Lecture_01

© Ram Mudambi, Temple University, 2006 1-1

Temple UniversityTemple University BA 951BA 951

Policy Formulation and Policy Formulation and AdministrationAdministration

Ram MudambiRam MudambiTemple University (USA)Temple University (USA)

andand University of Reading (UK)University of Reading (UK)

© Ram Mudambi, Temple University, 2006

Lecture 1Lecture 1

What is Strategic Management?What is Strategic Management?

BA 950BA 950Policy Formulation and Policy Formulation and

AdministrationAdministration


OverviewOverview

What is strategy?What is strategy? An plan of action a company takes to attain superior An plan of action a company takes to attain superior

performance.performance.

Why do some firms succeed while others fail?Why do some firms succeed while others fail? A central objective of strategic management is to A central objective of strategic management is to

learn why this happens.learn why this happens.

What is the strategic management process?What is the strategic management process? The process by which managers choose a set of The process by which managers choose a set of

strategies for the enterprise to pursue its vision.strategies for the enterprise to pursue its vision.


Superior PerformanceSuperior Performance Superior performanceSuperior performance

One company’s profitability relative to that of other companies One company’s profitability relative to that of other companies in the same or similar business or industryin the same or similar business or industry

Maximizing shareholder value is the ultimate goal of profit Maximizing shareholder value is the ultimate goal of profit making companiesmaking companies

ROICROIC ((Profitability) = Profitability) = RReturneturn OOn n IInvestednvested CCapitalapital = Net profit / capital invested = Net profit / capital invested = Net income after tax / (equity + debt to creditors)= Net income after tax / (equity + debt to creditors)

Competitive advantageCompetitive advantage When a company’s profitability is greater than the average of all When a company’s profitability is greater than the average of all

other companies in the same industry & competing for the same other companies in the same industry & competing for the same customerscustomers

Sustained competitive advantageSustained competitive advantage

Profitability

Growth


Performance in Nonprofit Performance in Nonprofit EnterprisesEnterprises

Nonprofit entities such as government agencies, Nonprofit entities such as government agencies, universities, and charities:universities, and charities:

Are not in business to make a profitAre not in business to make a profit Should use their resources efficiently and effectivelyShould use their resources efficiently and effectively Set performance goals unique to the organizationSet performance goals unique to the organization Set strategies to achieve goals and compete with other Set strategies to achieve goals and compete with other

nonprofits for scarce resourcesnonprofits for scarce resources

A successful strategy gives potential donors a compelling message as to

why they should contribute.


Strategy as a planStrategy as a plan Strategy is concerned with ‘draft(ing) the plan of

war...shap(ing) the individual campaigns, and within these, decid(ing) on the individual engagements.’ (Von Clausewitz, On War, 1976)

Strategy is ‘a complete plan: a plan which specifies what choices (the player) will make in every possible situation.’ (Von Neumann and Morgenstern, Games and Economic Behavior, 1944)

‘Strategy is a unified, comprehensive and integrated plan...designed to ensure that the basic objectives of the enterprise are achieved.’ (Glueck, Business Policy and Strategic Management, 1980)


Two factors underlying all Two factors underlying all outcomesoutcomes

OutcomeStrategy

Chance

Strategy

ChanceOutcome

Planned

Unplanned

Planned

Unplanned

Good strategy Bad strategy


Defining the Mission and Setting Top-Level GoalsDefining the Mission and Setting Top-Level Goals

External Analysis of Opportunities and ThreatsExternal Analysis of Opportunities and Threats

Internal Analysis of Strengths and WeaknessesInternal Analysis of Strengths and Weaknesses

Selection of Appropriate StrategiesSelection of Appropriate Strategies

Implementation of Chosen StrategiesImplementation of Chosen Strategies

Strategic PlanningStrategic Planning

Rational planning by top management?Rational planning by top management?

Basic Strategic Planning ModelBasic Strategic Planning Model


The Main The Main Components of Components of the Strategic the Strategic Planning Planning ProcessProcess

SYLLABUSSYLLABUS

TOPIC 1

TOPIC 2

TOPIC 5

TOPIC 6

TOPIC 7

TOPIC 3

The Strategic planning process

External Analysis

Internal Analysis

Competitive Advantage

Contextual Analysis of

Strategy

Corporate Strategy

Governance &Ethics

Strategy Implementation

TOPIC 8

TOPIC 4


The Main The Main Components of Components of the Strategic the Strategic Planning Planning ProcessProcess

TEXTTEXT


Mission and GoalsMission and Goals

MissionMission Sets out why the organization Sets out why the organization

exists and what it should be doing.exists and what it should be doing.

Major goals - visionMajor goals - vision Specify what the organization hopesSpecify what the organization hopes

to fulfill in the medium to long term.to fulfill in the medium to long term.

Secondary goalsSecondary goals Are objectives to be attained that lead to superior Are objectives to be attained that lead to superior

performance.performance.


Vision vs. MissionVision vs. Mission

A statement of purpose (A statement of purpose (strategic intentstrategic intent) ) committing the organization to ambitious committing the organization to ambitious overarching (overarching (stretchstretch) goals.) goals.

Provides a sense of direction and purpose.Provides a sense of direction and purpose. Drives strategic decision making Drives strategic decision making

and resource allocations.and resource allocations. Forces the seeking of Forces the seeking of

significant performancesignificant performance improvements to improvements to

attain goals.attain goals.


Customer Orientation and Business Customer Orientation and Business DefinitionDefinition

Abell’s FrameworkAbell’s Frameworkfor Defining thefor Defining theBusinessBusinessConsumer-oriented Consumer-oriented

versus versus Product-oriented Product-oriented business definitionbusiness definition

Source: Derek F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, N.J.: Prentice-Hall, 1980), p. 17.


ValuesValues

Johnson & Johnson’s credoJohnson & Johnson’s credosets its responsibilities to:sets its responsibilities to:

1.1. J&J product users.J&J product users.2.2. J&J employees.J&J employees.3.3. Communities in which J&JCommunities in which J&J

employees live and work.employees live and work.4.4. J&J stockholders.J&J stockholders.

Source: Courtesy of Johnson & Johnson.


External AnalysisExternal Analysis

Identify Identify strategic opportunities and threatsstrategic opportunities and threats in in the operating environment.the operating environment.

MacroenvironmentMacroenvironment NationalNational

Immediate (Industry)Immediate (Industry)


Internal AnalysisInternal Analysis

Identify strengthsIdentify strengths Quality and quantity of resources availableQuality and quantity of resources available Distinctive competenciesDistinctive competencies

Identify weaknessesIdentify weaknesses Inadequate resourcesInadequate resources Managerial and Managerial and

organizational deficienciesorganizational deficiencies


Strengths and WeaknessesStrengths and Weaknesses

Opportunities and ThreatsOpportunities and Threats(SWOT Analysis)(SWOT Analysis)

Strategic ChoiceStrategic ChoiceFunctionalFunctionalBusinessBusiness

GlobalGlobalCorporateCorporate

SWOT and Strategic ChoiceSWOT and Strategic Choice


A business model encompasses how the company will:

Company’s Business ModelCompany’s Business Model

Management’s model of howhow strategy will allow the company to gain competitive advantage

and achieve superior profitability

• Select its customers• Define and differentiate

its product offerings• Create value for its

customers• Acquire and keep

customers• Produce goods or

services

• Deliver those goods and services to the market

• Organize activities within the company

• Configure its resources• Achieve and sustain a

high level of profitability• Grow the business over

time


Levels of Strategic ManagementLevels of Strategic Management


Functional-Level StrategiesFunctional-Level Strategies

Focus is on improving the effectiveness of Focus is on improving the effectiveness of operations within a company.operations within a company.

ProductionProduction OperationsOperations MarketingMarketing Research and developmentResearch and development Human resourcesHuman resources


Business-Level StrategiesBusiness-Level Strategies

Cost leadershipCost leadership Attaining, then using the lowest total cost basis as a Attaining, then using the lowest total cost basis as a

competitive advantage.competitive advantage.

DifferentiationDifferentiation Using product features or services to distinguish the Using product features or services to distinguish the

firm’s offerings from its competitors.firm’s offerings from its competitors.

Market niche focusMarket niche focus Concentrating competitively on Concentrating competitively on

a specific market segment.a specific market segment.


Corporate-Level StrategiesCorporate-Level Strategies

Vertical integrationVertical integrationOutsourcingOutsourcingDiversificationDiversificationStrategic alliancesStrategic alliancesAcquisitionsAcquisitionsNew venturesNew venturesBusiness portfolio Business portfolio restructuringrestructuring


Strategy ImplementationStrategy Implementation

Designing organizational Designing organizational structurestructure

Designing Designing controlcontrol systems systems Market and output controlsMarket and output controls Bureaucratic controlsBureaucratic controls Control through organizational cultureControl through organizational culture Rewards and incentivesRewards and incentives

FitFit - Matching strategy, structure, - Matching strategy, structure, and controlsand controls

Congruence among strategy, Congruence among strategy, structure, and controlsstructure, and controls

StructureStructure

StrategyStrategy

ControlsControls


Strategic LeadershipStrategic Leadership

Vision, eloquence, and consistencyVision, eloquence, and consistency

CommitmentCommitment

Being well informedBeing well informed

Willingness to delegate and empowerWillingness to delegate and empower

The astute use of powerThe astute use of power

Emotional intelligenceEmotional intelligence Self-awarenessSelf-awareness Self-regulationSelf-regulation MotivationMotivation EmpathyEmpathy Social skillsSocial skills

Good leaders of the strategy-making process have a number of key attributes:


Strategy as an Emergent Strategy as an Emergent ProcessProcess• Strategy making in an unpredictable worldStrategy making in an unpredictable world

Creates the necessity for flexible strategic approaches.Creates the necessity for flexible strategic approaches.

• Strategy making by lower-level managersStrategy making by lower-level managers Strategy evolves through autonomous action.Strategy evolves through autonomous action.

• Serendipity and strategySerendipity and strategy Accidental discoveries and happenstances can have dramatic Accidental discoveries and happenstances can have dramatic

effects on strategic direction.effects on strategic direction.

• Intended and emergent strategiesIntended and emergent strategies Realized strategies are combinations of intended and Realized strategies are combinations of intended and

emergent strategies. emergent strategies.


Intended and Emergent Intended and Emergent StrategiesStrategies

Source: Reprinted from “Strategy Formation in an Adhocracy,” by Henry Mintzberg and Alexandra McGugh, published in Administrative Science Quarterly, Vol. 30, No. 2, June 1985, by permission of Administrative Science Quarterly.


The Strategic Management The Strategic Management Process for Intended and Process for Intended and Emergent StrategiesEmergent Strategies


Strategic Planning in PracticeStrategic Planning in Practice

Planning under uncertaintyPlanning under uncertainty Scenario planning for dynamic environmental changeScenario planning for dynamic environmental change

Ivory tower planningIvory tower planning Lack of contact with operational realitiesLack of contact with operational realities The importance of involving operating managersThe importance of involving operating managers Procedural justice in the decision-making processProcedural justice in the decision-making process

Engagement, explanation, and expectationsEngagement, explanation, and expectations

Planning for the present: Strategic IntentPlanning for the present: Strategic Intent Recognition of the static nature of the strategic fit modelRecognition of the static nature of the strategic fit model Strategic intent in focusing the organization on winning by Strategic intent in focusing the organization on winning by

achieving stretch goalsachieving stretch goals


Problems in Strategic Decision Problems in Strategic Decision MakingMaking1. Cognitive biases1. Cognitive biases systematically influence systematically influence the rationality of decision makers.the rationality of decision makers.

Mintzberg’s example of the Vietnam war


Problems in Strategic Decision Problems in Strategic Decision MakingMaking2. Pitfalls of groupthink2. Pitfalls of groupthink

Failing to question underlying assumptions.Failing to question underlying assumptions. Coalescing around a single person or policy.Coalescing around a single person or policy. Filtering out conflicting information.Filtering out conflicting information. Developing after-the-fact rationalizations.Developing after-the-fact rationalizations. Having an emotional (non-objective) Having an emotional (non-objective)

commitment to an action.commitment to an action.


Techniques for Improving Decision Techniques for Improving Decision MakingMakingTwo decision-Two decision-making processesmaking processesthat counteractthat counteractcognitive biases cognitive biases and groupthink.and groupthink.


SummarySummary

• What is strategy and strategic management? What is strategy and strategic management?

• Overview of the courseOverview of the course

• Strategic management in the firmStrategic management in the firm• Intended and emergent strategiesIntended and emergent strategies• Problems – sources and managementProblems – sources and management

Lecture_01

Business

plan strategy

strategic management

levels of strategic

successful strategy

business policy

goals mission

similar business

superior profitability