of resources, capabilities, and core competencies. Define strengths, weaknesses, opportunities, and threats.Define strengths, weaknesses, opportunities, and threats.

L E A R N I N G O U T L I N E (contd) Follow this Learning Outline as you read and study this chapter. Types of Organizational Strategies Describe the three major types of corporate strategies.Describe the three major types of corporate strategies. Discuss the BCG matrix and how its used.Discuss the BCG matrix and how its used. Describe the role of competitive advantage in business- level strategies.Describe the role of competitive advantage in business- level strategies. Explain Porters five forces model.Explain Porters five forces model. Describe Porters three generic competitive strategies and the rule of three.Describe Porters three generic competitive strategies and the rule of three.

L E A R N I N G O U T L I N E (contd) Follow this Learning Outline as you read and study this chapter. Strategic Management in Todays Environment Explain why strategic flexibility is important.Explain why strategic flexibility is important. Describe strategies applying e-business techniques.Describe strategies applying e-business techniques. Explain what strategies organizations might use to become more customer oriented and to be more innovative.Explain what strategies organizations might use to become more customer oriented and to be more innovative.

Strategic Management What managers do to develop the organizations strategies.What managers do to develop the organizations strategies.Strategies The decisions and actions that determine the long-run performance of an organization.The decisions and actions that determine the long-run performance of an organization.

Strategic Management (contd) Business ModelBusiness Model Is a strategic design for how a company intends to profit from its strategies, work processes, and work activities. Is a strategic design for how a company intends to profit from its strategies, work processes, and work activities. Focuses on two things: Focuses on two things: Whether customers will value what the company is providing. Whether customers will value what the company is providing. Whether the company can make any money doing that. Whether the company can make any money doing that.

Why is Strategic Management Important 1.It results in higher organizational performance. 2.It requires that managers examine and adapt to business environment changes. 3.It coordinates diverse organizational units, helping them focus on organizational goals. 4.It is very much involved in the managerial decision-making process.

Exhibit 8–1The Strategic Management Process

Strategic Management Process Step 1: Identifying the organizations current mission, goals, and strategiesStep 1: Identifying the organizations current mission, goals, and strategies Mission: the firms reason for being Mission: the firms reason for being The scope of its products and services The scope of its products and services Goals: the foundation for further planning Goals: the foundation for further planning Measurable performance targets Measurable performance targets Step 2: Doing an external analysisStep 2: Doing an external analysis The environmental scanning of specific and general environments The environmental scanning of specific and general environments Focuses on identifying opportunities and threats Focuses on identifying opportunities and threats

Exhibit 8–2Components of a Mission Statement

Strategic Management Process (contd) Step 3: Doing an internal analysisStep 3: Doing an internal analysis Assessing organizational resources, capabilities, and activities: Assessing organizational resources, capabilities, and activities: Strengths create value for the customer and strengthen the competitive position of the firm. Strengths create value for the customer and strengthen the competitive position of the firm. Weaknesses can place the firm at a competitive disadvantage. Weaknesses can place the firm at a competitive disadvantage. Analyzing financial and physical assets is fairly easy, but assessing intangible assets (employees skills, culture, corporate reputation, and so forth) isnt as easy. Analyzing financial and physical assets is fairly easy, but assessing intangible assets (employees skills, culture, corporate reputation, and so forth) isnt as easy. Steps 2 and 3 combined are called a SWOT analysis. (Strengths, Weaknesses, Opportunities, and Threats)Steps 2 and 3 combined are called a SWOT analysis. (Strengths, Weaknesses, Opportunities, and Threats)

Exhibit 8–3Corporate Rankings (partial lists) Interbrand/BusinessWeek 100 Top Global Brands (2005) 1. Coca-Cola 2. Microsoft 3. IBM 4. General Electric 5. Intel Harris Interactive/Wall Street Journal National Corporate Reputation (2005) 1. Johnson & Johnson 2. Coca-Cola 3. Google 4. United Parcel Service 5. 3M Company Hay Group/Fortune Americas Most Admired Companies (2006) Great Place to Work Institute/Fortune 100 Best Companies to Work For (2006) 1. General Electric 2. FedEx 3. Southwest Airlines 4. Procter & Gamble 5. Starbucks 1. Genentech 2. Wegmans Food Markets 3. Valero Energy 4. Griffin Hospital 5. W. L. Gore & Associates

Strategic Management Process (contd) Step 4: Formulating strategiesStep 4: Formulating strategies Develop and evaluate strategic alternatives Develop and evaluate strategic alternatives Select appropriate strategies for all levels in the organization that provide relative advantage over competitors Select appropriate strategies for all levels in the organization that provide relative advantage over competitors Match organizational strengths to environmental opportunities Match organizational strengths to environmental opportunities Correct weaknesses and guard against threats Correct weaknesses and guard against threats

Strategic Management Process (contd) Step 5: Implementing strategiesStep 5: Implementing strategies Implementation: effectively fitting organizational structure and activities to the environment. Implementation: effectively fitting organizational structure and activities to the environment. The environment dictates the chosen strategy; effective strategy implementation requires an organizational structure matched to its requirements. The environment dictates the chosen strategy; effective strategy implementation requires an organizational structure matched to its requirements. Step 6: Evaluating resultsStep 6: Evaluating results How effective have strategies been? How effective have strategies been? What adjustments, if any, are necessary? What adjustments, if any, are necessary?

Types of Organizational Strategies Corporate StrategiesCorporate Strategies Top managements overall plan for the entire organization and its strategic business units Top managements overall plan for the entire organization and its strategic business units Types of Corporate StrategiesTypes of Corporate Strategies Growth: expansion into new products and markets Growth: expansion into new products and markets Stability: maintenance of the status quo Stability: maintenance of the status quo Renewal: redirection of the firm into new markets Renewal: redirection of the firm into new markets

Exhibit 8–4Levels of Organizational Strategy

Corporate Strategies Growth StrategyGrowth Strategy Seeking to increase the organizations business by expansion into new products and markets. Seeking to increase the organizations business by expansion into new products and markets. Types of Growth StrategiesTypes of Growth Strategies Concentration Concentration Vertical integration Vertical integration Horizontal integration Horizontal integration Diversification Diversification

Growth Strategies ConcentrationConcentration Focusing on a primary line of business and increasing the number of products offered or markets served. Focusing on a primary line of business and increasing the number of products offered or markets served. Vertical IntegrationVertical Integration Backward vertical integration: attempting to gain control of inputs (become a self-supplier). Backward vertical integration: attempting to gain control of inputs (become a self-supplier). Forward vertical integration: attempting to gain control of output through control of the distribution channel or provide customer service activities (eliminating intermediaries). Forward vertical integration: attempting to gain control of output through control of the distribution channel or provide customer service activities (eliminating intermediaries).

Growth Strategies (contd) Horizontal IntegrationHorizontal Integration Combining operations with another competitor in the same industry to increase competitive strengths and lower competition among industry rivals. Combining operations with another competitor in the same industry to increase competitive strengths and lower competition among industry rivals. Related DiversificationRelated Diversification Expanding by combining with firms in different, but related industries that are strategic fits. Expanding by combining with firms in different, but related industries that are strategic fits. Unrelated DiversificationUnrelated Diversification Growing by combining with firms in unrelated industries where higher financial returns are possible. Growing by combining with firms in unrelated industries where higher financial returns are possible.

Growth Strategies (contd) Stability StrategyStability Strategy A strategy that seeks to maintain the status quo to deal with the uncertainty of a dynamic environment, when the industry is experiencing slow- or no-growth conditions, or if the owners of the firm elect not to grow for personal reasons. A strategy that seeks to maintain the status quo to deal with the uncertainty of a dynamic environment, when the industry is experiencing slow- or no-growth conditions, or if the owners of the firm elect not to grow for personal reasons.

Growth Strategies (contd) Renewal StrategiesRenewal Strategies Developing strategies to counter organization weaknesses that are leading to performance declines. Developing strategies to counter organization weaknesses that are leading to performance declines. Retrenchment: focusing of eliminating non-critical weaknesses and restoring strengths to overcome current performance problems. Retrenchment: focusing of eliminating non-critical weaknesses and restoring strengths to overcome current performance problems. Turnaround: addressing critical long-term performance problems through the use of strong cost elimination measures and large-scale organizational restructuring solutions. Turnaround: addressing critical long-term performance problems through the use of strong cost elimination measures and large-scale organizational restructuring solutions.

Corporate Portfolio Analysis Managers manage portfolio (or collection) of businesses using a corporate portfolio matrix such as the BCG Matrix.Managers manage portfolio (or collection) of businesses using a corporate portfolio matrix such as the BCG Matrix. BCG MatrixBCG Matrix Developed by the Boston Consulting Group Developed by the Boston Consulting Group Considers market share and industry growth rate Considers market share and industry growth rate Classifies firms as: Classifies firms as: Cash cows: low growth rate, high market share Cash cows: low growth rate, high market share Stars: high growth rate, high market share Stars: high growth rate, high market share Question marks: high growth rate, low market share Question marks: high growth rate, low market share Dogs: low growth rate, low market share Dogs: low growth rate, low market share

Exhibit 8–5The BCG Matrix

8–24 Business or Competitive Strategy Business (or Competitive) StrategyBusiness (or Competitive) Strategy A strategy focused on how an organization should compete in each of its SBUs (strategic business units). A strategy focused on how an organization should compete in each of its SBUs (strategic business units).

The Role of Competitive Advantage Competitive AdvantageCompetitive Advantage An organizations distinctive competitive edge. An organizations distinctive competitive edge. Quality as a Competitive AdvantageQuality as a Competitive Advantage Differentiates the firm from its competitors. Differentiates the firm from its competitors. Can create a sustainable competitive advantage. Can create a sustainable competitive advantage. Represents the companys focus on quality management to achieve continuous improvement and meet customers demand for quality. Represents the companys focus on quality management to achieve continuous improvement and meet customers demand for quality.

The Role of Competitive Advantage (contd) Sustainable Competitive AdvantageSustainable Competitive Advantage Continuing over time to effectively exploit resources and develop core competencies that enable an organization to keep its edge over its industry competitors. Continuing over time to effectively exploit resources and develop core competencies that enable an organization to keep its edge over its industry competitors.

Five Competitive Forces Threat of New EntrantsThreat of New Entrants The ease or difficulty with which new competitors can enter an industry. The ease or difficulty with which new competitors can enter an industry. Threat of SubstitutesThreat of Substitutes The extent to which switching costs and brand loyalty affect the likelihood of customers adopting substitutes products and services. The extent to which switching costs and brand loyalty affect the likelihood of customers adopting substitutes products and services. Bargaining Power of BuyersBargaining Power of Buyers The degree to which buyers have the market strength to hold sway over and influence competitors in an industry. The degree to which buyers have the market strength to hold sway over and influence competitors in an industry.

Five Competitive Forces Bargaining Power of SuppliersBargaining Power of Suppliers The relative number of buyers to suppliers and threats from substitutes and new entrants affect the buyer-supplier relationship. The relative number of buyers to suppliers and threats from substitutes and new entrants affect the buyer-supplier relationship. Current RivalryCurrent Rivalry Intensity among rivals increases when industry growth rates slow, demand falls, and product prices descend. Intensity among rivals increases when industry growth rates slow, demand falls, and product prices descend.

Exhibit 8–6Forces in the Industry Analysis

Types of Competitive Strategies Cost Leadership StrategyCost Leadership Strategy Seeking to attain the lowest total overall costs relative to other industry competitors. Seeking to attain the lowest total overall costs relative to other industry competitors. Differentiation StrategyDifferentiation Strategy Attempting to create a unique and distinctive product or service for which customers will pay a premium. Attempting to create a unique and distinctive product or service for which customers will pay a premium. Focus StrategyFocus Strategy Using a cost or differentiation advantage to exploit a particular market segment rather a larger market. Using a cost or differentiation advantage to exploit a particular market segment rather a larger market.

The Rule of Three Similar to Porters generic competitive strategiesSimilar to Porters generic competitive strategies The competitive forces in an industry will create a situation where three companies (full-line generalists) will dominate a market. The competitive forces in an industry will create a situation where three companies (full-line generalists) will dominate a market. Some firms in the market become super niche players and while others end up as ditch dwellers. Some firms in the market become super niche players and while others end up as ditch dwellers. Firms unable to develop either a cost or differentiation advantage become stuck in the middle and lack prospects for long-term success. Firms unable to develop either a cost or differentiation advantage become stuck in the middle and lack prospects for long-term success. A few firms successfully pursue both differentiation and cost advantages. A few firms successfully pursue both differentiation and cost advantages.

Strategic Management Today Strategic FlexibilityStrategic Flexibility New Directions in Organizational StrategiesNew Directions in Organizational Strategies e-business e-business customer service customer service innovation innovation

Exhibit 8–7Creating Strategic Flexibility Know whats happening with strategies currently being used by monitoring and measuring results. Encourage employees to be open about disclosing and sharing negative information. Get new ideas and perspectives from outside the organization. Have multiple alternatives when making strategic decisions. Learn from mistakes.

How the Internet Has Changed Business The Internet allows businesses to:The Internet allows businesses to: Create knowledge bases that employees can tap into anytime, anywhere. Create knowledge bases that employees can tap into anytime, anywhere. Turn customers into collaborative partners who help design, test, and launch new products. Turn customers into collaborative partners who help design, test, and launch new products. Become virtually paperless in specific tasks such as purchasing and filing expense reports. Become virtually paperless in specific tasks such as purchasing and filing expense reports. Manage logistics in real time Manage logistics in real time Change the nature of work tasks throughout the organization. Change the nature of work tasks throughout the organization.

Strategies for Applying e-Business Techniques Cost LeadershipCost Leadership On-line activities: bidding, order processing, inventory control, recruitment and hiring On-line activities: bidding, order processing, inventory control, recruitment and hiring DifferentiationDifferentiation Internet-based knowledge systems, on-line ordering and customer support Internet-based knowledge systems, on-line ordering and customer support FocusFocus Chat rooms and discussion boards, targeted web sites Chat rooms and discussion boards, targeted web sites

Customer Service Strategies Giving the customers what they want.Giving the customers what they want. Communicating effectively with them.Communicating effectively with them. Providing employees with customer service training.Providing employees with customer service training.

Innovation Strategies Possible EventsPossible Events Radical breakthroughs in products. Radical breakthroughs in products. Application of existing technology to new uses. Application of existing technology to new uses. Strategic Decisions about InnovationStrategic Decisions about Innovation Basic research Basic research Product development Product development Process innovation Process innovation First MoverFirst Mover An organization that brings a product innovation to market or use a new process innovations An organization that brings a product innovation to market or use a new process innovations

Exhibit 8–8First-Mover Advantages–Disadvantages AdvantagesAdvantages Reputation for being innovative and industry leader Reputation for being innovative and industry leader Cost and learning benefits Cost and learning benefits Control over scarce resources and keeping competitors from having access to them Control over scarce resources and keeping competitors from having access to them Opportunity to begin building customer relationships and customer loyalty Opportunity to begin building customer relationships and customer loyalty DisadvantagesDisadvantages Uncertainty over exact direction technology and market will go Uncertainty over exact direction technology and market will go Risk of competitors imitating innovations Risk of competitors imitating innovations Financial and strategic risks Financial and strategic risks High development costs High development costs

Terms to Know strategic managementstrategic management strategiesstrategies business modelbusiness model strategic management processstrategic management process missionmission opportunitiesopportunities threatsthreats resourcesresources capabilitiescapabilities core competenciescore competencies strengthsstrengths weaknessesweaknesses SWOT analysisSWOT analysis corporate strategycorporate strategy growth strategygrowth strategy related diversificationrelated diversification unrelated diversificationunrelated diversification stability strategystability strategy renewal strategyrenewal strategy retrenchment strategyretrenchment strategy turnaround strategyturnaround strategy BCG matrixBCG matrix business or competitive strategybusiness or competitive strategy strategic business unitsstrategic business units competitive advantagecompetitive advantage

Terms to Know (contd) cost leadership strategycost leadership strategy differentiation strategydifferentiation strategy focus strategyfocus strategy stuck in the middlestuck in the middle functional strategiesfunctional strategies strategic flexibilitystrategic flexibility first moverfirst mover