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Pearce & Robinson, 10th ed.

McGraw-Hill/IrwinMcGraw-Hill/IrwinStrategic Management, 10/eStrategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Strategic Management

Chapter 1Chapter 1

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Learning Objectives

1. Explain the concept of strategic management

2. Describe how strategic decisions differ from other decisions that managers make

3. Name the benefits and risks of a participative approach to strategic decision making

4. Understand the types of strategic decisions for which different managers are responsible

5. Describe a comprehensive model of strategic decision making

6. Appreciate the importance of strategic management as a process

7. Give examples of strategic decisions that companies have recently made

1-4The Nature and Value

of Strategic Management

• Strategic management:The set of decisions and actions that result in formulation and implementation of plans designed to achieve a company’s objectives

1-5Nine Critical Tasks of Strategic

Management -- Tasks 1-5:• Formulate the company’s mission

• Conduct an internal analysis

• Assess the external environment – competitive and general contexts

• Analyze the company’s options by matching its resources with the external environment

• Identify the most desirable options in light of the mission

1-6Nine Critical Tasks of Strategic

Management -- Tasks 6-9:• Select a set of long-term objectives and grand

strategies that will achieve the most desirable options

• Develop annual objectives and short-term strategies that are compatible with long-term objectives and grand strategies

• Implement the strategic choices

• Evaluate the success of the strategic process for future decision making

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What is Strategy?

• Large-scale, future-oriented plan

• Used to interact within competitive environment to achieve company goals

• Provides a framework for managerial decisions

• Reflects a company’s awareness of the main elements of competition-how, when, and where it should compete; against whom it should compete; and for what purposes it should compete.

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Dimensions of Strategic Decisions

• Strategic issues require top-management decisions– Strategic decisions overarch several

areas of a firm’s 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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Dimensions of Strategic Decisions

• Strategic issues require large amounts of the firm’s 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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Dimensions of Strategic Decisions

• Strategic issues often affect the firm’s long-term 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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Dimensions of Strategic Decisions

• 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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Dimensions of Strategic Decisions

• 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 firm’s SBUs, divisions, or program units

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Dimensions of Strategic Decisions

• Strategic issues require considering the firm’s 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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Three Levels of Strategy

• Corporate level: board of directors, CEO & administration [Highest]

• Business level: business and corporate managers [Middle]

• Functional level: Product, geographic, and functional area managers [Lowest]

1-15Alternative Strategic Management

Structures

1-16Characteristics of Strategic Management Decisions: Corporate

• Often carry greater risk, cost, and profit potential

• Greater need for flexibility

• Longer time horizons• Choice of businesses, dividend policies,

sources of long-term financing, and priorities for growth

1-17Characteristics of Strategic Management Decisions: Functional

• Implement the overall strategy formulated at the corporate and business levels

• Involve action-oriented and operational issues

• Relatively short range and low risk

• Modest costs: depend upon available resources

• Relatively concrete and quantifiable

1-18Characteristics of Strategic Management Decisions: Business

• Help bridge decisions at the corporate and functional levels

• Less costly, risky, and potentially profitable than corporate-level decisions

• More costly, risky, and potentially profitable than functional-level decisions

• Include decisions on plant location, marketing segmentation, and distribution

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Formality in Strategic Management

• Formality is the degree to which participation, responsibility, authority, and discretion in decision-making are specified in strategic management

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Forces Determining Formality

• Organizational Size

• Predominant Management Styles

• Complexity of Environment

• Production Process

• Problems in the Firm

• Purpose of the Planning System

• Stage of Firm’s Development

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Three Modes of Formality

• Entrepreneurial Mode – most small firms

• Planning Mode – most large firms

• Adaptive Mode – most medium size firms

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Strategy Makers

• Ideal strategic team includes decision makers from all three levels

• Top managers must give final approval

• Strategic decisions coincide with managers’ responsibilities

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Strategy Makers: The CEO

• A firm’s CEO plays a dominant role in strategic planning

• The CEO’s principal duty is giving long-term direction to the firm

• The CEO bears ultimate responsibility for the firm’s success and strategic success

• CEOs are typically strong-willed,

company-oriented individuals

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Benefits of Strategic Management

• Managers at all levels interact in planning and implementing strategy

• Similar to participative decision making

• Promoting positive behavioral consequences enables achievement of financial goals

• Behavioral effects of strategic management in strategy formulation improve the firm’s welfare

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Benefits of Strategic Management

Enhance the firm’s ability to choose best available alternative

The involvement of employees in strategy formulation improves their understanding of the productivity-reward relationship in every strategic plan and, thus, heightens their motivation.

Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles.

Resistance to change is reduced.

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Risks of Strategic Management

• Managers’ time away from other responsibilities

• Unrealistic expectations promised by strategy formulators

• Possible disappointment of participating subordinates if goal is not reached

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Strategic Management Process

• Strategic management is a process—a flow of information through interrelated stages of analysis toward the achievement of some goal.

• The basic components of the models used to analyze strategic management are similar. Here a model named ‘ Strategic Management Model’ is used.

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Strategic Management Model

It serves three major functions.

a) It depicts the sequence and the relationships of the major components of the strategic management process.

b) It is the outline for this book.

c) The model offers on approach for analyzing the case studies in this text and thus helps the analyst develop strategy formulation skills.

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Strategic Management Model

1-30Components of Strategic

Management Model• Company Mission

• External Analysis

• Long-Term Objectives

• Short-Term Objectives

• Policies Empowering Action

• Strategic Control & Continuous Improvement

• Internal Analysis• Strategic Analysis &

Choice• Generic & Grand

Strategies• Functional Tactics• Restructuring,

Reengineering & Refocusing

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Company Mission

Unique purpose that sets it apart from other companies of its type and identifies the scope of its operations.

Describes the company’s product, market, and technological areas of emphasis in a way that reflects the values and priorities of the strategic decision makers.

Must express how the company intends to contribute to the societies that sustain it.

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Questions for Discussion

• Find a recent copy of BusinessWeek and read the “Corporate Strategies” section. Was the main decision discussed strategic? At what level in the organization was the key decision made?

• In what ways do you think the subject matter in this strategic management-business policy course will differ from that of previous courses you have taken?

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Questions for Discussion

• After graduation, you are not likely to move directly to a top-level management position. In fact, few members of your class will ever reach the top-management level. Why, then, is it important for all business majors to study the field of strategic management?

• Do you expect outstanding performance in this course to require a great deal of memorization? Why or why not?

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Internal Analysis

Analyzing the quantity and quality of its financial, human, and physical resources.

Assessing the strengths and weaknesses of its management and organizational structure.

Contrasts & comparing the company’s past successes and traditional concerns with its current capabilities in an attempt to identify the company’s future capabilities.

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External Environment

• A firm’s external environment consists of all the conditions and forces that affect its strategic options and define its competitive situation.

• (2) The strategic management model shows the external environment as three interactive segments: the remote, industry, and operating environments.