Management. Part II: Planning Ch. 6. Strategic management

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1 Management Part II: Planning Ch. 6. Strategic management Dan C. Lungescu, PhD, assistant professor

2 Course outline Management Part I: Introduction Part II: Planning Part III: Organizing Part IV: Leading Part V: Controlling

3 Part II outline Management Part II: Planning Ch. 5. Organizational goals and plans Ch. 6. Strategic management Ch. 7. Decision making Ch. 8. Managing innovation and change

4 Learning objectives After studying this chapter, you should: Explain the concept of strategic management and differentiate among the three main levels of strategy. Outline the major components of the strategic management process. Describe the role of competitive analysis in strategy formulation and explain the major approaches to such analysis. Enumerate the main generic strategies available at the corporate level. Explain the three major portfolio strategy approaches for use at the corporate level. Describe Porter s competitive strategies for the business level. Explain the role of strategies at the functional level.

5 Chapter 6 outline A. The concept of strategic management B. The competitive analysis C. Corporate-level strategy D. Business-level strategy E. Functional-level strategy

6 A. The concept of strategic management Strategy Large-scale action plan for interacting with the environment in order to achieve long-term goals. Strategic management A process through which managers formulate and implement strategies geared toward optimizing strategic goal achievement, given available environmental and internal conditions. 1. Strategy formulation The process of identifying the mission and strategic goals, conducting competitive analysis, and developing specific strategies. 2. Strategy implementation The process of carrying out strategic plans and maintaining control over how those plans are carried out. Outline» A. The concept of strategic management

7 Strategic management process Strategy formulation Assess environmental factors Strategy implementation Identify current mission and strategic goals Conduct competitive analysis: SWOT Develop specific strategies: Corporate Business Functional Carry out strategic plans Maintain strategic control Assess organizational factors Outline» A. The concept of strategic management» Strategic management process

8 Importance of strategic management Competitive advantage The process helps organizations identify and develop a significant edge over the competition in dealing with competitive forces. Sense of direction Organization members know where to expend their efforts. Innovation Strategic management can help highlight the need for innovation and provide an organized approach for encouraging new ideas related to strategies. Involvement and commitment The process can be used to involve managers at various levels in planning, thus making it more likely that they will understand the resulting plans and be committed to their implementation. Outline» A. The concept of strategic management» Importance of strategic management

9 Levels of strategy 1. Corporate-level strategy Addresses what business the organization will operate, how the strategies of those businesses will be coordinated to strengthen the organization s competitive position, and how resources will be allocated among the businesses. 2. Business-level strategy Concentrates on the best means of competing within a particular business (strategic business unit) while also supporting the corporate-level strategy. Strategic business unit A distinct business, with its own set of competitors, that can be managed relatively independently of other businesses within the organization. 3. Functional-level strategy Focuses on action plans for managing a particular functional area within a business in a way that supports the business-level strategy. Outline» A. The concept of strategic management» Levels of strategy

Levels of strategy (2) Corporate strategy Corporate level

strategy Business level Functional level Operations

strategy Marketing strategy Human resources strategy

10 Levels of strategy (2) Corporate strategy Corporate level Business 1 strategy Business 2 strategy Business 3 strategy Business level Functional level Operations management strategy R & D strategy Financial / accounting strategy Marketing strategy Human resources strategy Outline» A. The concept of strategic management» Levels of strategy (2)

11 B. The competitive analysis SWOT analysis A method of analyzing an organization's competitive situation that involves assessing organizational strengths (S) and weaknesses (W), as well as environmental opportunities (O) and threats (T). Strength An internal characteristic that has the potential of improving the organization s competitive situation. Weakness An internal characteristic that leaves the organization potentially vulnerable to strategic moves by competitors. Opportunity An environmental condition that offers significant prospects for improving an organization s situation relative to competitors. Threat An environmental condition that offers significant prospects for undermining an organization s competitive situation. Outline» B. The competitive analysis

Bargaining power of customers 3. Bargaining power of suppliers 4.

12 Environmental assessment Michael Porter s 5 competitive forces model An approach to analyzing the nature and intensity of competition in a given industry. 1. Rivalry 2. Bargaining power of customers 3. Bargaining power of suppliers 4. Threat of new entrants 5. Threat of substitute products Outline» B. The competitive analysis» Environmental assessment

13 C. Corporate-level strategy The development of corporate-level strategy generally involves: I. Selecting a grand strategy II. Using portfolio strategy approaches I. Grand strategy A master strategy that provides the basic strategic direction at the corporate level. II. Portfolio strategy approach A method of analyzing an organization s mix of businesses in terms of both individual and collective contributions to strategic goals. Outline» C. Corporate-level strategy

14 I. Grand strategies Concentration a. Growth Vertical integration Diversification Grand strategies b. Stability c. Defense Harvest Turnaround Divestiture Bankruptcy Liquidation Outline» C. Corporate-level strategy» I. Grand strategies

15 a. Growth strategies Growth strategies Grand strategies that involve organizational expansion along some major dimensions. 1. Concentration Effecting the growth of a single product or service or a small number of closely related products or services. 2. Vertical integration Effecting growth through the production of inputs previously provided by suppliers (backward integration) or through the replacement of a customer role by disposing of one s own outputs (forward integration). 3. Diversification Effecting growth through the development of new areas that are clearly distinct from current businesses (through acquisition, merger, or joint venture). [types] Outline» C. Corporate-level strategy» I. Grand strategies» a. Growth strategies

16 Diversification Acquisition The purchase of all or part of one organization by another. Merger The combining of two or more companies into one organization. Joint venture Two or more organizations provide resources to support a given project or product offering. Outline» C. Corporate-level strategy» I. Grand strategies» a. Growth strategies» Diversification

17 b. Stability strategies Stability strategy A strategy that involves maintaining the status quo or growing in a methodical, but slow, manner. Outline» C. Corporate-level strategy» I. Grand strategies» b. Stability strategies

18 c. Defensive strategies Defensive strategies Strategies that focus on the desire or need to reduce organizational operations, usually through cost and/or asset reduction. 1. Harvest Minimizing investments while attempting to maximize short-run profits and cash flow, with the long-run intention of exiting the market. 2. Turnaround Reverse a negative trend and restore the organization to appropriate profitability. 3. Divestiture Organization s selling or divesting of a business or part of a business. 4. Bankruptcy An organization unable to pay its debts can seek court protection from creditors and from certain contract obligationswhileitattempts to regain financial stability. 4. Liquidation Selling or dissolving an entire organization. Outline» C. Corporate-level strategy» I. Grand strategies» c. Defensive strategies

19 II. Portfolio strategies Portfolio strategies Help managers determine the types of businesses in which the organization should be engaged. The most frequently used portfolio approaches: 1. BCG growth-share matrix [Boston Consulting Group] 2. GE business screen [General Electric] 2. Product/market evolution matrix Outline» C. Corporate-level strategy» II. Portfolio strategies

1. BCG growth-share matrix stars question marks a select few remainder divested Market growth rate low high cash cows (net users of resources) (net suppliers of resources) dogs The circle: the

20 1. BCG growth-share matrix stars question marks a select few remainder divested Market growth rate low high cash cows (net users of resources) (net suppliers of resources) dogs The circle: the business s percent revenue relative to the revenues generated by other portfolio business. harvested, divested, or liquidated high low Relative competitive position (market share) Outline» C. Corporate-level strategy» II. Portfolio strategies» 1. BCG growth-share matrix

21 2. GE business screen Long-term industry attractiveness low medium high high average low Business strength comparative position High priority for investment Medium priority for investment Low priority for investment The circle: the size is proportional to the size of the industry. The pie slice: the business s market share within the industry. Outline» C. Corporate-level strategy» II. Portfolio strategies» 2. GE business screen

3. Product/market evolution matrix Industry stage in

competitive shakeout maturity saturation decline

position The circle: the size is proportional to the

The pie slice: the business s market share within the

22 3. Product/market evolution matrix Industry stage in the evolutionary life cycle development growth competitive shakeout maturity saturation decline strong average weak Business unit s competitive position The circle: the size is proportional to the size of the industry. The pie slice: the business s market share within the industry. Outline» C. Corporate-level strategy» II. Portfolio strategies» 3. Product/market evolution matrix

23 D. Business-level strategy The best-known approach: Porter s competitive strategies: Cost leadership strategy Involves emphasizing organizational efficiency so that the overall costs of providing products and services are lower than those of competitors. Differentiation strategy Involves attempting to develop products and services that are viewed as unique in the industry. Focus strategy Entails specializing by establishing a position of overall cost leadership, differentiation, or both, but only within a particular portion, or segment, of an entire market. Outline» D. Business-level strategy

Example Under a product differentiation strategy, the R&D department might be called upon to accelerate the innovation process in order to

24 E. Functional-level strategy Functional-level strategies Spell out the specific ways that functional areas can be used to bolster the business-level strategy. Example Under a product differentiation strategy, the R&D department might be called upon to accelerate the innovation process in order to provide new products in advance of the competition, marketing might develop a plan that calls for premium prices, distribution through prestigious locations, and a special promotion scheme aimed at targeted market segments and so forth. Outline» E. Functional-level strategy

25 Dan C. Lungescu, PhD, assistant professor

Lesson 7. Managing Strategy

Lesson 7. Managing Strategy Lesson 7 Managing Strategy Learning Objectives 1. Define strategic management and explain why it s important. 2. Explain what managers do during the six steps of the strategic management process. 3. Describe