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Strategic Management

Chapter One: Introduction to Strategic Managment

Janapriya Multiple Campus, MBS

Topics covered
Evolution of strategic management Characteristics of strategic decisions Minzbergs modes of strategic decision making Components of strategic management: strategic planning, strategy implementation and strategic control Importance of strategic management in Nepal Strategic plan: mission, objective, strategies Levels of objectives and strategies Role of chief executive officer in strategic management

Evolution of strategic management

It originated in the 1950s and 1960s Alfred Chandler, Philip Selznick, Igor Ansoff, Peter Drucker were influential pioneers. Alfred showed a relationship between strategy and structure Philip Selznick developed the idea of matching internal environment with external environment Igor Ansoff developed the concept of gap analysis Peter Drucker developed the concept of Management by Objective

Evolution of strategic management (contd)

During 1960s a number of new business evolved in US During 1960s and 1970s strategic management it was regarded as panacea for all problems The amount of foreign competition strongly increased after 1980s and led to the phenomenon of globalization. During this period strategic planning was not emphasized as planning mode did not yield high return From 1990-2000 strategic management/planning was widely practiced in the business world.

Characteristics of strategic decisions

Strategic Issues require Top-management decisions. Strategic Issues involve the allocations of large amount of company resources. Strategic Issues are likely to Have a Significant Impact on the Long-term Prosperity of the firm. Strategic Issues are Future Oriented. Strategic Issues Usually have Major Multifunctional or Multibusiness Consequences. Strategic Issues Necessitate Considering Factors in the Firms External Environment.

Minzbergs mode of strategic decision making

1. Entrepreneurial mode: (dominant leader, expects
others to follow)

2. Adaptive mode: (Strategy formulation is not a regular and

continuous process. Reactive decisions)

3. Planning mode: (Made in very formalized and rational way) 4. Logical instrumentalism: (Uses combination of all of these

Meaning of strategic management

Art & science of formulating, implementing, and evaluating crossfunctional decisions that enable an organization to achieve its objectives. -Fred David

Fig: Process of Strategic of Strategic Management

Environmen tal Scanning

Strategy Formulation

Strategy Implementation

Evaluation and Control


Components of strategic management

Strategic planning Strategy implementation Strategic control

Strategic planning
The process of strategic planning involves: a) Identification of organizations, mission, objectives and strategies b) Review of environmental forces c) Identify opportunities and threats d) Analyze the organizations opportunities and threats e) Identify strength and weakness

Strategic Implementation

Strategic Control

Strategic Plan
Mission Objectives Strategies

Characteristics of a Mission Statement

Defines current business activities Highlights boundaries of current business Conveys
Who we are, What we do, and Where we are now

Company specific, not generic so as to give a company its own identity A companys mission is not to make a profit !
The real mission is alwaysWhat will we do to make a profit?

What is a Company Mission?

The fundamental purpose that sets a firm apart from other firms of its type and identifies the scope of its operations in product and market terms

Characteristics of a Mission Statement

Embodies the business philosophy of the firms strategic decision makers Implies image firm seeks to project Reflects firms self-concept Indicates firms principal product or service areas primary customer needs the firm will attempt to satisfy

Questions Addressed By a Mission Statement

Why is this firm in business? What are our economic goals? What is our operating philosophy in terms of quality, company image, and self-concept? What are our core competencies and competitive advantages? What customers do and can we serve? How do we view our responsibilities to stockholders, employees, communities, environment, social issues, competitors?

Components of a Mission Statement

Specifies basic type of product or service to be offered Identifies primary market or customer groups to be served Specifies the technology to be used in production or delivery Reflects the firms fundamental concern for survival through growth and profitability Reflects the firms managerial philosophy Identifies the public image the firm seeks Specifies the self-concept those affiliated with the firm should have of it

Ex 2-2: Practical Examples of Mission Statement Components

To anticipate and meet market needs of farmers, ranchers, and rural communities within North America (CENEX)

AMAXs principal products are molybdenum, coal, iron ore, copper, lead, zinc, petroleum and natural gas,. potash phosphates, nickel, tungsten, silver, gold, and magnesium

Ex 2-2 (contd.)
Geographic domain
We are dedicated to total success of Corning Glass Works as a worldwide competitor

The common technology in these areas relates to discrete particle coatings (NASHUA)

Concern for Survival

In this respect, the company will conduct its operations prudently, and will provide the profits and growth which will assure Hoovers ultimate success

Ex 2-2 (contd.)
Philosophy We are committed to improve health care throughout the world (Baxter Travenol) Self-concept Hoover Universal is a diversified, multi-industry corporation with strong manufacturing capabilities, entrepreneurial policies, and individual business unit autonomy Concern for Public Image
We are responsible to the communities in which we live and work and to the world community as well (Johnson & Johnson)

Newest Trends in Mission Components Sensitivity to customer wants

The customer is our top priority! Emphasis on extensive product safety programs

Concern for quality

Quality is job one! Emphasis on quality in manufacturing New philosophy quality is the norm

Newest Trends in Mission Components Statements of company vision

Developed to express the aspirations of the executive leadership Presents the firms strategic intent A computer on every desk, and in every home, running on Microsoft software

Business Mission: Cardinal Health

Cardinal Health is a leading provider of services supporting health care worldwide. The company offers a broad array of services for health-care providers and manufacturers to help them improve the efficiency and quality of health care. These services include pharmaceutical distribution, health-care product manufacturing and distribution, drug delivery systems development, . . . , retail pharmacy franchising, and health-care information systems development.

Business Mission:
JDS Uniphase is the leading provider of advanced fiber optic components and modules.
These products are sold to the worlds leading telecommunications and cable television system providers . Our products perform both optical-only functions and optoelectronic functions within fiber option networks.

Our products include semiconductor lasers, . . . , and isolators for fiber optic applications.
In addition, we design, manufacture, and market laser subsystems for a broad range of OEM applications, which include . . .

Business Mission: Russell Corp.

Russell Corporation is a vertically integrated international designer, manufacturer, and marketer of athletic uniforms, . . . , and a comprehensive line of lightweight, yarn-dyed woven fabrics. The Companys manufacturing operations include the entire process of converting raw fibers into finished apparel and fabrics. Products are marketed to sporting goods dealers, department and specialty stores, mass merchandisers, . . . ,and other apparel manufacturers.

Narrow enough to specify real arena of interest

Serve as Boundary for what to do and not do

Broad or Narrow Mission Statements?

Beacon of where top management intends to take firm

Diversified companies have broader business definitions than single-business enterprises

Broad Definition

Definitions: Broad vs. Narrow Scope

Wrought-iron lawn furniture Long-distance telephone service Soft drinks Overnight package delivery Caribbean cruises

Narrow Definition

Beverages Global mail delivery Travel & tourism

Business Mission: The McGraw Hill Companies (a diversified firm)

The McGraw-Hill Companies is a global publishing, financial, information and media services company with such renowned brands as Standard & Poors, Business Week, and McGraw-Hill educational and professional materials. The Company provides information via various media platforms: books, magazines and newsletters; on-line; via television, satellite and FM sideband broadcast; and software, videotape, facsimile and CD-ROM products. The Company now creates more than 90 % of its information on digital platforms and its business units are represented on more than 75 Web sites.

Business Mission: FDX Corporation

(a diversified firm)
FDX is composed of a powerful family of companies: FedEx, RPS, Viking Freight, FDX Global Logistics and Roberts Express. These companies offer logistics and distribution solutions on a regional, national and global scale: fast, reliable, time-definite express delivery; . . . expedited same-day delivery; . . . ; and integrated information and logistics solutions With all this expertise under one umbrella, the FDX companies can provide businesses with the competitive advantage they need by providing streamlined solutions that are on the cutting edge of technology.

Managerial Value of a Well-Conceived Strategic Vision and Mission

Crystallizes long-term direction Reduces risk of rudderless decision-making Conveys organizational purpose and identity Keeps direction-related actions of lower-level managers on common path Helps organization prepare for the future

Setting Objectives
Second Direction-Setting Task

Represent commitment to achieve specific performance targets by a certain time Should be stated in quantifiable terms and contain a deadline for achievement

Spell-out how much of what kind of performance by when

Substitutes results-oriented decision-making for aimlessness over what to accomplish

Provides a set of benchmarks for judging organizational performance

Purpose of Objective-Setting

Short-Range Versus Long-Range Objectives

Short-Range objectives
Targets to be achieved soon Serve as stair steps for reaching longrange performance

Long-Range objectives
Targets to be achieved within years 3 to 5

Prompt actions now that will permit reaching targeted long-range performance later

Objectives Are Needed at All Levels

Objective-setting process is top-down, not bottom-up! 1. First, establish organization-wide objectives and performance targets

2. Next, set business and objectives

3. Then, establish functional departmental objectives

product line

4. Individual objectives are established last

Strategic Management Principle

Objective-setting needs to be more of a topdown than a bottom-up process in order to

guide lower-level managers and

organizational units toward outcomes that

support the achievement of overall business

and company objectives.

Two Types of Objectives Are Required

Financial Objectives
Outcomes that improve a firms financial performance

Strategic Objectives
Outcomes that strengthen a firms competitiveness and long-term market position

Examples: Financial Objectives

Achieve revenue growth of 10% per year Increase earnings by 15% annually Increase dividends per share by 5% per year Increase net profit margins from 2% to 4% Attractive EVA performance Stronger bond and credit ratings A rising stock price (outperform the S&P 500) Attractive increases in MVA Recognition as a blue chip company A more diversified revenue base

Examples: Strategic Objectives

A bigger market share Quicker design-to-market times than rivals Higher product quality than rivals Lower costs relative to key competitors Broader product line than rivals Better e-commerce and Internet sales capabilities than rivals Better customer service than rivals Recognition as a leader in technology Wider geographic coverage than rivals

Strategic or Financial Objectives -Which Take Precedence?

Pressures for better short-term financial performance become pronounced when Firm is struggling financially Resource commitments for new strategic initiatives may hurt bottom-line for several years Proposed strategic moves are risky Otherwise strategic objectives merit top prioritya firm that consistently passes up opportunities to strengthen its long-term competitive position Risks diluting its competitiveness Risks losing momentum in its markets Hurts its ability to fend off rivals challenges

Third Direction-Setting Task

An organizations strategy deals with How to make the strategic vision a reality and achieve target objectives The game plan for Pleasing customers Conducting operations Building a sustainable competitive advantage Strategy constitutes managements business model for producing good profitability

Strategizing Involves HOW To Achieve performance.targets ..

Our game plan for running the company will be ...

Out-compete rivals and achieve a sustainable competitive advantage Respond to changing market conditions and new customer requirements
Make the strategic vision a reality

Characteristics of Strategy-Making
Strategy is action-oriented Strategy evolves over time Strategy-making is a neverending, ongoing task

Rule-Breaking Strategies
Challenge fundamental conventions by
Reconceiving a product or service
(Creating a single-use disposable camera)

Redefining the marketplace

(Detouring retailers by selling online at the companys website)

Redrawing industry boundaries

(Getting credit cards from Shell Oil or General Motors or AOL)

Figure 2.1: Levels of Strategy-Making in a Diversified Company (PYRAMID)

Corporate-Level Managers

Corporate Strategy
Two-Way Influence

Business-Level Managers

Business Strategies
Two-Way Influence

Functional Managers

Functional Strategies
Two-Way Influence

Operating Managers

Operating Strategies

Figure 2-1: Levels of Strategy-Making in a Single-Business Company (PYRAMID)

Executive-Level Managers

Business Strategy
Two-Way Influence

Functional Managers

Functional Strategies
Two-Way Influence

Operating Managers

Operating Strategies

Figure 2.2: Corporate Strategy for a Diversified Company

Narrow or broad-based diversification Approach to capital allocation Is diversification related, unrelated or a mix?

Efforts to capture cross-business strategic fits

Corporate Strategy

Scope of geographic operations

Moves to divest weak business units

Moves to build positions in new industries

Moves to add new new businesses

Tasks of Corporate Strategy

Moves to achieve diversification

Actions to boost performance of individual businesses

Capturing valuable cross-business strategic fits that result in 1 + 1 = 3 effects! Establishing investment priorities and steering corporate resources into the most attractive businesses

Figure 2.3: Identifying the Components of a Single-Business Companys Strategy

Planned, proactive moves to outcompete rivals Efforts to build competitive advantage Responses to changing conditions

R&D strategy Supply chain management strategy Collaborative Manufacturing partnerships and strategy Marketing strategic alliances strategy Finance strategy Human resources strategy

Business Strategy

Scope of geographic coverage

What Business Strategy Involves

Forming responses to changes in industry and competitive conditions, buyer needs and preferences, economy, regulations, etc. Crafting competitive moves to produce sustainable competitive advantage Building competitively valuable capabilities competencies and

Uniting strategic initiatives of functional areas

Addressing strategic issues facing the company

Functional Strategies

Game plan for a strategically-relevant function, activity, or business process Details how key activities be managed will

Provide support for business strategy Specify how functional objectives are to be achieved

Operating Strategies
Concern narrower strategies for managing grassroots activities and strategicallyrelevant operating units

Add detail to business and functional strategies

Example: Operating Strategy

Improving Delivery & Order-Filling

Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones of its customer service approach. Warehouse manager took following approaches:

Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item
Staffing strategy of maintaining workforce capability to ship any order within 24 hours

Example: Operating Strategy

Boosting Worker Productivity

To boost productivity by 10%, managers of firm with low-price, high-volume strategy take following actions:
Recruitment manager develops selection process designed to weed out all but best-qualified candidates Information systems manager devises way to use technology to boost productivity of office workers Compensation manager devises improved incentive compensation plan Purchasing manager obtains new efficiency-increasing tools and equipment

Uniting the Companys Strategy-Making Effort

A companys strategy is a collection of strategies and initiatives being acted on by managers at various organizational levels Separate levels of strategy must be unified into a cohesive, company-wide action plan Pieces of strategy should fit together like the pieces of a puzzle

Figure 2.4: Networking of Missions, Objectives, and Strategies

Corporate-wide Level 1 Strategic Corporate-Level Vision Managers Two-Way Influence Corporate Level Objectives
Two-Way Influence

Corporate Level Strategy

Two-Way Influence

Level 2 Business-Level Managers Level 3

Business Level Strategic Vision

Two-Way Influence

Business Level Objectives

Two-Way Influence

Business Level Strategies

Two-Way Influence

Functional Managers Level 4 Plant Managers, Lower-Level Supervisors

Functional Missions
Two-Way Influence

Functional Objectives
Two-Way Influence

Functional Strategies
Two-Way Influence

Operating Missions

Operating Objectives

Operating Strategies

Role of CEO in strategic management

Role in strategic formulation Role in strategy implementation

Role in strategy formulaiton

Define and provide long term direction to the firm Work as a bridge between the board of directors and business managers Allow managers from all levels to participate in decision making

Role in implementing strategy

Provide guidelines to the entire organization Make managers and organizational members more responsive to environmental change Help to unify the organization Create more proactive management posture Promote development of business models to enhance bottom line success for the firm Provide managers with a rationale for evaluating competing budget requests.