Chapter 7 Strategic Management. Learning Objectives After reading this chapter, you should be able to: Explain how the firm’s external environment should.

Chapter 7

StrategicManagement

Learning ObjectivesAfter reading this chapter, you should be able to:

Explain how the firm’s external environment should be examined as part of the strategic management process.

Explain how the firm’s internal environment should be examined as part of the strategic management process.

State the meaning and purpose of the firm’s strategic intent and mission.

Understand how the strategy formulation process helps the firm achieve its mission.

Describe the issues that should be considered in strategy implementation.

Understand how the outcomes of the strategic management process should be assessed.

iPod Universe Critical Thinking Questions focus on

Apple’s strategy of encouraging the manufacture of Ipod accessories

Role of strategic management in encouraging other manufacturers to ride on iPod’s success

Possible results of Apple’s aggressive entry into accessory market

The Strategic Management Process It is the job of top level management

to chart the course of the entire enterprise.

It consists of: Analysis of the internal and external

environment of the firm. Definition of the firm’s mission. Formulation and implementation of

strategies to create or continue a competitive advantage.

The Strategic Management Process (cont)

Strategic management involves both long-range thinking and adaptation to changing conditions.

Strategies should be designed to generate a sustainable competitive advantage.

Competitors should be unable to duplicate what the firm has done or should find it too difficult or expensive.

Analyze the external and Analyze the external and internal environmentsinternal environments

Define strategic intent and Define strategic intent and missionmission

Formulate strategiesFormulate strategies

Implement strategiesImplement strategies

Assess strategic outcomesAssess strategic outcomes

Components of the Strategic Components of the Strategic ManagementManagement Process:Process:

SWOT Analysis Commonly used strategy tool: SWOT

Strengths, Weaknesses, Opportunities, Threats

External Environment Internal Environment

Components

•Scanning

•Monitoring

•Forecasting

•Assessing

Scope

•General environment

•Industry environment

•Strategic groups

•Direct competitors

Resource types

•Tangible

•Intangible

Firm capabilities

•Functional

•Value Chain

•Benchmarking

The External Environment Company leaders must study the external

environment in order to: Identify opportunities and threats in the

marketplace. Avoid surprises. Respond appropriately to competitors’ moves.

A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage.

Components of External Analysis

ScanningScanning MonitoringMonitoring

ForecastingForecastingAssessingAssessing

Scope of the External Analysis

General General EnvironmentEnvironment The IndustryThe Industry

Strategic Strategic GroupsGroups

Competitor Competitor AnalysisAnalysis

The Segments of the General Environment

DemographyDemographyEconomic Economic

ConditionsConditions

Political/Legal Political/Legal

ForcesForces

Socio-cultural Socio-cultural ConditionsConditions

Technological Technological Changes

Changes

Globalization

Globalization

Porter’s Analyzing the Industry Environment

Threat of new Threat of new entrantsentrants Threat of Threat of

substitutessubstitutes

SuppliersSuppliers

CustomersCustomersIntensity of rivalryIntensity of rivalry

among competitorsamong competitors

Focusing on the Future (p. 300) Refer to Focusing on the Future in Chapter

5 (p.215)

The Internal Environment Each company has something that it

does well. These are called “core competencies.”

Company executives should identify the resources, capabilities, and knowledge the firm has that may be used to exploit market opportunities and avoid potential threats.

Resource-based view: Basing the strategy on what the firm is capable of doing

Resource Types: Tangible Resources

Assets that can be quantified and observed.

Include financial resources, physical assets, and workers.

Strategic assessment of tangible resources should enable management to efficiently use tangible resources to support the company and to expand the volume of business.

Resource Types: Intangible Resources Difficult to quantify and included on a

balance sheet

Often provides the firm with a strong competitive advantage.

Competitors find it difficult to purchase or imitate these resources.

Strategically most important intangibles: Reputation Technology Human Capital

Analyzing the Firm’s Capabilities

Functional Functional AnalysisAnalysis

Value Chain Value Chain AnalysisAnalysis

BenchmarkingBenchmarking

Analyzing Capabilities by Functional Areas

Functional Area Capability

Corporate Management

Effective financial control systemsExpertise in strategic control of diversified corporationEffectiveness in motivating and coordinating divisional and business-unit managementManagement of acquisitionsValues-driven, in-touch corporate leadership

Information Management

Comprehensive and effective MIS network, with strong central coordination

Research and Development

Capability in basic researchAbility to develop innovative new productsSpeed of new product development

Analyzing Capabilities by Functional Areas (cont.)

Functional Area Capability

Manufacturing Efficiency in volume manufacturingCapacity for continual improvements in production processesFlexibility and speed of response

Product Design Design capability

Marketing Brand management and brand promotion

Promoting and exploiting reputation for quality

Responsive to market trends

Sales and Distribution Effectiveness in promoting and executing sales

Efficiency and speed of distribution

Quality and effectiveness of customer service

Value-Chain Analysis Breaks down the firm into

a sequential series of activities and attempts to identify the value added of each activity

Benchmarking Involves Four Stages: Identifying activities or functions that are

weak and need improvement.

Identifying firms that are known to be at the leading edge of these activities or functions.

Studying the leading-edge firms by visiting them, talking to managers and employees, and reading trade publications.

Using the information gathered to redefine goals, modify processes, and acquire new resources to improve the firm’s functions.

Strategic Intent and Mission The primary guides to strategic

management are formal statements of strategic intent and mission.

Strategic intent is internally focused, defining how the firm uses its resources, capabilities, and core competencies.

Strategic mission is externally focused, defining what will be to produced and marketed, utilizing its internal core competencies.

Strategic Intent and Mission(cont.)

Strategic Intent and Mission

Intent: How firm would like to use

•Resources

•Capabilities

•Core competencies

Mission: Determine the firm’s external focus on

•Products

•Markets

Strategy Formulation The design of an approach to achieve

the firm’s mission.

Takes place at: Corporate-Level Business-Level

Corporate-Level Strategy The corporation’s overall plan concerning

the: Number of businesses the corporation holds. Variety of markets or industries it serves. Distribution of resources among those

businesses.

This diversification strategy may be analyzed in terms of: Portfolio mix Type of diversification Process of diversification

Portfolio Analysis The basic idea is to classify the

businesses of a diversified company within a single framework.

Two of the most widely applied include: The McKinsey-General Electric Portfolio

Analysis Matrix The Boston Consulting Group’s Growth

Share Matrix

The McKinsey-General Electric Portfolio Analysis Matrix

1) Harvest

2) 3)

4) 5)

Hold

6)

7) 8) 9)

Build

Low Medium High

Business-Unit Position

High

Medium

Low

IndustryAttractiveness

The Boston Consulting Group’s Growth Share Matrix

Earnings: high stable, growingCash Flow: neutralStrategy: invest for growthSTAR

Earnings: low, unstable, growingCash Flow: negativeStrategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog?

Earnings: high, stableCash Flow: high stable Strategy: milkCOW

Earnings: low, unstableCash Flow: neutral or negativeStrategy: divestDOG

Relative Market Share

Annual RealRate of MarketGrowth

Diversification StrategyType of Diversification Concentration strategy Vertical integration

strategy Concentric

diversification strategy Conglomerate

diversification

Process of Diversification

Acquisition and restructuring strategies Acquisition Merger

International strategy

Business-Level Strategy Deals with how to compete in each

business area or market segment.

Firms have two basic choices: Cost leadership strategy Differentiation strategy

Strategy Implementation

OrganizationOrganizational Structure al Structure and Controlsand Controls

Cooperative Cooperative StrategiesStrategies

Human Human Resource Resource StrategiesStrategies

Strategic Strategic LeadershipLeadership

Corporate Corporate EntrepreneursEntrepreneurs

hip and hip and InnovationInnovation

Strategic Outcomes Company leaders should periodically assess

whether the outcomes meet expectations. A firm must first and foremost cater to the

desires of its primary stakeholders. The firm should also consider the desires of

other stakeholders affected by its performance.

Some of the standard measures of strategic success includes: Profits Growth of sales/market share Growth of corporate assets Reduced competitive threats Innovations

iPod Universe Critical Thinking Questions focus on

iPod sales benefitted from the availability of ipod accessories.

The concept of complementors (accessories in this case) and their role in increasing the popularity of a new technology is a key concept in strategic management (in high technology industries)

Because accessories manufacturers have increased iPod popularity, Apple’s entry into accessories should prove beneficial

Video: Developing the golden parachute Discuss the three questions on p. 276

In-class writing Refer to Focusing on the Future p. 300

Write on a sheet of paper, what are you not clear on and what aspect needs clarification?

Exchange with your neighbor. Write your clarification to his or her question. Exchange and discuss. Do you agree?