Chapter Outline. The importance of strategic management

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1 Chapter 8 Strategic Management Chapter Outline The importance of strategic management Explain why strategic management is important Discuss what studies of the effectiveness of strategic management have shown The strategic management process List the 6 steps in the SM process Describe what managers do when they do external and internal analyses Explain the role of resources, capabilities, and core competences in the internal analysis Copyright McGraw-Hill. All rights reserved

2 Chapter Outline (cont d) Types of organizational strategies Explain the 3 growth strategies Discuss the BCG matrix and how it s s used Define SBUs and business-level strategies Describe the role of competitive advantage in business-level strategies Explain Porter s s five forces model Describe the 3 generic competitive strategies Copyright McGraw-Hill. All rights reserved. 8 3 Chapter Outline (cont d) Strategic management in today s s environment Discuss the implication of dynamic and uncertain environment on organizational strategy Explain the rule of 3 and its significance for strategic management Describe strategies applying e-business e techniques Explain what strategies organizations might use to become more customer oriented and to be more innovative Copyright McGraw-Hill. All rights reserved

3 A manager s s dilemma Copyright McGraw-Hill. All rights reserved. 8 5 The importance of strategic management What is strategic management? Wal-mart & Kmart SM: management that set of managerial decisions and actions that determines the long-run performance of an organization Questions to ask: What changes and trends are occurring Who are our customers What products or services should we offer How can we offer these products or services most efficiently Copyright McGraw-Hill. All rights reserved

4 The importance of strategic management Why is strategic management important? All organizations are composed First, it can make a of difference diverse divisions, in how units, well an organization performs functions, and work activities, all Secondly, organizations these need of to all be types coordinated and sizes to face continually changing achieve situations the organization s goal Next, SM is important because of the nature of organizations Finally, SM is important because it s s involved in many of the decisions that managers make Copyright McGraw-Hill. All rights reserved. 8 7 The strategic management process The SM process is a six-step step process that encompasses strategic planning, implementation, and evaluation Identify the organization s current mission, goals and strategies External analysis opportunities threats SWOT Analysis Internal analysis strengths weaknesses Formulate strategies Evaluate strategies Implement strategies Copyright McGraw-Hill. All rights reserved

5 The strategic management process Step 1: identify the organization s s current mission, objectives, and strategies Every organization needs a mission What is our reason for being in business? Defining the organization s s mission forces managers to carefully identify the scope of its products or services Goals are the foundations of planning It s s important for managers to identify the organization s s current strategies Copyright McGraw-Hill. All rights reserved. 8 9 The strategic management process Step 2: external analysis Analyzing the environment is a critical step in the strategy process Managers need to know What the competition is doing What pending legislation might affect the organization What the labor supply is like in locations it operates The specific and general environments Opportunities: positive trends in external environment Threats: the negative trends in external environment Copyright McGraw-Hill. All rights reserved

6 The strategic management process Step 3: internal analysis From the outside to inside, focusing the organization s resources, such as financial capital, technical expertise Strengths: any activities the organization does well or any unique resources that it has Core competencies Weaknesses: activities the organization does not do well or resources it needs but does not possess The organizational culture: it can promote or hinder the organization s s strategic actions Copyright McGraw-Hill. All rights reserved Organization s opportunities Organization s resources/capabilities Opportunities in the environment Copyright McGraw-Hill. All rights reserved

7 Checklist for for Analyzing Organizational Strengths and Weaknesses Management and Organization Management quality Degree of centralization Organization charts Planning, information, control systems Finance Profit margin Debt-equity ratio Inventory ratio Return on investment Credit rating Marketing Distribution channels Market share Advertising efficiency Customer satisfaction Product quality Service reputation Sales force turnover Production Plant location Machinery obsolescence Purchasing system Quality control Productivity/efficiency Human Resources Employee experience, education Union status Turnover, absenteeism Work satisfaction Grievances Research and Development Basic applied research Laboratory capabilities Research programs New-product innovations Technology innovations Sources: Based on Howard H. Stevenson, Defining Corporate Strengths and Weaknesses, Sloan Management Review 17 (spring 1976), 51-68; and M.L.Kastens, Long-Range Planning for Your Business (New York: American Management Association, 1976). Copyright McGraw-Hill. All rights reserved The strategic management process Step 4: formulating strategies A A set of strategies needs to be established For the corporate level For the business level For the functional level Copyright McGraw-Hill. All rights reserved

8 Planning and Strategy Formulation Figure 8.5 Copyright McGraw-Hill. All rights reserved The strategic management process Step 5: implementing strategies The strategy-culture relationship Human resources Effective team Top management leadership Copyright McGraw-Hill. All rights reserved

9 The strategic management process Step 6: evaluating results How effective have the strategies been? What adjustments, if any, are necessary? Copyright McGraw-Hill. All rights reserved Types of organizational strategies Corporate-Level Strategy: What business are we in? Corporation Business-Level Strategy: How do we compete? Textiles Unit Chemicals Unit Auto Parts Unit Functional-Level Strategy: How do we support the business-level strategy? Finance R&D Manufacturing Marketing Copyright McGraw-Hill. All rights reserved

10 Types of organizational strategies Corporate-level strategy Business-level strategy Functional-level level strategy Copyright McGraw-Hill. All rights reserved The relationship between plans and strategies Figure 8.2 Copyright McGraw-Hill. All rights reserved

11 Corporate-level strategy An organization strategy that seeks to determine what businesses a company should be in or want to be in Pepsi example 33 types Growth strategy: A corporate-level strategy that seeks to increase the organization s s business by expanding the number of products offered or markets served. Stability strategy: A corporate-level strategy characterized by an absence of significant change. Renewal strategy: A corporate-level strategy designed to address organizational weaknesses that are leading to performance declines. Corporate portfolio analysis Copyright McGraw-Hill. All rights reserved Growth strategy Concentration Concentrates on its primary line of business and increase the number of products offered or markets served in the primary business Vertical integration Choose to grow by vertical integration, which is an attempt to gain g control of inputs (backward), outputs (forward), or both Horizontal integration Company grows by combining with other organizations in the same industry Diversification Related diversification: acquiring firms in different but related industries Unrelated diversification: acquiring firms in different and unrelated industries Copyright McGraw-Hill. All rights reserved

12 Concentration Growth Strategy Can become a strong competitor, but can be risky. Diversification Related diversification into similar market areas to build upon existing competencies. Synergy: two divisions working together perform better than the sum of their individual performances. Unrelated diversification is entry into industries unrelated to current business. Attempts to build a portfolio of unrelated firms to reduce risk of single industry; difficulty to manage. Copyright McGraw-Hill. All rights reserved Vertical Integration Growth strategy A A strategy that allows an organization to create value by producing its own inputs or distributing its own products. Backward vertical integration occurs when a firm seeks to reduce its input costs by producing its own inputs. Forward vertical integration occurs when a firm distributes its outputs or products to lower distribution costs and ensure the quality service to customers. A A fully integrated firm faces the risk of bearing the full costs of an industry-wide slowdown. Copyright McGraw-Hill. All rights reserved

13 Stages in in a Vertical Value Chain Figure 8.6 Copyright McGraw-Hill. All rights reserved Stability strategy Examples of stability strategy Continuing to serve the same clients by offering the same product or service Maintaining market share Sustaining the organization s s return-on on-investment results Situations to apply stability strategy One is the industry is in a period of rapid upheaval with external forces drastically changing and making the future uncertain Another is if the industry is facing slow-or or-no-growth opportunities Finally, owners and managers of small businesses often purposefully choose to follow a stability strategy Copyright McGraw-Hill. All rights reserved

14 Renewal strategy Retrenchment strategy It is a short-run run renewal strategy used in situations when performance problems aren t t as serious It helps the company stabilize operations, revitalize organizational resources and capabilities, and prepare to compete once again Turnaround strategy It is a renewal strategy for times when the organization s performance problems are more critical. Copyright McGraw-Hill. All rights reserved Corporate portfolio analysis BCG matrix: developed by the Boston Consulting Group, introduced the idea that an organization s s businesses could be evaluated and plotted using a 2*2 matrix to identify which ones offered high potential and which were a drain on organizational resources Stars Question mark Cash cows Dogs Copyright McGraw-Hill. All rights reserved

15 high rates) Stars Cash cows 转变 question Dogs(anticipated growth 放弃 清算 low high (Market share) low Copyright McGraw-Hill. All rights reserved Business-level strategy An organizational strategy that seeks to determine how an organization should compete in each of its businesses. SBUs:: when an organization is in several different businesses, these single businesses that are independent and formulate their own strategies are often called strategic business units or SBUs. The role of competitive advantage Quality as a competitive advantage Sustaining competitive advantage Competitive advantage Copyright McGraw-Hill. All rights reserved

16 The role of competitive advantage Competitive advantage: what sets an organization apart, its distinct edge Comes from organizational capabilities Comes from organizational assets or resources Copyright McGraw-Hill. All rights reserved Quality as a competitive advantage Quality can be a way for an organization to create a sustainable competitive advantage Quality management focuses on customers and continuous improvement Copyright McGraw-Hill. All rights reserved

17 Sustaining competitive advantage A A sustainable competitive advantage enables the organization to keep its edge-despite despite competitors or evolutionary changes in the industry Copyright McGraw-Hill. All rights reserved Competitive strategies Michael Porter An industry analysis five forces model Select an appropriate competitive strategy Cost leadership strategy Differentiation strategy Focus strategy After doing these, the company is ready to succeed Copyright McGraw-Hill. All rights reserved

18 The Five Forces Model The Threat of Substitute Products The Power of Suppliers The Level of Rivalry Among Organizations in an Industry The Power of Customers The Potential for Entry into an Industry Copyright McGraw-Hill. All rights reserved The Five Forces Competitive Forces Level of Rivalry Potential for Entry Power of Suppliers Power of Customers Substitutes Increased competition results in lower profits. Easy entry leads to lower prices and profits. If there are only a few suppliers of important items, supply costs rise. If there are only a few large buyers, they can bargain down prices. More available substitutes tend to drive down prices and profits. Copyright McGraw-Hill. All rights reserved

19 Porter s s Business-Level Strategies Number of Market Segments Served Strategy Many Few Low-cost Focused low-cost Differentiation Focused differentiation Table 8.2 Copyright McGraw-Hill. All rights reserved Formulating Business-Level Strategies Low-Cost Strategy Driving the organization s s total costs down below the total costs of rivals. Manufacturing at lower costs, reducing waste. Lower costs than competition means that the low cost producer can sell for less and still be profitable. Differentiation Offering products different from those of competitors. Differentiation must be valued by the customer in order for a producer to charge more for a product. Copyright McGraw-Hill. All rights reserved

20 Formulating Business-Level Strategies Stuck in the Middle Attempting to simultaneously pursue both a low cost strategy and a differentiation strategy. Difficult to achieve low cost with the added costs of differentiation. Focused Low-Cost Serving only one market segment and being the lowest-cost organization serving that segment. Focused Differentiation Serving only one market segment as the most differentiated organization serving that segment. Copyright McGraw-Hill. All rights reserved The competitive strategy Cost leadership strategy A A business-level strategy in which the organization is the lower-cost producer in its industry A A low-cost leader searches out Efficiencies in production Marketing Other areas of operation Copyright McGraw-Hill. All rights reserved

21 The competitive strategy Differentiation strategy a business-level strategy in which a company offers unique products that are widely valued by customers Sources High quality extraordinary service innovative design technological capability unusually positive brand image Copyright McGraw-Hill. All rights reserved Focus strategy The competitive strategy A A business-level strategy in which a company pursues a cost or differentiation advantage in a narrow industry segment Research suggests that the focus strategy may be the most effective choice for small businesses Stuck in the middle A situation where an organization hasn t t been able to develop either a low cost or a differentiation competitive advantage Copyright McGraw-Hill. All rights reserved

22 Functional-level level strategy An organizational strategy that supports the business- level strategy Manufacturing Marketing Human resources Research and development Finance Copyright McGraw-Hill. All rights reserved Functional-level level Strategies A plan that indicates how a function intends to achieve its goals Seeks to have each department add value to a good or service. Marketing, service, and production functions can all add value to a good or service through: Lowering the costs of providing the value in products. Adding new value to the product by differentiating. Functional strategies must fit with business level strategies. Copyright McGraw-Hill. All rights reserved

23 Goals for Successful Functional Strategies 1. Attain superior efficiency as a measure of outputs for a given unit of input. 2. Attain superior quality by producing reliable products that do their intended job. 3. Attain superior innovation developing new and novel features that can be added to the product or process. 4. Attain superior responsiveness to customers by acknowledging their needs and fulfilling them. Copyright McGraw-Hill. All rights reserved Plans and strategies Copyright McGraw-Hill. All rights reserved

24 Corporate-Level Plan Corporate level Top management s s decisions pertaining to the organization s s mission, overall strategy, and structure. Provides a framework for all other planning. Corporate-Level Strategy A A plan that indicates in which industries and national markets an organization intends to compete. Copyright McGraw-Hill. All rights reserved Business-Level Plan: business level Divisional managers decisions pertaining to divisions long-term goals overall strategy, and structure. Identifies how the business will meet corporate goals. Business-Level Strategy A A plan that indicates how a division intends to compete against its rivals in an industry Shows how the business will compete in market. Copyright McGraw-Hill. All rights reserved

25 Functional-Level Plan Functional level Functional managers decisions pertaining to the goals that they propose to pursue to help the division attain its business-level goals. Functional Strategy A A plan that indicates how a function intends to achieve its goals. Copyright McGraw-Hill. All rights reserved Strategic management in today s environment The rule of 3 Competitive forces in an industry, if kept relatively free of government interference or other special circumstances, will inevitably create a situation where 3 companies dominate any given market The corresponding strategies P196 Copyright McGraw-Hill. All rights reserved

26 Strategic management in today s environment New directions in organizational strategies Strategies for applying e-business e techniques A cost leader can use e-business e techniques to reduce costs in a variety of ways A differentiator needs to offer products or services that customers perceive and value as unique Also the focus strategy Customer service strategies Innovation strategies Copyright McGraw-Hill. All rights reserved