CHAPTER 1 BASIC CONCEPTS OF STRATEGIC MANAGEMENT Read : America Online, Inc. (AOL) P. 1 - 2 1.1 THE
STUDY
OF
STRATEGIC
MANAGEMENT Strategic
management
:
set
of
managerial decisions and actions that determines the long-run performance of a corporation :- includes : external - environmental scanning
internal
1.2
- strategy formulation (strategic or long - range planning) - strategy implementation - evaluation and control
Phases of Strategic Management Many
dealing have
concepts
with been
and
strategic developed
techniques
management and
used
in
all
successfully i.e. GE - now,
managers
organizations
take
strategic
management seriously in order to keep their company competitive in
1.3
an
increasingly
volatile
environment
Four
phases
of
strategic
management : Phase 1 : Basic financial planning : next year's Budget
little
analysis
(only
simplest operational planning pretend
to
be
strategic
management) Phase 2 : Forecast-based planning : as budget become less useful at
1.4
stimulation
long-term
planning,
managers attempt to propose five years
plans-Internal
&
External
environment, - process
gets
managers
very
political
compete
for
as
larger
shares of funds - 3 - 5 years Phase
3
:
Externally
oriented
planning (strategic planning) - frustrated
of
political,
top
management takes control of the planning
process
strategic planning
by
initiating
1.5
- top-down formal
planning
emphasizes
strategy
implementation
formulation-
leaves
to
lower
management levels - typically 5 - year plan
Phase 4 : Strategic management Realizing
that
even
the
best
strategic plans are worthless without the input and commitment of lower level
managers,
top
management
forms planning groups of managers
1.6
and key employees at many levels from
various
departments
and
workgroups - strategic thinking at all levels of the organization - people
at
all
levels
are
now
involved GE led the transition from strategic planning
to
strategic
management
during the 1980s By 1990s, most corporation had also begun the conversion to strategic management
1.7
Read : Company Spotlight P.5 Phase 1? Maytag Corporation Benefits of Strategic Management Research
has
revealed
that
organizations that engage in strategic management
generally
outperform
those that do not Benefits : • Clearer sense of strategic vision for the firm • Sharper
focus
on
what
is
strategically important • Improved
understanding
rapidly changing
of
a
1.8
environment To
be
effective,
strategic
management need not always be a formal process (Ex. Maytag asking a few simple questions) 1. Where
is
the
organization
now ? (Not where do we hope it is !) 2. If no changes are made, where will the organization be in one year ? two years ? five years ? ten years ? Are the answer acceptable ?
1.9
3. If
the
answers
are
not
acceptable, what specific actions should management undertake ? What are the risk and payoffs involved ? Small companies
may
plan
informally and irregularly Even the degree of formality in strategic planning had no significant impact on a firm's profitability, formal planners had twice the growth rate in
1.10
sales.
How
about
multidivisional
corporations ?
1.2 GLOBALIZATION : A CHALLENGE TO STRATEGIC MANAGEMENT Why ? Read Global Issues for the 21 Century of each chapter st
As more industries become global, strategic management is becoming as increasingly
important
way
to
keep
track of international development and position
the
competitive
company advantage.
for (i.e.
long-term Maytag
1.11
purchased Hoover) P.7 : a company without a manufacturing presence in the European Union (EU) would be at a competitive disadvantage More
and
more
companies
are
realized that they must shifted from a vertically organized, top-down type of organization
to
a
more
horizontally
managed, interactive organization. Attempting to adapt more quickly to changing
conditions
learning organizations.
by
becoming
1.12
1.3 CREATING
A
LEARNING
ORGANIZATION Primary
value
Management" :
of
"Strategic
helping
the
organization operate successfully in a dynamic, complex environment. Ex. Inland Steel Company Any
sustainable
advantage following
lies a
not
centrally
competitive in
doggedly
managed
five-
years plan, but in stringing together a series of strategic short-term thrusts corporations must develop strategic
1.13
flexibility
the ability to shift from
one dominant strategy to another Strategic flexibility :
demands
that the company becomes a "learning organization"
organizations which
are skilled at 4 main activities : 1) Solving problems systematically 2) Experimenting
with
new
approaches 3) Learning
from
their
own
experiences and past history as well as from the experiences of others
1.14
4) Transferring
knowledge
quickly
and efficiently throughout the organization People at all levels, not just top management, need to be involved in strategic management : Xerox 1.4 BASIC
MODEL
OF
STRATEGIC
MANAGEMENT Strategic management consists of 4 basic elements : Fig. 1.1 P. 9 1)
environmental scanning
2)
strategy formulation
1.15
3)
strategy implementation
4)
evaluation and control
Environmental
Scanning
(SWOT
Analysis) Purposes factors"
:
to
monitoring,
identify
"strategic
evaluation,
and
disseminating of information from the external and internal environments Strength, Weaknesses, Opportunity and Threats External environment : O & T CH. 3 Fig. 1.2 P. 9, Fig 1.3 P. 10
1.16
societal environment Environmental variables
task
environment (Industry) Internal environment : S+W
CH.
4 structure Corporation's
culture resources
Strengths
core competencies
Strategy Formulation
1.17
development of long-range plans for effective management of S,W,O,T - mission - objectives - strategies - policy guidelines Mission : : the purpose or reason for the organization's existence :
tells
what
the
company
is
providing to society :
may
also
philosophy
include
the
firm's
1.18
about how
it
does
business it
treats
its
what
the
what
the
employees Some people Mission
:
describes
organization is now Vision
:
describes
organization I would like to be in the future This vision
book
combines
mission
&
1.19
Mission : " It tells who we are and what we do as will as what we'd like to become" Ex. Maytag " To improve the quality of home life by designing, building, marketing, and servicing the best appliances in the world" Ex. Newport News Ship building " We shall build good ships here at a profit if we can - at a loss it we must - but always good ships" Mission may be broad or narrow Maytag
appliances (ex. P 11)
1.20
Objectives
:
the
end
results
of
planned activity * State what is to be accomplished by when and should be quantified if possible. Ex. Minnesota Mining + Manufacturing (3M) 1. To achieve 10 % annual growth in earnings per share. 2. To achieve 20 % - 25 % return on equity.
1.21
3. To
achieve
27
%
return
on
capital employed. Goals : an open-ended statement of what one wants to accomplish with no quantification of what is to be achieve and no time criteria for completion "goal" is often used interchangeably with the term " objective" Example objectives"
of P. 12
"
goals"
and
"
1.22
Strategies : a comprehensive master plan stating how the corporation will achieve its mission and objectives. - it
maximizes
advantage
competitive
and
minimizes
competitive disadvantage. Ex. Rockwell - realized that it could no longer achieve its objectives by continuing
with
diversification business
into
its
strategy
multiple
line
of of
so
- sold its aerospace and defense units to Boeing
1.23
- concentrated
on
electronics
(an
management
felt
commercial area had
that greater
opportunities for growth) 3 type of strategy 1.
Corporate strategy : describes a company's
overall
terms
its
of
toward
general
growth
management
direction
of
attitude
and its
the various
businesses and product line - stability - growth - retrenchment
in
1.24
Ex. Maytag growth strategy by acquiring other appliance companies 2.
Business strategy : usually occurs at the business unit or product level,
and
improvement
it of
emphasizes
the
position
of
a
products
or
specific
industry
competitive corporation's
services or
in
the
market
segment served by that business unit. May fit within or -
-
competitive strategie
cooperatives
1.25
Ex Maytag
uses
a
differentiation
competitive strategy - emphasizes quality for its Maytag brand appliances, but - uses
a
low-cost
competitive
strategy for its Magic Chef brand appliances 3.
Functional
strategy
:
the
approach taken by a functional area to achieve corporate and business unit objectives and strategies
by
maximizing
resource productivity.
1.26
concerned with developing and
-
nurturing
a
competence
to
distinctive provide
a
company or business unit with a competitive advantage Ex. R & D department -
technological
fellowship
(imitate
the products of other companies) -
technological leadership
(pioneer
an innovation) Maytag-converting manufacturing different
types
from
strategy of
home
of
a making
appliances
1.27
under the same brand name in one plant -
to a more cost-effective strategy of making one type of appliance (e.g.
dishwashers)
for
many
brands in a very large plant Business firms use all three types of strategy simultaneously Hierarchy of strategy : Fig 1.4 P.13 The grouping of strategy types by level in the organization
they
complement and support one another (functional strategies support business
1.28
strategies, which, in turn, support the corporate strategy (ies)) Policies : a broad guiline for decision making that links the formulation of strategy with its implementation - companies use policies to make sure take actions that
support
the
corporation's
mission, objectives, and strategies. Ex P. 14 Strategy Implementation
1.29
The process by which strategies and
policies
are
put
into
action
through the development of programs, budgets, and procedures. This process : - may
involves
changes
(culture,
structure, management system) - typically conducted by middle and lower management (with review by top management) - often
involves
day-to-day
decisions Programs
:
activities
or
a
statement steps
of
the
needed
to
1.30
accomplish a single-use plan (it makes the strategy action- oriented) - it may involve restructuring the corporation,
changing
company's
internal
the
culture,
or
beginning a new research effort. Ex. Intel
would
not
be
able
to
continue its corporate growth strategy without the continuous development of new
generations
of
microprocessors
(P. 14 - 15) Keep
in
introducing
mind a
:
new
Be
careful
program
of
without
ensuring its fit with the organization's
1.31
overall strategies and objectives as well as its impact on the rest of the firm Budgets
:
corporation's
a
statement
programs
in
of
a
terms
of
dollars - lists
detailed
cost
of
each
program (used in planning and control) - not only serves as a detailed plan of new strategy in action, it also
specifies
through
program
financial statements the expected
1.32
impact
on
the
firm's
financial
future Procedures
:
(Standard
Operating
Procedures : SOP) : a system sequential
steps
or
techniques
of that
describe in detail how a particular task or job is to be done * Strategy implementation
detail
in CH. 8&9 Evaluation and Control The
process
in
which
corporate
activities and performance results are monitored so that actual performance
1.33
can
be
compared
with
desired
performance. - final major element of
strategic
management - can
pinpoint
previously plans
weaknesses
implemented stimulate
in
strategic
the
entire
process to begin again - for evaluation and control to be effective, managers must obtain clear,
prompt,
and
unbiased
information from the people below
1.34
them
in
the
corporation's
hierarchy * Evaluation and control
detail
in CH. 10 Feedback / Learning Process Fig.
1.2
(P.
9)
includes
a
feedback/learning process -
As
a
develops
firm
or
business
strategies,
unit
programs,
and the like, it often must go back to revise or correct decision made earlier in the model.
1.35
1.5 INITIATION
OF
STRATEGY
:
TRIGGERING EVENTS Henry Mintzberg
strategy
formulation is typically not a regular, continuous process Triggering
event
:
something
that
acts as a stimulus for a change in strategy.
• New CEO • External intervention (firm's bank refuses to
1.36
approve a new loan) • Threats of change in ownership (takeover) • Performance gap (errors) 1.6 STRATEGIC DECISION MAKING As organizations grow larger and more
complex
environments,
with
more
decisions
uncertain become
increasingly complicated and difficult to make. What makes a Decision Strategic Strategic decisions : deal with the long-run
future
of
the
entire
1.37
organization
have 3 characteristics
: 1.
Rare : unusual and typically have no precedent to follow
2.
Consequential
:
commit
substantial resources and demand a great deal of commitment from people at all levels 3.
Directive lesser
:
set
decisions
precedents and
for
future
actions Mintzberg's
Modes
Decision Making
of
Strategic
1.38
•
Entrepreneurial mode : strategy is made by one powerful individual (founders : AOL)
•
Adaptive mode (muddling through) :
reactive
solutions
to
existing
problems, rather than a proactive search (much
for
new
opportunities
bargaining
goes
on
concerning priorities of objectives large
corporations,
most
universities) •
Planning
mode
gathering
of
:
systematic appropriate
information for situation analysis,
1.39
the
generation
alternative rational
of
feasible
strategies,
selection
and
of
the
the most
appropriate strategy (includes both the
proactive
opportunities
search and
for
the
new
reactive
solution of existing problems) Some
instances
Logical
:
4
th
approach
incrementalism
:
a
synthesis of the planning, adaptive, and,
to
the
lessor
entrepreneurial modes
extent,
the
1.40
Strategic
Decision-Making
Process
:
Aid to Better Decisions This book prefer
planning mode
more analytical less political Eight-step
:
strategic
decision-
making process Fig. 1.5 P. 20 1. Evaluate
current
performance
results 2. Review corporate governance 3. Scan and access the external environment (O,T)
1.41
4. Scan and assess the internal corporate environment (S,W) 5. Analyze
strategic
(SWOT)
factors 6. Generate, evaluate, and select the best alternative strategy 7. Implement selected strategies 8. Evaluate implemented strategies 1.7 GLOBAL ISSUES FOR THE 21 CENTURY * Read P. 21 - 22
ST
1.42
• nations
are
forming
regional
trading associations (ASEAN, NAFTA etc.) • globalization creates opportunities, but
also
poses
threats
to
companies that are not able to adapt quickly enough • more
people
at
all
levels
are
involved greater need for more access to information greater difficulty in dealing with it • increasing organizations
pressure for
a
on quick
1.43
response to changing conditions make it difficult for corporations to engage in the planning mode of strategic management
