Management 05-8 Lecture 1: Basic Concept of Strategic Management (STRATEGIC MANAGEMENT & BUSINESS POLICY 12TH EDITION) THOMAS

L. WHEELEN J. DAVID HUNGER

Strategic Management: a set of managerial decisions and actions that determines the long-run performance of a corporation. Includes: Internal and external environment scanning Strategy formulation Strategy implementation Evaluation and control

Phases of Strategic Management: Phase 1: Basic financial planning Phase 2: Forecast-based planning Phase 3: Externally oriented strategic planning Phase 4: Strategic management Benefits of Strategic Management: Clearer sense of strategic vision for the firm Sharper focus on what is strategically important Improved understanding of a rapidly changing environment

Additional Benefits of Strategic Management: Improved organizational performance Achieves a match between the organizations environment and its strategy, structure and processes Important in unstable environments Strategic thinking Organizational learning

Impact of Globalization: Globalization: the integration and internationalization of markets and corporations Impact of Environmental Sustainability: Environmental Sustainability: the use of business practices to reduce a companys impact on the natural, physical environment Impact of Environmental Sustainability Risks of Climate Change include: Regulatory risk Supply chain risk Product and technology risk Litigation risk Reputational risk Physical risk

Population ecology: established organizations are unable to adapt to change Institution theory: organizations adapt by imitating successful organizations Strategic choice perspective: organizations adapt to change and have the ability to reshape their environment Organizational learning theory: organizations adapt defensively and use knowledge to improve their relationship with the environment

Strategic flexibility: the ability to shift from one dominant strategy to another and requires: Long-term commitment to the development and nurturing of critical resources Learning organization Learning organization: an organization skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights

Main activities of a learning organization include: Solving problems systematically Experimenting with new approaches Learning from past experience, history and experiences of others Transferring knowledge quickly and easily throughout the organization

Basic Elements of Strategic Management 1. 2. 3. 4. Environmental scanning Strategy formulation Strategy implementation Evaluation and control

Basic Elements of Strategic Management Environmental Scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the organization

Basic Elements of Strategic Management Strategy Formulation: the development of long-range plans for the effective management of environmental opportunities and threats in light of organizational strengths and weaknesses (SWOT) Mission- the purpose or reason for the organizations existence Vision- describes what the organization would like to become Objectives- the end results of planned activity

Strategies- form a comprehensive master plan that states how the corporation will achieve its mission and objectives Corporate Business Functional Policies- the broad guidelines for decision making that links the formulation of a strategy with its implementation

Strategy implementation: the process by which strategies and policies are put into action through the development of: Programs Budgets Procedures

Evaluation and control: the process in which corporate activities and performance results are monitored so that actual performance can be compared to desired performance Performance: the end result of organizational activities Feedback/Learning Process: revise or correct decisions based on performance

Triggering event: something that acts as a stimulus for a change in strategy and can include: New CEO External intervention Threat of change of ownership Performance gap Strategic inflection point

What Makes a Strategic Decision? Strategic decision making focuses on the long-run future of the organization Characteristics of strategic decision making include: Rare Consequential Directive Mintzbergs Modes of Strategic Decision Making Entrepreneurial Adaptive Planning Logical incrementalism (Quinn) Strategic Decision Making Process: 1. Evaluate current performance results 2. Review corporate governance 3. Scan and assess the external environment 4. Scan and assess the internal corporate environment 5. Analyze strategic (SWOT) factors 6. Generate, evaluate and select the best alternative strategy 7. Implement selected strategies 8. Evaluate implemented strategies

Strategic audit provides a checklist of questions, by area or issue, that enables a systematic analysis to be made of various corporate functions and activities

1. Why has strategic management become so important to todays corporations? 2. How does strategic management typically evolve in a corporation? 3. What is a learning organization? Is this approach to strategic management better than the more traditional top-down approach in which strategic planning is primarily done by top management? 4. Why are strategic decisions different from other kinds of decisions? 5. When is the planning mode of strategic decision making superior to the entrepreneurial and adaptive modes?

Corporation: a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit Corporation is governed by the board of directors that oversees top management with the concurrence of the shareholders. Corporate governance: the relationship among the board of directors, top management and shareholders in determining the direction and performance of the corporation Due care: Board of directors are responsible that the corporation is not harmed by members of the board. Directors can be held liable Responsibilities of the Board of Directors Sets corporate strategy, overall direction, mission, or vision Hires and fires the CEO and top management Controls, monitors, or supervises top management Reviews and approves the use of resources Cares for shareholders interests Assures that the corporation is managed in accordance with state laws, security regulations and conflict of interest situations Role of the Board in Strategic Management Monitor developments inside and outside the corporation Evaluate and Influence management proposals, decisions and actions Initiate and Determine the corporations mission and strategies

Members of a Board of Directors Inside Directors are officers or executives employed by the boards corporation Outside Directors are executives of other firms but are not employees of the boards corporation Affiliated directors- not employed by the corporation, handle legal or insurance work Retired executive directors- used to work for the corporation, partly responsible for past decisions affecting current strategy Family directors- descendents of the founder and own significant blocks of stock Agency theory problems arise in corporations because top management is not willing to accept responsibility for their decisions unless they own a substantial amount of stock in the corporation Stewardship theory as the result of long tenure with the corporation, insiders (top management) tend to identify with the corporation and its success. Act in the best interest of the corporation more than self-interest Interlocking Directorates- useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics Direct interlocking directorate- when two firms share a director or when an executive of one firm sits on the board of a second Indirect interlocking directorate- when two corporations have directors who serve on the board of a third firm Nomination and Election of Board Members 97% of U.S. boards use nominating committees to identify potential board members Staggered boards- only a portion of board members stand for re-election when directors serve more than one year terms Criteria for a good director include: Willingness to challenge management when necessary Special expertise that is important to the company Available for outside meetings to advise management Expertise on global issues Understands the firms key technologies and processes Brings external contacts that are potentially valuable to the firm Has detailed knowledge of the firms industry Has high visibility in their field Is accomplished at representing the firm to stakeholders Approximately 70% of the top executives of U.S. publicly held companies hold the dual designation of Chairman and CEO

Lead Director- is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO 96% of U.S. companies that combine the Chairman and CEO positions had a lead director

Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance Sarbanes Oxley Act 2002- designed to protect shareholders from excesses and failed oversight of boards of directors Whistleblower procedures Improved corporate Evaluating Governance Rating agencies S&P Corporate Governance Scoring System Avoiding Governance Improvements Multiple classes of stock Public to private ownership Controlled companies

Trends in Corporate Governance Boards shaping company strategy Institutional investors active on boards Shareholder demands that directors and top management own significant stock More involvement of non-affiliated outside directors Increased representation of women and minorities Boards evaluating individual directors Smaller boards Splitting the Chairman and CEO positions Shareholders may begin to nominate board members Society expects boards to balance profitability with social needs of society

Responsibilities of Top Management Executive leadership is the directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation Strategic vision- description of what the company is capable of becoming

Transformational Leaders provide change and movement in an organization by providing a vision for that change. Characteristics include: CEO articulates a strategic vision for the corporation CEO presents a role for others to identify with and to follow CEO communicates high performance standards and also show confidence in the followers abilities to meet these standards Managing the Strategic Planning Process Strategic planning staff- supports both top management and the business units in the strategic planning process Major responsibilities include: Identifying and analyzing company-wide strategic issues, and suggesting corporate strategic alternatives to top management Work as facilitators with business units to guide them through the strategic planning process

1. 2. 3. 4. 5.

When does a corporation need a board of directors? Who should and should not serve on a board of directors? Should a CEO be allowed to serve on another companys board of directors? What would be the result if the only insider on a corporations board were the CEO? Should all CEOs be transformational leaders? Would you like to work for a transformational leader?

Responsibilities of a Business Firm Social Responsibility: proposes that a private corporation has responsibilities to society that extend beyond making a profit Friedmans traditional view of a business firm: Argues against the concept of social responsibility Primary goal of business is profit maximization not spending shareholder money for the general social interest Carrolls four responsibilities of business: (in order of priority) Economic Legal Ethical Discretionary

Carrolls four responsibilities of business:

Social capital refers to the goodwill of key stakeholders and provides a company with: The ability to enter local and international markets Enhanced reputation Competitive advantage Cost savings The ability to charge premium prices Improved relationships with suppliers and distributors The ability to attract better talent Goodwill in the eyes of public officials Access to capital Characteristics of Sustainability Environmental Economic Social Corporate Stakeholders Stakeholders have an interest in the business and affect or are affected by the achievement of the firms objectives Enterprise strategy- articulates the firms ethical relationship with its stakeholders

Stakeholder Analysis- the identification of corporate stakeholders in 3 steps: 1. Primary stakeholders have a direct connection with the corporation and have sufficient bargaining power to directly affect corporate activities 2. Secondary stakeholders have an indirect stake in the corporation but are also affected by corporate activities 3. Estimate the effect on each stakeholder from a particular strategic decision

Reasons for Unethical Behavior Unaware that behavior is questionable Lack of standards of conduct Different cultural norms and values Behavior-based or relationship-based governance systems Different values between business people and stakeholders

Moral Relativism claims that morality is relative to some personal, social, or cultural standard and that there is not a method for deciding whether one decision is better than another

Types of Moral Relativism include: Nave relativism Role relativism Social group relativism Cultural relativism

Kohlbergs Levels of Moral Development Preconventional level: concern for ones self Conventional level: considerations for societys laws and norms Principled level: guided by an internal code

Encouraging Ethical Behavior Code of Ethics- specifies how an organization expects its employees to behave while on the job Whistleblowers- employees who report illegal or unethical behavior on the part of others

Key Terms in Ethical Behavior Ethics- the consensually accepted standards of behavior for an occupation, trade, or profession Morality- the precepts of personal behavior based on religious or philosophical grounds Law is the formal codes that permit or forbid certain behaviors and may or may not enforce ethics or morality Approaches to Ethical Behavior Utilitarian- actions are judged by consequences Individual rights- fundamental rights should be respected Justice- decisions must be equitable, fair and impartial in the distribution of costs and benefits to individuals or groups

Cavanaghs questions to solve ethical problems: 1. Utility- does it optimize the satisfactions of the stakeholders? 2. Rights- Does it respect the rights of the individuals involved 3. Justice- Is it consistent with the canons of justice? Kants categorical imperatives: 1. Actions are ethical only if the person is willing for the same action to be taken by everyone who is in a similar situation 2. Never treat another person simply as a means but always as an end

1. What is the relationship between corporate governance and social responsibility? 2. What is your opinion of GAP Internationals having a code of conduct for its suppliers? What would Milton Friedman say? Contrast his view with Archie Carrolls view. 3. Does a company have to act selflessly to be considered socially responsible? For example, when building a new plant, a corporation voluntarily invested in additional equipment that enabled it to reduce its pollution emissionsbeyond any current laws. Knowing that it would be very expensive for its competitors to do the same, the firm lobbied the government to make pollution regulations more restrictive on the entire industry. Is this company socially responsible? Were its managers acting ethically? 4. Are the people living in a relationship-based governancesystem likely to be unethical in business dealings? 5. Given that people rarely use a companys code of ethicsto guide their decision making, what good are the codes?

Environmental scanning- the monitoring, evaluation and dissemination of information from the external and internal environments to key people within the corporation Identifying External Environmental Variables Natural environment Societal environment Task environment Natural environment Physical resources Wildlife Climate Societal environment- social systems that influence long-term decisions Economic forces Technological forces Political-legal forces Sociocultural forces Task environment- groups that directly affect a corporation and are affected by the corporation Government Local communities Suppliers Competitors Customers Creditors Unions Special interest groups/trade associations

Industry analysis- an in-depth examination of key factors within a corporations task environment

STEEP Analysis- monitoring trends in the societal and natural environments SocioculturalTechnologicalEconomicEcologicalPolitical-legal forces

Trends in Economic Forces: Interest rates Home sales Oil prices Emerging markets BRIC countries Eastern Europe

Trends in Technological Forces: Portable information devices and electronic networking Alternative energy sources Precision farming Virtual personal assistants Genetically altered organisms Smart, mobile robots

Trends in Political-Legal Forces: Enforcement of U.S. antitrust laws Taxation and labor laws Government bureaucracy World Trade Organization Trends in Sociocultural Forces: Demographics Increasing environmental awareness Growing health consciousness Expanding seniors market Impact of Gen Y Declining mass market Changing pace and location of life Changing household composition Increasing diversity of workforce and markets

Identifying External Strategic Factors: Issues priority matrix- used to identify and analyze developments in the external environment External strategic factors- key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation

Industry- a group of firms that produces a similar product or service Porters 5 forces: Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders (added)

Threat of new entrants- new entrants to an industry bring new capacity, a desire to gain market share and substantial resources

Entry barrier- an obstruction that makes it difficult for a company to enter an industry Economies of scale Product differentiation Capital requirements

Switching costs Access to distribution channels Cost disadvantages due to size Government policies

Rivalry Among Existing Firms- new entrants to an industry bring new capacity, a desire to gain market share and substantial resources Number of competitors Rate of industry growth Product or service characteristics Amount of fixed costs Capacity Height of exit barriers Diversity of rivals

Threat of Substitute Products or Services- products that appear different but can satisfy the same need as another product Bargaining Power of Buyers- ability of buyers to force prices down, bargain for higher quality, play competitors against each other Large purchases Backward integration Alternative suppliers Low cost to change suppliers Product represents a high percentage of buyers cost Buyer earns low profits Product is unimportant to buyer Bargaining Power of Suppliers- ability of suppliers to raise prices or reduce quality Industry is dominated by a few companies Unique product or service Substitutes are not readily available Ability to forward integrate Unimportance of product or service to the industry Relative Power of Other Stakeholders Government Local communities Creditors Trade associations Special interest groups

Unions Shareholders Complementors- products that work well with a firms product

Industry Evolution Fragmented industry- no firm has a large market share and each firm only serves a small piece of the total market in competition with other firms Consolidated industry- domination by a few large firms, each struggles to differentiate products from its competition Categorizing International Industries Multi-domestic Industries- specific to each country or group of countries Global Industries- operate worldwide with multinational companies making only small adjustments for country-specific circumstances Regional industries- multinational companies primarily coordinate their activities within regions

Strategic group- a set of business units or firms that pursue similar strategies with similar resources

Strategic Types Defenders- focus on improving efficiency Prospectors- focus on product innovation and market opportunities Analyzers- focus on at least two different product market areas Reactors- lack a consistent strategy-structure-culture relationship Hypercompetition Creates a condition of disequilibrium and change Competitive advantage comes from: knowledge of environment willingness to take risks Cannibalization of own products Key success factors- variables that can significantly affect the overall competitive positions of companies within an industry Industry matrix- summarizes the key success factors within a particular industry

Using Key Success Factors to Create an Industry Matrix Competitive intelligence (business intelligence)- a formal program of gathering information on a companys competitors Sources of competitive intelligence: Information brokers

Internet Industrial espionage Investigatory services

Monitoring Competitors for Strategic Planning Primary activity of competitive intelligence is to monitor competitors Competitors organizations that offer same, similar, or substitute products or services in the business areas in which a particular company operates

Forecasting is based on a set of assumptions Faulty underlying assumptions are the most frequent cause of forecasting errors

Useful forecasting techniques Extrapolation Brainstorming Expert opinion Industry Scenario Delphi technique Statistical modeling Prediction markets Cross impact analysis

1. Discuss how a development in a corporations natural and societal environments can affect the corporation through its task environment 2. According to Porter, what determines the level of competitive intensity in an industry? 3. According to Porters discussion of industry analysis, is Pepsi Cola a substitute of Coca Cola? 4. How can a decision maker identify strategic factors in acorporations external international environment? 5. Compare and contrast trend extrapolation with the writingof scenarios as forecasting techniques

Organizational analysis- concerned with identifying and developing an organizations resources and competencies Core and Distinctive Competencies Resources- an organizations assets Tangible Intangible

Capabilities- a corporations ability to exploit its resources Competency- a cross-functional integration and coordination of capabilities Core competency- a collection of competencies that cross divisional boundaries, is wide-spread throughout the corporation and is something the corporation does exceedingly well Distinctive competency- core competencies that are superior to those of the competition VRIO framework (Barney) Value Rare Imitability Organization

Using Resources to Gain Competitive Advantage 1. Identify and classify resources in terms of strengths and weaknesses 2. Combine the firms strengths into specific capabilities and core competencies 3. Appraise profit potential- Are there any distinctive competencies?

4. Select the strategy that best exploits the firms capabilities and competencies relative to external opportunities 5. Identify resource gaps and invest in upgrading weaknesses Access to a Distinctive Competency 1. Asset endowment 2. Acquired from someone else 3. Shared with another business 4. Built and accumulated within the company

Access to a Distinctive Competency Clusters- geographic concentrations of interconnected companies and industries Access to: Employees Suppliers Information Complementary products

Imitability an Advantage Durability- the rate at which a firms underlying resources, capabilities, or core competencies depreciate or become obsolete Imitability- the rate at which a firms underlying resources, capabilities, or core competencies can be duplicated by others Determining the Sustainability of an Advantage Transparency- the speed at which other firms under the relationship of resources and capabilities support a successful strategy Transferability- the ability of competitors to gather the resources and capabilities necessary to support a competitive challenge Replicability- the ability of competitors to use duplicated resources and capabilities to imitate the other firms success

Explicit knowledge- knowledge that can be easily articulated and communicated Tacit knowledge- knowledge that is not easily communicated because it is deeply rooted in employee experience or in the companys culture

Business models- a companys method for making money in the current business environment Includes Who the company serves What the company provides How the company makes money How the company differentiates and sustains competitive advantage How the company provides its product/service Customer solutions model Profit pyramid model Multi-component system/installed model Advertising model Switchboard model

Efficiency model Blockbuster model Profit multiplier model Entrepreneurial model De Facto industry standard model

Value chain- a linked set of value creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marking a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer

Industry Value Chain Analysis Value chain segments include: Upstream Downstream

Center of gravity- the part of the chain that is most important to the company and the point where its core competencies lie Vertical integration

Corporate Value Chain Analysis Primary activities Inbound logistics Operations Outbound logistics

Support activities Procurement

Technology development Human resource management Firm infrastructure

Corporate Value Chain Analysis 1. Examine each product lines value chain in terms of the various activities involved in producing the product or service 2. Examine the linkages within each product lines value chain 3. Examine the potential synergies among the value chains of different product lines or business units

Basic Organizational Structures Simple Functional

Divisional Strategic Business Units Conglomerate

Corporate Culture: The Company Way Corporate culture- the collection of beliefs, expectations and values learned and shared by a corporations members and transmitted from one generation of employees to another. Functions of Corporate Culture Conveys a sense of identity for employees Generates employee commitment Adds to the stability of the organization as a social system

Serves as a frame of reference for employees to understand organizational activities and as a guide for behavior

Corporate Culture: The Company Way Cultural intensity- the degree of which members of a unit accept the norms, values and other cultural content associated with the unit Shows the depth of the culture Cultural integration- the extent of which units throughout the organization share a common culture Shows the breadth of the culture Strategic Marketing Issues Market position- Who are our customers? Marketing Mix- the particular combination of key variables under a corporations control that can be used to affect demand and to gain competitive advantage

Product life cycle- product monetary sales over time from introduction through growth and maturity to decline

Brand- a name given to a companys product which identifies that item in the mind of the consumer Corporate brand- a type of brand in which the companys name serves as the brand Corporate reputation- a widely held perception of a company by the general public Stakeholders perceptions of quality Corporations prominence in the minds of stakeholders

Strategic Financial Issues Financial leverage- ratio of total debt to total assets Used to describe how debt is used to increase earnings available to common shareholders

Capital budgeting- the analyzing and ranking of possible investments in fixed assets in terms of additional outlays and receipts that will result from each investment Hurdle point

Strategic Research and Development Issues R & D intensity- pending no R & D as a percentage of sales revenue Technology competence- the development and use of innovative technology Technology transfer- the process of taking new technology from the laboratory to the marketplace

R & D Mix- the mix of: Basic R & D- focuses on theoretical problems Product R & D- concentrates on marketing and is concerned with product or product packaging improvements Engineering R & D is concerned with engineering, concentrating on quality control, and the development of design specifications and improved production equipment Strategic Research and Development Issues Technology discontinuity- when a new technology cannot be used to enhance current technology, but substitutes for the technology to yield better performance Moores Law

Strategic Operations Issues Intermittent Systems- item is normally processed sequentially, but the work and sequence of the process vary Continuous systems- work is laid out in lines on which products can be continuously assembled or processed

Operating leverage- impact of a specific change in sales volume on net operation income Experience curve- unit production costs decline by some fixed percentage each time the total accumulated volume of production units doubles Flexible Manufacturing for Mass Customization Computer Assisted Design Computer Assisted Manufacturing Economies of Scale

Strategic Human Resource Issues Teams Autonomous (self-managed)- a group of people working together without a supervisor to plan, coordinate and evaluate their work Cross-functional work teams- various disciplines are involved in a project from the beginning Concurrent engineering- specialists work side-by-side and compare notes constantly to design costeffective products with features customers want Virtual Teams- groups of geographically or organizationally dispersed coworkers that are assembled using a combination of telecommunications and information technologies to accomplish organizational tasks- driven by 5 trends Flatter organizational structures Turbulent environments Increased employee autonomy Higher knowledge requirements Increased globalization Increased employee decision making

Quality of work life- includes improvements in: Introducing participative problem solving Restructuring work Introducing innovative reward systems

Improving the work environment

Human diversity- the mix in the workplace of people from different races, cultures and backgrounds Provides a sustainable competitive advantage

Strategic Information Systems/Technology Issues Information systems/technology contributions to performance: Automation of back office processes Automation of individual tasks Enhancement of key business functions Development of a competitive advantage

Current trends in Information systems/technology Internet include: Intranet Extranet Web 2.0

Supply chain management- networks for sourcing raw materials, manufacturing products or creating services, storing, and distributing goods, and delivering them to customers and consumers

1. What is the relevance of the resource-based view of the firm to strategic management in a global environment? 2. How can value chain analysis help indentify a companys strengths and weaknesses? 3. In what ways can a corporations structure and culture be internal strengths and weaknesses? 4. What are the pros and cons of management using the experience curve to determine strategy? 5. How might a firms management decide whether it should continue to invest in current known technology or in new, but untested technology? What factors might encourage or discourage such a shift?