1

Chapter 1
Strategic Management

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter Topics
The Nature and Value of Strategic Management
Dimensions of Strategic Decisions Formality in Strategic Management Benefits of Strategic Management Risks of Strategic Management The Strategic Management Process Components of the Strategic Management Model Strategic Management as a Process

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

What is Strategic Management?

The set of decisions and actions that result in the formulation and implementation of plans designed to achieve a companys objectives.

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Critical Tasks of Strategic Management

1. 2. 3. 4. 5. 6. 7. 8. 9.
McGraw-Hill/Irwin

Formulate the companys mission Conduct internal analysis Assess the companys external environment Analyze companys options Identify most desirable options Select long-term objectives and grand strategies Develop annual objectives and short-term strategi Implement the strategic choices Evaluate success of the strategic process
2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

What is Strategy? Large-scale, future-oriented plan for interacting with the competitive environment to achieve objectives Companys game plan Framework for managerial decisions

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Dimensions of Strategic Decisions

Strategic issues
Require top-management decisions Require large amounts of the firms resources Often affect the firms long-term prosperity Are future oriented Usually have multifunctional or multibusiness consequences Require considering the firms external environment
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Three Levels of Strategy 1. Corporate level 2. Business level 3. Functional level

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Exhibit 1-3: Single-business Firms

Corporate/ business level

Functional Level

POM/R&D strategies

Financial/ accounting strategies

Marketing strategies

Human relations strategies

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Ex 1-3: Multiple business Firms

Corporate strategies Business 1 Business 2 Business 3

Business Level Functional Level

POM/R&D strategies

Financial/ accounting strategies

Marketing strategies

Human relations strategies

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

10

Ex 1-4: Hierarchy of Objectives and Strategies

Strategic Decision Makers Ends
(What is to be achieved)

Means
(How is to be achieved)

Board of Directors

Corporate Managers

Business Functional Managers Managers

Mission, including Goals and philosophy

Grand strategy

Long-term objectives Annual objectives

Short-term strategies and policies

Note: indicates a principal responsibility; indicates a secondary responsibility

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

11

Characteristics of Strategic Management Decisions

Greater risk,cost, and profit potential Corporate-level decisions Greater need for flexibility

Longer time horizons

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

12

Characteristics of Strategic Management Decisions (contd.)

Implement overall strategy

Functionallevel decisions

Involve action-oriented operational issues Are relatively short range and low risk Incur only modest costs

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

13

Characteristics of Strategic Management Decisions (contd.)

Bridge decisions at corporate and functional levels
Business-level decisions

Are less costly, risky, and potentially profitable than corporate-level decisions Are more costly, risky, and potentially profitable than functional-level decisions

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

14

Formality in Strategic Management

Definition
Degree to which participants, responsibilities, authority, and discretion in decision making are specified

Forces affecting degree of formality

Size of organization Predominant management styles Complexity of environment Production process Problems Purpose of planning system

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

15

The Strategy Makers

The ideal strategic management team includes
Chief executive officer (CEO) Product managers Heads of functional areas

The strategic management team obtains input from

Planning staff Lower-level management and supervisors

Role of CEO
Provides long-term direction Assumes ultimate responsibility for firms success Solicits guidance from Board of Directors
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

16

Benefits of Strategic Management

Enhances the firms ability to prevent problems Emphasizes group-based strategic decisions likely to be based on best available alternatives Improves employees understanding of the productivity-reward relationship Reduces gaps/overlaps in activities among employees as their participation clarifies differences in roles Resistance to change is reduced
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

17

Risks of Strategic Management

Time involved may negatively impact operational responsibilities of managers Lack of involvement of strategy makers in strategy implementation may result in shirking of responsibility for strategic decisions Potential disappointment of employees over unattained expectations requires managerial time and training
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Ex 1-6: Strategic Management Process

18

Company mission and social responsibility

Possible?

External environment

Internal analysis
Desired?

Strategic analysis and choice

Long-term objectives Short-term objectives; reward systems

Generic and grand strategies

Policies that empower action

Functional tactics

Restructuring, reengineering and refocusing the organization

Legend
Major impact Minor impact
McGraw-Hill/Irwin

Strategic control and continuous improvement

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

19

Components of the Strategic Management Model

Company Mission
Specifies unique purpose of company Identifies scope of operations Describes product, market, and technological areas of emphasis Reflects values and priorities of decision makers Expresses approach to social responsibility efforts

Internal Analysis
Depicts quantity and quality of companys financial, human, and physical resources Assesses companys strengths and weaknesses Contrasts past successes and concerns with current capabilities to identify future capabilities
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

20

Components of the Strategic Management Model (contd.)

External Environment
Consists of all conditions and forces affecting firms strategic options and define its competitive situation Includes three interactive segments remote, industry, and operating environments

Strategic Analysis and Choice

Involves simultaneous assessment of external environment and company profile Incorporates screening process based on mission to generate possible and desired opportunities Results in selection of options from which a strategic choice is made

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

21

Components of the Strategic Management Model (contd.)

Long-term Objectives
Profitability Return on investment Competitive position Technological leadership Productivity Employee relations Public responsibility Employee development

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

22

Components of the Strategic Management Model (contd.)

Generic Strategies
Low cost Differentiation Focus

Grand Strategies
Comprehensive, general plan of major actions through which the firm intends to achieve its long-term objectives in a dynamic environment

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

23

Components of the Strategic Management Model (contd.)

Action Plans and Short-Term Objectives
Translate generic and grand strategies into action
Identify specific functional tactics to be taken in the near term Establish a clear time frame for completion Creates accountability Specify one or more immediate objectives as outcomes of the action

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

24

Components of the Strategic Management Model (contd.)

Functional Tactics
Involve identifying activities unique to the function to help build competitive advantage Specify detailed statements of means to be used to achieve short-term objectives

Policies that Empower Action

Include broad, precedent-setting decisions that substitute for repetitive or time-sensitive decision making Often increase managerial effectiveness by empowering discretion of subordinates in implementing strategies
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

25

Components of the Strategic Management Model (contd.)

Restructuring, Reengineering, and Refocusing the Organization
Involves an internal focus getting work done efficiently and effectively to make the strategy work Downsizing, restructuring and reengineering reflect the critical stage in strategy implementation wherein managers attempt to recast their organization.

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

26

Components of the Strategic Management Model (contd.)

Strategic Control and Continuous Improvement
Control
Tracks a strategy during implementation Detects problems Involves making necessary adjustments

Continuous improvement
Provides another approach to strategic control Allows an organization to respond more proactively and timely to rapid developments

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

27

Implications of Viewing Strategic Management as a Process

Changes in any one component will affect other components Strategy formulation and implementation are sequential Necessity of feedback from institutionalization, review, and evaluation to early stages of process Need to regard it as dynamic, involving constant changes in interdependent strategic activities
McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.