Understanding Strategic Management

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What is Strategic Management

Strategic Management entails three ongoing processes:

1.

Analysis:
- Analysis of strategic goals and the external and internal environments

2.

Decisions: - What industries to compete? - How should we compete?

3.

Actions:
- Actions to implement decisions

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Strategic Management
Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

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Four Key Attributes of Strategic Management

Directs the organization toward overall goals and objectives Includes multiple stakeholders in decision

making
Needs to incorporate short-term and long-term perspectives Recognize trade-offs between efficiency and effectiveness
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Explaining the 4 Attributes

Organizations must consider overall organizational perspective rather than a functional one

Organizations must satisfy multiple stakeholders

Managers must maintain both a vision for the future as well as a focus on its present operating needs

Doing the right thing versus doing things right

The need for ambidextrous behaviors, i.e. balancing between aligning resources to take advantage of

existing product markets and proactively exploring new opportunities

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Strategic Management Process

Intended versus Realized Strategies

Intended strategy refers to strategy in which

organizational decisions are determined only by analysis

Realized strategy refers to strategy in which organizational decisions are determined by both analysis

and unforeseen environmental developments, unanticipated resource constraints, and/or changes in managerial preferences. Realized strategy is a combination of deliberate and emergent strategies.

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Thinking Strategically: Three Big Central Questions

1. Whats the companys present situation?

- industry conditions and competitive pressure

- current performance and market standing - resource strength and capabilities and competitive weaknesses

2. Where does the company need to go from here?

Business(es) to be in and market positions to stake out Buyer needs and groups to serve Direction to head

3. How should it get there?

A companys answer to how will we get there? is its strategy

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Strategy
Strategy consists of competitive moves and business approaches used by managers to run the company Strategy involves making analysis and choices The hows that define a firm's strategy
How to grow the business How to please customers How to outcompete rivals How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on) How to respond to changing market conditions How to achieve targeted levels of performance
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Choosing a Strategy
Strategic choices about how are based on
Trial-and-error organizational learning about what has worked and

what has not worked

Managements appetite for taking risks Managerial analysis and strategic thinking about how best to proceed, given market conditions and the companys circumstances

In choosing a strategy, management is in effect saying, Among all the many different business approaches and ways of competing we could have chosen, we have decided to employ this particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position, and competitiveness, and boosting performance.

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Key Elements of a Successful Strategy

Developing a successful strategy hinges on making competitive moves aimed at
Appealing to buyers in ways to set the enterprise apart from rivals and Carving out its own market position

Involves developing a distinctive aha element to

Attract customers and Produce a competitive edge

Copying competitive moves of other successful companies rarely works

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Sustainable Competitive Advantage

A company has a competitive advantage when sizeable number of buyers prefer its products or services over the offerings of competitors The company achieves sustainable competitive advantage when the basis for this preference is durable

What separates a powerful strategy from an ordinary strategy is managements ability to forge a series of moves, both in the marketplace and internally, that produces sustainable competitive advantage!
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Four possible strategic approaches to achieve sustainable competitive advantage

Being the industrys low-cost provider (a cost-based competitive advantage) Incorporate differentiating features (a superior product type of competitive advantage keyed to higher quality, better performance, wider selection, value-added services, or some other attribute) Focusing on a narrow market niche (winning a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers comprising the niche)

Developing expertise and resource strengths not easily imitated or matched by rivals (a capabilities-based competitive advantage)

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Examples of Competitive Advantage

Strive to be the industrys low-cost provider
Wal-Mart Southwest Airlines

Outcompete rivals on a key differentiating feature

Johnson & Johnson Reliability in baby products Harley-Davidson King-of-the-road styling Rolex Top-of-the-line prestige Mercedes-Benz Engineering design and performance L.L. Bean Good value Amazon.com Wide selection and convenience

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Examples of Competitive Advantage (contd)

Focus on a narrow market niche
eBay Online auctions Jiffy Lube International Quick oil changes McAfee Virus protection auctions Starbucks Premium coffees and coffee drinks The Weather Channel Cable TV

Develop expertise, resource strengths, and capabilities not easily imitated by rivals
FedEx Next-day delivery of small packages Walt Disney Theme park management and family entertainment Toyota Sophisticated production system Ritz-Carlton Personalized customer service

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STRATEGY EXAMPLE: McDONALDS Strategic & financial objectives

Continued growth Providing exceptional customer care Remaining an efficient & quality producer Offering high value Effectively marketing McDonalds brand on a global scale

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KEY ELEMENTS OF McDONALDS STRATEGY

Adding 700-900 restaurants annually Using new menu items, low price specials, Extra Value Meals to promote frequent customer visits Being highly selective in granting franchises Choosing sites convenient to customers Focusing on limited product line & consistent quality Careful attention to store efficiency Extensive advertising & use of Mc prefix Hiring courteous personnel; paying an equitable wage; & providing good training
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Why Do Strategies Evolve?

A companys strategy is a work in progress
Changes may be necessary to react to
Shifting market conditions Technological breakthroughs Fresh moves of competitors Evolving customer preferences Emerging market opportunities New ideas to improve strategy Crisis situations

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Crafting Strategy Is an Exercise in Entrepreneurship

Strategy-making is a market-driven activity involving
Studying market trends and competitors actions Keen observation of customer needs Scrutinizing business possibilities based on new technologies Building firms market position via acquisitions or new product introductions Pursuing ways to strengthen firms competitive capabilities Proactively searching out opportunities to
Do new things or Do existing things in new or better ways

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Linking Strategy With Ethics

Ethical and moral standards go beyond
Prohibitions of law and the language of thou shalt not

to issues of
Duty and right vs. wrong

Ethical and moral standards address What is the right thing to do? Two criteria of an ethical strategy:
Does not entail actions and behaviors that cross the line from should do to should not do and unsavory or shady and Allows management to fulfill its ethical duties to all stakeholders
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A Firms Ethical Responsibilities to Its Stakeholders

Owners/shareholders Rightfully expect some form of return on their investment Employees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise

Customers - Rightfully expect a seller to provide them with a reliable, safe product o service Suppliers - Rightfully expect to have an equitable relationship with firms they supply and be treated fairly Community - Rightfully expect businesses to be good citizens in their community

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Role of Senior Executives: Linking Strategy with Ethics

Forbid pursuit of ethically questionable business opportunities Insist all aspects of company strategy reflect high ethical standards Make it clear all employees are expected to act with integrity Install organizational checks and balances to
Monitor behavior Enforce ethical codes of conduct Provide guidance to employees in gray areas

Display genuine commitment to conduct business activities ethically

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Business Model
A companys business model describes the economic logic of how its strategy can deliver value to customers at a price and cost that yields acceptable profitability Business model deals with whether the revenues and costs flowing from the strategy show business viability It is about the bottom line A company should have a business model that promises acceptable profit, regardless of whether there are competitors or not.
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Relationship Between Strategy and Business Model

Strategy . . .
Deals with a companys competitive initiatives and business approaches Business Model . . . Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable
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Strategic Management Process

The steps by which management converts a firms vision, mission, and goals/objectives into a workable strategy Consists of four stages:
Formulation of Mission and Policies External and Internal Analysis (SWOT analysis) Development of strategies Implementation of strategies Evaluation/adjustment

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Strategy-Making Hierarchy
A companys overall strategy is a collection of strategic initiatives and actions devised by managers and key employees up and down the whole organizational hierarchy
It comprises four distinct levels of strategy
Corporate strategy Business/competitive strategy Functional strategy Operating strategy
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Types of Business-Level Strategies Competitive Advantage

Cost Uniqueness Broad Target Cost Leadership Differentiation

Competitive Scope
Narrow Target

Integrated Cost Leadership/ Differentiation Focused Cost Leadership Focused Differentiation

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Cost Leadership Strategy: Competitors

Rivalry with Existing Competitors
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Due to cost leaders advantageous position:

Rivals hesitate to compete on basis of price. Lack of price competition leads to greater profits.

Bargaining power of buyers

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Cost Leadership Strategy: Substitutes

Product Substitutes
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Cost leader is well positioned to:

Make investments to be first to create substitutes. Buy patents developed by potential substitutes. Lower prices in order to maintain value position.

Bargaining power of buyers

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Cost Leadership Strategy: Buyers Bargaining Power

of Buyers
Can mitigate buyers power by:
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm.

Bargaining power of buyers

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Cost Leadership Strategy: Suppliers Bargaining Power

of Suppliers
Can mitigate suppliers power by:
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Being able to absorb cost increases due to low cost position.

Being able to make very large purchases, reducing chance of supplier using power.

Bargaining power of buyers

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Cost Leadership Strategy: New Entrants

The Threat of Potential Entrants
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Can frighten off new entrants due to:

Their need to enter on a large scale in order to be cost competitive. The time it takes to move down the learning curve.

Bargaining power of buyers

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Differentiation Strategy
An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.
Focus is on non-standardized products Appropriate when customers value differentiated features more than they value low cost.

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Differentiation Strategy: Competitors Rivalry with

Competitors
Defends against competitors because brand loyalty to differentiated product offsets price competition.
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Bargaining power of buyers

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Differentiation Strategy: Substitutes

Product Substitutes
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Well positioned relative to substitutes because:

Brand loyalty to a differentiated product tends to reduce customers testing of new products or switching brands.

Bargaining power of buyers

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Differentiation Strategy: Buyers

Bargaining Power of Buyers
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Can mitigate buyers power because well differentiated products reduce customer sensitivity to price increases.

Bargaining power of buyers

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Differentiation Strategy: Suppliers

Bargaining Power of Suppliers
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Can mitigate suppliers power by:

Absorbing price increases due to higher margins.

Bargaining power of buyers

Passing along higher supplier prices because buyers are loyal to differentiated brand.

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Differentiation Strategy: New Entrants

The Threat of Potential Entrants
Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers

Can defend against new entrants because:

New products must surpass proven products. New products must be at least equal to performance of proven products, but offered at lower prices.

Bargaining power of buyers

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Types of Potential Competitive Advantage

Achieving lower overall costs than rivals
Performing activities differently (reducing process costs)

Possessing the capability to differentiate the firms product or service and command a premium price
Performing different (more highly valued) activities.
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Focus Strategies
An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.
Particular buyer groupyouths or senior citizens
Different segment of a product line professional craftsmen versus do-it-yourselfers Different geographic marketsEast coast versus West coast
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Focus Strategies (contd)

Types of focused strategies
Focused cost leadership strategy Focused differentiation strategy

To implement a focus strategy, firms must be able to:

Complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns.
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Integrated Cost Leadership/ Differentiation Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:
Adapt quickly to environmental changes. Learn new skills and technologies more quickly.

Effectively leverage its core competencies while competing against its rivals.

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References
Ungson G. R. & Wong, Y-Y (2008) Global Strategic Management. M. E. Sharpe, New Yor., 579 p. Meredith R. (2007) The Elephant and The Dragon Rice of India and China and What it Means for All of Us. WW Norton Comp., New Yor., 252 p Angtmael, van A. (2007) The Emerging Markets Century - How a New Breed of World-Class Companies Is Overtaking the World. Free Press, New York. 358 p. Friedman, T. L. (2007) The World Is Flat 3.0 - A Brief History of the Twenty-first Century Picador, 672 p. Hamel, G. (2000) Leading the Revolution. 333 p. DAveni, R. A. (1995) Hypercompetitive Rivalries Competing in Highly Dynamic Environments. The Free Press. 288 p. Ohmae, K. (1991) The Mind of the Strategist. McGraw-Hill, Inc. 304 p. Pitts, R. & Lei, D. (2006) Strategic Management Building and Sustaining Competitive Advantage. South-Western Educational Publishing; 2nd edition 512 p. Tichy N. M (1983) Managing Strategic Change Technical, Political and Cultural Dynamics. John Wiley & Sons, 464 p. Kaplan R.S: & Norton D. P. (2004) Strategy Maps Converting Intangible Assets into Tangible Outcomes. HBS Press. 480 p.

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References
Simons, R. (2000) Performance Measurement & Control Systems for Implementing Strategy. Pearson Education, New yearsey. 792 p. Images of Strategy (2003) Edited by Cumming S. & Wilson, D. Blackwell Publ. Ltd. 450 p. Collins, J. (2004) Hyvst paras. Gummerus Oy, Jyvskyl. 363 s. Kim W. C. & Mauborgne, R. (2005) Blue Ocean Strategy. HBS Publishing. 240 p.

Writing an Effective Business Plan. 4th edition. 2003 Deloitte & Touche LLP, 52 p.

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info@yaleconsultant.com

03-2021 0577

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