CHAPTER ONE

THE NATURE OF STRATEGIC MANAGEMENT

1.1. Definition of Strategic Management

 Harrison and St. John defined strategic management
as the process through which organizations analyze and
learn from their internal and external environments,
establish strategic direction, create strategies that are
intended to help achieve established goals, and execute
these strategies, all in an effort to satisfy key
organizational stakeholders.
 1.2. Stages of strategic management
The strategic management process consists of three stages:
1. Strategy Formulation (strategy planning)
2. Strategy Implementations
3. Strategy Evaluation
Define Perform Establish Formulate Implement Evaluate
vision and situational objectives strategies strategies and
mission analysis correct

Strategy Formulation Strategy Strategy

Implementation Evaluation
1. Strategy formulation includes
 2. Strategy Implementation
 It requires a firm to establish annual objectives, devise
policies, motivate employees, and allocate resources so
that formulated strategies can be executed.
 3. Strategy Evaluation
In this stage of strategic management process,
managers desperately need to know when
particular strategies are not working well,
Three fundamental strategy-evaluation activities
are
A. Reviewing external and internal factors that are
the bases for current strategies,
B. Measuring performance, and
C. Taking corrective actions.
Strategic evaluation……
 1.3. Key terms in strategic management
1. Vision Statements which answers the question,
what do we want to become?
2. Mission statements express organization’s purpose
or reason for existence.
3. Policies are guidelines, rules, and procedures
established to support efforts to achieve stated annual
objectives.
4.Objectives-is a target (end result) that an
organization wants to achieve so as to realize its
vision and mission.
5. Competitive Advantage:- anything that a firm does
especially well compare to rival firms.”
6. Opportunities and Threat (External)-they are
largely beyond the control of a single
organization
7. Internal Strengths and Weakness- they are
controllable activities performed especially well
or poorly
8. Strategists:- are the individuals who are most
responsible for the success or failure of an
organization.
 1.4. Overview types of strategy
We try to discuss the types of strategy in main
basis of the followings
Integration Strategies
Intensive Strategies
Diversification Strategies
Defensive Strategies
 1.4.1. Integration Strategies

A. Backward integration: It the firm’s supply (input)

activities through mergers or acquisition Or by
growing one’s own supply system.
E.g. Manufacturing firm & supplier
B. Forward integration: It is a strategy of seeking
ownership or increased control of a firm’s
distributers or retailers.
C. Horizontal Integration: It refers to a strategy of
seeking ownership of or increased control over
firm’s competitors.
 1.4.2 Intensive Strategies

A. Market penetration: It implies increasing the

sale of existing products in the existing markets.

B. Market development: It involves exploring new

markets for existing products.

C. Product development: It implies developing new

or modified products for sale in the existing markets
 1.4.4. Diversification Strategies

A. Concentric Diversification: When a firm enters into

some business, which is related with its present
business in terms of technology, marketing or
both.

B. Conglomerate Diversification: When a firm enters

into business, which is unrelated to its existing
business both in terms of technology and marketing.

C. Horizontal diversification: It is Adding new,

unrelated products or services for present customers
 1.4.4. Defensive Strategies

A. Retrenchment/turnaround/ reorganizational
strategy: It when an organization regroups through
cost and asset reduction to reverse declining sales
and profits.
B. Divestiture: It is selling a division or part of an
organization.
C. Liquidation: It is Selling all of a company’s
assets, in parts, for their tangible worth.
 It is recognition of defeat and consequently can be
an emotionally difficult strategy
 1.4.5. Michael Porter’s Generic Strategies

According to Porter, strategies allow organizations

to gain competitive advantage from three
different bases:
Cost leadership,
Differentiation, and
Focus. Porter calls these bases generic strategies.
 Cost leadership strategy: It emphasizes producing standardized
products at very low per-unit cost for consumers who are price-
sensitive.
 This strategy emphasizes efficiency.

B. Differentiation Strategies: It is a strategy aimed at producing

products and services considered unique industry wide and directed at
consumers who are relatively price-insensitive.

C. Cost Focus Strategy (Niche strategy): producing products and

services that fulfill the needs of small groups of consumers.
 Cont…
Larger firms with greater access to resources
typically compete on a cost leadership and/or
differentiation basis, whereas smaller firms often
compete on a focus basis.
Criticisms of generic strategies
Several commentators have questioned the use of
generic strategies claiming they lack specificity,
lack flexibility, and are limiting.
 Levels of strategy

A firm’s strategy is formulated at several levels;

1. Corporate-Level Strategy: It focuses what
businesses to compete in, and, how businesses can
be managed to achieve synergy, that is, create more
value by working together than if they operated as a
stand-alone entity.
2. Business-Level Strategy addresses the issue of how
firms compete in an industry to gain competitive
advantage.

 It seeks to determine how an organization should

compete in each of its businesses.
3. Functional Level Strategy: It seeks to determine how to
support the business-level strategy.
 A firm needs a functional strategy for every
competitively relevant business activity and
organizational unit
 Strategic Management Approach

1. Industrial Organization Model: The firm’s performance

is believed to be determined primarily by a range of
industry properties, including economies of scale, barriers
to market entry, diversification, product differentiation, and
the degree of concentration of firms in the industry. Thus,
strategy of the firm should be developed in line with theses
all.
2. Resource Based Model: This model assumes that each
organization is a collection of unique resources and
capabilities.
 A firm’s resources are classified into three categories:
physical, human, and organizational capital.

 The uniqueness of its resources and capabilities is the

basis of a firm’s strategy and its ability to earn above-
average returns.
 1.5. Means for Achieving Strategies

A. Joint Venture/Partnering
It is a popular strategy that occurs when two or
more companies form a temporary partnership or
consortium for the purpose of capitalizing on
some opportunity.
B. Merger/Acquisition
A merger occurs when two organizations of about
equal size unite to form one enterprise.
 C. First Mover Advantages

First mover advantages refer to the benefits a

firm may achieve by entering a new market or
developing a new product or service prior to rival
firms.
Some advantages of being a first mover include
Securing access to rare resources,
Gaining new knowledge of key factors and issues, and
Carving out market share and a position that is easy to
defend and costly for rival firms to overtake.
 D. Outsourcing

Business-process outsourcing (BPO) is a rapidly

growing new business that involves companies
taking over the functional operations, such as
 human resources,
 information systems,
 payroll,
 accounting, customer service, and even marketing of other
firms.
Companies are choosing to outsource their functional
operations more and more for several reasons:
1. It is less expensive,
2. It allows the firm to focus on its core businesses, and
3. It enables the firm to provide better services.
 1.6. Benefits of Strategic Management
Financial Benefits:
Businesses using SM concepts show significant
improvement in sales, profitability, and Productivity
compared to firms without systematic planning
activities.
Non-financial Benefits:
Besides helping firms avoid financial demise, SM
offers other tangible benefits, such as
Enhanced awareness of external threats,
Improved understanding of competitors‟ strategies,
Increased employee productivity,
Reduced resistance to change, and
A clearer understanding of performance-reward relationships.
 Generally we can see the benefit of SM from
two perspectives:
Financial Benefits:
Businesses using SM concepts show significant
improvement in sales, profitability, and Productivity
compared to firms without systematic planning
activities.
Non-financial Benefits:
Besides helping firms avoid financial demise, SM offers
other tangible benefits, such as
 Enhanced awareness of external threats,
 Improved understanding of competitors‟ strategies,
 Increased employee productivity,
 Reduced resistance to change, and
 A clearer understanding of performance-reward relationships.
The Disadvantages of Strategic
Management

 The strategic management system

is designed to help organizations achieve
long-term benefits. Hence, it won't be
effective in crises or uncertain situations.
 Strategic management takes time to plan
and allocate resources, which is not possible
or effective in suddenly arising troublesome
situations.
 It can be expensive; benefits not for
immediate results; impedes flexible
decision-making and it is a complex
process.
 1.7. Business ethics and strategic management

Business ethics can be defined as 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!
All strategy formulation, implementation, and
evaluation decisions have ethical ramifications.
Thank you for your
attention!
THE END OF THE CHAPTER!