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CHAPTER 1

Basic Concepts
of Strategic
Management
STRATEGIC MANAGEMENT & BUSINESS POLICY
11TH EDITION
THOMAS L. WHEELEN

Prentice Hall, Inc. 2009

J. DAVID HUNGER

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Learning Objective
After finishing this chapter, you should be able to
Understand the benefits of strategic management,
Explain how globalization and e-commerce influence strategic
management,
Understand the basic model of strategic management,
Identify some triggering events that act as stimuli for strategic
change,
Understand strategic management decision making modes,
Use the strategic audit as a method of analyzing corporate functions
and activities.

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Basic Concepts of Strategic Management

Globalization
Internationalization of markets and corporations
Global (worldwide) markets rather than national
markets

Electronic Commerce
Use of the Internet to conduct business
transactions
Basis for competition on a more strategic level rather
than traditional focus on product features and costs

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Basic Concepts of Strategic Management

Electronic Commerce -- Trends

Forcing company transformation


Market access & branding changing
disintermediation of traditional
distribution channels
Balance of power shift to consumer
Competition changing

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Basic Concepts of Strategic Management

Electronic Commerce -- Trends

Pace\speed of business increasing


Internet purchasing beyond traditional
boundaries
Knowledge key asset source of
competitive advantage

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Strategic Management Defined

Set of managerial decisions and actions


that determines the long-run performance
of a firm.
It includes environmental scanning,
strategy formulation, strategy
implementation, and evaluation and
control.

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Strategic Management Defined


Strategic management is the process by
which managers set an organizations (or
several organizations) long-term course,
develop plans in the light of internal and
external circumstances, and undertake
appropriate action to reach those goals.

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Basic Concepts of Strategic Management

4 Phases of Strategic Management


Firms evolve through the following
faces of strategic management.
1. Basic financial planning
2. Forecast-based planning
3. Externally-oriented planning
4. Strategic management

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Strategic management in profit sectors and


non profit sectors
Although strategic management as a
conscious enterprise emerged first in the
private, profit-making sector, managers in
other sectors are beginning to use its
methods to try to improve their
effectiveness.

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Strategic Management and research


As a self-identified area of inquiry, strategic management
is still young. The first major conference devoted to the
subject was only held in 1977 at the University of
Pittsburgh. The Strategic Management Journal and the
Journal of Business Strategy each published their first
issue three years later. Michael Porters landmark study,
Competitive Strategy, appeared in 1980. The Academy
of Management, the professional association of business
school teachers, organized its Business Policy and
Strategy division at around the same time.

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Basic Concepts of Strategic Management

1.
2.
3.
4.

Basic financial planning: initiate some


planning when they requested to set up their
budgets; considers activities for one year.
Forecast-based planning: consider projects
for more than a year. The time horizon is
usually 3-5 years.
Externally-oriented planning: conduct
strategic planning by top management and
they leave implementation to low level.
Strategic management: planning by forming
a team from all levels in the company.

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Benefits of Strategic
Management
Research has revealed that organizations that engage in
strategic management generally outperform those that
do not. The attainment of an appropriate match, or fit,
between an organizations environment and strategy,
structure, and processes has positive effects on the
organization's performance. For example, studies of the
impact of deregulation on The U.S. railroad and trucking
industries found that companies that changed their
structures as their environment changed outperformed
companies that did not.

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Basic Concepts of Strategic Management

Highly Rated Benefits


A survey of nearly 50 corporations in a variety of
countries and industries found the three most
highly rated benefits of strategic management
to be:

Clearer sense of strategic vision


Sharper focus on strategic importance
Improved understanding of changing
environment

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Basic Concepts of Strategic Management

Not Always a Formal Process

Where is the organization now? (not


where do we hope it is)
If no changes are made, where will the
organization be in 1,2,5 or 10 years?
What specific actions should
management undertake?
What are the risks and payoffs?

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Basic Concepts of Strategic Management

Basic Elements of the Strategic


Management Process

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Environmental Scanning Defined

Monitoring, evaluation, and disseminating


information from external and internal
environments to key people in the firm

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Basic Concepts of Strategic Management

Environmental
Variables

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SWOT Analysis
SWOT is an acronym used to describe the
particular strengths, weaknesses, opportunities,
and threats, that are strategic factors for a
specific company.
The external environment consists of variables
(OT)that are outside the organization and not
typically within the short run control of top
management. These variables from the context
within which the corporation exists
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SWOT Analysis
The internal environment of a corporation
consists of variable(SW) that are within the
organization itself and are not usually within the
short run control of top management. These
variables from the context in which work is done.
They include the corporations structure, culture,
and resources, key strengths from a set of core
competencies that the corporation can use to
gain competitive advantage
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Environmental Scanning

SWOT Analysis

Strengths Weaknesses

Opportunities - Threats

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Strategy Formulation
Formulation is the development of longrange plans for the effective management
of environmental opportunities and
threats, in light of corporate strengths and
weaknesses (SWOT). It includes defining
the corporate mission, specifying
achievable objectives, developing
strategies, and setting policy guidelines.
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Mission statement
An organizations mission statement is the
purpose or reason for the organizations
existence. It tells what the company is
providing to society.

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Strategy Formulation

Mission Statement

Purpose/reason for organization


Promotes shared expectations
Communicates public image
Who we are; what we do; what we
aspire to

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Objectives
Objectives are the end results of planned activity. They
should be stated as action verbs and tell what is to be
accomplished by when and quantified if possible. The
achievement of corporate objectives should result in the
fulfillment of corporations mission.
The term goal is often used interchangeably with the
term objective. In this book we prefer to differentiate the
two terms. In contrast to an objective, we consider a goal
as an open ended statement of what we want to
accomplish, with no quantification of what is to be
achieved and no time criteria for completion
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Goals and objective


Corporate Goals/Objectives

Profitability (net profit)


Efficiency (low costs.etc)
Growth (increase in total assets, sales, etc)
Resource utilization (ROE, ROI)
Reputation(being considered a top firm
Contributions to employees(employment security, wages,
diversity)
Contributions to society(tax paid, participation in charities)
Market leadership (market share)

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Objective and goals continue


Technological leadership(innovation,
creativity)
Survival (avoiding bankruptcy)
Personal need of top management (using
the firm for personal purposes, such as
providing jobs for relatives)

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Strategy
A strategy of a corporation forms a
comprehensive master plan that states
how the corporation will achieve its
mission and objectives. It maximizes
competitive advantage and minimizes
competitive disadvantage

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Policy
A policy is a broad guideline for decision
making that links the formulation of a
strategy with its implementation.
Companies use policies to make sure that
employees throughout the firm make
decisions and take actions that support
the corporations mission, objectives, and
strategies
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Policies
1. Policies include guidelines, rules, and
procedures established to support efforts to
achieve stated objectives.
2. Policies are most often stated in terms of
management, marketing, finance/accounting,
production/operations, research and
development, and computer information systems
activities.
Examples: smoking policy, recruitment policy
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Strategy implementation
Strategy implementation is a process by which
strategies and policies are put into action
through the development of programs, budgets,
and procedures.
the implementation of strategy directly or
indirectly connects to all facts of management.
Thus it is fundamental to follow a holistic
approach when analyzing and assessing
complex issues of strategy implementation.
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Budgeting and procedures


Budgeting: Is the process of allocating resources to be employed to
achieve objectives.
Budget is a statement of a corporations activities in terms of dollars.
Used in planning and control, a budget lists the detailed cost of each
program. Many corporations demand a certain percentage return on
investment, often called a hurdle rate before management will approve
a new program.
Budget should be directly linked to strategy implementation.
Procedures: Sometimes termed Standard Operating Procedures
(SOP), are a system of sequential steps or techniques that describe in
detail how a particular task or job is to be done. They typically detail the
various activities that must be carried out in order to complete the
corporations program.

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Strategy control and evaluation


Ensure that a company is achieving what
it sets out to accomplish. It compares
performance with desired result and
provides the feed back necessary for
management to evaluate results and take
corrective action, as needed.

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Performance
Performance is the end result of activities, it includes the
outcomes of the strategic management process. The
practice of strategic management is justified in terms of
its ability to improve an organizations performance,
typically measured in terms of profits and return in
investment. For evaluation and control to be effective,
managers must obtain clear, prompt, and unbiased
information from the people below them in the
corporations hierarchy. Using this information, managers
comparing what is actually happening with what was
originally planed in the formulation stage.
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Organizational Adaptation

Organization fit with environment

Theory of population ecology\biology:


org. unable to adapt to changing
conditions.
Institution theory: org. can adapt to
changes.
Strategic choice perspective: not only
adapt to changes but also it can
reshape its environment.
Organizational learning theory:

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Organizational Adaptation

Strategic flexibility

Demands long-term commitment to


development of critical resources

Demands firm become a learning


organization

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Learning Organizations

An organization skilled at creating,


acquiring, and transferring
knowledge and at modifying its
behavior to reflect new knowledge
and insights

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Learning Organizations

4 Chief Activities

Systematic problem solving


New approach experimentation
Learning from experiences
Intra-organization knowledge transfer

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Basic Concepts of Strategic Management

Hierarchy of
Strategy

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levels of strategy\hierarchy
A large corporation tends to have three
levels of strategy (corporate, business,
and functional) which form a hierarchy of
strategy.

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Basic Concepts of Strategic Management

3 Types of Strategy
Corporate strategy
Business strategy
Functional strategy

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Corporate strategy
Describes a companys overall direction in terms of its
general attitude toward growth and the management of
its various businesses and product lines. Corporate
strategies typically fit within the three main categories of
stability, growth, and retrenchment. Staples, for example,
was following a corporate strategy of growth by
diversifying from its base in retailing into the delivery
business.

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Basic Concepts of Strategic Management

Corporate Strategy
Stability
Growth
Retrenchment

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Basic Concepts of Strategic Management

Business Strategy
Competitive strategies
Cooperative strategies

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Basic Concepts of Strategic Management

Functional Strategy
Technological leadership
Technological followership

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Basic Concepts of Strategic Management

Strategic
Decision-Making
Process

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Business strategy
Usually occurs at the business unit or product level, and it emphasizes
improvement of the competitive position of a corporations products or
services in the specific industry or market segment served by that
business unit. Business strategies are grouped into two overall
categories , competitive and cooperative strategies. For example,
staples has used a competitive strategy to differentiate its retail stores
from its competitors by adding services to its stores, such as copying,
UPS shipping, and hiring mobile technicians who can fix computers
and install networks. British airways has followed a cooperative
strategy by forming an alliance with American airlines in order to
provide global service. Cooperative stratgey may thus be used to
support a competitive strategy. Intel, a manufacturer of computer
microprocessors, uses its alliance (cooperative strategy) with
Microsoft to differentiate itself (competitive steategy) from AMD, its
primary competitor.
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Functional strategy
Is the approach taken by a functional area to achieve corporate and
business unit objectives and strategies by maximizing resource
productivity. It is concerned with developing and nurturing a distinctive
competence to provide a company or business unit with a competitive
advantage. Examples of research and development (R&D) functional
strategies are technological followership (imitation of the products of other
companies)and technological leadership (pioneering of an innovation). For
years, Magic Chef had been a successful appliance maker by spending
little on R&D but by quickly imitating the innovations of other competitors.
This has helped the company to keep it costs lower than those of its
competitors and consequently to compete with lower prices. In terms of
marketing pull , the process of spending huge amounts on advertising in
order to create customer demand. This supports P&Gs competitive
strategy of differentiating its products from those of its competitors.

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Strategic Decision Making


Strategic Decisions
Strategic Decision Making

Rare: unusual, no precedent to


follow.
Consequential : require substantial
resources and commitment from all.
Directive: set precedent for future
action.

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Strategic Decision Making

Top managers tend to


use one of four modes
of strategy formulation:
Mintzbergs Modes
Entrepreneurial mode
Adaptive mode
Planning mode
Logical incrementalism

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Mintzbergs Modes
Entrepreneurial mode: the strategy is made by
powerful individual. The focus on opportunities.
Adaptive mode: using reactive solution rather
than proactive.
Planning mode: it uses reactive and proactive
mode. Data gathering and analysis and select
strategies.
Logical incrementalism: strategy is set based on a
series of incremental commitment rather than
through global formulation of total strategies.
This suitable when environment is changing
rapidly.
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Hambrick and Fredrickson Good Strategy

5 Elements of Good Strategy


1.
2.
3.
4.
5.

Arenas
Vehicles
Differentiators
Staging
Economic logic

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