BUS 590 STRATEGIC MANAGEMENT ABDU LATIF SALLEH, PhD College of Business Administration Prince Sultan University.

BUS 590 STRATEGIC MANAGEMENT

ABDU LATIF SALLEH, PhDCollege of Business Administration

Prince Sultan University

Thinking Strategically:Three Big Central Questions

1. What’s the company’s present situation?

- industry conditions and competitive pressure

- current performance and market standing

- resource strength and capabilities and competitive weaknesses

2. Where does the company need to go from here?

− Business(es) to be in and market positions to stake out

− Buyer needs and groups to serve

− Direction to head

3. How should it get there?

− A company’s answer to “how will we get there?” is its strategy

Core Concepts

• Strategy

• Sustainable competitive advantage

• Business model

• Strategic management process

• Company’s vision, mission and objectives

• Strategy-making hierarchy

Strategy

• Strategy consists of competitive moves and business approaches used by managers to run the company

• Strategy involves making analysis and choices• The hows that define a firm's strategy

− How to grow the business

− How to please customers

− How to outcompete rivals

− How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on)

− How to respond to changing market conditions

− How to achieve targeted levels of performance

Choosing a Strategy

• Strategic choices about “how” are based on − Trial-and-error organizational learning about what has

worked and what has not worked− Management’s appetite for taking risks− Managerial analysis and strategic thinking about how best to

proceed, given market conditions and the company’s circumstances

• In choosing a strategy, management is in effect saying,“Among all the many different business approaches and ways of competing we could have chosen, we have decided to employ this particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position, and competitiveness, and boosting performance.”

Key Elements of a Successful Strategy

• Developing a successful strategy hinges on making competitive moves aimed at− Appealing to buyers in ways to set the enterprise

apart from rivals and− Carving out its own market position

• Involves developing a distinctive “aha”element to − Attract customers and − Produce a competitive edge

• Copying competitive moves of other successful companies rarely works

Sustainable Competitive Advantage• A company has a competitive advantage when

sizeable number of buyers prefer its products or services over the offerings of competitors −The company achieves sustainable competitive

advantage when the basis for this preference is durable

• What separates a powerful strategy from an ordinary strategy is management’s ability to forge a series of moves, both in the marketplace and internally, that produces sustainable competitive advantage!

Four possible strategic approaches to achieve sustainable competitive

advantage• Being the industry’s low-cost provider (a cost-based

competitive advantage)

• Incorporate differentiating features (a “superior product” type of competitive advantage keyed to higher quality, better performance, wider selection, value-added services, or some other attribute)

• Focusing on a narrow market niche (winning a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers comprising the niche)

• Developing expertise and resource strengths not easily imitated or matched by rivals (a capabilities-based competitive advantage)

Examples of Competitive Advantage

• Strive to be the industry’s low-cost provider− Wal-Mart

− Southwest Airlines

• Outcompete rivals on a key differentiating feature− Johnson & Johnson – Reliability in baby products

− Harley-Davidson – King-of-the-road styling

− Rolex – Top-of-the-line prestige

− Mercedes-Benz – Engineering design and performance

− L.L. Bean – Good value

− Amazon.com – Wide selection and convenience

Examples of Competitive Advantage (contd)

• Focus on a narrow market niche− eBay – Online auctions− Jiffy Lube International – Quick oil changes− McAfee – Virus protection auctions− Starbucks – Premium coffees and coffee drinks− The Weather Channel – Cable TV

• Develop expertise, resource strengths, andcapabilities not easily imitated by rivals− FedEx – Next-day delivery of small packages− Walt Disney – Theme park management and family

entertainment− Toyota – Sophisticated production system− Ritz-Carlton – Personalized customer service

STRATEGY EXAMPLE: McDONALD’S

• Strategic & financial objectives−Continued growth−Providing exceptional customer care−Remaining an efficient & quality

producer−Offering high value−Effectively marketing McDonald’s brand

on a global scale

KEY ELEMENTS OFMcDONALD’S STRATEGY

• Adding 700-900 restaurants annually• Using new menu items, low price specials, Extra

Value Meals to promote frequent customer visits• Being highly selective in granting franchises• Choosing sites convenient to customers• Focusing on limited product line & consistent

quality• Careful attention to store efficiency• Extensive advertising & use of Mc prefix• Hiring courteous personnel; paying an equitable

wage; & providing good training

Why Do Strategies Evolve?

• A company’s strategy is a work in progress

• Changes may be necessary to react to− Shifting market conditions

− Technological breakthroughs

− Fresh moves of competitors

− Evolving customer preferences

− Emerging market opportunities

− New ideas to improve strategy

− Crisis situations

A Company’s Strategy Is Partly Proactive and Partly

Reactive

Crafting Strategy Is anExercise in Entrepreneurship

• Strategy-making is a market-driven activity involving− Studying market trends and competitors’ actions− Keen observation of customer needs− Scrutinizing business possibilities based on new

technologies− Building firm’s market position via acquisitions or new

product introductions− Pursuing ways to strengthen firm’s competitive

capabilities− Proactively searching out opportunities to

• Do new things or• Do existing things in new or better ways

Linking Strategy With Ethics

• Ethical and moral standards go beyond− Prohibitions of law and the language of “thou shalt not”

to issues of− Duty and “right” vs. “wrong”

• Ethical and moral standards address“What is the right thing to do?”

• Two criteria of an ethical strategy:− Does not entail actions and behaviors that cross the

line from “should do” to “should not do” and “unsavory” or “shady” and

− Allows management to fulfill its ethical duties to all stakeholders

A Firm’s EthicalResponsibilities to Its

Stakeholders

Customers - Rightfully expect a seller to provide them with a reliable, safe product or service

Employees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise

Owners/shareholders – Rightfully expect some form of return on their investment

Suppliers - Rightfully expect to have an equitable relationship with firms they supply and be treated fairly

Community - Rightfully expect businesses to be good citizens in their community

Role of Senior Executives:Linking Strategy with Ethics

• Forbid pursuit of ethically questionable business opportunities

• Insist all aspects of company strategyreflect high ethical standards

• Make it clear all employees areexpected to act with integrity

• Install organizational checks and balances to− Monitor behavior− Enforce ethical codes of conduct− Provide guidance to employees in gray areas

• Display genuine commitment to conduct business activities ethically

Business Model

• A company’s business model describes the economic logic of how its strategy can deliver value to customers at a price and cost that yields acceptable profitability

• Business model deals with whether the revenues and costs flowing from the strategy show business viability

• It is about the “bottom line”

• A company should have a business model that promises acceptable profit, regardless of whether there are competitors or not.

Relationship Between Strategy and Business Model

Strategy . . .

Deals with a company’s competitive initiatives and business approaches

Business Model . . . Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable

Strategy-Making Hierarchy

• A company’s overall strategy is a collection of

strategic initiatives and actions devised by

managers and key employees up and down the

whole organizational hierarchy

• It comprises four distinct levels of strategy• Corporate strategy• Business/competitive strategy• Functional strategy• Operating strategy

A Company’s Strategy-Making Hierarchy

Tasks of Corporate Strategy

• Moves to achieve diversification

• Actions to boost performance of individual businesses

• Capturing valuable cross-business synergies to provide 1 + 1 = 3 effects!

• Establishing investment priorities and steering corporate resources into the most attractive businesses

Tasks of Business Strategy

• Initiating approaches to produce successful performance in a specific business

• Crafting competitive moves to build sustainable competitive advantage

• Developing competitively valuablecompetencies and capabilities

• Uniting strategic activities of functional areas

• Gaining approval of business strategies by corporate-level officers and directors

Tasks of Functional Strategies

• Game plan for a strategically-relevantfunction, activity, or business process

• Detail how key activitieswill be managed

• Provide support forbusiness strategy

• Specify how functional objectivesare to be achieved

Tasks of Operating Strategies

• Concern narrow strategic approaches to manage key operating units and strategically-relevant operating activities

• Add detail to businessand functional strategies

• Delegation of responsibilityto frontline managers

Strategic Management Process• The steps by which management converts a firm’s vision,

mission, and goals/objectives into a workable strategy

FIVE TASKS OF STRATEGIC MANAGEMENT 1. Defining business, stating a mission, & forming a strategic vision

2. Setting measurable objectives

3. Crafting a strategy to achieve objectives

4. Implementing & executing strategy

5. Evaluating performance, reviewing new developments, & initiating

corrective adjustments

DEVELOPING A VISION & MISSION

• Begins with thinking strategically−About firm’s future makeup &−Forming vision of firm’s future in 5-10 years−Task is to

• Inject sense of purpose into firm’s activities• Provide LONG-TERM DIRECTION• Give firm STRONG IDENTITY• Decide “WHO we are, WHAT we do, & WHERE we

are headed”

Developing Company’s Vision

• Involves thinking strategically about− Future direction of company

− Changes in company’s product/market/customer technology to improve

• Current market position

• Future prospects

• A strategic vision is a road map showing the route a company intends to take in developing and strengthening its business

• It paints a picture of a company’s destination and provides a rationale for going there

• It portrays a company’s future business scope (“where we are going”)

Role of a Strategic Vision

• A well-conceived and well-communicated vision functions as a valuable managerial tool to− Give the organization a sense of direction, mold organizational

identity, and create a committed enterprise− Inform company personnel and other stakeholders what

management wants its business to look like and “where we are going”

− Spur company personnel to action− Provide managers with a reference point to

• Make strategic decisions• Translate the vision into hard-edged objectives

and strategies• Prepare the company for the future

A strategic vision exists only as words and has no organizational impact unless and until it wins the commitment of company personnel and energizes them to act in ways that move the company along the intended strategic path!

Examples of Strategic Visions

Wells FargoWe want to satisfy all of our customers’ financial needs, help them success financially, be the premier provider of financial services in every one of our markets, and be known as one of America’s great companies

CaterpillarBe the global leader in customer value

AVIS RENT-A-CAROur business is renting cars. Our mission is total customer

satisfactioneBay

Provide a global trading platform where practically anyone can trade practically anything.

AMERICAN RED CROSS

The mission is to improve the quality of human life; to enhance self-reliance and concern for others; and to help

people avoid, prepare for, and cope with emergencies

Examples of Strategic Visions

H. J. Heinz CompanyBe the world’s premier food company, offering nutritious,

superior tasting foods to people everywhere. Being the premier food company does not mean being the biggest but it does mean being the best in terms of consumer value, customer service, employee talent, and consistent and predictable growth.

Hilton Hotels CorporationOur vision is to be the first choice of the world’s travelers.

Hilton intends to build on the rich heritage and strength of our brands by:

• Consistently delighting our customers• Investing in our team members• Delivering innovative products and services• Continuously improving performance• Increasing shareholder value• Creating a culture of pride• Strengthening the loyalty of our constituents.

SABIC: Our VisionOur aim• Our aim is to become the world’s preferred manufacturer and marketer

of chemical and metal products. We are ambitious and competitive, and we will achieve our aim by supplying high-quality industrial products and services to our customers, and by satisfying the expectations of our shareholders.

Our values• One of the reasons for SABIC’s creation in 1976 was to contribute to

Saudi Arabia’s development. We are still committed to developing the country’s natural resources and to improving the skills and education of its people. We respect Saudi cultural values – as we respect the values of every country in which we work.

Our standards• We will use our natural resources and human talent to their best

advantage by innovating, educating and using the latest technology. This care for people and natural resources is reflective of our standards. SABIC prides itself on its integrity, and we set ourselves the highest standards in relation to business practices, safety and the care of the environment. We will not compromise these standards.

AL-HAMMADI HOSPITAL

OUR VISION

Al-Hammadi Hospital will be recognized as the

best private healthcare provider in the Kingdom

of Saudi Arabia

OUR MISSION

We are dedicated to continuously the quality of

our services to meet the healthcare needs of our

clients through committed leadership, qualified

staff and state-of-the-art medical technology.

SAUDI ARAMCO – OUR VALUESEXCELLENCE

• We pursue excellence in everything we do.

HUMAN RESOURCES• We encourage continuous learning

and strive to develop our people to their highest potential.

FAIRNESS AND INTEGRITY• We strive for fairness and adhere

to the highest ethical standards.

TEAMWORK• We support each other and work

together to achieve our business objectives successfully.

SAFETY• We strive to maintain the highest

levels of safety, security, health and environmental standards.

RESPONSIVENESS• We are responsive to the

expectations of the government and our customers.

STEWARDSHIP• We are proud of our company and

are committed to preserving its assets and resources.

TRUST• We place authority where

responsibility lies. 

ACCOUNTABILITY• We are accountable for our

actions.

CITIZENSHIP• We support our communities and

serve as a role model for others.

SPECIFIC QUESTIONS THAT HELP FORM STRATEGIC VISIONS

• What business are we in now?

• What business do we want to be in?

• What will our customers want in future?

• What are expectations of our stakeholders?

• Who will be our future competitors? suppliers? partners?

• What should our competitive scope be?

• How will technology impact our industry?

• What environmental scenarios are possible?

Strategic Vision vs. Mission

•A strategic vision concerns a firm’s future business path - “wherewe are going”

−Markets to be pursued−Future product/market/customer/technology focus−Kind of company management is trying to create

•The mission statement of a firm focuses on its present business purpose - “who we are and what we do”

−Current product and service offerings−Customer needs being served−Technologicaland businesscapabilities

Characteristics of a Mission Statement

• Identifies the boundaries of the current business and highlights− Present products and services− Types of customers served− Geographic coverage

• Conveys− Who we are,− What we do, and− Why we are here

A well-conceived mission statement distinguishes a company’s business makeup from that of other profit-seeking enterprises

in language specific enough to give the company its own identify!

Key Elements of a Mission Statement

• Three factors need to be identified for completeness− Customer needs being met

What is being satisfied− Customer groups or markets being served

Who is being satisfied− What the organization does (in terms of business

approaches, technologies used, and activities performed) to satisfy the target needs of the target customer groups How customer needs are satisfied

A company’s mission is not to make a profit! Its true mission is its answer to “What will we do to make a profit?” Making is profit is an objective or intended

outcome!

SAMPLE MISSION STATEMENTS

Otis Elevator• Key Market: To provide any customer• Contribution: a means of moving people and things up,

down and sideways over short distances• Distinction: with higher reliability than any similar

enterprise in the world.

Courtyard by Marriott• Key Market: To provide economy and quality minded

travelers• Contribution: with a premier, moderate priced lodging

facility• Distinction: which is consistently perceived as clean,

comfortable, well maintained, and attractive, staffed by friendly, attentive and efficient people.

SAMPLE MISSION STATEMENTS

McDonald’s• Key Market: To offer the fast food customer• Contribution: food prepared in the same high-

quality manner world-wide, tasty and reasonably priced,

• Distinction: delivered in a consistent, low-key decor and friendly atmosphere.

Wal-Mart• Key Market: To offer all of the fine customers in our

territories• Contribution: all of their household needs• Distinction: in a manner in which they continue to

think of us fondly.

WHY BOTHER TO DEFINE“WHO,” “WHAT,” & “WHERE?

• Helps managers avoid trap of−Trying to move in too many directions−Being so confused about firm’s direction

that effective actions are NOT taken to move in ANY direction

• To successfully chart firm’s future, managers must−Know where firm is now−Have view of where it ought to be headed−Recognize time to shift to a new direction

SETTING OBJECTIVES• Objectives are an organization’s performance targets, i.e.

results and outcomes it wants to achieve

• Objectives function as yardsticks for tracking an organization’s performance and progress

• Purpose of setting OBJECTIVES is to− Convert mission into performance targets− Create yardsticks to track performance− Establish performance goals requiring stretch− Push firm to be inventive, intentional, focused

• Setting CHALLENGING but ACHIEVABLE objectives guards against− Complacency− Drift− Internal confusion− Status quo performance

Company’s objectives

• Two distinct types of objectives are needed:

• Financial:−Outcomes that relate to improving firm’s

financial performance−e.g. Increase earnings growth from 10 to 15% per

year; achieve & maintain a AA bond rating; up firm’s market share from 18 to 22%

• Strategic−Outcomes that will result in greater

competitiveness & stronger long-term market position

−e.g. attain lower overall costs than rivals; overtake rivals on quality or customer service; become leader in new product introductions

EXAMPLES OF CORPORATE OBJECTIVES

QUAKER OATS COMPANY• To achieve return on equity at 20% or above, “real” earnings

growth averaging 5% or better over time, be a leading marketer of strong consumer brands, and improve the profitability of low-return businesses or divest them.

EXXON• Provide shareholders a secure investment with a superior return.

ALCAN ALUMINUM• To be the lowest cost producer of aluminum & to outperform the

average return on equity of the Standard and Poor’s industrial stock index.

GENERAL ELECTRIC• To become the most competitive enterprise in the world by being

number one or number two in market share in every business the company is in.

APPLE COMPUTER• To offer the best possible personal computing technology, and to

put that technology in the hands of as many people as possible.

Nike’sCORPORATE OBJECTIVES

• Protect & improve Nike’s position as the number one athletic brand in America.

• Build a strong momentum in growing fitness market.

• Intensify the company’s effort to develop products that women need and want.

• Explore the market for products specifically designed for the requirements of maturing Americans.

• Direct & manage the company’s international business as it continues to develop.

• Continue the drive for increased margins through proper inventory management and fewer, better products.