chapter1-nature-of-st.-management introduction

Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
Ch 1 -1
Chapter 1
The Nature of Strategic Management
Strategic Management:
Concepts & Cases
12th Edition
Fred David

Ch 1 -2
Themes in the Text
•Global Considerations –
impact virtually all strategic decisions
•E-commerce –
vital strategic management tool
•Natural Environment –
important strategic issue

Ch 1 -3
Themes in the Text
 Global considerations impact virtually all strategic
decisions.
 The boundaries of countries can no longer be the
boundary of our minds.
 It has become a matter of survival for businesses to
see and appreciate the world from the perspective
of others.
 The underpinnings of strategic management hinge
on managers gaining an understanding of
competitors, markets, prices, suppliers, distributors,
governments, creditors, shareholders, and
customers worldwide.

Ch 1 -4
Themes in the Text
 The natural environment is an important
strategic issue.
 Perhaps no greater threat exists to business
and society than the continuous decimation
and degradation of our natural environment.

Ch 1 -5
Art & science of formulating,
implementing, and evaluating,
cross-functional decisions that
enable an organization to achieve its
objectives
Strategic Management –
Defined

ٍStrategic Management defined
 Strategic management is the process by
which managers set an organization’s (or
several organizations’) long-term course,
develop plans in the light of internal and
external circumstances, and undertake
appropriate action to reach those goals.
Ch 1 -6

Ch 1 -7
Strategic Management
 The term originated in the 1950S.
 Was very popular between mid-1960s and
mid-1970s.
 It casted aside during 1980s.
 The 1990s and on brought the revival of
strategic planning, the process is widely
practiced.

Strategic Management and Research
 As a self-identified area of inquiry, strategic management is
still young. The first major conference devoted to the subject
was only held in 1977 at the University of Pittsburgh. The
Strategic Management Journal and the Journal of Business
Strategy each published their first issue three years later.
Michael Porter’s landmark study, Competitive Strategy,
appeared in 1980. The Academy of Management, the
professional association of business school teachers, organized
its Business Policy and Strategy division at around the same
time.
Ch 1 -8

Ch 1 -9
Strategic Management and planning
 The term strategic management is used
synonymously with strategic planning.
 The purpose of strategic management is to
exploit and create new and different
opportunities for tomorrow
 While long-range planning tries to optimize
for tomorrow the trends of today.

Ch 1 -10
In essence, the strategic plan is a
company’s game plan.

Ch 1 -11
Strategic management
achieves a firm’s success
through integration ––
Management
MIS
Production/Operations
Finance/Accounting
Marketing
Research & Development

Ch 1 -12
Stages of strategic planning
 Environmental analysis
 Strategy formulation
 Strategy implementation
 Strategy evaluation.

Environmental Scanning defiened
 Monitoring, evaluation, and disseminating
information from external and internal
environments –to key people in the firm
Ch 1 -13

SWOT Analysis
 SWOT is an acronym used to describe the
particular strengths, weaknesses, opportunities,
and threats, that are strategic factors for a
specific company.
 The external environment consists of variables
(OT)that are outside the organization and not
typically within the short run control of top
management. These variables from the context
within which the corporation exists
Ch 1 -14

SWOT Analysis
 The internal environment of a corporation
consists of variable(SW) that are within the
organization itself and are not usually within the
short run control of top management. These
variables from the context in which work is done.
They include the corporation’s structure, culture,
and resources, key strengths from a set of core
competencies that the corporation can use to
gain competitive advantage
Ch 1 -15

Strategy formulation
 Strategy Formulation is the development
of long-range plans for the effective
management of environmental
opportunities and threats, in light of
corporate strengths and weaknesses
(SWOT). It includes defining the corporate
mission, specifying achievable objectives,
developing strategies, and setting policy
guidelines.
Ch 1 -16

Mission Statement
 An organization’s mission statement is the
purpose or reason for the organization’s
existence. It tells what the company is
providing to society.
Ch 1 -17

Mission Statement
• Purpose/reason for organization
• Promotes shared expectations
• Communicates public image
• Who we are; what we do; what we aspire to
Ch 1 -18

Objectives
 Objectives are the end results of planned activity. They
should be stated as action verbs and tell what is to be
accomplished by when and quantified if possible. The
achievement of corporate objectives should result in the
fulfillment of corporation’s mission.
 The term goal is often used interchangeably with the
term objective. In this book we prefer to differentiate the
two terms. In contrast to an objective, we consider a goal
as an open ended statement of what we want to
accomplish, with no quantification of what is to be
achieved and no time criteria for completion
Ch 1 -19

Corporate Goals/Objectives
– Profitability (net profit)
– Efficiency (low costs.etc)
– Growth (increase in total assets, sales, etc)
– Resource utilization (ROE, ROI)
– Reputation(being considered a “top” firm
– Contributions to employees(employment security, wages,
diversity)
– Contributions to society(tax paid, participation in charities)
– Market leadership (market share)
– Technological leadership(innovation, creativity).
– Survival (avoiding bankruptcy).
– Personal need of top management (using the firm for
personal purposes, such as providing jobs for relatives)
Ch 1 -20

Strategy
 A strategy of a corporation forms a
comprehensive master plan that states how
the corporation will achieve its mission and
objectives. It maximizes competitive
advantage and minimizes competitive
disadvantage
Ch 1 -21

Policies
 1. Policies include guidelines, rules, and
procedures established to support efforts to
achieve stated objectives.
 2. Policies are most often stated in terms of
management, marketing, finance/accounting,
production/operations, research and
development, and computer information
systems activities.
 Examples: smoking policy, recruitment policy
Ch 1 -22

Ch 1 -23
Vision & Mission
Strategy Formulation
External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection

Ch 1 -24
Issues in Strategy
Formulation
New business
opportunities
Businesses to abandon
Allocation of resources
Expansion or
diversification
International markets
Mergers or joint ventures
Avoidance of hostile
takeover

Strategy implementation
 Strategy implementation is a process by which
strategies and policies are put into action
through the development of programs, budgets,
and procedures.
 the implementation of strategy directly or
indirectly connects to all facts of management.
Thus it is fundamental to follow a holistic
approach when analyzing and assessing
complex issues of strategy implementation.
Ch 1 -25

Ch 1 -26
Strategy Implementation
Annual Objectives
Policies
Employee Motivation
Resource Allocation

Ch 1 -27
Strategy
Implementation
Action Stage of Strategic
Management
Most difficult stage
recruitment of employees
& managers
Interpersonal skills
critical
Consensus on goal
pursuit
Interpersonal skills are
essential.

Strategy Evaluation
 Ensure that a company is achieving what it
set out to accomplish. It compares
performance with desired result and provides
the feed back necessary for management to
evaluate results and take corrective action,
as needed.
Ch 1 -28

Ch 1 -29
Strategy Evaluation
Internal Review
External Review
Performance Metrics
Corrective Actions

Ch 1 -30
Strategy
Evaluation
Final Stage of Strategic
Management
Subject to future
modification
Today’s success no
guarantee of future success
New & different problems
Complacencysatisfaction
leads to demisedeath

Ch 1 -31
Peter Drucker: Think through the
overall mission of a business. Ask
the key question: “What is our
Business?”
Prime Task of

Ch 1 -32
The strategic management process
attempts to organize quantitative and
qualitative information under conditions of
uncertainty.
Integrating Intuition &
Analysis

Ch 1 -33
The strategic-management process can
be described as an objective, logical,
systematic approach for making major
decisions in an organization.
Analysis

Ch 1 -34
Intuition is based on:
 Past experiences
 Judgment
 Feelings
Analysis
Intuition is useful for decision making in:
 Conditions of great uncertainty
 Conditions with little precedent

Ch 1 -35
Involve management at all levels
Intuition & Judgment
Influence all analyses
Analysis

Ch 1 -36
Analytical Thinking
Analysis
Intuitive Thinking

Ch 1 -37
Organizations must monitor
events
 Ongoing process
 Internal and external events
 Timely changes
Adapting to Change

Ch 1 -38
The need to adapt to change leads
organizations to key strategic-management
questions, such as, “What kind of business
should be become?” “Are we in the right field?”
“Should we reshape our business?” “What new
competitors are entering our industry?”
Adapting to Change

Ch 1 -39
“Anything that a firm does especially
well compared to rival firms”
Strategic Management is
Gaining and Maintaining
Competitive Advantage

Ch 1 -40
1. Adapting to change in external trends,
internal capabilities, and resources
Achieving Sustained
Competitive Advantage
2. Effectively formulating, implementing, and
evaluating strategies

Ch 1 -41
Rate & magnitude of change
increasing dramatically
Adapting to Change
E-commerce
Demographics
Technology

Ch 1 -42
Internet and sales value in US
 2006 online sales in US rose 25% to reach
24.6$ billion.
 Traditional sales increased 5% only to 457.4$
billion.
 The internet has changed the very nature and
core of buying and selling.

Ch 1 -43
Effective Adaptation
Adapting to Change
Requires long-term focus

Ch 1 -44
 What kind of business should
we become?
 Are we in the right fields?
 Are there new competitors?
 What strategies should we
pursue?
 How are our customers
changing?
Adapting to Change – Key
Questions

Ch 1 -45
Strategists
1. Strategists are individuals who are most responsible for
the success or failure of an organization.
2. Strategists hold various job titles, such as chief
executive officers, president, owner, chair of the board,
executive director, chancellor, dean, or entrepreneur.
3. Strategists help an organization gather, analyze, and
organize information. They track industry and
competitive trends, develop forecasting models and
scenario analyses, evaluate corporate and divisional
performance, spot emerging market opportunities,
identify business threats, and develop creative action
plans.

Ch 1 -46
Example Strategies in Action in 2007
McDonald’s Corp
The world’s largest restaurant chain by number of outlets, Big Mac is
doing fantastic both in the United States and abroad. In past months,
McDonald’s began opening drive-through restaurants in China, closed
25 sites in the United Kingdom, and disposed of a supply-chain
operation in Russia. Big Mac in 2007 opened 800 new restaurants in
China, Japan, and Russia. Shares of McDonald’s stock increased 42
percent in 2006 as sales for the year eclipsed $41 billion. Big Mac is
working to eliminate trans fats from their food (New York City is requiring
this of all restaurants in 2007). McDonald’s plans in 2008 to turn
ownership of about 2,300 restaurants in Canada and the United
Kingdom over to licensees.

Ch 1 -47
Example Strategies in Action in 2007
American General
A Fortune 500 company based in Piscataway, New Jersey, American
General split into three businesses in 2007: Air-conditioning systems,
Bath-and-kitchen business, and vehicle-control systems. The firm also
is renaming itself Trane, after its flagship air-conditioning brand name.
The company plans to divest the bath-and-kitchen division and to spin
off its vehicle control division into a publicly traded company named
Wabco. Led by CEO Fred Poses, American General employs about
62,000 persons and has manufacturing operations in 28 countries.

Ch 1 -48
External
Audit
Chapter 3
Internal
Audit
Chapter 4
Long-Term
Objectives
Chapter 5
Generate,
Evaluate,
Select
Strategies
Chapter 6
Implement
Strategies:
Mgmt Issues
Chapter 7
Implement
Strategies:
Marketing,
Fin/Acct,
R&D, CIS
Chapter 8
Measure &
Evaluate
Performance
Chapter 9
Vision
&
Mission
Chapter 2
Figure 1.1 Comprehensive Strategic-Management Model

Ch 1 -49
 Dynamic & continuous
 More formal in larger organizations
Strategic Management Model
Strategic Management Process

Benefits of Strategic Management
 Research has revealed that organizations that engage in
strategic management generally outperform those that
do not. The attainment of an appropriate match, or “fit,”
between an organization’s environment and strategy,
structure, and processes has positive effects on the
organization's performance. For example, studies of the
impact of deregulation on The U.S. railroad and trucking
industries found that companies that changed their
structures as their environment changed outperformed
companies that did not.
Ch 1 -50

Ch 1 -51
Benefits of Strategic
Management
• Proactive in shaping firm’s future
• Initiate and influence firm’s activities
• Formulate better strategies
•Systematic, logical, rational

Ch 1 -52
Management
Financial Benefits
• Improvement in sales
• Improvement in profitability
• Productivity improvement

Ch 1 -53
Management
Nonfinancial Benefits
• Improved understanding of competitors’ strategies
• Enhanced awareness of threats
• Reduced resistance to change
• Enhanced problem-prevention capabilities

Ch 1 -54
Management (Greenley)
1. Identification of opportunities
2. Objective view of management problems
3. Improved coordination & control
4. Minimizes unfavorable conditions &
changes
5. Decisions that better support objectives

Ch 1 -55
Management (Greenley – cont’d)
6. Effective allocation of time & resources
7. Internal communication among personnel
8. Integration of individual behaviors
9. Clarify individual responsibilities
10. Encourage forward thinking

Ch 1 -56
Management (Greenley – cont’d)
11. Encourages favorable attitude toward
change
12. Provides discipline and formality to the
management of the business

Ch 1 -57
Why Some Firms Do No
Strategic Planning
Poor reward structures
Fire-fighting
Waste of time
Too expensive
Laziness
Contenthappy with success

Ch 1 -58
Why Some Firms Do No
Strategic Planning
Fear of failure
Overconfidence
Prior bad experience
Self-interest: self-esteem through effectively
using old system.
Fear of the unknown: uncertain of their
ability to learn new skills.
Suspicion: employees may not trust
management.

Ch 1 -59
PITFALLS IN STRATEGIC PLANNING
•Using strategic planning to gain control over decisions and resources
•Doing strategic planning only to satisfy accreditation or regulatory
requirements
•Too hastilyquickly moving from mission development to strategy formulation
•Failing to communicate the plan to employees, who continue working in the
dark
•Top managers making many intuitive decisions that conflict with the formal
plan
•Top managers not actively supporting the strategic-planning process
•Failing to use plans as a standard for measuring performance
•Delegating planning to a “planner” rather than involving all managers
•Failing to involve key employees in all phases of planning
•Failing to create a collaborative climate supportive of change
•Viewing planning to be unnecessary or unimportant
•Becoming so engrossed in current problems that insufficient or no planning is
done
•Being so formal in planning that flexibility and creativity are stifled

Ch 1 -60
Guidelines For Effective Strategic
Management
 “Is strategic management in our firm a people
process or a paper process?” should be addressed.
 Balancing between long-range versus short-range or
maximizing profits versus increasing shareholders’
wealth.
 Subjective factors such as attitudes toward risk,
concern for social responsibility, and organizational
culture will always affect strategy-formulation
decisions, but organizations must remain as
objective as possible.

Ch 1 -61
COMPARING BUSINESS AND
MILITARY STRATEGY
 A Strong Military Heritage Underlies the Study of
 Terms such as objectives, mission, strengths, and
weaknesses were first formulated to address
problems on the battlefield.
 A fundamental difference between military and
business strategy is that business strategy is
formulated, implemented, and evaluated with the
assumption of competition, while military strategy is
based on an assumption of conflict.

Ch 1 -62
 Principles of conduct within organizations
that guide decision making and behavior
Business Ethics & Strategic
Management
Business ethics defined –

Ch 1 -63
 Prerequisite for good strategic management
Management
Good business ethics –

Ch 1 -64
 Provides basis on which policies can be
devised to guide daily behavior and
decisions in the workplace
Management
Code of business ethics –

Ch 1 -65
 Misleading advertising
 Misleading labeling
 Harm to the environment
 Insider trading
 Dumping flawed/faulty products on foreign markets
 Poor product or service safety
 Padding expense accounts
Management
Business practices always considered unethical –

Ch 1 -66
 Parent company: a firm investing in
international operations;
 Host country: the country where that business is
conducted.
The Nature of Global
Competition
International/multinational corporations

Ch 1 -67
 Cultural differences
 Norms
 Values
 Work ethic
The Nature of Global
Competition
Strategy implementation may be difficult

Ch 1 -68
Advantages of International
Operations
Absorb excess capacity
Reduce unit costs
Spread risk over wider markets
Low-cost production facilities

Ch 1 -69
Advantages of International
Operations (cont’d)
Less intense competition
Lower taxes
Economies of scale

Ch 1 -70
Disadvantages of International
Operations
Difficult communications
Underestimate foreign competition
Cultural barriers to effective management
Complications arising from currency
differences

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