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Pearce & Robinson, 10th ed.

Chapter 1 Strategic Management

McGraw-Hill/Irwin Strategic Management, 10/e

Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives
1. 2. 3. Explain the concept of strategic management Describe how strategic decisions differ from other decisions that managers make Name the benefits and risks of a participative approach to strategic decision making Understand the types of strategic decisions for which different managers are responsible Describe a comprehensive model of strategic decision making Appreciate the importance of strategic management as a process Give examples of strategic decisions that companies have recently made

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5. 6. 7.

The Nature and Value of Strategic Management

Strategic management:

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The set of decisions and actions that result in formulation and implementation of plans designed to achieve a companys objectives

Nine Critical Tasks of Strategic Management -- Tasks 1-5:

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Formulate the companys mission Conduct an internal analysis Assess the external environment competitive and general contexts Analyze the companys options by matching its resources with the external environment Identify the most desirable options in light of the mission

Nine Critical Tasks of Strategic Management -- Tasks 6-9:

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Select a set of long-term objectives and grand strategies that will achieve the most desirable options Develop annual objectives and short-term strategies that are compatible with long-term objectives and grand strategies Implement the strategic choices Evaluate the success of the strategic process for future decision making

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What is Strategy?
Large-scale, future-oriented plan Used to interact within competitive environment to achieve company goals Provides a framework for managerial decisions Reflects a companys awareness of the main elements of competition-how, when, and where it should compete; against whom it should compete; and for what purposes it should compete.

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Dimensions of Strategic Decisions

Strategic issues require topmanagement decisions
Strategic decisions overarch several areas of a firms operations Usually only top management has the perspective needed to understand their broad implications Usually only top managers have the power to authorize necessary resource allocations

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Dimensions of Strategic Decisions

Strategic issues require large amounts of the firms resources
They involve substantial allocations of people, physical assets, and money Strategic decisions commit the firm to actions over an extended period In highly competitive firms, achieving and maintaining customer satisfaction frequently involves commitment from every facet of the firm

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Dimensions of Strategic Decisions

Strategic issues often affect the firms long-term prosperity
Strategic decisions commit the firm for a long time, typically 5 years; however the impact lasts much longer Once a firm has committed itself to a strategy, its image and competitive advantages are usually tied to that strategy Firms become known for what they do and where they compete. Shifting away from that can jeopardize their previous gains.

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Dimensions of Strategic Decisions

Strategic issues are future-oriented
They are based on what managers forecast, rather than what they know Emphasis is on the development of solid projections that will enable a firm to seek the most promising strategic options A firm will succeed only if it takes a proactive (anticipatory) stance toward change

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Dimensions of Strategic Decisions

Strategic issues usually have multifunctional or multibusiness consequences.
Strategic decisions have complex implications for most areas of the firm Decisions about customer mix, competitive emphasis, or organizational structure involve a number of the firms SBUs, divisions, or program units

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Dimensions of Strategic Decisions

Strategic issues require considering the firms external environment
All businesses exist in an open system. They affect and are affected by external conditions that are largely beyond their control Successful positioning requires that strategic managers look beyond operations and consider what relevant others are likely to do

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Three Levels of Strategy

Corporate level: board of directors, CEO & administration [Highest] Business level: business and corporate managers [Middle] Functional level: Product, geographic, and functional area managers [Lowest]

Alternative Strategic Management Structures

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Characteristics of Strategic Management Decisions: Corporate

Often carry greater risk, cost, and profit potential Greater need for flexibility Longer time horizons Choice of businesses, dividend policies, sources of long-term financing, and priorities for growth

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Characteristics of Strategic Management Decisions: Functional

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Implement the overall strategy formulated at the corporate and business levels Involve action-oriented and operational issues Relatively short range and low risk Modest costs: depend upon available resources Relatively concrete and quantifiable

Characteristics of Strategic Management Decisions: Business

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Help bridge decisions at the corporate and functional levels Less costly, risky, and potentially profitable than corporate-level decisions More costly, risky, and potentially profitable than functional-level decisions Include decisions on plant location, marketing segmentation, and distribution

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Formality in Strategic Management

Formality is the degree to which participation, responsibility, authority, and discretion in decision-making are specified in strategic management

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Forces Determining Formality

Organizational Size Predominant Problems in the Management Firm Styles Purpose of the Complexity of Planning System Environment Production Process Stage of Firms Development

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Three Modes of Formality

Entrepreneurial Mode most small firms Planning Mode most large firms Adaptive Mode most medium size firms

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Strategy Makers
Ideal strategic team includes decision makers from all three levels Top managers must give final approval Strategic decisions coincide with managers responsibilities

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Strategy Makers: The CEO

A firms CEO plays a dominant role in strategic planning The CEOs principal duty is giving long-term direction to the firm The CEO bears ultimate responsibility for the firms success and strategic success CEOs are typically strong-willed, company-oriented individuals

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Benefits of Strategic Management

Managers at all levels interact in planning and implementing strategy Similar to participative decision making Promoting positive behavioral consequences enables achievement of financial goals Behavioral effects of strategic management in strategy formulation improve the firms welfare

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Benefits of Strategic Management

Enhance the firms ability to choose best available alternative The involvement of employees in strategy formulation improves their understanding of the productivity-reward relationship in every strategic plan and, thus, heightens their motivation. Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles. Resistance to change is reduced.

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Risks of Strategic Management

Managers time away from other responsibilities Unrealistic expectations promised by strategy formulators Possible disappointment of participating subordinates if goal is not reached

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Strategic Management Process

Strategic management is a processa flow of information through interrelated stages of analysis toward the achievement of some goal. The basic components of the models used to analyze strategic management are similar. Here a model named Strategic Management Model is used.

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Strategic Management Model

It serves three major functions. a) It depicts the sequence and the relationships of the major components of the strategic management process. b) It is the outline for this book. c) The model offers on approach for analyzing the case studies in this text and thus helps the analyst develop strategy formulation skills.

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Strategic Management Model

Components of Strategic Management Model

Company Mission External Analysis Long-Term Objectives Short-Term Objectives Policies Empowering Action Strategic Control & Continuous Improvement Internal Analysis Strategic Analysis & Choice Generic & Grand Strategies Functional Tactics Restructuring, Reengineering & Refocusing

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Company Mission
Unique purpose that sets it apart from other companies of its type and identifies the scope of its operations. Describes the companys product, market, and technological areas of emphasis in a way that reflects the values and priorities of the strategic decision makers. Must express how the company intends to contribute to the societies that sustain it.

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Questions for Discussion

Find a recent copy of BusinessWeek and read the Corporate Strategies section. Was the main decision discussed strategic? At what level in the organization was the key decision made? In what ways do you think the subject matter in this strategic management-business policy course will differ from that of previous courses you have taken?

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Questions for Discussion

After graduation, you are not likely to move directly to a top-level management position. In fact, few members of your class will ever reach the topmanagement level. Why, then, is it important for all business majors to study the field of strategic management? Do you expect outstanding performance in this course to require a great deal of memorization? Why or why not?

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Internal Analysis
Analyzing the quantity and quality of its financial, human, and physical resources. Assessing the strengths and weaknesses of its management and organizational structure. Contrasts & comparing the companys past successes and traditional concerns with its current capabilities in an attempt to identify the companys future capabilities.

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External Environment
A firms external environment consists of all the conditions and forces that affect its strategic options and define its competitive situation. (2) The strategic management model shows the external environment as three interactive segments: the remote, industry, and operating environments.