Strategic Management

Notable Quotes
• "Without a strategy, an organization is like a ship without a rudder, going around in
circles. It’s like a tramp; it has no place to go."
—Joel Ross and Michael Kami

• "The formulation of strategy can develop competitive advantage only to the extent
that the process can give meaning to workers in the trenches."
—David Hurst

• "Most of us fear change. Even when our minds say change is normal, our stomachs
quiver at the prospect. But for strategists and managers today, there is no choice but
to change."
—Robert Waterman Jr.

• "If a man takes no thought about what is distant, he will find sorrow near at hand. He
who will not worry about what is far off will soon find something worse than worry.“
—Confucius
LEARNING OUTLINE
Follow this Learning Outline as you read and study this chapter.

The Importance of Strategic Management

• Define strategic management, strategy, and business
model.
• Explain why strategic management is important.

The Strategic Management Process

• List the six steps in the strategic management process.
• Describe what managers do during external and internal
analyses.
• Explain the role of resources, capabilities, and core
competencies.
• Define strengths, weaknesses, opportunities, and threats.
L E A R N I N G O U T L I N E (cont’d)
Follow this Learning Outline as you read and study this chapter.

Types of Organizational Strategies

• Describe the three major types of corporate strategies.
• Discuss the BCG matrix and how it’s used.
• Describe the role of competitive advantage in business-
level strategies.
• Explain Porter’s five forces model.
• Describe Porter’s three generic competitive strategies and
the rule of three.
L E A R N I N G O U T L I N E (cont’d)
Follow this Learning Outline as you read and study this chapter.

Strategic Management in Today’s Environment

• Explain why strategic flexibility is important.
• Describe strategies applying e-business techniques.
• Explain what strategies organizations might use to
become more customer oriented and to be more
innovative.
Strategic Management
• Strategic management is a set of managerial
decisions and actions that determines the long-run
performance of a corporation.
• It includes environmental scanning (both external and
internal), strategy formulation (strategic or long-range
planning), strategy implementation, and evaluation and
control.
• It emphasizes the monitoring and evaluating of external
opportunities and threats in light of a corporation’s
strengths and weaknesses.
Strategies
• The decisions and actions that determine the long-
run performance of an organization.
Why is Strategic Management Important
1. It results in higher organizational performance.
2. It requires that managers examine and adapt
to business environment changes.
3. It coordinates diverse organizational units,
helping them focus on organizational goals.
4. It is very much involved in the managerial
decision-making process.
Exhibit 8–1 The Strategic Management Process
Strategic Management Process
• Step 1: Identifying the organization’s current
mission, goals, and strategies
 Mission: the firm’s reason for being
Defining the organization's mission forces
managers to carefully identify the scope of its
products or services.
 Goals: the foundation for further planning
 Measurable performance targets
 Exhibit 8–2 Components of a Mission Statement

Source: Based on F. David, Strategic Management, 11 ed. (Upper Saddle River, NJ: Prentice Hall, 2007), p.70.
 Sample Mission Statements
Caterpillar
• Caterpillar will be the leader in providing the best value in machines, engines and
support services for customers dedicated to building the world's infrastructure and
developing and transporting its resources. We provide the best value to
customers.
• Caterpillar people will increase shareholder value by aggressively pursuing
growth and profit opportunities that leverage our engineering, manufacturing,
distribution, information management and financial services expertise. We grow
profitably.
• Caterpillar will provide its worldwide workforce with an environment that
stimulates diversity, innovation, teamwork, continuous learning and improvement
and rewards individual performance. We develop and reward people.
• Caterpillar is dedicated to improving the quality of life while sustaining the quality
of our earth. We encourage social responsibility.
Cont’d…
Microsoft
• To enable people and businesses throughout the world to realize their
full potential.
Nike
• To bring inspiration and innovation to every athlete in the world
Ethiopian
• To become the leading Aviation Group in Africa by providing safe and reliable
passenger and cargo transport, aviation training, flight catering, MRO and
ground services whose quality and price “value proposition” is always better
than its competitors

• To ensure being an airline of choice to its customers, employer of choice to its

employees and an investment of choice to its owner

• To contribute positively to the socio-economic development of Ethiopia in

particular and the countries it operates in general by undertaking its corporate
social responsibilities and providing vital global air connectivity
Cont’d…
Step 2: Doing an external analysis
 The environmental scanning of specific and general
environments
 Area for scanning:
Macro environment: PESTLE
Task Env’t: Its suppliers, marketing
intermediaries, customer markets, competitors, and
publics.
 Focuses on identifying opportunities and threats
Strategic Management Process (cont’d)
• Step 3: Doing an internal analysis
 Assessing organizational resources, capabilities, and activities:
 Strengths create value for the customer and strengthen the
competitive position of the firm.
 Weaknesses can place the firm at a competitive disadvantage.

 Analyzing financial and physical assets is fairly easy, but

assessing intangible assets (employee’s skills, culture, corporate
reputation, and so forth) isn’t as easy.

• Steps 2 and 3 combined are called a SWOT analysis.

(Strengths, Weaknesses, Opportunities, and Threats)
Strategic Management Process (cont’d)
• Step 4: Formulating strategies
 Develop and evaluate strategic alternatives
 Select appropriate strategies for all levels in the
organization that provide relative advantage over
competitors
 Match organizational strengths to environmental
opportunities
 Correct weaknesses and guard against threats
Strategic Management Process (cont’d)
• Step 5: Implementing strategies
 Implementation: effectively fitting organizational
structure and activities to the environment.
 The environment dictates the chosen strategy;
effective strategy implementation requires an
organizational structure matched to its requirements.

• Step 6: Evaluating results

 How effective have strategies been?
 What adjustments, if any, are necessary?
 Types of Organizational Strategies

Exhibit Levels of Organizational Strategy

 Cont’d…
• Corporate Strategies
 Top management’s overall plan for the entire organization and its
strategic business units
• determines the direction that the organization is going and
the roles that each business unit in the organization will play
in pursuing that direction.
• Types of Corporate Strategies( Grand Strategies)
 Growth: expansion into new products and markets
(expand the company’s activities)
 Stability: maintenance of the status quo (make no change to the
company’s current activities)
 Retrenchment strategies reduce the company’s level of activities.
Corporate Strategies
• Growth Strategy
 Seeking to increase the organization’s business by
expansion into new products and markets.

• Types of Growth Strategies

Concentration-on the current product line(s) in
one industry
 Vertical integration
 Horizontal integration
 Diversification - into other product lines in other
industries.
Growth Strategies
a) Concentration (direct expansion)
 Focusing on a primary line of business and increasing
the number of products offered or markets served.
• Vertical Integration- an attempt to gain control of
inputs (backward vertical integration), outputs
(forward vertical integration), or both.
 Backward vertical integration: attempting to gain
control of inputs (become a self-supplier).
 Forward vertical integration: attempting to gain control
of output through control of the distribution channel or
provide customer service activities (eliminating
intermediaries).
Growth Strategies (cont’d)
• Horizontal Integration
 Combining operations with another competitor in the
same industry to increase competitive strengths and
lower competition among industry rivals.
e.g. Merger
• Related Diversification (Concentric)
 Expanding by combining with firms in different, but
related industries that are “strategic fits.”
e.g. Acquisition
• Unrelated Diversification (Conglomerate)
 Growing by combining with firms in unrelated
industries where higher financial returns are possible.
Growth Strategies (cont’d)
• Stability Strategy
 A strategy that seeks to maintain the status quo to
deal with the uncertainty of a dynamic environment,
when the industry is experiencing slow- or no-growth
conditions, or if the owners of the firm elect not to
grow for personal reasons.
 When the env’t is stable.
Cont’d…
• Pause/Proceed with Caution Strategy
A pause/proceed-with-caution strategy is, in effect, a
timeout—an opportunity to rest before continuing a
growth or retrenchment strategy.
• No-Change Strategy
A no-change strategy is a decision to do nothing
new—a choice to continue current operations and
policies for the foreseeable future.
• Profit strategy
is a decision to do nothing new in a worsening
situation but instead to act as though the company’s
problems are only temporary.
Retrenchment strategies
Retrenchment: when it has a weak competitive
position in some or all of its product lines
resulting in poor performance
• In an attempt to eliminate the weaknesses that
are dragging the company down, management
may follow one of several retrenchment
strategies:
• Turnaround: addressing critical long-term
performance problems through the use of strong
cost elimination measures and large-scale
organizational restructuring solutions .
 Cont’d…
Contraction is the initial effort to quickly “stop the
bleeding” with a general, across-the board cutback
in size and costs.
• Captive company strategy involves giving up
independence in exchange for security.
• Divestment- If the corporation has multiple
business lines and it chooses to sell off a division
with low growth potential
• Sell-out strategy makes sense if management can still
obtain a good price for its shareholders and the employees
can keep their jobs by selling the entire company to another
firm.
Corporate Portfolio Analysis
• Managers manage portfolio (or collection) of businesses
using a corporate portfolio matrix such as the BCG
Matrix.
• BCG Matrix
 Developed by the Boston Consulting Group
 Considers market share and industry growth rate
 Classifies firms as:
 Cash cows: low growth rate, high market share
 Stars: high growth rate, high market share
 Question marks: high growth rate, low market share
 Dogs: low growth rate, low market share
Exhibit 8–5 The BCG Matrix
Business or Competitive Strategy
• Business (or Competitive) Strategy
 A strategy focused on how an organization should
compete in each of its SBUs (strategic business
units).
The Role of Competitive Advantage
• Competitive Advantage
 An organization’s distinctive competitive edge.

• Quality as a Competitive Advantage

 Differentiates the firm from its competitors.
 Can create a sustainable competitive advantage.
 Represents the company’s focus on quality
management to achieve continuous improvement and
meet customers’ demand for quality.
The Role of Competitive Advantage
(cont’d)
• Sustainable Competitive Advantage
 Continuing over time to effectively exploit resources
and develop core competencies that enable an
organization to keep its edge over its industry
competitors.
Five Competitive Forces
• Threat of New Entrants
 The ease or difficulty with which new competitors can
enter an industry.
• Threat of Substitutes
 The extent to which switching costs and brand loyalty
affect the likelihood of customers adopting substitutes
products and services.
• Bargaining Power of Buyers
 The degree to which buyers have the market strength
to hold sway over and influence competitors in an
industry.
Five Competitive Forces
• Bargaining Power of Suppliers
 The relative number of buyers to suppliers and
threats from substitutes and new entrants affect the
buyer-supplier relationship.
• Current Rivalry
 Intensity among rivals increases when industry
growth rates slow, demand falls, and product prices
descend.
 Exhibit 8–6 Forces in the Industry Analysis

Source: Based on M.E. Porter, Competitive Strategy: Techniques for

Analyzing Industries and Competitors (New York: The Free Press, 1980).
Types of Competitive Strategies
• Cost Leadership Strategy
 Seeking to attain the lowest total overall costs relative
to other industry competitors.
• Differentiation Strategy
 Attempting to create a unique and distinctive product
or service for which customers will pay a premium.
• Focus Strategy
 Using a cost or differentiation advantage to exploit a
particular market segment rather a larger market.
Strategic Management Today
• Strategic Flexibility
• New Directions in Organizational Strategies
 e-business
 customer service
 innovation
 Exhibit 8–7 Creating Strategic Flexibility

• Know what’s happening with strategies currently being

used by monitoring and measuring results.
• Encourage employees to be open about disclosing
and sharing negative information.
• Get new ideas and perspectives from outside the
organization.
• Have multiple alternatives when making strategic
decisions.
• Learn from mistakes.

Source: Based on K. Shimizu and M. A. Hitt, “Strategic Flexibility: Organizational Preparedness to Reverse
Ineffective Strategic Decisions,” Academy of Management Executive, November 2004, pp. 44–59.
How the Internet Has Changed Business
• The Internet allows businesses to:
 Create knowledge bases that employees can tap into
anytime, anywhere.
 Turn customers into collaborative partners who help
design, test, and launch new products.
 Become virtually paperless in specific tasks such as
purchasing and filing expense reports.
 Manage logistics in real time
 Change the nature of work tasks throughout the
organization.
Customer Service Strategies
• Giving the customers what they want.
• Communicating effectively with them.
• Providing employees with customer service
training.