Management 05-8

Lecture 1: Basic Concept of Strategic Management

(STRATEGIC MANAGEMENT & BUSINESS POLICY12TH 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 organization’s 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 company’s 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 changeInstitution theory: organizations adapt by imitating successful organizationsStrategic choice perspective: organizations adapt to change and have the ability to reshape their environmentOrganizational 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. Environmental scanning2. Strategy formulation3. Strategy implementation4. 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 organization’s 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 organizationCharacteristics of strategic decision making include:

• Rare• Consequential• Directive

Mintzberg’s Modes of Strategic Decision Making• Entrepreneurial• Adaptive• Planning• Logical incrementalism (Quinn)

Strategic Decision Making Process:1. Evaluate current performance results2. Review corporate governance3. Scan and assess the external environment4. Scan and assess the internal corporate environment5. Analyze strategic (SWOT) factors6. Generate, evaluate and select the best alternative strategy7. Implement selected strategies8. 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 today’s 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 situationsRole 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 corporation’s mission and strategies

Members of a Board of DirectorsInside Directors are officers or executives employed by the board’s corporation

Outside Directors are executives of other firms but are not employees of the board’s 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 firm’s key technologies and processes– Brings external contacts that are potentially valuable to the firm– Has detailed knowledge of the firm’s 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. When does a corporation need a board of directors?2. Who should and should not serve on a board of directors?3. Should a CEO be allowed to serve on another company’s board of directors?4. What would be the result if the only insider on a corporation’s board were the CEO?5. 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

Friedman’s 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

Carroll’s four responsibilities of business: (in order of priority)

• Economic

• Legal

• Ethical

• Discretionary

Carroll’s 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 firm’s objectives

• Enterprise strategy- articulates the firm’s 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:• Naïve relativism

• Role relativism

• Social group relativism

• Cultural relativism

Kohlberg’s Levels of Moral Development• Preconventional level: concern for one’s self

• Conventional level: considerations for society’s 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

Cavanagh’s 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?

Kant’s 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 International’s having a code of conduct for its suppliers? What

would Milton Friedman say? Contrast his view with Archie Carroll’s 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 company’s 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 corporation’s task environment

STEEP Analysis- monitoring trends in the societal and natural environments

– Sociocultural-– Technological-– Economic-– Ecological-– Political-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

Porter’s 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 buyer’s 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 firm’s 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

HypercompetitionCreates 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 company’s 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 corporation’s 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 Porter’s discussion of industry analysis, is Pepsi Cola a substitute of Coca Cola?

4. How can a decision maker identify strategic factors in acorporation’s external international environment?

5. Compare and contrast trend extrapolation with the writingof scenarios as forecasting techniques

Organizational analysis- concerned with identifying and developing an organization’s resources and competencies

Core and Distinctive Competencies

Resources- an organization’s assets

• Tangible

• Intangible

Capabilities- a corporation’s 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 firm’s strengths into specific capabilities and core competencies

3. Appraise profit potential- Are there any distinctive competencies?

4. Select the strategy that best exploits the firm’s 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 firm’s underlying resources, capabilities, or core competencies depreciate or become obsolete

Imitability- the rate at which a firm’s 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 firm’s 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 company’s culture

Business models- a company’s 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 line’s value chain in terms of the various activities involved in producing the product or service

2. Examine the linkages within each product line’s 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 corporation’s 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 corporation’s 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 company’s product which identifies that item in the mind of the consumer

Corporate brand- a type of brand in which the company’s name serves as the brand

Corporate reputation- a widely held perception of a company by the general public

• Stakeholders’ perceptions of quality

• Corporation’s 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

• Moore’s 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 cost-effective 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 company’s

strengths and weaknesses?

3. In what ways can a corporation’s 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 firm’s 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?