!!chapter 8 strategic management -...

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88Chapter

Strategic ManagementStrategic Management

© Copyright McGraw-Hill. All rights reserved. 8–2

Chapter OutlineChapter OutlineChapter Outline

•• The importance of strategic managementThe importance of strategic managementExplain why strategic management is importantExplain why strategic management is important

Discuss what studies of the effectiveness of Discuss what studies of the effectiveness of strategic management have shownstrategic management have shown

•• The strategic management processThe strategic management processList the 6 steps in the SM processList the 6 steps in the SM process

Describe what managers do when they do external Describe what managers do when they do external and internal analysesand internal analyses

Explain the role of resources, capabilities, and core Explain the role of resources, capabilities, and core competences in the internal analysiscompetences in the internal analysis

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Chapter Outline (cont’d)Chapter Outline (contChapter Outline (cont’’d)d)

•• Types of organizational strategiesTypes of organizational strategiesExplain the 3 growth strategiesExplain the 3 growth strategies

Discuss the BCG matrix and how itDiscuss the BCG matrix and how it’’s useds used

Define Define SBUsSBUs and businessand business--level strategieslevel strategies

Describe the role of competitive advantage in Describe the role of competitive advantage in businessbusiness--level strategieslevel strategies

Explain PorterExplain Porter’’s five forces models five forces model

Describe the 3 generic competitive strategiesDescribe the 3 generic competitive strategies


Chapter Outline (cont’d)Chapter Outline (contChapter Outline (cont’’d)d)

•• Strategic management in todayStrategic management in today’’s environments environmentDiscuss the implication of dynamic and uncertain Discuss the implication of dynamic and uncertain environment on organizational strategyenvironment on organizational strategy

Explain the rule of 3 and its significance for Explain the rule of 3 and its significance for strategic managementstrategic management

Describe strategies applying eDescribe strategies applying e--business techniquesbusiness techniques

Explain what strategies organizations might use to Explain what strategies organizations might use to become more customer oriented and to be more become more customer oriented and to be more innovativeinnovative

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A manager’s dilemmaAA managermanager’’s dilemmas dilemma


The importance of strategic managementThe importance of strategic managementThe importance of strategic management

•• What is strategic management?What is strategic management?WalWal--mart & Kmartmart & KmartSM: management that set of managerial decisions SM: management that set of managerial decisions and actions that determines the longand actions that determines the long--run run performance of an organizationperformance of an organizationQuestions to ask:Questions to ask:What changes and trends are occurringWhat changes and trends are occurringWho are our customersWho are our customersWhat products or services should we offerWhat products or services should we offerHow can we offer these products or services most How can we offer these products or services most efficientlyefficiently

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The importance of strategic managementThe importance of strategic managementThe importance of strategic management

•• Why is strategic management important?Why is strategic management important?First, it can make a difference in how well an First, it can make a difference in how well an organization performsorganization performs

Secondly, organizations of all types and sizes face Secondly, organizations of all types and sizes face continually changing situationscontinually changing situations

Next, SM is important because of the nature of Next, SM is important because of the nature of organizationsorganizations

Finally, SM is important because itFinally, SM is important because it’’s involved in s involved in many of the decisions that managers makemany of the decisions that managers make

All organizations are composed of diverse divisions, units,

functions, and work activities, all these need to be coordinated to achieve the organization’s goal


The strategic management processThe strategic management processThe strategic management process

•• The SM process is a sixThe SM process is a six--step process that step process that encompasses strategic planning, encompasses strategic planning, implementation, and evaluationimplementation, and evaluation

Identify the organization’s current mission, goals and strategies

External analysis• opportunities• threats

Internal analysis• strengths• weaknesses

Formulate strategies

Implement strategies

Evaluate strategies

SWOT Analysis

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•• Step 1: identify the organizationStep 1: identify the organization’’s current s current mission, objectives, and strategiesmission, objectives, and strategies

Every organization needs a missionEvery organization needs a mission

•• What is our reason for being in business?What is our reason for being in business?

•• Defining the organizationDefining the organization’’s mission forces managers to s mission forces managers to carefully identify the scope of its products or servicescarefully identify the scope of its products or services

Goals are the foundations of planningGoals are the foundations of planning

ItIt’’s important for managers to identify the s important for managers to identify the organizationorganization’’s current strategies s current strategies



•• Step 2: external analysisStep 2: external analysisAnalyzing the environment is a critical step in the Analyzing the environment is a critical step in the strategy processstrategy process

Managers need to knowManagers need to know

•• What the competition is doingWhat the competition is doing

•• What pending legislation might affect the organizationWhat pending legislation might affect the organization

•• What the labor supply is like in locations it operatesWhat the labor supply is like in locations it operates

The specific and general environmentsThe specific and general environments

Opportunities: positive trends in external environmentOpportunities: positive trends in external environment

Threats: the negative trends in external environmentThreats: the negative trends in external environment

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•• Step 3: internal analysisStep 3: internal analysisFrom the outside to inside, focusing the organizationFrom the outside to inside, focusing the organization’’s s resources, such as financial capital, technical expertiseresources, such as financial capital, technical expertise

•• Strengths: any activities the organization does well or any Strengths: any activities the organization does well or any unique resources that it hasunique resources that it has

•• Core competenciesCore competencies

•• Weaknesses: activities the organization does not do well Weaknesses: activities the organization does not do well or resources it needs but does not possessor resources it needs but does not possess

The organizational culture: it can promote or hinder the The organizational culture: it can promote or hinder the organizationorganization’’s strategic actionss strategic actions


Organization’s resources/capabilities

Opportunities in the environment

Organization’s opportunities

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Checklist for Analyzing Organizational Strengths and Weaknesses

Checklist for Analyzing Organizational Strengths and Checklist for Analyzing Organizational Strengths and WeaknessesWeaknesses

Sources: Based on Howard H. Stevenson, “ Defining Corporate Strengths and Weaknesses,” Sloan Management Review 17 (spring 1976), 51-68; and M.L.Kastens, Long-Range Planning for Your Business (New York: American Management Association, 1976).

Management and OrganizationManagement qualityDegree of centralizationOrganization chartsPlanning, information, control systems

FinanceProfit marginDebt-equity ratioInventory ratioReturn on investmentCredit rating

Marketing Distribution channelsMarket shareAdvertising efficiencyCustomer satisfactionProduct quality Service reputation Sales force turnover

ProductionPlant location Machinery obsolescencePurchasing systemQuality controlProductivity/efficiency

Human ResourcesEmployee experience, education Union statusTurnover, absenteeismWork satisfaction Grievances

Research and DevelopmentBasic applied researchLaboratory capabilitiesResearch programsNew-product innovationsTechnology innovations



•• Step 4: formulating strategiesStep 4: formulating strategiesA set of strategies needs to be established A set of strategies needs to be established

•• For the corporate levelFor the corporate level

•• For the business levelFor the business level

•• For the functional levelFor the functional level

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Planning and Strategy FormulationPlanning and Strategy FormulationPlanning and Strategy Formulation

Figure 8.5



•• Step 5: implementing strategiesStep 5: implementing strategiesThe strategyThe strategy--culture relationshipculture relationship

Human resourcesHuman resources

Effective teamEffective team

Top management leadershipTop management leadership

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•• Step 6: evaluating resultsStep 6: evaluating resultsHow effective have the strategies been?How effective have the strategies been?

What adjustments, if any, are necessary?What adjustments, if any, are necessary?


Types of organizational strategiesTypes of organizational strategies

Corporate-Level Strategy: What business are we in?

Corporation

Business-Level Strategy: How do we compete?

Textiles Unit Chemicals Unit Auto Parts Unit

Functional-Level Strategy: How do we support the business-level strategy?

Finance R&D Manufacturing Marketing

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Types of organizational strategiesTypes of organizational strategiesTypes of organizational strategies

•• CorporateCorporate--level strategylevel strategy

•• BusinessBusiness--level strategylevel strategy

•• FunctionalFunctional--level strategylevel strategy


The relationship between plans and strategiesThe relationship between plans and strategiesThe relationship between plans and strategies

Figure 8.2

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•• CorporateCorporate--level strategylevel strategyAn organization strategy that seeks to determine what An organization strategy that seeks to determine what businesses a company should be in or want to be inbusinesses a company should be in or want to be in

Pepsi examplePepsi example

3 types3 types

•• Growth strategy: A corporateGrowth strategy: A corporate--level strategy that seeks to level strategy that seeks to increase the organizationincrease the organization’’s business by expanding the s business by expanding the number of products offered or markets served.number of products offered or markets served.

•• Stability strategy: A corporateStability strategy: A corporate--level strategy characterized level strategy characterized by an absence of significant change.by an absence of significant change.

•• Renewal strategy: A corporateRenewal strategy: A corporate--level strategy designed to level strategy designed to address organizational weaknesses that are leading to address organizational weaknesses that are leading to performance declines.performance declines.

Corporate portfolio analysisCorporate portfolio analysis


•• Growth strategyGrowth strategyConcentrationConcentration

•• Concentrates on its primary line of business and increase the Concentrates on its primary line of business and increase the number of products offered or markets served in the primary number of products offered or markets served in the primary businessbusiness

Vertical integrationVertical integration

•• Choose to grow by vertical integration, which is an attempt to gChoose to grow by vertical integration, which is an attempt to gain ain control of inputs (backward), outputs (forward), or bothcontrol of inputs (backward), outputs (forward), or both

Horizontal integrationHorizontal integration

•• Company grows by combining with other organizations in the same Company grows by combining with other organizations in the same industryindustry

DiversificationDiversification

•• Related diversification: acquiring firms in different but relateRelated diversification: acquiring firms in different but related d industriesindustries

•• Unrelated diversification: acquiring firms in different and unreUnrelated diversification: acquiring firms in different and unrelated lated industriesindustries

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Growth StrategyGrowth StrategyGrowth Strategy

•• ConcentrationConcentrationCan become a strong competitor, but can be risky.Can become a strong competitor, but can be risky.

•• DiversificationDiversificationRelated diversification into similar market areas to Related diversification into similar market areas to build upon existing competencies. build upon existing competencies.

•• Synergy: two divisions working together perform Synergy: two divisions working together perform better than the sum of their individual performances.better than the sum of their individual performances.

Unrelated diversification is entry into industries Unrelated diversification is entry into industries unrelated to current business.unrelated to current business.

•• Attempts to build a portfolio of unrelated firms to Attempts to build a portfolio of unrelated firms to reduce risk of single industry; difficulty to manage.reduce risk of single industry; difficulty to manage.


Growth strategyGrowth strategyGrowth strategy

•• Vertical IntegrationVertical IntegrationA strategy that allows an organization to create A strategy that allows an organization to create value by producing its own inputs or distributing its value by producing its own inputs or distributing its own products.own products.

•• Backward vertical integration occurs when a firm Backward vertical integration occurs when a firm seeks to reduce its input costs by producing its own seeks to reduce its input costs by producing its own inputs.inputs.

•• Forward vertical integration occurs when a firm Forward vertical integration occurs when a firm distributes its outputs or products to lower distribution distributes its outputs or products to lower distribution costs and ensure the quality service to customers.costs and ensure the quality service to customers.

A fully integrated firm faces the risk of bearing the A fully integrated firm faces the risk of bearing the full costs of an industryfull costs of an industry--wide slowdown.wide slowdown.

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Stages in a Vertical Value ChainStages in a Vertical Value ChainStages in a Vertical Value Chain

Figure 8.6


•• Stability strategyStability strategyExamples of stability strategyExamples of stability strategy

•• Continuing to serve the same clients by offering the same Continuing to serve the same clients by offering the same product or serviceproduct or service

•• Maintaining market shareMaintaining market share

•• Sustaining the organizationSustaining the organization’’s returns return--onon--investment resultsinvestment results

Situations to apply stability strategySituations to apply stability strategy

•• One is the industry is in a period of rapid upheaval with One is the industry is in a period of rapid upheaval with external forces drastically changing and making the future external forces drastically changing and making the future uncertainuncertain

•• Another is if the industry is facing slowAnother is if the industry is facing slow--oror--nono--growth growth opportunitiesopportunities

•• Finally, owners and managers of small businesses often Finally, owners and managers of small businesses often purposefully choose to follow a stability strategypurposefully choose to follow a stability strategy

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•• Renewal strategyRenewal strategyRetrenchment strategyRetrenchment strategy

•• It is a shortIt is a short--run renewal strategy used in situations when run renewal strategy used in situations when performance problems arenperformance problems aren’’t as serioust as serious

•• It helps the company stabilize operations, revitalize It helps the company stabilize operations, revitalize organizational resources and capabilities, and prepare to organizational resources and capabilities, and prepare to compete once againcompete once again

Turnaround strategy Turnaround strategy

•• It is a renewal strategy for times when the organizationIt is a renewal strategy for times when the organization’’s s performance problems are more critical.performance problems are more critical.


•• Corporate portfolio analysisCorporate portfolio analysisBCG matrix: developed by the Boston Consulting Group, BCG matrix: developed by the Boston Consulting Group, introduced the idea that an organizationintroduced the idea that an organization’’s businesses s businesses could be evaluated and plotted using a 2*2 matrix to could be evaluated and plotted using a 2*2 matrix to identify which ones offered high potential and which were identify which ones offered high potential and which were a drain on organizational resourcesa drain on organizational resources

•• Stars Stars

•• Question markQuestion mark

•• Cash cows Cash cows

•• Dogs Dogs

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Stars question

Cash cows Dogs

（antici

pat

ed g

row

thra

tes)

high （Market share） low

清算

放弃转变

high

low


•• BusinessBusiness--level strategylevel strategyAn organizational strategy that seeks to determine how An organizational strategy that seeks to determine how an organization should compete in each of its businesses.an organization should compete in each of its businesses.

SBUsSBUs: when an organization is in several different : when an organization is in several different businesses, these single businesses that are independent businesses, these single businesses that are independent and formulate their own strategies are often called and formulate their own strategies are often called strategic business units or strategic business units or SBUsSBUs..

The role of competitive advantageThe role of competitive advantage

Quality as a competitive advantageQuality as a competitive advantage

Sustaining competitive advantageSustaining competitive advantage

Competitive advantageCompetitive advantage

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•• The role of competitive advantageThe role of competitive advantageCompetitive advantage: what sets an organization apart, Competitive advantage: what sets an organization apart, its distinct edgeits distinct edge

•• Comes from organizational capabilitiesComes from organizational capabilities

•• Comes from organizational assets or resourcesComes from organizational assets or resources


•• Quality as a competitive advantageQuality as a competitive advantageQuality can be a way for an organization to create a Quality can be a way for an organization to create a sustainable competitive advantagesustainable competitive advantage

Quality management focuses on customers and Quality management focuses on customers and continuous improvementcontinuous improvement

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•• Sustaining competitive advantageSustaining competitive advantageA sustainable competitive advantage enables the A sustainable competitive advantage enables the organization to keep its edgeorganization to keep its edge--despite competitors or despite competitors or evolutionary changes in the industryevolutionary changes in the industry


•• Competitive strategiesCompetitive strategiesMichael PorterMichael Porter

•• An industry analysis An industry analysis ------------ five forces modelfive forces model

•• Select an appropriate competitive strategySelect an appropriate competitive strategy–– Cost leadership strategyCost leadership strategy

–– Differentiation strategy Differentiation strategy

–– Focus strategyFocus strategy

After doing these, the company is ready to succeed

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The Five Forces ModelThe Five Forces ModelThe Five Forces Model

The Threat ofSubstitute Products

The Power of

Suppliers

The Level of Rivalry Among Organizations

in an Industry

The Power of

Customers

The Potential for Entry into an Industry


The Five ForcesThe Five ForcesThe Five Forces

Competitive Forces

Level of Rivalry Increased competition results in lower profits.

Potential for Entry Easy entry leads to lower prices and profits.

Power of Suppliers If there are only a few suppliers of important items, supply costs rise.

Power of Customers If there are only a few large buyers, they can bargain down prices.

Substitutes More available substitutes tend to drive down prices and profits.

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Porter’s Business-Level StrategiesPorterPorter’’s Businesss Business--Level StrategiesLevel Strategies

Table 8.2

Number of Market Segments Served Strategy Many Few

Low-cost Focused low-cost Differentiation Focused differentiation


Formulating Business-Level StrategiesFormulating BusinessFormulating Business--Level StrategiesLevel Strategies

•• LowLow--Cost StrategyCost StrategyDriving the organizationDriving the organization’’s total costs down below s total costs down below the total costs of rivals.the total costs of rivals.

•• Manufacturing at lower costs, reducing waste.Manufacturing at lower costs, reducing waste.•• Lower costs than competition means that the low cost Lower costs than competition means that the low cost

producer can sell for less and still be profitable.producer can sell for less and still be profitable.

•• DifferentiationDifferentiationOffering products different from those of Offering products different from those of competitors.competitors.

•• Differentiation must be valued by the customer in Differentiation must be valued by the customer in order for a producer to charge more for a product.order for a producer to charge more for a product.

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Formulating Business-Level StrategiesFormulating BusinessFormulating Business--Level StrategiesLevel Strategies

•• ““Stuck in the MiddleStuck in the Middle””Attempting to simultaneously pursue both a low Attempting to simultaneously pursue both a low cost strategy and a differentiation strategy.cost strategy and a differentiation strategy.

Difficult to achieve low cost with the added costs of Difficult to achieve low cost with the added costs of differentiation.differentiation.

•• Focused LowFocused Low--CostCostServing only one market segment and being the Serving only one market segment and being the lowestlowest--cost organization serving that segment.cost organization serving that segment.

•• Focused DifferentiationFocused DifferentiationServing only one market segment as the most Serving only one market segment as the most differentiated organization serving that segment.differentiated organization serving that segment.


The competitive strategyThe competitive strategyThe competitive strategy

•• Cost leadership strategyCost leadership strategyA businessA business--level strategy in which the organization is level strategy in which the organization is the lowerthe lower--cost producer in its industrycost producer in its industry

A lowA low--cost leader searches out cost leader searches out •• Efficiencies in productionEfficiencies in production•• Marketing Marketing •• Other areas of operationOther areas of operation

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•• Differentiation strategyDifferentiation strategya businessa business--level strategy in which a company offers level strategy in which a company offers

unique products that are widely valued by customersunique products that are widely valued by customers

SourcesSources•• High qualityHigh quality•• extraordinary serviceextraordinary service•• innovative designinnovative design•• technological capabilitytechnological capability•• unusually positive brand imageunusually positive brand image



•• Focus strategyFocus strategyA businessA business--level strategy in which a company pursues a level strategy in which a company pursues a cost or differentiation advantage in a narrow industry cost or differentiation advantage in a narrow industry segmentsegment

Research suggests that the focus strategy may be the Research suggests that the focus strategy may be the most effective choice for small businesses most effective choice for small businesses

Stuck in the middleStuck in the middle•• A situation where an organization hasnA situation where an organization hasn’’t been able to t been able to

develop either a low cost or a differentiation competitive develop either a low cost or a differentiation competitive advantageadvantage

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•• FunctionalFunctional--level strategylevel strategyAn organizational strategy that supports the businessAn organizational strategy that supports the business--level strategylevel strategy

•• Manufacturing Manufacturing

•• Marketing Marketing

•• Human resourcesHuman resources

•• Research and development Research and development

•• FinanceFinance


Functional-level StrategiesFunctionalFunctional--level Strategieslevel Strategies

•• A plan that indicates how a function intends to A plan that indicates how a function intends to achieve its goalsachieve its goals

Seeks to have each department add value to a Seeks to have each department add value to a good or service. Marketing, service, and production good or service. Marketing, service, and production functions can all add value to a good or service functions can all add value to a good or service through:through:

•• Lowering the costs of providing the value in products.Lowering the costs of providing the value in products.•• Adding new value to the product by differentiating.Adding new value to the product by differentiating.

Functional strategies must fit with business level Functional strategies must fit with business level strategies. strategies.

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Goals for Successful Functional StrategiesGoals for Successful Functional StrategiesGoals for Successful Functional Strategies

1.1. Attain superior efficiency as a measure of Attain superior efficiency as a measure of outputs for a given unit of input.outputs for a given unit of input.

2.2. Attain superior quality by producing reliable Attain superior quality by producing reliable products that do their intended job.products that do their intended job.

3.3. Attain superior innovation developing new Attain superior innovation developing new and novel features that can be added to the and novel features that can be added to the product or process.product or process.

4.4. Attain superior responsiveness to customers Attain superior responsiveness to customers by acknowledging their needs and fulfilling by acknowledging their needs and fulfilling them.them.


Plans and strategiesPPlans and strategieslans and strategies

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Corporate levelCorporate levelCorporate level

•• CorporateCorporate--Level PlanLevel PlanTop managementTop management’’s decisions pertaining to the s decisions pertaining to the organizationorganization’’s mission, overall strategy, and s mission, overall strategy, and structure.structure.

Provides a framework for all other planning.Provides a framework for all other planning.

•• CorporateCorporate--Level StrategyLevel StrategyA plan that indicates in which industries and A plan that indicates in which industries and national markets an organization intends to national markets an organization intends to compete.compete.


business levelbusiness levelbusiness level

•• BusinessBusiness--Level Plan:Level Plan:Divisional managersDivisional managers’’ decisions pertaining to decisions pertaining to divisions longdivisions long--term goals overall strategy, and term goals overall strategy, and structure.structure.

•• Identifies how the business will meet corporate goals.Identifies how the business will meet corporate goals.

•• BusinessBusiness--Level StrategyLevel StrategyA plan that indicates how a division intends to A plan that indicates how a division intends to compete against its rivals in an industrycompete against its rivals in an industry

•• Shows how the business will compete in market.Shows how the business will compete in market.

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Functional levelFunctional levelFunctional level

•• FunctionalFunctional--Level PlanLevel PlanFunctional managersFunctional managers’’ decisions pertaining to the decisions pertaining to the goals that they propose to pursue to help the goals that they propose to pursue to help the division attain its businessdivision attain its business--level goals.level goals.

•• Functional StrategyFunctional StrategyA plan that indicates how a function intends to A plan that indicates how a function intends to achieve its goals.achieve its goals.


Strategic management in today’s environment

Strategic management in todayStrategic management in today’’s s environmentenvironment

•• The rule of 3The rule of 3Competitive forces in an industry, if kept relatively free Competitive forces in an industry, if kept relatively free of government interference or other special of government interference or other special circumstances, will inevitably create a situation where circumstances, will inevitably create a situation where 3 companies dominate any given market3 companies dominate any given market

The corresponding strategiesThe corresponding strategies•• P196P196

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Strategic management in today’s environment

Strategic management in todayStrategic management in today’’s s environmentenvironment

•• New directions in organizational strategiesNew directions in organizational strategiesStrategies for applying eStrategies for applying e--business techniquesbusiness techniques•• A cost leader can use eA cost leader can use e--business techniques to reduce business techniques to reduce

costs in a variety of wayscosts in a variety of ways•• A differentiator needs to offer products or services that A differentiator needs to offer products or services that

customers perceive and value as uniquecustomers perceive and value as unique•• Also the focus strategyAlso the focus strategy

Customer service strategiesCustomer service strategies

Innovation strategiesInnovation strategies

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