Chapter 8 Strategic Management

ANNOTATED OUTLINE

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INTRODUCTION Effective managers recognize the role that strategic management plays in their organizations performance. Throughout this chapter, students discover that good strategies can lead to high organizational performance.

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THE IMPORTANCE OF STRATEGIC MANAGEMENT Managers must carefully consider their organizations internal and external environments as they develop strategic plans. They should have a systematic means of analyzing the environment, assessing their organizations strengths and weaknesses, identifying opportunities that would give the organization a competitive advantage, and incorporating these findings into their planning. The value of thinking strategically has an important impact on organization performance. A. $. %. (. $. %. ). *. hat !s "trategic Management# Strategic management is what managers do to develop the organizations strategies. "trategic management involves all four of the &asic management functions'planning, organizing, leading, and controlling. hy !s "trategic Management !mportant# "trategic management has a significant impact on how well an organization performs. !n todays &usiness world, organizations of all types and sizes must manage constantly changing situations. Todays companies are composed of diverse divisions, units, functions, and work activities that must &e coordinated. "trategic management is involved in many of the decisions that managers make.

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THE STRATEGIC MANAGEMENT PROCESS The strategic management r!cess is a six+step process that encompasses strategic planning, implementation, and evaluation. ,"ee E"#i$it %&1 and P!'erP!int s(i)e %& %.A. Step 1: Strategies $. Every organization needs a missi!n* which is a statement of the purpose of an organization. The mission statement addresses the Identifying the Organizations Current Mission, Objecti es, and

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hat is the organizations reason for &eing in &usiness#

,"ee E"#i$it %&2 and P!'erP!int s(i)e %&1+.The organization must identify its current o&0ectives and strategies, as well. Step !: "#ternal $nalysis $. Managers in every organization need to conduct an external analysis. !nfluential factors such as competition, pending legislation, and la&or supply are included in the external environment. %. After analyzing the external environment, managers must assess what they have learned in terms O ). of opportunities and threats. !rt,nities are positive trends in external environmental factors1

t#reats are negative trends in environmental factors. (ecause of different resources and capa&ilities, the same external environment can present opportunities to one organization and pose threats to another. 2. Step %: Internal $nalysis $. %. ). *. !nternal analysis should lead to a clear assessment of the organizations resources and capa&ilities. Any activities the organization does well or any uni.ue resources that it has are called strengt#s. -ea.nesses are activities the organization does not do well or resources it needs &ut does not possess. The organizations ma0or value+creating skills and capa&ilities that determine its competitive weapons are the organizations c!re c!m etencies. 3. 5. 6. 4rganizational culture is important in internal analysis1 the companys culture can promote or hinder its strategic actions. S-OT ana(/sis is an analysis of the organizations strengths, weaknesses, opportunities, and threats. Step &: 'or(ulating Strategies $. %. E. 7. After the " 4T, managers develop and evaluate strategic alternatives and select strategies that are appropriate. "trategies need to &e esta&lished for corporate, &usiness, and functional levels. Step ): I(ple(enting Strategies $. $. A strategy is only as good as its implementation. 8ow effective have the strategies &een# Are ad0ustments necessary# Step *: " aluating +esults

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T1PES OF ORGANI2ATIONA3 STRATEGIES "trategic planning takes place on three different and distinct levels/ &usiness, and functional. ,"ee E"#i$it %&0 and P!'erP!int s(i)e %&14-. A. 2orporate "trategy C!r !rate strateg/ is an organizational strategy that determines what &usinesses a company is in, should &e in, or wants to &e in, and what it wants to do with those &usinesses. $. There are three main types of corporate strategies/ a. A gr!'t# strateg/ is a corporate strategy that is used when an organization wants to grow and does so &y expanding the num&er of products offered or markets served, either through its current &usiness,es- or through new &usiness,es-. &. A sta$i(it/ strateg/ is a corporate strategy characterized &y an a&sence of significant change in what the organization is currently doing. c. A rene'a( strateg/ is a corporate strategy designed to address organizational weaknesses that are leading to performance declines. Two such strategies are retrenchment strategy and turnaround strategy. %. C!r !rate P!rt5!(i! Ana(/sis is used when an organizations corporate strategy involves a num&er of &usinesses. Managers can manage this portfolio of &usinesses using a corporate portfolio matrix, such as the (29 matrix. a. The 6CG matri" is a strategy tool that guides resource allocation decisions on the &asis of market share and growth rate of "(:s. ,"ee E"#i$it %&7 and P!'erP!int s(i)e %&23.(. (usiness ,2ompetitive- "trategy A $,siness strateg/ ,also known as a competitive strategy- is an organizational strategy focused on how the organization will compete in each of its &usinesses. $. The ;ole of 2ompetitive Advantage. A c!m etiti8e a)8antage is what sets an organization apart, that is, its distinctive edge. An organizations competitive advantage can come from its core competencies. %. <uality as a 2ompetitive Advantage. competitive advantage. !f implemented properly, .uality can &e one way for an organization to create a sustaina&le corporate,

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"ustaining 2ompetitive Advantage. An organization must &e a&le to sustain its competitive advantage1 it must keep its edge despite competitors action and regardless of ma0or changes in the organizations industry.

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Michael =orters work explains how managers can create and sustain a competitive advantage that will give a company a&ove+average profita&ility. a. !ndustry analysis is an important step in =orters framework. 8e says there are five competitive forces at work in an industry1 together, these five forces determine industry attractiveness and profita&ility. ,"ee E"#i$it %&4 and P!'erP!int s(i)e %&29-. =orter proposes that the following five factors can &e used to assess an industrys attractiveness/ $,hreat of ne- entrants. 8ow likely is it that new competitors will come into the industry# Managers should assess &arriers to entry, which are factors that determine how easy or difficult it would &e for new competitors to enter the industry. %,hreat of substitutes. 8ow likely is it that products of other industries could &e su&stituted for a companys products# )*3/argaining po-er of buyers. 8ow much &argaining power do &uyers ,customers- have# /argaining po-er of suppliers. 8ow much &argaining power do a companys suppliers have# Current ri alry. 8ow intense is the competition among firms that are currently in the industry#

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According to =orter, managers must choose a strategy that will give their organization a competitive advantage. =orter identifies three generic competitive strategies. hich strategy managers select depends on the organizations strengths and core competencies and the particular weaknesses of its competitor,s-. a. A c!st (ea)ers#i strateg/ is a &usiness or competitive strategy in which the organization competes on the &asis of having the lo-est costs in its industry. &. A )i55erentiati!n strateg/ is a &usiness or competitive strategy in which a company offers uni0ue products that are widely valued &y customers.

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A 5!c,s strateg/ is a &usiness or competitive strategy in which a company pursues a cost or differentiation advantage in a narro- industry seg(ent.

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An organization that has &een not &een a&le to develop either a low cost or a differentiation competitive advantage is said to &e > st,c. in t#e mi))(e.?

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"u&se.uent research indicates that it is possi&le, though very difficult, for organizations that are stuck in the middle to achieve high performance.

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7unctional "trategy F,ncti!na( strateg/ is the strategies used &y an organizations various functional departments to support the &usiness or competitive strategy.

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STRATEGIC MANAGEMENT IN TODA1:S EN;IRONMENT A. The ;ule of Three. 2ompetitive forces in an industry, if kept relatively free from government interference or other special circumstances, will inevita&ly create a situation where three companies dominate any given market. (. Aew 6irections in 4rganizational "trategies $. E+(usiness "trategies. :sing the !nternet, companies have created knowledge &ases that employees can tap into anytime, anywhere. E+ &usiness as a strategy can &e used to develop a sustaina&le competitive advantage1 it can also &e used to esta&lish a &asis for differentiation or focus. %. 2ustomer "ervice "trategies. These strategies give customers what they want, communicate effectively with them, and provide employees with customer service training. ). !nnovation "trategies. These strategies focus on &reakthrough products and can include the application of existing technology to new uses. An organization that is first to &ring a product innovation to the market or to use a new process innovation is called a 5irst m!8er.