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CHAPTER 1

Strategic Management

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Chapter Topics

• The Nature and Value of Strategic Management• Dimensions of Strategic Decisions• Formality in Strategic Management• Benefits of Strategic Management• Risks of Strategic Management• Executives’ Views of Strategic Management

• The Strategic Management Process• Components of the Strategic Management Model• Strategic Management as a Process

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What is Strategic Management?

The set of decisions and actions that result in the formulation and implementation ofplans designed to achieve a company’s objectives.

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Critical Tasks of Strategic Management

1. Formulate the company’s mission

2. Conduct internal analysis

3. Assess the company’s external environment

4. Analyze company’s options

5. Identify most desirable options

6. Select long-term objectives and grand strategies

7. Develop annual objectives and short-term strategies

8. Implement the strategic choices

9. Evaluate success of the strategic process

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What is Strategy?

• Large-scale, future-oriented plan for interacting with the competitive environment to achieve objectives

• Company’s “game plan”

• Framework for managerial decisions

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Dimensions of Strategic Decisions

• Strategic issues• Require top-management decisions

• Require large amounts of the firm’s resources

• Often affect the firm’s long-term prosperity

• Are future oriented

• Usually have multifunctional or multibusiness consequences

• Require considering the firm’s external environment

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Three Levels of Strategy

1. Corporate level

2. Business level

3. Functional level

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Exhibit 1-2: Single-business Firms

P O M /R & Ds tra te g ies

F in a n c ia l/a cco u n tings tra te g ies

M a rke tings tra te g ies

H u m anre la tio ns

s tra te g ies

C o rp ora te /b u s ine ss le ve l

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Ex 1-2: Multiple business Firms

B u s ine ss 1T yp e t it le h e re

P O M /R & Ds tra te g ies

F in a n c ia l/a cco u n tings tra te g ies

M a rke tings tra te g ies

H u m anre la tio ns

s tra te g ies

B u s ine ss 2T yp e t it le h e re

B u s ine ss 3T yp e t it le h e re

C o rpo ra tes tra te g ies

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Ex 1-3: Hierarchy of Objectives and Strategies

Ends(What is to be

achieved)

Means(How is to be achieved)

Board ofDirectors

CorporateManagers

BusinessManagers

FunctionalManagers

Strategic Decision Makers

Mission, includingGoals and philosophy

Long-term objectives

Annual objectives

Grand strategy

Short-term strategiesAnd policies

Note: indicates a principal responsibility; indicates a secondary responsibility

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Characteristics of Strategic Management Decisions

Corporate-leveldecisions

Greater risk,cost, and profit potential

Greater need forflexibility

Longer time horizons

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Characteristics of Strategic Management Decisions

Functional-level

decisions

Functional-level

decisions

Implement overall strategy

Involve action-orientedoperational issues

Are relatively short rangeand low risk

Incur only modest costs

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Characteristics of Strategic Management Decisions

Business-leveldecisions

Bridge decisions atcorporate and functional

levels

Are less costly, risky, and potentially profitable thancorporate-level decisions

Are more costly, risky, andpotentially profitable than functional-level decisions

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Formality in Strategic Management

• Definition• Degree to which participants, responsibilities, authority, and

discretion in decision making are specified

• Forces affecting degree of formality• Size of organization• Predominant management styles• Complexity of

• Environment• Production process• Problems

• Purpose of planning system

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The Strategy Makers

• The ideal strategic management team includes• Chief executive officer (CEO)• Product managers• Heads of functional areas

• The strategic management team obtains input from• Planning staff• Lower-level management and supervisors

• Role of CEO• Provides long-term direction• Assumes ultimate responsibility for firm’s success• Solicits guidance from Board of Directors

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Benefits of Strategic Management

Enhances the firm’s ability to prevent problems

Emphasizes group-based strategic decisions likely to be based on best available alternatives

Improves employees’ understanding of the productivity-rewardrelationship

Reduces gaps/overlaps in activities among employees as theirparticipation clarifies differences in roles

Resistance to change is reduced

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Risks of Strategic Management

• Time involved may negatively impact operational responsibilities of managers

• Lack of involvement of strategy makers in strategy implementation may result in shirking of responsibility for strategic decisions

• Potential disappointment of employees over unattained expectations requires managerial time and training

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Company missionand social

responsibility

Externalenvironment

Internal analysis

Strategic analysis and choice

Long-termobjectives

Generic and grand strategies

Short-term objectives;reward systems

Functional tacticsPolicies that

empower action

Restructuring, reengineeringand refocusing the organization

Strategic control andcontinuous improvement

Possible?

Desired?

Feedback

Fee

dbac

k

Legend

Major impactMinor impact

Ex 1-5StrategicManagementProcess

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Components of the Strategic Management Model

• Company Mission• Specifies unique purpose of company• Identifies scope of operations• Describes product, market, and technological areas of emphasis• Reflects values and priorities of decision makers• Expresses approach to social responsibility efforts

• Internal Analysis• Depicts quantity and quality of company’s financial, human, and

physical resources• Assesses company’s strengths and weaknesses• Contrasts past successes and concerns with current capabilities to

identify future capabilities

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Components of the Strategic Management Model

• External Environment• Consists of all conditions and forces affecting firm’s strategic

options and define its competitive situation• Includes three interactive segments – remote, industry, and

operating environments

• Strategic Analysis and Choice• Involves simultaneous assessment of external environment and

company profile • Incorporates screening process based on mission to generate

possible and desired opportunities• Results in selection of options from which a strategic choice is

made

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Components of the StrategicManagement Model

• Long-term Objectives– Profitability

– Return on investment

– Competitive position

– Technological leadership

– Productivity

– Employee relations

– Public responsibility

– Employee development

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Components of the StrategicManagement Model

• Generic and Grand Strategies• Low cost

• Differentiation

• Focus

• Action Plans and Short-Term Objectives• Translate generic and grand strategies into “action”

• Identify specific functional tactics to be taken in the near term

• Establish a clear time frame for completion

• Creates accountability

• Specify one or more immediate objectives as outcomes of the action

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Components of the StrategicManagement Model

• Functional Tactics• Involve identifying activities unique to the function to help build

competitive advantage

• Specify detailed statements of “means” to be used to achieve short-term objectives

• Policies that Empower Action• Include broad, precedent-setting decisions that substitute for

repetitive or time-sensitive decision making

• Often increase managerial effectiveness by empowering discretion of subordinates in implementing strategies

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Components of the StrategicManagement Model

• Restructuring, Reengineering, and Refocusing the Organization• Involves an internal focus – getting work done efficiently and

effectively to make the strategy work• Organizational structure

• Leadership

• Culture

• Reward systems

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Components of the StrategicManagement Model

• Strategic Control and Continuous Improvement• Control

• Tracks a strategy during implementation

• Detects problems

• Involves making necessary adjustments

• Continuous improvement• Provides another approach to strategic control

• Allows an organization to respond more proactively and timely to rapid developments

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Implications of the StrategicManagement Process

Changes in any one component will affect other components

Strategy formulation and implementation are sequential

Necessity of feedback from institutionalization, review, and evaluation to early stages of process

Need to regard it as dynamic, involving constant changes in interdependent strategic activities