Chapter 7

Strategic Management

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Learning Objectives
Explain how the firms external environment should be examined as part of the strategic management process. Explain how the firms internal environment should be examined as part of the strategic management process. State the meaning and purpose of the firms strategic intent and mission. Understand how the strategy formulation process helps the firm achieve its mission. Describe the issues that should be considered in strategy implementation.

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After reading this chapter, you should be able to:

Understand how the outcomes of the strategic management process should be assessed.
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The Strategic Management Process

It is the job of top level management to chart the course of the entire enterprise. It consists of:
Analysis of the internal and external environment of the firm. Definition of the firms mission. Formulation and implementation of strategies to create or continue a competitive advantage.
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The Strategic Management Process (cont)

Strategic management involves both longrange thinking and adaptation to changing conditions. Strategies should be designed to generate a sustainable competitive advantage.
Competitors should be unable to duplicate what the firm has done or should find it too difficult or expensive.
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Components of the Strategic Management Process:

Analyze the external and internal environments

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Define strategic intent and mission

Formulate strategies

Implement strategies

Assess strategic outcomes

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Slide 6

SWOT Analysis
Commonly used strategy tool: SWOT
Strengths, Weaknesses, Opportunities, Threats
External Environment Components Scanning Monitoring Forecasting Assessing
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Internal Environment Resource types Tangible Intangible Firm capabilities Functional Value Chain Benchmarking

Scope General environment Industry environment Strategic groups Direct competitors

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Slide 7

The External Environment

Company leaders must study the external environment in order to:
Identify opportunities and threats in the marketplace. Avoid surprises. Respond appropriately to competitors moves.

A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage.
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Components of External Analysis

Scanning Monitoring

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Assessing

Forecasting

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Scope of the External Analysis

General Environment
The Industry

Slide 9

Competitor Analysis

Strategic Groups

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The Segments of the General Environment

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Porters Analyzing the Industry Environment

Threat of new entrants

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Threat of substitutes

Suppliers

Customers
Intensity of rivalry among competitors
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Slide 12

The Internal Environment

Each company has something that it does well. These are called core competencies. Company executives should identify the resources, capabilities, and knowledge the firm has that may be used to exploit market opportunities and avoid potential threats.

Resource-based view: Basing the strategy on what the firm is capable of doing
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Resource Types: Tangible Resources

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Assets that can be quantified and observed. Include financial resources, physical assets, and workers.

Strategic assessment of tangible resources should enable management to efficiently use tangible resources to support the company and to expand the volume of business.
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Resource Types: Intangible Resources

Difficult to quantify and included on a balance sheet Often provides the firm with a strong competitive advantage.

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Competitors find it difficult to purchase or imitate these resources.

Strategically most important intangibles:
Reputation Technology Human Capital
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Analyzing the Firms Capabilities

Functional Analysis

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Value Chain Analysis

Benchmarking
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Analyzing Capabilities by Functional Areas

Functional Area Corporate Management Capability

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Effective financial control systems Expertise in strategic control of diversified corporation Effectiveness in motivating and coordinating divisional and business-unit management Management of acquisitions Values-driven, in-touch corporate leadership

Information Management Comprehensive and effective MIS network, with strong central coordination

Research and Development

Capability in basic research Ability to develop innovative new products Speed of new product development
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Slide 17

Analyzing Capabilities by Functional Areas (cont.)

Functional Area Manufacturing Capability Efficiency in volume manufacturing Capacity for continual improvements in production processes Flexibility and speed of response Design capability Brand management and brand promotion Promoting and exploiting reputation for quality Responsive to market trends Effectiveness in promoting and executing sales Efficiency and speed of distribution Quality and effectiveness of customer service
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Product Design Marketing

Sales and Distribution

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Slide 18

Value-Chain Analysis
Breaks down the firm into a sequential series of activities and attempts to identify the value added of each activity

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Benchmarking Involves Four Stages:

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Identifying activities or functions that are weak and need improvement. Identifying firms that are known to be at the leading edge of these activities or functions.

Studying the leading-edge firms by visiting them, talking to managers and employees, and reading trade publications. Using the information gathered to redefine goals, modify processes, and acquire new resources to improve the firms functions.
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Slide 20

Strategic Intent and Mission

The primary guides to strategic management are formal statements of strategic intent and mission. Strategic intent is internally focused, defining how the firm uses its resources, capabilities, and core competencies. Strategic mission is externally focused, defining what will be to produced and marketed, utilizing its internal core competencies.

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Slide 21

Strategic Intent and Mission

(cont.)

Strategic Intent and Mission

Intent: How firm would like to use Mission: Determine the firms external focus on

Resources
Capabilities Core competencies

Products
Markets

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Slide 22

Strategy Formulation
The design of an approach to achieve the firms mission.
Takes place at:
Corporate-Level Business-Level

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Slide 23

Corporate-Level Strategy
The corporations overall plan concerning the:
Number of businesses the corporation holds. Variety of markets or industries it serves. Distribution of resources among those businesses.

This diversification strategy may be analyzed in terms of:

Portfolio mix Type of diversification Process of diversification

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Slide 24

Portfolio Analysis
The basic idea is to classify the businesses of a diversified company within a single framework. Two of the most widely applied include:
The McKinsey-General Electric Portfolio Analysis Matrix The Boston Consulting Groups Growth Share Matrix

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The McKinsey-General Electric Portfolio Analysis Matrix

Business-Unit Position Low Low

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Medium

High

1) Harvest 4)

2)

3)

5) Hold

6)

Medium

Industry Attractiveness

7)
High

8)

9)

Build
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The Boston Consulting Groups Growth Share Matrix

Relative Market Share Earnings: high stable, growing Cash Flow: neutral Strategy: invest for growth STAR
Annual Real Rate of Market Growth

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Earnings: low, unstable, growing Cash Flow: negative Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog ? Earnings: low, unstable Cash Flow: neutral or negative Strategy: divest DOG

Earnings: high, stable Cash Flow: high stable Strategy: milk COW

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Slide 27

Diversification Strategy
Type of Diversification Concentration strategy Vertical integration strategy Concentric diversification strategy Conglomerate diversification
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Process of Diversification Acquisition and restructuring strategies Acquisition Merger International strategy

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Slide 28

Business-Level Strategy
Deals with how to compete in each business area or market segment. Firms have two basic choices:
Cost leadership strategy Differentiation strategy

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Slide 29

Strategy Implementation
Organizational Structure and Controls Corporate Entrepreneurship and Innovation Strategic Leadership Cooperative Strategies Human Resource Strategies

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Slide 30

Strategic Outcomes
Company leaders should periodically assess whether the outcomes meet expectations. A firm must first and foremost cater to the desires of its primary stakeholders. The firm should also consider the desires of other stakeholders affected by its performance. Some of the standard measures of strategic success includes:
Profits Growth of sales/market share Growth of corporate assets Reduced competitive threats Innovations
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