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DEFINITIONS Strategic Management is a process for conducting the entrepreneurial activities of a firm for organizational renewal, growth, and transformation. The major tasks are: (1) set a miss mission ion and and goals goals,, (2) (2) assess the environment, (3) appraise company capabilities, (4) strategy, and (6) craft the strategy, (5) implement the strategy, strategy.. evaluate and control the strategy Business Policy is a set of prescribed and discretionary statements, limiting actions of individuals in the firm, as set forth in directives and guides. Mission is the reason for which the fir m exists, and what it will do. Basically, Basically, it describes the products/services to be supplied, the markets to be served, and the technology applied (if important). Vision Statement answers the question, What do we want to become? generall ends Goals express the aspirations of the firm, genera that cannot be measured. Ex. “In unrelenting pursuit of perfection.”” perfection. are specific specific targets to be accomplished by a Objectives are specified time. Ex. “Profits will grow at the rate of 5% annually for the next f ive years.” Long-term objectives (5 years or more) are strategic objectives and define the desired character of the company company,, at the specified time. Strategy is simply the means or general actions to be taken tak en to achi achiev evee lon long-t g-term erm obj objecti ectives ves.. Strateg Strategic ic management is the work of the General Manager. General Manager is a person who is responsible for a profit ce nter, as opposed to a functional manager who is responsible only for a cost or revenue center. Generic Strategy is the name for a group of similar specific strategies.
Levels of Strategy 1. Corporate level. Wha Whatt types types of busine businesses sses should sho uld we be in? 2. Business level. How do do we compete? compete? 3. Functi should our our Functional onal compo component nent lev level el. What should organization do to synchronize with the business-level strategy? Opportunity is a set of circumstances that, if acted upon at the right moment, will produce a gain. probab babilit ility y of a futur futuree event event and and its its Threat is the pro potentially harmful impact on the f irm.
Mission & Vi Vision sion Evaluation Capabilities
Forecast the Environment
Strengths
Opportunities
Weaknesses
Threats Set Long-Term Objectives
Craft the Strategy
QUICK REFERENCE GUIDE
COMPANY MISSION: COMPANY WHAT IS OUR BUSINESS? 1. 2. 3. 4. 5. 6.
Basic produc productt or service service Primary mark markets ets Principal technology technology used (if relevant) relevant) Customer satisfaction, quality, and societal goals Company Comp any philosoph philosophy y Self-concep Self-c onceptt (identity) (identity)
THE ENVIRONMENT THE REMOTE (MACRO) ENVIRONMENTAL ENVIRONMENT AL FACTORS 1. Econ Economi omicc 2. Socia Social-dem l-demogra ographic phic 3. Pol Politic itical-le al-legal gal 4. Technolog echnological ical 5. Cul Cultu tural ral 6. Ecologic Ecological-natural al-natural
TASK (IMMEDIATE, OPERATING) ENVIRONMENTAL ENVIRONMEN TAL FACT FACTORS ORS 1. The task environment environment comprises comprises all persons, persons, groups, or entities that have an interest in the company. These are called stakeholders. 2. A narrower narrower definition refers to those those stakeholders with whom the firm has contact from time to time, as follows: a. Cus Custom tomers ers b. Suppliers c. Financial instituti institutions ons d. Com Competi petitors tors e. Tr Trade ade associati associations ons f. Acti Activist vist group groupss g. Federal Federal,, state, and local government government agencies h. Media representati representatives ves i. Un Unio ions ns
Evaluate & Control Strategy Fig. 1, The Strategic Management Model
THREAT A threat is an event, event, as defined by its impact impact on your your company and the probability of its occurrence, that will result in harm to your company. It is an attack on company underpinnings, such as: 1. Support of stakeholder stakeholder groups 2. Resources: human, financial 3. Cust Custome omerr base 4. Capabilities, such as technology technology,, products, processes, management, management, and functional functional 5. Artificial barriers to competition: laws, regulations, regulatio ns, patents, and licenses 6. Social changes changes and customer customer preferences preferences 4. Potential computer entrants 2. Buyers
1.
DEFINING AN INDUSTRY 1. Pro Produc ducts ts 2. Comp Competit etitors ors 3. Structure (number, (number, size, relative relative strength, market share of competitors, product differentiation) 4. Econ Economi omicc traits 5. Critical success factors 6. Entry barrie barriers rs
Rivalry among existing firms
3.
Suppliers
COMPETITIVE ENVIRONMENT: MICHAEL E. PORTER’S 5-FORCE MODEL See Figure 2. intensity of competition As Porter says, the nature and and intensity in an industry is a composite of five competitive forces: 1. Rivalry among competitors in the the industry industry 2. The bargaining bargaining power power of buyers 3. The bargaining bargaining power power of suppliers 4. The potential potential entry of new competitors 5. The power power of firms with substitute substitute products Industry-driving forces inc increas reasee incenti incentive ve for the the industry to change. Examples of driving driving forces are industry growth rate, rate, product inno innovation, vation, customer preferences, f irms entering and leaving the industry industry,, cost and productivity, and increasing globalization.
OPPORTUNITY Implement the Strategy
2. Advances in technology technology,, e.g., fiber optics, gene manipulation. 3. A misfortune befalls befalls a major competitor competitor who who then shuts down, liquidates, or goes bankrupt. 4. A competing company company is put put up for sale at a good price. 5. A chance occurs for you you to hire a noted expert expert that you need. 6. A breakthrough breakthrough in your product product or process (“Research & Development”) that makes possible possib le a gain in market share.
An opportunity is a combination of events or circumstances circumstan ces that arise, which, which, if acted upon at a certain time, will result in prof it, gain, or victory. Such circ ci rcum umst stan ances ces may may be caus caused ed by ch chan ange gess in the the environment enviro nment or or by changes in the company company,, relative to the environment. Examples: 1. Opportunities arise for the firm as it is. These include product and market extensions through mergers, failures of competitors, and legal change.
5.
Potential competitive substitutive substitut ive products from firms in other industries
Fig. 2, Porter’s Force Model
EVOLUTION OF COMPANY COMP ANY CAP CAPABILITIE ABILITIES S SITUATION ANALYSIS 1. How well well is the company’s company’s strategy working? 2. What are the company’s strengths and weaknesses? 3. What are its core products products and competencies? 4. What benchmarks are being used for measuring its situation?
APPROACHES TO INTERNAL SCANNING & ANALYSIS Value Chain Analysis 1. Basic concept: Value analysis identifies the primary and support activities that create value. 2. It may be be used to analyze analyze and reduce reduce business costs and compare one business’ value chain with those of competing companies. See Fig. 3 (next page).
Evolution of Company Capabilities (continued) Functional Analysis of Strengths & Weaknesses of the Firm
1. Establish a table with column headings: Factors, Strengths/Weaknesses, Standards and Comparison. For each factor to be evaluated, the question must be asked, “Compared to what?” 2. Standards or criteria may be: a. The industry average for the factor being evaluated b. The best fi rm’s values c. The best value of any firm on each criterion d. A previously set objective e. A previous forecast 3. Functional factors should be selected from the following functional areas: a. Marketing b. Operations/Production c. Finance and accounting d. Human resources, especially management and organization e. Information systems f. Quality of all transactions, relationships, and outputs Support activities and costs
Technology development and product and process improvement
Human Resources Management
General Administration
Primary activities and costs
Purchased supplies and inbound logistics Operations Outbound logistics Sales and Marketing Service Profit Margin
Fig. 3, The Value Chain
MATCH OF STRATEGY & STRUCTURE
1.Culture 2.Images 3.Identity 4.Leadership 5.Mission, goals, objectives, and organizational structure RESOURCE-BASED ANALYSIS This approach to strengths and weaknesses is based on two fundamental assumptions: (1) resource heterogeneity - a firm is a bundle of resources and these resources are different for each firm, and (2) resource immobility, which says that if these resources are difficult to copy, they are a potential source of competitive advantage. Lists of firm att ributes that may be thought of as resources may be divided into four categories: 1. Financial capital 2. Plant capital 3. Human capital 4. Organizational capital
PIMS ANALYSIS Profit Impact of Marketing Strategy , offered by the Strategic Planning Institute, is based on a database of about 3,000 businesses. Their research is directed at identifying principles that will guide companies in establishing successful strategies, or evaluating their own.
SETTING STRATEGIC (LONG-TERM) OBJECTIVES Characteristics of Long-Term Objectives 1. Acceptable to managers 2. Adaptable to extraordinary changes in the environment 3. Clearly measurable against specified criterion 4. Motivating - not too high and not too low 5. Understandable
Corporate Level What business should we be in? A. Choose GENERIC corporate-level strategies. 1. Feasible corporate-level strategies.
GENERIC GROUPS OF LONG-TERM OBJECTIVES
competitive strength
Within each generic strategy objective group below, specific objectives may be selected. 1. Product/Market scope 2. Profitability 3. Competitive edge 4. Financial specifications, expenditures, net worth, etc. 5. Innovation and technology 6. Employee development/Productivity 7. Sources of, and deployment of, resources 8. Synergy 9. Risk 10. Legitimacy (satisfaction of stakeholders) 11. Ideological leadership
CRAFTING CORPORATELEVEL STRATEGY OBJECTIVES Corporate-level strategy is directed toward: 1. Maintaining corporate-wide consistency of direction of the total company toward long-range, usually global, goals called strategic intent. 2. Leveraging resources for long-range goals. 3. Reducing financial risk by building a balanced portfolio of businesses with a balanced portfolio of advantages. 4. Investing in core competencies for the businesses (usually called Strategic Business Units or SBUs). 5. In general, corporate strategy is designed to answer the question: What businesses should we be in?
THE PROCESS The process of developing corporate-level strategy is shown in Fig. 4 and explained as follows:
CHOOSE GENERIC CORPORATE-LEVEL STRATEGIES Generic Strategy is a group of corporate-level strategies that are first determined so that the decision maker is guided toward making an appropriate specific strategy (See Fig. 5.5, 6 & 7). A list of generic strategies generally used is as follows: Concentration - the corporation concentrates its efforts and resources on current business or businesses. Concentric diversification - the company decides to diversify into products related to its present products through similar marketing methods, production process es , or products. Conglomerate diversification - diversification into products unrelated to the firm’s present products. Vertical backward integration - the company buys, or otherwise competes with, its suppliers. Forward integration - the company buys companies that are customer businesses. Joint ventures - two or more companies combine equity in a new company to gain an advantage or minimize individual weaknesses. Divestiture - a company sells off, spins off in various ways, a portion or an entire SBU. Turnaround/Restructuring - a defensive strategy followed by a company in need of immediate improvement. Bankruptcy - a means for getting respite from creditors and used by very healthy companies, as well as those which need to be reorganized and obtain additional capital. Liquidation - the company sells its assets and goes out of business. An
industry attractiveness 2. Choose final generic strategy option.
Options Opportunity Long-term objectives Generic strategy (appropriate feasible)
Select options to get final gene strategies. B. Choose SPECIFIC corporate-level strategy, guide by final generic strategy to yield. Portfolio of businesses = answers to the origin of the question
Fig. 4, Corporate Strategy Formulation
ANALYSIS & EVALUATION OF THE PORTFOLIO General Electric 9-Cell Business Screen 1. Fig. 6 shows a 9-cell matrix of the positioning of SBUs, in terms of competitive strength vs. industry attractiveness. 2. The areas of the circles represent the sales of each SBU. The segments represent market share. 3. The position of a business on the grid may be determined either subjectively, or quantitatively, by using a weighted rating system for the factors shown. 4. Corporate strategy implications from the matrix are: a. Suggest investment priorities. b. Incor porate a wide variety of strategic variables (others in addition to those shown may be incorporated). c. Indication of possible life-cycle stages of the SBUs. d. Indicate balance or lack of balance in the portfolio. e. Compare performance among business units.
SELECTING A GENERIC STRATEGY 1. Plot the company’s current (and potential) SBUs on Fig. 5, a competitive strength vs. industry attractiveness matrix. Each circle (area) is proportional to the sales of the particular SBU (See Fig. 5). 2. Select feasible corporate-level generic strategies from the cells in which the SBUs fall. 3. Find a match of an opportunity, a set of long-term objectives, and a generic strategy from Fig. 5. Such a set represents a strategic option. 4. Find a number of strategic options and select, judgmentally, the ones that your resources can support. This will give you your final feasible generic strategies.
Rapid Market Growth 1. Reformation of concentration 2. Horizontal integration 3. Divestiture 4. Liquidation
1. Concentration 2. Vertical integration 3. Concentric diversification
Supermarket Group
Specialty Shop Group
Weak Competitive Position
1. Turnaround or retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Divestiture 5. Liquidation
Drug Store Group
Strong Competitive Position
1. Concentric diversification 2. Conglomerate diversification 3. Joint ventures
Slow Market Growth Source: John A. Pearce & Richard B. Robinson, Strategic Management, Homewood, Illinois: Irwin, Inc., 1982 p. 210.
Fig. 5, Feasible Corporate Generic Strategies
Competitive Status of the Corporation’s Business Units
l s a e t t n i y e i n m n u a n t r o M r o i v p p n e o
Strong
Average
Weak
Cell A
Cell D
Cell G
1. Internal growth 2. Vertical integration of related businesses 3. Mergers 4. Horizontal diversification
t n e m n o r Cell B i l s v a n e t i e t s 1. Vertical integration t n E t a i e e l a n of related businesses r r u h a e m n t 2. Horizontal related t n d r o r o i o r d diversification e M t v p p n a n x e o E e h t Cell C f o 1. Horizontal-related e l t a t diversification a t l n s a e t 2. Horizontal-unrelated S c
a i diversification t m n e i r r o h (conglomerate) r t C i 3. Vertical integration of v n unrelated businesses e 4. Divestment
1. Mergers 2. Horizontal integration 3. Strategic alliances
1. Turnaround 2. Divestment
Cell E
Cell H
1. Stability 2. Mergers 3. Horizontal integration 4. Strategic alliances 5. Divestment
1. Turnaround 2. Divestment
Cell I
Cell F 1. Divestment 2. Horizontal-related diversification 3. Horizontal-unrelated diversification 4. Stability
1. Liquidation
CHOOSE THE SPECIFIC CORPORATE-LEVEL STRATEGY (PORTFOLIO OF BUSINESS UNITS)
1. Specific Corporate-Level Strategy answers the question: “What businesses should we be in?” 2. For each generic strategy, decide the business, if any, that you wish to add to or subtract from your portfo lio. For example, if you were a manufacturer of golf carts and decided to follow a concentric diversification strategy, you might select the purchase of a power lawn mower company to add to your portfolio. 3. When you have reviewed all your feasible generic strategies and made such decisions, the companies remaining represent your portfolio and set the direction for the total company. Using SWOT (Strength, Weaknesses, Opportunities, Threats) to derive generic corporate strategies (P. Wright, M. J. Kroll, and J. Parnell)
SWOT analysis ties together strengths, weaknesses, opportunities, and threats vs. competitive position. Place each SBU in a cell, giving recommended feasible generic strategies (Fig 5.5).
LIFE CYCLE MATRIX The Life Cycle Matrix is similar to the G.E. Matrix, except that it focuses on the life cycles of the products, rather than the industry attractiveness. In Fig. 7, the competitive position is shown for each SBU, but the stage of the SBU’s life cycle is also shown. Small sales at the beginning and end of the life cycle, with a strong competitive position, for example, may be considered favorable. If all SBUs are in different stages of the life cycle, but in the strong competitive position, this may also be a favorable condition. If all SBUs are in the strong competitive position and maturity stage, this indicates trouble later, because no new businesses are in the company’s portfolio.
Fig. 5.5, SWOT Portfolio Framework
STRATEGIC FIT ANALYSIS Market size and growth rate Industry profit margins Competitive intensity Bargaining power of customers and supplier
Cyclicality of demand Financial norms Economies of scale Barriers to entry Capital intensity
Invest aggressively
1. Does each business fit with other businesses in the portfolio? Compare the value analysis chains of each. 2. Does each business fit the strategic direction of the total company? Does each business contribute heavily to corporate financial performance?
Invest selectively Harvest or divest
Competitive Position
Industry Attractiveness High Business Strength
Medium
Strong Average Weak
Low
w o L m u i d e M h g i H
Relative market share Profit margins Cost position Level of differentiation Technological capability Response time Financial strength Human assets Fig. 6, GE 9-Cell Screening Grid
Development
n o i t u l o v E t e k r a M / t c u d o r P f o e g a t S
Growth
Shakeout
Maturity Saturation
Decline
Fig. 7, Life Cycle Matrix
BUSINESS STRATEGIES FOR SBU S & SINGLE-PRODUCT COMPANIES THE FIRST STEP IN CRAFTING THE COMPETITIVE STRATEGY FOR SBU Decide on the generic strategy or strategies to follow. The basic four generic strategies that may be used are shown in Fig. 8 (below) as (1) low-cost leadership, (2) differentiation, (3) niche or focus market segment with low cost, and (4) focus on a market segment using differentiation. Use low-cost leadership when: 1. Price competition among rival sellers is especially intense. 2. The product is essentially a commodity with many sellers. 3. There are few ways to differentiate the products that have value to the user. 4. Buyers have low switching costs and can change to lower-priced sellers. 5. Buyers are large and can bargain down prices. Use differentiation strategy when: 1. Differentiation of a product can command a premium price for its product. 2. Brand loyalty can be won over. 3. The cost of differentiation is less than the premium price that can be obtained. Use focus strategy when: 1. The segment of the market focused on is large enough to be prof itable. 2. The segment is not important to the success of major competitors. 3. The segment has good potential for growth. 4. The company can provide excellent service and goodwill within the segment. GENERIC BUSINESS STRATEGY OPTIONS 1. A business generic strategy option consists of a match of an opportunity , a long-term business objective, and a generic strategy. See Fig. 8. 2. At this point, the generic strategy is honed by deciding on the emphasis to be placed on or allocation of resources to: competitor orientation, market orientation, and product/service orientation. 3. Avoid “stuck-in-the-middle” strategies that lead to engaging in each generic strategy, and thereby failing to achieve any of them. 4. Select the option or options to obtain the final generic strategies.
DEVELOP THE SPECIFIC BUSINESS-LEVEL STRATEGY 1. The specific business strategy describes specifically what the firm will do to compete. 2. The generic strategies and long-term objectives restrict the statement of the bus ine ss- lev el str ate gy. 3. Each functional manager prepares his/her component of the total business strategy, showing major additions and programs for the next five years. 4. The General Manager then directs the reconciliation of all functional programs and budgets, as indicated in Fig. 8 (this page, at right).
IMPLEMENTING THE STRATEGY IMPLEMENTING WITH STRUCTURE Implementing strategy is the conversion of concepts into action and results. It is the total and detailed activities to fulfill the strategy and achieve the longterm objectives. The first part consists of:
1. Communicating the strategy to the organization to prepare every employee with an understanding of what will follow and the things in general that must be done. 2. Prepare and disseminate a list of major annual objectives for the organization. 3. Establish policies and procedures for actions. 4. Prepare annual plans and budgets for resource allocations. 5. Prepare an organization STRUCTURE that matches the new strategy (portfolio and SBUs). 6. Install best practices for each department, based on the value chain and benchmarks.
IMPLEMENTING WITH ORGANIZATIONAL LEADERSHIP 1. Staff the organization with committed leaders capable of driving implementation. 2. Avoid resistance to change through employee development and communication with employees. 3. Tie rewards and incentives to achievement of performance objectives. 4. Develop a strategy-supporting culture.
IMPLEMENTING WITH THE FUNCTIONAL COMPONENTS OF STRATEGY Each functional manager should prepare his/her functional component of the business strategy and plans for execution. These are reconciled and approved by the business managers and upper management. The typical functional areas are shown with examples of a few issues that may arise in implementation: 1. Marketing: product policies, distribution policies , ethics, customer relatio ns, pricing policies. 2. Production/operations: equipment, layout, method of delivery of services, work methods, production planning,quality control, outsourcing. 3. R&D/design: estimating the time for new product development, quality and cost balance in design, continuing education of creative workers, outsourcing of design work. 4. Accounting/finance: increasing labor costs, increasing sales expense, economic value added, taxes, exchange rate between U. S. and other currencies, transfer pricing. 5. Human Resource management: assignment of people to new projects , salar y and bonus payments, promotions and dismissals, major human errors, recruitment and selection. 6. Corporate information and communication systems: management information system, personalcommunications, mass communications, communicating policies.
IMPLEMENTING WITH CONCERN FOR LAWS, ENVIRONMENTAL & SOCIAL CONCERNS Implementation must be carried out with concern for factors that may not always be spelled out, but must represent good citizenship.
STRATEGY EVALUATION
2. Is the strategy consistent with the environment? 3. Is the strategy appropriate in view of the available resources? 4. Does the strategy involve an acceptable degree of risk? 5. Does the strategy have an appropriate time framework? 6. Is the strategy workable? Stage Criteria The strategy may be evaluated at each stage of its development shown in Fig. 1 (see page 1), as well as after implementation at selected times. * Source: Seymour Tilles, “How to Evaluate Corporate Strategy,” Harvard Business Review 41 (1963): 111-121.
Business Level How should we compete? A.Choose GENERIC business-level strategies. 1. Feasible business strategies
Low-cost leadership
Differentiation
Niche low Focused differentiation cost 2. Choose final generic business strategy option.
Options Opportunities Long-term objectives Generic strategies (feasible) Competitor-Directed Market-Directed Product-Directed
Select options to get f inal generic strategies Year 1 2 3 4 5 Marketing Production Research & Development Finance
Long-term objectives
Generic Strategies
Fig. 8, Business Strategy Formation Fig. 1, The Strategic Management Model
CREDITS Layout: A. Thomas Fenik
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NOTE TO STUDENT This QUICKSTUDY ® guide is an outline of the basic topics taught in Management courses. Due to its condensed format, use it as a study guide but not as a replacement for assigned class work. All rights reserved. No part of this publication may be reproduced or transmitted in any form, or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission from the publisher. ©2001 BarCharts, Inc. 0508
ISBN-13: 978-142320707-8 ISBN-10: 142320707-6
FOUNDATION FOR STRATEGY EVALUATION
Foundation for Evaluation of Strategy The basis for evaluation is to compare strategy with quantitative or qualitative criteria. In addition, strategy may be evaluated at different stages. Quantitative Criteria 1. Overall financial performance, such as ROI, ROE, prof it margin , market share, ea rnings per share . 2. Time of implantation vs. planned time. 3. Increase in productivity, quality, number of employees, etc. Qualitative Criteria (from S. Tilles *) 1. Is the strategy internally consistent?
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