Chapter 1

The Nature of Strategic Management

Strategic Management:
Concepts & Cases
13th Edition
Fred David

Ch 1 -1
 When CEOs from the big three
American automakers, Ford, General
Motors (GM), and Chrysler, showed up
without a clear strategic plan to ask
congressional leaders for bailout
monies, they were sent home with
instructions to develop a clear strategic
plan for the future.

Ch 1 -2
 Austan Goolsbee, one of President Obama’s
top economic advisers, said, “Asking for a
bailout without a convincing business plan
was crazy.” Goolsbee also said, “If the three
auto CEOs need a bridge, it’s got to be a
bridge to somewhere, not a bridge to
nowhere.”
 This course gives the instructions on how to
develop a clear strategic plan—a bridge to
somewhere rather than nowhere.
Ch 1 -3
 This chapter provides an overview of
strategic management.

 It introduces a practical, integrative model

of the strategic-management process; it
defines basic activities and terms in
strategic management.

Ch 1 -4
 When most firms were struggling in 2008,
McDonald’s increased its revenues from
$22.7 billion in 2007 to $23.5 billion in 2008.
 McDonald’s net income nearly doubled
during that time from $2.4 billion to $4.3
billion—quite impressive. Fortune magazine
in 2009 rated McDonald’s as their 16th “Most
Admired Company in the World” in terms of
their management and performance.

Ch 1 -5
 Jim Skinner, CEO of McDonald’s, says,
“We do so well because our strategies
have been so well planned out.”
McDonald’s served about 60 million
customers every day in 2009, 2 million
more than in 2008.
 It is the first company that featured for
excellent performance in the global
recession
Ch 1 -6
Strategic Management –Defined

Art & science of formulating,

implementing, and evaluating,
cross-functional decisions that
enable an organization to achieve its
objectives

Ch 1 -7
 The term strategic management is used to
refer to strategy formulation,
implementation, and evaluation, with
strategic planning referring only to
strategy formulation.

Ch 1 -8
Purpose of Strategic Management

To exploit and create new and different

opportunities for tomorrow

Ch 1 -9
 While the purpose of strategic
management is to exploit and create new
and different opportunities for tomorrow;
long-range planning, in contrast, tries to
optimize for tomorrow the trends of today.

Ch 1 -10
Strategic Management

In essence, the strategic plan is a

company’s game plan

Ch 1 -11
3 Stages of the Strategic
Management Process

 Strategy formulation

 Strategy implementation

 Strategy evaluation

Ch 1 -12
Strategy Formulation

Vision & Mission

External Opportunities & Threats

Internal Strengths & Weaknesses

Long-Term Objectives

Alternative Strategies

Strategy Selection

Ch 1 -13
Issues in Strategy
Formulation


Businesses
Businesses to to enter
enter

Businesses
Businesses to to abandon
abandon

Allocation
Allocation of
of resources
resources

Expansion
Expansionor
ordiversification
diversification

International
International markets
markets

Mergers
Mergers or
or joint
joint ventures
ventures

Avoidance
Avoidanceof
ofhostile
hostiletakeover
takeover

Ch 1 -14
Strategy Implementation

Annual Objectives

Policies

Employee Motivation

Resource Allocation

Ch 1 -15
Strategy Implementation Steps

 Developing a strategy-supportive culture

 Creating an effective organizational structure
 Redirecting marketing efforts
 Preparing budgets
 Developing and utilizing information systems
 Linking employee compensation to
organizational performance

Ch 1 -16
 Strategy implementation often is called
the “action stage” of strategic
management.

Ch 1 -17
Issues in Strategy
Implementation

Action
Action Stage
Stage of
of Strategic
Strategic
Management
Management


Mobilization
Mobilization of
of employees
employees
&
& managers
managers


Most
Most difficult
difficult stage
stage


Interpersonal
Interpersonal skills
skills critical
critical
Ch 1 -18
 Strategy implementation requires personal
discipline, commitment, and sacrifice.
 Successful strategy implementation
hinges upon managers’ ability to motivate
employees, which is more an art than a
science.
 The challenge of implementation is to
stimulate managers and employees
throughout an organization to work with
pride and enthusiasm toward achieving
stated objectives.
Ch 1 -19
Strategy Evaluation

Internal Review

External Review

Performance Measurement

Corrective Action

Ch 1 -20
Prime Task of
Strategic Management

Peter Drucker: Think through the

overall mission of a business. Ask
the key question:
“What is our Business?”

Ch 1 -21
 This leads to the setting of objectives, the
development of strategies, and the making
of today’s decisions for tomorrow’s results.
 This clearly must be done by a part of the
organization that can see the entire
business; that can balance objectives and
the needs of today against the needs of
tomorrow; and that can allocate resources
of men and money to key results.

Ch 1 -22
 Strategy formulation, implementation, and
evaluation activities occur at three
hierarchical levels in a large organization:
 corporate,
 divisional or strategic business unit, and
 functional.
 Most small businesses and some large
businesses do not have divisions or strategic
business units; they have only the corporate
and functional levels.
Ch 1 -23
Integrating Intuition & Analysis

The strategic management process

attempts to organize quantitative and
qualitative information under
conditions of uncertainty

Ch 1 -24
Integrating Intuition & Analysis
Intuition is based on:
 Past experiences

 Judgment

 Feelings

Intuition is useful for decision making in

conditions of:
 Great uncertainty

 Little precedent

 Highly interrelated variables

 Several plausible alternatives

Ch 1 -25
 Albert Einstein acknowledged the
importance of intuition when he said,
 “I believe in intuition and inspiration. At
times I feel certain that I am right while not
knowing the reason. Imagination is more
important than knowledge, because
knowledge is limited, whereas imagination
embraces the entire world.”

Ch 1 -26
Integrating Intuition & Analysis

Intuition & Judgment

Involve management at all levels

Influence all analyses

Ch 1 -27
 Choosing an intuitive or analytic approach to
decision making is not an either–or proposition.

 Managers at all levels in an organization inject

their intuition and judgment into strategic-
management analyses.

 Analytical thinking and intuitive thinking

complement each other.

Ch 1 -28
Adapting to Change

Organizations should continually

monitor internal and external
events and trends so that timely
changes can be made as needed

Ch 1 -29
 As Waterman has noted:
“In today’s business environment, more than
in any preceding era, the only constant is
change. Successful organizations
effectively manage change, continuously
adapting their bureaucracies, strategies,
systems, products, and cultures to survive
the shocks and prosper from the forces
that decimate (destroy) the competition.”

Ch 1 -30
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

Ch 1 -31
Strategic Management is
Gaining and Maintaining
Competitive Advantage

Anything that a firm does

especially well compared to rival
firms

Ch 1 -32
Achieving Sustained
Competitive Advantage

 Normally, a firm can sustain a competitive

advantage for only a certain period due to
rival firms imitating and undermining that
advantage.

Ch 1 -33
… Achieving Sustained Competitive
Advantage

1. Continually adapting to changes in

external trends and events and internal
capabilities, competencies, and resources

2. Effectively formulating, implementing,

and evaluating strategies that capitalize
on those factors

Ch 1 -34
… Achieving Sustained
Competitive Advantage
 For example, newspaper circulation in the
United States is steadily declining.

 Most national newspapers are rapidly

losing market share to the Internet, and
other media that consumers use to stay
informed.

Ch 1 -35
… Achieving Sustained
Competitive Advantage
 Daily newspaper circulation in the United
States totals about 55 million copies
annually, which is about the same as it was
in 1954.
 The six broadcast networks—ABC, CBS,
Fox, NBC, UPN, and WB—are being
assaulted by cable channels, video games,
broadband, wireless technologies, satellite
radio, high-definition TV, and digital video
recorders.
Ch 1 -36
Strategists

Gather Information

Analyze Information

Organize Information

Ch 1 -37
 Strategists are the individuals who are most
responsible for the success or failure of an
organization.
 The CEO is the most visible and critical
strategic manager.
 Any manager who has responsibility for a
unit or division, responsibility for profit and
loss outcomes, or direct authority over a
major piece of the business is a strategic
manager (strategist).
Ch 1 -38
 In the last five years, the position of chief
strategy officer (CSO) has emerged as a
new addition to the top management
ranks of many organizations

 This new title represents recognition of

the growing importance of strategic
planning in the business world

Ch 1 -39
 Strategists
 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 -40
Vision and Mission Statements

Vision Statement –
What do we want to become?

Mission Statement –
What is our business?

Ch 1 -41
Mission Statements

 are “enduring statements of purpose that

distinguish one business from other similar
firms.
 A mission statement identifies the scope of a
firm’s operations in product and market
terms.”
 It broadly charts the future direction of an
organization.
 It is a constant reminder to its employees of
why the organization exists
Ch 1 -42
External Opportunities and Threats

Analysis of Trends
 Economic
 Social
 Cultural
 Demographic/Environmental
 Political, Legal, Governmental
 Technological
 Competitors

Ch 1 -43
External Opportunities and Threats

Basic Tenet of Strategic Management

Take
Takeadvantage
advantageof
of
External
ExternalOpportunities
Opportunities
Strategy
Formulation

Avoid/minimize
Avoid/minimizeimpact
impactof
of
External
ExternalThreats
Threats

Ch 1 -44
Internal Strengths and Weaknesses

 Controllable
activities performed
especially well or poorly

 Determined relative to competitors

Ch 1 -45
Internal Strengths and Weaknesses

 Relative deficiency or superiority is

important information.
 Also, strengths and weaknesses can be
determined by elements of being rather
than performance. For example, a
strength may involve ownership of natural
resources or a historic reputation for
quality.

Ch 1 -46
… Internal Strengths and Weaknesses
 Typically located in functional areas of the
firm

 Management
 Marketing

 Finance/Accounting

 Production/Operations

 Research & Development

 Management Information Systems

Ch 1 -47
… Internal Strengths and Weaknesses

Assessing the Internal Environment

Ratios

Internal Performance Measures

Factors Industry Averages

Survey Data

Ch 1 -48
Long-Term Objectives

 Specific results that an organization

seeks to achieve in pursuing its
basic mission

 Long-term means more than one

year

Ch 1 -49
Long-Term Objectives

 Essential for ensuring the firm’s success

 Provide direction

 Aid in evaluation

 Create synergy

 Reveal priorities

 Focus coordination

 Provide basis for planning, organizing,

motivating, and controlling

Ch 1 -50
Long-Term Objectives

 Objectives should be
 challenging,

 measurable,

 consistent,

 reasonable, and

 clear.

Ch 1 -51
Strategies

Means by which long-term

objectives are achieved

Ch 1 -52
Strategies
 Strategies may include/Examples/:
 Geographic expansion

 Diversification

 Acquisition

 Product development

 Market penetration

 Retrenchment (downsizing)

 Divestiture

 Liquidation

 Joint venture

Ch 1 -53
Sample Strategies
 Table 1-1

 Best Buy

 Levi Strauss

 New York Times Company

Ch 1 -54
Annual Objectives

Short-term milestones that firms

must achieve to reach long-term
objectives

Ch 1 -55
… Annual Objectives
 Like long-term objectives, annual
objectives should be
 measurable,

 quantitative,

 challenging,

 realistic, consistent, and

 prioritized.

Ch 1 -56
… Annual Objectives
 In a large organization, they
should be established at the
 corporate,
 divisional, and

 functional levels.

Ch 1 -57
… Annual Objectives
 Annual objectives should be stated in
terms of
 management,
 marketing,
 finance/accounting,
 production/operations,
 research and development, and
 management information systems

(MIS) accomplishments.

Ch 1 -58
… Annual Objectives
 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 resources.

Ch 1 -59
Policies

Means by which annual objectives

will be achieved

Ch 1 -60
… Policies
 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.

Ch 1 -61
… Policies
 Policies are most often stated in terms of
 management,

 marketing,

 finance/accounting,

 production/operations,

 research and development, and

 computer information systems activities.

Ch 1 -62
… Policies
 Policies can be established at the corporate
level and apply to an entire organization at the
divisional level and apply to a single division, or
at the functional level and apply to particular
operational activities or departments.
 Policies allow consistency and coordination
within and between organizational departments.

Ch 1 -63
The Strategic-Management
Model

 This model does not guarantee

success, but it does represent a
clear and practical approach for
formulating, implementing, and
evaluating strategies.

Ch 1 -64
Ch 1 -65
… Strategic Management Model

 StrategicManagement Process
 Dynamic & continuous

 More formal in larger

organizations

Ch 1 -66
… Strategic Management Model

 A change in any one of the major components

in the model can necessitate a change in any
or all of the other components.
 For instance, a shift in the economy could

represent a major opportunity and require a

change in long-term objectives and strategies

Ch 1 -67
… Strategic Management Model

 A failure to accomplish annual

objectives could require a change in
policy; or
 A major competitor’s change in

strategy could require a change in

the firm’s mission.

Ch 1 -68
… Strategic Management Model

 Therefore, strategy formulation,

implementation, and evaluation
activities should be performed on a
continual basis, not just at the end of
the year or semiannually. The strategic-
management process never really ends.

Ch 1 -69
… Strategic Management Model

 Three important questions to

answer in developing a strategic
plan:
 Where are we now?
 Where do we want to go?

 How are we going to get there?

Ch 1 -70
Strategic Management
 Communication is a key to
successful strategic management
 Good communication and feedback

are needed throughout the strategic-

management process.

Ch 1 -71
Benefits of Strategic Management

 Allows an organization to be more

proactive than reactive in shaping its own
future
 It allows an organization to initiate and
influence (rather than just respond to)
activities—and thus to exert control over
its own destiny.

Ch 1 -72
… Benefits of Strategic Management

 Historically, the principal benefit of

strategic management has been to help
organizations formulate better strategies
through the use of a more systematic,
logical, and rational approach to strategic
choice.

Ch 1 -73
… Benefits of Strategic Management

 This certainly continues to be a major

benefit of strategic management, but
research studies now indicate that the
process, rather than the decision or
document, is the more important
contribution of strategic management.

Ch 1 -74
… Benefits of Strategic Management

Ch 1 -75
… Benefits of Strategic Management

 Through involvement in the process, line

managers become “owners” of the strategy.

 Ownership of strategies by the people who

have to execute them is a key to success!

 Participation is a key to gaining commitment

for needed changes.

Ch 1 -76
… Benefits of Strategic
Management
 Nonfinancial Benefits
 Enhanced awareness of threats
 Improved understanding of competitors’
strategies
 Increased employee productivity
 Reduced resistance to change
 Clearer understanding of performance-reward
relationship
 Enhanced problem-prevention capabilities

Ch 1 -77
… Benefits of Strategic
Management
 Financial Benefits
 organizations using strategic-management
concepts
 are more profitable and successful

 show significant improvement in sales,

profitability, and productivity
 exhibit superior long-term financial
performance relative to their industry.
 make more informed decisions with good
anticipation of both short- and long-term
consequences

Ch 1 -78
… Benefits of Strategic
Management
 Financial Benefits
 In contrast, firms that perform poorly (do not
engage in strategic planning)
 often engage in activities that are

shortsighted and do not reflect good

forecasting of future conditions.
 Strategists of low-performing organizations

are often preoccupied with solving internal

problems and meeting paperwork deadlines.

Ch 1 -79
… Benefits of Strategic
Management
 Financial Benefits
 In contrast, firms that perform poorly (do not
engage in strategic planning)
 They typically underestimate their

competitors’ strengths and overestimate

their own firm’s strengths.
 They often attribute weak performance to

uncontrollable factors such as a poor

economy, technological change, or foreign
competition.

Ch 1 -80
Why Some Firms Do No Strategic
Planning
 Lack of knowledge of strategic planning
 Poor reward structures
 Fire fighting
 Waste of time
 Too expensive
 Laziness
 Content with success (things are fine as they
stand)

Ch 1 -81
Why Some Firms Do No Strategic
Planning (continued)
 Fear of failure
 Overconfidence
 Prior bad experience
 Self-interest
 Fear of the unknown
 Honest difference of opinion
 Suspicion

Ch 1 -82
Pitfalls in Strategic Planning

Strategic planning is an involved,

intricate, and complex process that
takes an organization into uncharted
(new) territory

Ch 1 -83
Effective Strategic Planning is:

 A people process more than a paper

process
 A learning process
 Words supported by numbers
 Simple and nonroutine
 Varying assignments, team membership,
meeting formats, and planning calendars
 Challenging assumptions underlying
corporate strategy
Ch 1 -84
… Effective Strategic Planning

 Welcomes bad news

 Requires open-mindedness and a spirit of
inquiry
 Is not a bureaucratic mechanism
 Is not ritualistic or stilted
 Is not too formal, predictable, or rigid
 Does not contain jargon or arcane language

Ch 1 -85
… Effective Strategic Planning

 Is not a formal system for control

 Does not disregard qualitative information
 Is not controlled by “technicians”
 Does not pursue too many strategies at
once
 Continually strengthens the “good ethics
is good business” policy

Ch 1 -86
Comparing Business and Military
Strategy
 Strategic planning started in the military
 Similarity
 Both business and military organizations
must adapt to change and constantly improve
 Difference
 Business strategy assumes competition
 Military strategy assumes conflict

Ch 1 -87
Ch 1 -88