CHAPTER ONE

INTRODUCTION TO STRATEGIC MANAGEMENT

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 Contents
Definition of strategic management
Stages of strategic management
 Key terms in strategic management
Types of strategy
The strategic management approach
Benefits of strategic management
Business ethics and corporate social
responsibility 2
Defining Strategic Management
 Strategic management can be defined as the art and
science of formulating, implementing, and evaluating
cross-functional decisions that enable an organization
to achieve its objectives.
 As this definition implies, strategic management
focuses on integrating management, marketing,
finance and accounting, production and operations,
research and development, and information systems to
achieve organizational success.
 Strategic management is used synonymously with the
term strategic planning.
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Defining Strategic Management
Strategic management
– Used more often in academia
Strategic planning
– Used more often in the business world
Strategic management refers to:
– Strategy formulation
– Strategy implementation
– Strategy evaluation
Strategic planning refers to:
– Strategy formulation
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Defining Strategic Management
 A strategic plan is, in essence, a company’s
game plan.
 Just as a football team needs a good game plan
to have a chance for success, a company must
have a good strategic plan to compete
successfully.
 A strategic plan results from tough managerial
choices among numerous good alternatives,
and it signals commitment to specific
markets, policies, procedures, and operations.
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Strategic Management Process: Three Stages

Strategy Formulation

Strategy Implementation

Strategy Evaluation
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 Strategy Formulation
 Developing a vision and mission, identifying an
organization’s external opportunities and threats,
determining internal strengths and weaknesses,
establishing long-term objectives, generating alternative
strategies, and choosing particular strategies to pursue.
 Strategy-formulation issues include deciding what new
businesses to enter, what businesses to abandon, how to
allocate resources, whether to expand operations or
diversify, whether to enter international markets, whether
to merge or form a joint venture, and how to avoid a
hostile takeover.
 Strategy-formulation decisions commit an organization to
specific products, markets, resources, and technologies
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over an extended period of time.
Strategy Implementation
 Strategy implementation requires a firm to establish
annual objectives, devise policies, motivate
employees, and allocate resources so that
formulated strategies can be executed.
 Developing a strategy-supportive culture, creating
an effective organizational structure, redirecting
marketing efforts, preparing budgets, developing
and utilizing information systems, and linking
employee compensation to organizational
performance.
 Implementing strategy means mobilizing employees
and managers to put formulated strategies into action.
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Strategy Implementation
 Strategy implementation often is called the ―action
stage‖ of strategic management.
 Often considered to be the most difficult stage in
strategic management, strategy implementation
requires personal discipline, commitment, and
sacrifice.
 Interpersonal skills are especially critical for
successful strategy implementation.
 Strategy making requires person with vision while
strategy implementation requires a person with
administrative ability.
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Strategy Evaluation
 It is the final stage in strategic management process
 Three fundamental strategy-evaluation activities
are:
→Reviewing external and internal factors that are
the bases for current strategies,
→Measuring performance, and
→Taking corrective actions.
 Strategy evaluation is needed because success today
is no guarantee of success tomorrow!
 Success always creates new and different problems;
complacent organizations experience demise. 10
Management VS Strategic Management
Management Strategic Management

Planning Strategy Formulation

Organizing Strategy Implementation

Staffing Strategy Implementation

Motivating Strategy Implementation

Controlling Strategy Evaluation

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Key Terms in Strategic Management
 Competitive advantage
 Strategists
 Vision and mission statements
 External opportunities and threats
 Internal strengths and weaknesses
 Long-term objectives
 Strategies
 Annual objectives
 Policies
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Competitive advantage
 Strategic management is all about gaining and
maintaining competitive advantage.
 Anything that a firm does especially well compared
to rival firms.
 When a firm can do something that rival firms
cannot do, or owns something that rival firms
desire.
 Normally, a firm can sustain a competitive
advantage for only a certain period due to rival
firms imitating and undermining that advantage.
 A firm must strive to achieve sustained competitive
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advantage.
Strategists
 Strategists are the individuals who are most responsible
for the success or failure of an organization.
 Strategists have various job titles, such as chief
executive officer, president, owner, chair of the board,
executive director, chancellor, dean, or entrepreneur.
 Strategists help an organization gather, analyse, 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.
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Vision and Mission Statements
Vision Statement
 Developing a vision statement is often considered the
first step in strategic planning, preceding even
development of a mission statement.
 What do we want to become?
Mission Statement
 Enduring statements of purpose that distinguish one
business from other similar firms.
 Identifies the scope of a firm’s operations in product
and market terms.
 Addresses the basic question that faces all strategists:
→What is our business? 15
External Opportunities and Threats
 External opportunities and external threats refer to
economic, social, cultural, demographic,
environmental, political, legal, governmental,
technological, and competitive trends and events that
could significantly benefit or harm an organization in
the future.
 Opportunities and threats are largely beyond the
control of a single organization-thus the word
external.
 Firms need to formulate strategies to take advantage
of external opportunities and to avoid or reduce the
impact of external threats. 16
Internal Strengths and Weaknesses
 Refers to internal factors that show relative deficiency
and superiority of a companies internal situation as
compared to competitors.
 Organizations strive to pursue strategies that capitalize
on strengths and improve weaknesses.
 Strengths and weaknesses are typically located in the
functional areas of the firm, such as:
– Management
– Marketing
– Finance/Accounting
– Production/Operations
– Research & Development
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– Management Information Systems
Internal Strengths and Weaknesses

Assessing the Internal Environment

Financial Ratios

Performance Measures
Internal Factors
Industry Averages

Survey Data

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Long-Term Objectives
 Objectives can be defined as specific results that an
organization seeks to achieve in pursuing its basic
mission.
 Long-term means more than one year.
 Objectives are essential for organizational success
because they state direction; aid in evaluation; create
synergy; reveal priorities; focus coordination; and
provide a basis for effective planning, organizing,
motivating, and controlling activities..
 Objectives should be challenging, measurable,
consistent, reasonable, and clear
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Strategies
 Strategies are means by which long-term objectives
are achieved. Business strategies may include:

Concentric diversification Market penetration

Conglomerate diversification Market development

Forward integration Product development

Backward integration Divestiture

Horizontal integration Liquidation

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Annual Objectives
 Annual objectives are short-term milestones that
organizations must achieve to reach long term objectives.
 Like long-term objectives, annual objectives should be
measurable, quantitative, challenging, realistic, consistent,
and prioritized.
 They should be established at the corporate, divisional, and
functional levels in a large organization.
 A set of annual objectives is needed for each long-term
objective.
 Annual objectives are especially important in strategy
implementation, whereas long-term objectives are
particularly important in strategy formulation.
 Annual objectives represent the basis for allocating
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resources.
Policies
 Policies are the means by which annual objectives will
be achieved.
 Policies include guidelines, rules, and procedures
established to support efforts to achieve stated
objectives.
 Policies are guides to decision making and address
repetitive or recurring situations.
 Policies, like annual objectives, are especially important
in strategy implementation because they outline an
organization’s expectations of its employees and
managers.
 Policies allow consistency and coordination within and
between organizational departments. 22
Types of Strategy
I: Growth Strategy
Integration: Integration means joining activities related to
the present activities of a firm.
 Vertical Integration: When a firm acquires control over
another firm operating into the same value chain. It can be
of two types:
→Backward Integration – acquiring a firm engaged in raw
materials or seeking ownership or increased control of a
firm’s suppliers.
→Forward Integration — Gaining ownership or increased
control over distributors or retailers or acquiring control over
a firm/activity taking it nearer to the ultimate consumer.
 Horizontal Integration: Seeking ownership or increased
control over competitors. 23
Growth Strategy…
Intensive Strategies: Require intensive efforts to
improve a firm’s competitive position with existing
products.
 Market Penetration: Seeking increased market
share for present products or services in present
markets through greater marketing efforts.
 Market Development: Introducing present
products or services into new geographic area.
 Product Development: Seeking increased sales by
improving present products or services or
developing new ones.
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Growth Strategy…
Diversification Strategies: Adding a new customer
function(s), customer group(s), or alternative
technologies to an existing business.
 Concentric diversification: Adding new but related
products or services is known as concentric
diversification.
 Conglomerate or unrelated diversification: Adding
new, unrelated products or services
 Horizontal diversification: It means adding new
products or services for present customers.
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II: Stability Strategies
 It is also known as neutral strategy
 Occurs when an organization is satisfied with its
current situation & wants to maintain the status quo.
 Reasons for using stability strategy:
– The company is doing well ―if it works, don’t fix
it‖
– The management wants to avoid additional hassles
associated with growth
– Resources has been exhausted because of earlier
growth strategies.
 Some of the more popular of these strategies are:
→Pause and proceed with caution strategy
→No change strategy 26
III: Defensive strategies
 Defensive Strategies most often used as a short-term
solution to:
– Reverse a negative trend
– Overcome a crisis or problem situation
 It could be classified into decline & closure strategies
Reasons:
 The company faced financial problems – certain parts
of the organization are doing poorly
 The company forecasts hard times ahead related to:
– Challenges from new competitors & products
– Changes in government regulations
 Owners are tired of the business or have an
opportunity to profit substantially by selling. 27
Defensive strategies …
 Retrenchment: Regrouping through cost and asset
reduction to reverse declining sales and profit. The
main purpose of retrenchment is economizing through
cutting production costs.
 Divestiture: Divestiture strategy occurs when an
organization sells or divests itself of a business or part
of a business.
 Liquidation: Liquidation strategy occurs when an
entire company is either sold or dissolved either by
choice or force.

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IV: Michael Porter's generic strategies
 Cost Leadership: This strategy emphasizes efficiency.
By producing high volumes of standardized products,
the firm hopes to take advantage of economies of scale
and experience curve effects.
 Differentiation: Differentiation involves creating a
product that is perceived as unique. The unique features
or benefits should provide superior value for the
customer if this strategy is to be successful.
 Focus Strategy: In this strategy the firm concentrates
on a selected few target markets. You target a niche
market-focuses its effort on one particular segment and
becomes well known for providing products/services
within the segment. 29
The Strategic Management Approach
Resource-based View
 A firm’s unique resources and capabilities are the
critical determinants of strategic competitiveness.
 This model focuses on the firm’s internal
environment of the organization.
 Assumes each firm is a collection of unique
resources and capabilities
 The uniqueness of the resources/capabilities is the
basis for a firm’s strategy and ability to earn above-
average returns.
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The Strategic Management Approach

To obtain a competitive advantage, a resource

or capability must be:

– Valuable - effective

– Rare - not widely distributed

– Costly to imitate - inimitable

– Not substitutable - non substitutable

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The Strategic Management Approach
Industrial organization (I/O) View
 External environment is primary determinant of a firm’s
strategic actions.
 I/O theorists contend that external factors and the
industry in which a firm chooses to compete has a
stronger influence on the firm’s performance than do the
internal functional decisions managers make in
marketing, finance, and the like.
 Firm performance, is primarily based more on industry
properties, such as economies of scale, barriers to
market entry, product differentiation, the economy, and
level of competitiveness than on internal resources,
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capabilities, structure, and operations.
Business Ethics and Strategic Management
 Business ethics can be defined as principles of
conduct within organizations that guide decision
making and behavior.
 Good business ethics is a prerequisite for good
strategic management; good ethics is just good
business!
 Strategists responsible for high ethical principles.
 All strategy formulation, implementation, and evaluation
decisions have ethical ramification.
 A code of business ethics can provide a basis on which
policies can be devised to guide daily behaviour and
decisions at the work site. 33
Business Ethics and Strategic Management

Business actions always unethical include:

– Misleading advertising

– Misleading labeling

– Environmental harm

– Poor product or service safety

– Overpricing

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Social Responsibility and Strategic Management
 The concept of social responsibility proposes that a
private corporation has responsibilities to society that
extend beyond making a profit.
 Business has an obligation to constituent groups in society
other than stockholders.
 Social responsibility is the ethical accountability
framework for the industry which defines principles,
policies and practices and codes of conduct designed to
ensure:
– the protection of stakeholders,
– the sustainability of industry, and
– quality of life improvements in the communities in
which it operates. 35
Benefits of Strategic Management
 Makes the organization proactive rather than reactive.
 It serves as a communication document with different
stakeholders.
 Research studies now indicate that the process, rather
than the decision or document, is the more important
contribution of strategic management.
Financial benefits
– Improvement in sales
– Improvement in profitability
– Improvement in productivity
Nonfinancial benefits
– Identification of opportunities
– Objective view of management problems 36
Benefits of Strategic Management
Nonfinancial benefits…
– Minimizes adverse conditions and changes
– Improved coordination and control
– Decisions to better support objectives
– Effective allocation of time and resources
– Internal communication among personnel
– Integration of individual behaviors
– Clarifies individual responsibilities
– Encourages forward thinking
– Encourages favorable attitude toward change
– Discipline and formality to the management of
the business. 37
Comprehensive Strategic Management Model

Business Ethics, Social Responsibility, and Environmental Sustainability

Perform
External
Audit

Develop Generate, Implement Implement

Establishing Strategies;
Vision and Evaluate Strategies:
Long Term Functional
Mission and Select Management
Objectives Issues
Statement Strategies Issues

Perform Measure and

Internal Evaluate
Audit Performance

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