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Chapter 1

Strategic Management

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Chapter Topics

• The Nature and Value of Strategic


Management
• Dimensions of Strategic Decisions
• Formality in Strategic Management
• Benefits of Strategic Management
• Risks of Strategic Management
• The Strategic Management Process
• Components of the Strategic Management Model
• Strategic Management as a Process

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What is Strategic Management?

The set of decisions and actions that result


in the formulation and implementation of
plans designed to achieve a company’s
objectives.

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Critical Tasks of Strategic Management

1. Formulate the company’s mission


2. Conduct internal analysis
3. Assess the company’s external environment
4. Analyze company’s options
5. Identify most desirable options
6. Select long-term objectives and grand strategies
7. Develop annual objectives and short-term strategi
8. Implement the strategic choices
9. Evaluate success of the strategic process

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What is Strategy?

• Large-scale, future-oriented plan for


interacting with the competitive
environment to achieve objectives
• Company’s “game plan”
• Framework for managerial decisions

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Dimensions of Strategic Decisions

• Strategic issues
• Require top-management decisions
• Require large amounts of the firm’s resources
• Often affect the firm’s long-term prosperity
• Are future oriented
• Usually have multifunctional or multibusiness
consequences
• Require considering the firm’s external
environment

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Three Levels of Strategy

1. Corporate level
2. Business level
3. Functional level

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Exhibit 1-3: Single-business Firms

Corporate/
business level

Functional Level
POM/R&D Financial/ Marketing Human
strategies accounting strategies relations
strategies strategies

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Ex 1-3: Multiple business Firms

Corporate
strategies

Business Level
Business 2 Business 3
Business 1

Financial/ Human
POM/R&D Marketing

Functional Level
accounting relations
strategies strategies
strategies strategies

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Ex 1-4: Hierarchy of Objectives and Strategies

Strategic Decision Makers

Ends Means Board of Corporate Business Functional


(What is to be (How is to be achieved) Directors Managers Managers Managers
achieved)
Mission, including
Goals and
philosophy   
Long-term
objectives
Grand strategy   
Annual objectives Short-term strategies
and policies
  

Note:  indicates a principal responsibility;  indicates a secondary responsibility

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Characteristics of Strategic Management


Decisions

Greater risk,cost,
and profit potential

Corporate-level Greater need for


decisions flexibility

Longer time horizons

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Characteristics of Strategic Management


Decisions (contd.)

Implement overall strategy

Involve action-oriented
Functional- operational issues
level
decisions Are relatively short range
and low risk

Incur only modest costs

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Characteristics of Strategic Management


Decisions (contd.)
Bridge decisions at
corporate and functional
levels

Are less costly, risky, and


Business-level potentially profitable than
decisions corporate-level decisions

Are more costly, risky, and


potentially profitable than
functional-level decisions

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Formality in Strategic Management

• Definition
• Degree to which participants, responsibilities,
authority, and discretion in decision making are
specified
• Forces affecting degree of formality
• Size of organization
• Predominant management styles
• Complexity of environment
• Production process
• Problems
• Purpose of planning system

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The Strategy Makers


• The ideal strategic management team
includes
• Chief executive officer (CEO)
• Product managers
• Heads of functional areas
• The strategic management team obtains
input from
• Planning staff
• Lower-level management and supervisors
• Role of CEO
• Provides long-term direction
• Assumes ultimate responsibility for firm’s success
• Solicits guidance from Board of Directors

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Benefits of Strategic Management

Enhances the firm’s ability to prevent problems


Emphasizes group-based strategic decisions likely to be based on
best available alternatives
Improves employees’ understanding of the productivity-reward
relationship
Reduces gaps/overlaps in activities among employees as their
participation clarifies differences in roles

Resistance to change is reduced

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Risks of Strategic Management


• Time involved may negatively impact
operational responsibilities of
managers
• Lack of involvement of strategy
makers in strategy implementation
may result in shirking of responsibility
for strategic decisions
• Potential disappointment of employees
over unattained expectations requires
managerial time and training

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Ex 1-6:
Strategic
Company mission
Management
and social
Process
responsibility

Possible?
External
Internal analysis
environment
Desired?

Strategic analysis and choice

Long-term
Generic and grand strategies
objectives

Short-term objectives; Policies that


Functional tactics
reward systems empower action

Restructuring, reengineering
and refocusing the organization
Legend Strategic control and
Major impact continuous improvement
Minor impact

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Components of the Strategic


Management Model
• Company Mission
• Specifies unique purpose of company
• Identifies scope of operations
• Describes product, market, and technological areas
of emphasis
• Reflects values and priorities of decision makers
• Expresses approach to social responsibility efforts
• Internal Analysis
• Depicts quantity and quality of company’s
financial, human, and physical resources
• Assesses company’s strengths and weaknesses
• Contrasts past successes and concerns with current
capabilities to identify future capabilities

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Components of the Strategic


Management Model (contd.)
• External Environment
• Consists of all conditions and forces affecting
firm’s strategic options and define its competitive
situation
• Includes three interactive segments – remote,
industry, and operating environments
• Strategic Analysis and Choice
• Involves simultaneous assessment of external
environment and company profile
• Incorporates screening process based on mission
to generate possible and desired opportunities
• Results in selection of options from which a
strategic choice is made

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Components of the Strategic


Management Model (contd.)

• Long-term Objectives
 Profitability
 Return on investment
 Competitive position
 Technological leadership
 Productivity
 Employee relations
 Public responsibility
 Employee development

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Components of the Strategic


Management Model (contd.)

• Generic Strategies
• Low cost
• Differentiation
• Focus
• Grand Strategies
• Comprehensive, general plan of major
actions through which the firm intends to
achieve its long-term objectives in a
dynamic environment

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Components of the Strategic


Management Model (contd.)

• Action Plans and Short-Term Objectives


• Translate generic and grand strategies into
“action”
• Identify specific functional tactics to be taken in the
near term
• Establish a clear time frame for completion
• Creates accountability
• Specify one or more immediate objectives as
outcomes of the action

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Components of the Strategic


Management Model (contd.)
• Functional Tactics
• Involve identifying activities unique to the
function to help build competitive advantage
• Specify detailed statements of “means” to be used
to achieve short-term objectives
• Policies that Empower Action
• Include broad, precedent-setting decisions that
substitute for repetitive or time-sensitive decision
making
• Often increase managerial effectiveness by
empowering discretion of subordinates in
implementing strategies

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Components of the Strategic


Management Model (contd.)

• Restructuring, Reengineering, and


Refocusing the Organization
• Involves an internal focus – getting work done
efficiently and effectively to make the strategy
work
• Downsizing, restructuring and reengineering
reflect the critical stage in strategy implementation
wherein managers attempt to recast their
organization.

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Components of the Strategic


Management Model (contd.)
• Strategic Control and Continuous
Improvement
• Control
• Tracks a strategy during implementation
• Detects problems
• Involves making necessary adjustments
• Continuous improvement
• Provides another approach to strategic control
• Allows an organization to respond more proactively
and timely to rapid developments

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Implications of Viewing Strategic


Management as a Process
 Changes in any one component will
affect other components
 Strategy formulation and
implementation are sequential
 Necessity of feedback from
institutionalization, review, and
evaluation to early stages of process
 Need to regard it as dynamic,
involving constant changes in
interdependent strategic activities

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.