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Strategic Management:
Creating Competitive Advantages
McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives
After reading this chapter, you should have a good understanding of:
 The definition of strategic management and its four key attributes.  The strategic management process and its three interrelated and principal activities.  The significance of strategic issues  The vital role of corporate governance and stakeholder management as well as how symbiosis can be achieved among an organizations stakeholders.  The importance of social responsibility, including environmental sustainability, and how it can enhance a corporations innovation strategy.  The need for greater empowerment throughout the organization.  How an awareness of a hierarchy of strategic goals can help an organization achieve coherence in its strategic direction.

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Two Perspectives of Leadership

Romantic view
Leader is the key force in organizations success

External control perspective

Focus is on external factors that affect an organizations success

Leaders can make a difference

Must be aware of opportunities and threats faced in external environment Must have thorough understanding of the firms resources and capabilities

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Strategic Management
Analysis
Strategic goals (vision, mission, strategic objectives) Internal and external environment of the firm

Strategic decisions Strategy Formulation

What industries should we compete in? How should we compete in those industries?

Actions Strategy Implementation

Allocate necessary resources Design the organization to bring intended strategies to reality

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Strategic Management
 Strategic management is the study of why some firms outperform others
How to compete in order to create competitive advantages in the marketplace How to create competitive advantages in the market place
o Unique and valuable o Difficult for competitors to copy or substitute

 In short, strategic management is about how an

organization adds value and competes in its environment.

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Key Attributes
Key Attributes of strategic management:
Directs the organization toward overall goals and objectives Includes multiple stakeholders in decision making Needs to incorporate short-term and long-term perspectives Recognizes trade-offs between efficiency and effectiveness

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Question
The final realized strategy of a firm is a combination of:
a) b) c) d) Intended and unrealized strategies Unrealized and emergent strategies Emergent and deliberate strategies Deliberate and unrealized strategies

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Strategic Management Process

Adapted from Exhibit 1.2 Realized Strategy and Intended Strategy: Usually Not the Same Source: H. Mintzberg and J. A. Waters, Of Strategies, Deliberate and Emergent, Strategic Management Journal 6 (1985), pp. 25772.

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Strategic Analysis
Starting point in the strategic management process Precedes effective formulation and implementation of strategies

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Strategic Analysis (cont.)

Clear goals and objectives permit effective allocation of resources Hierarchy of goals
- Vision - Mission - Strategic objectives

Analyzing external environments

- Managers must scan the environment and analyze competitors - General environment - Industry environment

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Strategic Analysis (cont.)

Frameworks for analyzing a firms internal environment
- Strengths - Weaknesses

Analyzing strengths can uncover potential sources of competitive advantage

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Strategic Analysis (cont.)

Intellectual assets are drivers of
- Competitive advantage - Wealth creation

Networks and relationships among

Employees Customers Suppliers Alliance partners

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Strategic Issues
Results from Strategic Analysis Strategic issues require top-management decisions
- Strategic decisions overarch several areas of a firms operations - Usually only top management has the perspective needed to understand their broad implications - Usually only top managers have the power to authorize necessary resource allocations

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Strategic Issues
Strategic issues require large amounts of the firms resources
- They involve substantial allocations of people, physical assets, and money - Strategic decisions commit the firm to actions over an extended period - In highly competitive firms, achieving and maintaining customer satisfaction frequently involves commitment from every facet of the firm

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Strategic Issues
Strategic issues often affect the firms longterm prosperity
- Strategic decisions commit the firm for a long time, typically 5 years; however the impact lasts much longer - Once a firm has committed itself to a strategy, its image and competitive advantages are usually tied to that strategy - Firms become known for what they do and where they compete. Shifting away from that can jeopardize their previous gains.

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Strategic Issues
Strategic issues are future-oriented
- They are based on what managers forecast, rather than what they know - Emphasis is on the development of solid projections that will enable a firm to seek the most promising strategic options - A firm will succeed only if it takes a proactive (anticipatory) stance toward change

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Strategic Issues
Strategic issues usually have multifunctional or multibusiness consequences.
- Strategic decisions have complex implications for most areas of the firm - Decisions about customer mix, competitive emphasis, or organizational structure involve a number of the firms SBUs, divisions, or program units

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Strategic Issues
Strategic issues require considering the firms external environment
- All businesses exist in an open system. They affect and are affected by external conditions that are largely beyond their control - Successful positioning requires that strategic managers look beyond operations and consider what relevant others are likely to do

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Strategy Formulation
Business level strategy:
- Successful firms develop bases for competitive advantage
Cost leadership Differentiation Focusing on narrow or industry-wide market segments

- Sustainability - Industry life cycle

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Strategy Formulation (cont.)

Corporate-level strategy addresses:
Firms portfolio, group, mix of businesses
- What business(es) should we be in? - How can we create synergies among the businesses?

Diversification
- Related - Unrelated

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Strategy Formulation (cont.)

International Strategy
- Appropriate entry strategies for foreign markets - Sustain competitive advantage in global markets

Effective strategies for entrepreneurial initiatives

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Strategy Implementation
Informational control
- Monitor and scan the environment - Respond effectively to threats and opportunities

Behavioral control Effective corporate governance

- Interests of managers and owners of the firm

Organizational structure and design

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Strategy Implementation (cont.)

Organizational boundaries
- Flexible - Permeable

Strategic Alliances Develop organization that is committed to

- Excellence - Ethical behavior

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Strategy Implementation (cont.)

Learning organization responsive to
- Rapid and unpredictable change

Corporate entrepreneurship and innovation

New opportunities Enhance innovative capacity Autonomous entrepreneurial behavior Product champions

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Corporate Governance and Stakeholder Management

Corporate governance: the relationship among various participants in determining the direction and performance of corporations
- Shareholders - Management (led by the CEO) - Board of Directors

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Question
Briefly describe the role of board of directors in corporate governance.

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Corporate Governance and Stakeholder Management (cont.)

Board of Directors - Elected representatives of the owners - Ensure interests and motives of management are aligned with those of the owners
Effective and engaged Board of Directors Shareholder activism Proper managerial rewards and incentives

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Example: New Rules for Directors

In light of numerous corporate scandals, the role and rules for board of directors are being redefined. Few areas of focus :
Numbers Knowledge Strategy Focus Time & Understanding Watchdog

Source: Tipsheet, Business Week, January 22, 2007

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Stakeholder Management
Two views of stakeholder management
- Zero sum
Stakeholders compete for attention and resources of the organization Gain of one is a loss to the other

- Symbiosis
Stakeholders are dependent upon each other Mutual benefits

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Social Responsibility
Social responsibility: the expectation that businesses or individuals will strive to improve the overall welfare of society
Managers must take active steps to make society better Socially responsible behavior changes over time Triple bottom line

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Example: Social Responsibility

Starbucks Coffee Company
 Corporate social responsibility is embedded throughout the organization.  The following are some of the commitments they have made to be socially responsible:
Commitment to origins Helping protect the environment Starbucks in your community Commitment to partners

Source: www.starbucks.com

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Strategic Management Perspective

Integrative view of the organization Assess how functional areas and activities fit together to achieve goals and objectives All managers and employees must take and integrative, strategic perspective of issues facing the organization

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Enhancing Employee Involvement

Have significant profit and loss responsibility

Local Line Leaders

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Enhancing Employee Involvement

Local Line Leaders Executive Leaders

Champion and guide ideas Create a learning infrastructure Establish a domain for taking action

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Enhancing Employee Involvement

Have little positional power and formal authority Generate their power through the conviction and clarity of their ideas

Local Line Leaders Executive Leaders Internal Networkers

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Modern Flow of Strategic Management

Top Management

Subsidiary Management

Functional Management

Operating Management Employees

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Why Modern Flow of Strategic Management?

Changes in and heightened competition driven by
- Pressure for low cost products and services - Higher quality requirements - Globalization - Increasing rate of technological change and diffusion - Information technology - Knowledge as an organizational resource

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Coherence in Strategic Direction

Company vision
Massively inspiring Overarching Long-term Driven by and evokes passion - Fundamental statement of the organizations
Values Aspiration Goals

Company vision

Hierarchy of Goals

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Coherence in Strategic Direction

Mission statements
- Purpose of the company - Basis of competition and competitive advantages - More specific than vision - Focused on the means by which the firm will compete Company vision Mission statements

Hierarchy of Goals

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Coherence in Strategic Direction

Strategic objectives
- Operationalize the mission statement - Provide guidance on how the organization can fulfill or move toward the higher goals - More specific - Cover a more welldefined time frame Company vision Mission statements Strategic objectives

Hierarchy of Goals

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Coherence in Strategic Direction

Strategic objectives
Measurable Specific Appropriate Realistic Timely Challenging Resolve conflicts that arise - Yardstick for rewards and incentives Company vision Mission statements Strategic objectives

Hierarchy of Goals