Chapter 1

Introduction
What is Strategic
Management?
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 The word strategy has entered the field of
management more recently. Originally, the word
strategy has been derived from Greek word
‘Strategoes’, which means generalship. The word
strategy, therefore, means the art of the general.
 When the term strategy is used in military sense, it
refers to action that can be taken in the light of
action taken by opposite party.
 A strategy is a set of actions that managers take to
increase their company’s performance relative to
rivals.

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 Defining Strategic Management

• Strategic management
– the art and science of formulating,
implementing, and evaluating cross-
functional decisions that enable an
organization to achieve its objectives

– Set of managerial decisions and actions

that determines the long-run performance
of a firm.
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Defining Strategic Management
Strategic management is used synonymously with the
term strategic planning.
Sometimes the term strategic management is used to
refer to strategy formulation, implementation, and
evaluation, with strategic planning referring only to
strategy formulation.

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Stages of Strategic Management

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Stages of Strategic Management

Strategy Formulation

Vision & Mission

External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection

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Issues in Strategy Formulation


Businesses
Businesses to
to enter
enter

Businesses
Businesses to
to abandon
abandon

Allocation
Allocation of
of resources
resources

Expansion
Expansion oror diversification
diversification

International
International markets
markets

Mergers
Mergers or
or joint
joint ventures
ventures
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 Stages of Strategic Management
• Strategy implementation
– Requires a firm to establish annual
objectives, devise policies, motivate
employees, and allocate resources so that
formulated strategies can be executed
– Often called the action stage

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 Stages of Strategic Management
Strategy Implementation

Annual Objectives

Policies
Employee Motivation

Resource Allocation

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 Stages of Strategic Management

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

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Stages of Strategic Management
• Strategy evaluation

– 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!
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Stages of Strategic Management

Strategy Evaluation

Internal Review

External Review

Performance Measurement

Corrective Action

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 Stages of Strategic Management
Strategy formulation, implementation, and evaluation
activities occur at three hierarchical levels in a large
organization: corporate, divisional or strategic
business unit, and functional
Strategic management helps a firm function as a
competitive team

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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
 1. competitive advantage is Anything that a firm does
especially well compared to rival firms.
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
 Key Terms in Strategic Management

2. Strategists: the individuals who are most

responsible for the success or failure of an organization

Strategists

Gather Information

Analyze Information

Organize Information
 Key Terms in Strategic Management
3. Vision statement
– answers the question “What do we want to become?”
– often considered the first step in strategic planning

4. Mission statements
– enduring statements of purpose that distinguish one
business from other similar firms
– addresses the basic question that faces all strategists:
“What is our business?”

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 Key Terms in Strategic Management

5. External opportunities and 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.

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 Some Opportunities and Threats

Computer hacker problems are increasing.

Unemployment and underemployment rates
remain high.
Interest rates are rising.
Product life cycles are becoming shorter.
State and local governments are financially
weak.

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 Key Terms in Strategic Management
6. Internal strengths and weaknesses
– an organization’s controllable activities that are performed
especially well or poorly.

7. Long term Objectives

– specific results that an organization seeks to achieve in
pursuing its basic mission
– should be challenging, measurable, consistent, reasonable,
and clear
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 Key Terms in Strategic Management
8. Strategies
– the means by which long-term objectives will be achieved
– may include geographic expansion, diversification, acquisition,
product development, market pénétration
• 9. Annual objectives
– short-term milestones that organizations must achieve to reach
long-term objectives
– should be measurable, quantitative, challenging, realistic,
consistent, and prioritized
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 Key Terms in Strategic Management
10. Policies
– the means by which annual objectives will be
achieved
– include guidelines, rules, and procedures established
to support efforts to achieve stated objectives
– guides to decision making and address repetitive or
recurring situations

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The Strategic-Management Model

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 Comprehensive Strategic Management Model
External
Audit

Long-Term Implement Measure &

Objectives Generate, Strategies: Evaluate
Evaluate, Mgmt Issues Performance
Vision
Select
&
Strategies
Mission
Statements

Internal
Audit

Ch. 1-24
 Over view of types of strategy

It is possible to identity three levels of

strategy: corporate strategy, business strategy
and functional strategy.  Figure .

Ch 1 -25
Figure : The Levels of Strategy

Corporate
Headquarters
Corporate top
Corporate
management
Strategy

Business SBU top

SBU 1 SBU 2 SBU 3 Strategy management

Functional Functional
Production R&D Finance Marketing Personnel Distribution Strategy management

Ch 1 -26
 1. Corporate Strategy

In what industries and markets should we compete?

Deals with three key issues facing the corporation as a
whole:
 The firm’s overall orientation toward growth, stability, or
retrenchment (directional strategy)
 The industries or markets in which the firm competes
through its products and business units (portfolio
analysis)
 The manner in which management coordinates activities
and transfers resources and cultivates capabilities among
product lines and business units (parenting strategy)
Ch 1 -27
 2. Business Strategy
• How are we going to compete for customers in this industry
and market?
 Business-level strategy is an integrated and coordinated set
of actions the firm uses to gain a competitive advantage by
exploiting core competencies in specific product markets.
 This means that business-level strategy indicates the choices
the firm has made about how it intends to compete in
individual product markets.
 The purpose of a business-level strategy is to create
differences between the firm’s position and those of its
competitors.
 Thus, the firm’s business-level strategy is a deliberate choice
about how it will perform the value chain’s primary and
support
Ch 1 -28
activities in ways that create unique value .
 3. Functional Strategy
• How can we best utilize resources to implement our
business strategy?
• is the approach a functional area takes to achieve
corporate and business unit objectives and
strategies by maximizing resource productivity.
• It is concerned with developing and nurturing a
distinctive competence to provide a company or
business unit with a competitive advantage.
• The main aim of functional strategy is to obtain the
maximum productivity from resources.
• Concern with process of implementing business
strategies.
Ch 1 -29
 Strategic management approach
Model of Above-Average Returns (AAR)

• Industrial organization
• Resource based

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 1. Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
Underlying Assumptions
– External environment imposes pressures and constraints
that determine the strategies resulting in AAR
– Most firms that compete within a particular industry
control similar resources and pursue similar strategies
– Resources for implementing strategies are highly mobile
across firms

The Industrial Organization model suggests that above-

average returns for any firm are largely determined by
characteristics outside the firm.
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Industrial
Organizati
onal (I/O)
Model of
Above-
Average
Returns
(AAR)

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 Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
Limitations
– Only two strategies are suggested for
competing in an industry: Cost Leadership or
Differentiation
– Internal resources & capabilities are not
considered
– AAR are earned when a firm implements the
strategy dictated by external environment
(general, industry, and competitor)

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 The Resource-Based Model of AAR
Resources are Inputs into a firm's production process includes
capital equipment, employee skills, patents, high-quality
managers, financial condition, etc.
• Basis for competitive advantage: When resources are valuable,
rare, costly to imitate, and non substitutable
• Capability
– Capacity for a set of resources to perform a task or activity in
an integrative manner
• Core Competency
– A firm’s resources and capabilities that serve as sources of
competitive advantage over its rival
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 The Resource-Based Model of AAR
• Basic Premise - a firm's unique resources & capabilities is the
basis for firm strategy and AAR
– Each organization is a bundle of unique resources and capabilities
– Performance difference between firms emerge over time due to these
unique resources and capabilities (versus industry’s structural
characteristics)
– Combined uniqueness should define the firms’ strategic actions
• A firm has superior performance because of
• Unique resources and capabilities, and the combination makes
them different, and better, than their competition – driving the
competitive advantage
• The Resource-Based model argues that Core Competencies are the
basis for a firm’s Competitive Advantage, Strategic
Competitiveness and Ability to Earn Above-average Returns.
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 The
Resource-
Based
Model of
AAR

36
 Summary Models of Superior Returns
Industrial Organization Resource-Based
Model Model
The External Environment Resources

An Attractive Industry Capability

Strategy Formulation Competitive Advantage

Assets and Skills An Attractive Industry

Strategy Implementation Strategy Implementation

Superior Returns Superior Returns

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 Benefits of Strategic Management

1. Financial Benefits
Businesses using strategic-management concepts
show significant improvement in sales, profitability,
and productivity compared to firms without
systematic planning activities

High-performing firms seem to make more

informed decisions with good anticipation of both
short- and long-term consequences
Ch. 1-38
 Benefits of Strategic Management
(Cont’d)
2. Nonfinancial Benefits
Enhanced awareness of external threats
Understanding of competitors’ strategies
Increased employee productivity
Reduced resistance to change
Clear performance-reward relationships
Order and discipline to the firm
View change as opportunity
Ch. 1-39
 Nonfinancial Benefits

• It allows for identification, prioritization, and

exploitation of opportunities.
• It provides an objective view of management
problems.
• It represents a framework for improved
coordination and control of activities.
• It minimizes the effects of adverse conditions and
changes.

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 Nonfinancial Benefits
• It allows major decisions to better support
established objectives.
• It allows more effective allocation of time and
resources to identified opportunities.
• It allows fewer resources and less time to be
devoted to correcting erroneous or ad hoc
decisions.
• It creates a framework for internal
communication among personnel.

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 Pitfalls in Strategic Planning
• Doing strategic planning only to satisfy accreditation
or regulatory requirements
• Too hastily moving from mission development to
strategy formulation
• Failing to communicate the plan to employees, who
continue working in the dark
• Top managers making many intuitive decisions that
conflict with the formal plan

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 Pitfalls in Strategic Planning
• Top managers not actively supporting the
strategic-planning process
• Failing to use plans as a standard for measuring
performance
• Delegating planning to a “planner” rather than
involving all managers
• Failing to involve key employees in all phases of
planning
• Failing to create a collaborative climate
supportive of change
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 Business Ethics & Strategic Planning

Defined:
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!

Ch. 1-44
 Business Ethics & Strategic Planning (Cont’d)

• Strategists responsible for high ethical principles

• All strategic processes have ethical

ramifications
• Formal codes of ethics are in place for many
businesses

Ch. 1-45
 Business Ethics & Strategic Planning (Cont’d)

Business actions always unethical include:

• Misleading advertising
• Misleading labeling
• Environmental harm
• Poor product or service safety
• Dumping flawed products on foreign markets

Ch. 1-46
END

Thank you!!

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