Strategic Management

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Strategic Management

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Title: Strategic Management


1
Strategic Management
  • Chapter 1

2
Dimensions of Strategic Decisions
  • Strategic issues require top-management decisions
  • Strategic issues require large amounts of the
    firms resources
  • Strategic issues often affect the firms
    long-term prosperity
  • Strategic issues are future oriented
  • Strategic issues usually have multifunctional or
    multibusiness consequences
  • Strategic issues require considering the firms
    external environment

3
Three Levels of Strategy
  • Corporate level board of directors, CEO
    administration Highest
  • Business level business and corporate managers
    Middle
  • Functional level Product, geographic, and
    functional area managers Lowest

4
Characteristics of Strategic Management
Decisions Corporate
  • Often carry greater risk, cost, and profit
    potential
  • Greater need for flexibility
  • Longer time horizons
  • Choice of businesses, dividend policies, sources
    of long-term financing, and priorities for growth

5
Characteristics of Strategic Management
Decisions Business
  • Help bridge decisions at the corporate and
    functional levels
  • Less costly, risky, and potentially profitable
    than corporate-level decisions
  • More costly, risky, and potentially profitable
    than functional-level decisions
  • Include decisions on plant location, marketing
    segmentation, and distribution

6
Characteristics of Strategic Management
Decisions Functional
  • Implement the overall strategy formulated at the
    corporate and business levels
  • Involve action-oriented operational issues
  • Relatively short range and low risk
  • Modest costs depend upon available resources
  • Relatively concrete and quantifiable

7
Company Mission
  • Chapter 2

8
Four Essential Components
  • Basic Product or Service
  • Primary Market--WHO
  • Where
  • Financial position

9
Primary Company Goals
  • Survival A firm that cant survive cant
    satisfy its stakeholders. (Often taken for
    granted)
  • Profitability the mainstay goal of a business.
  • Growth is tied to survival and profitability.
    Broadly defined in terms of market share, etc.

10
Company PhilosophyBULLETS
  • Covers
  • Stakeholders
  • Customers
  • Employees
  • Management
  • Stockholders
  • Suppliers
  • Community
  • Social responsibility
  • Taxes
  • Environmental protection

11
Agency Theory
  • Agency theory --based on the belief that the
    separation of the ownership from management
    creates a situation where managers will spend the
    stockholders money in ways they would not spend
    their own.

12
Agency Costs
  • The cost of agency problems plus the cost of
    actions taken to minimize agency problems are
    collectively termed agency costs.

13
How Agency Problems Occur
  • Moral hazard problem--Executives have
    disproportionate access to company information.
  • Adverse selection--a problem caused by the
    limited ability of stockholders to determine the
    competencies and priorities of executives they
    hire.

14
Problems Resulting from Agency
  • Executives pursue growth in company size rather
    than earnings
  • Executives attempt to diversify their corporate
    risk
  • Executives avoid healthy risk
  • Managers act to optimize their personal payoffs
  • Executives protect their status

15
Solutions to Agency Problem
  • Owners pay executives a premium for their service
    to increase loyalty
  • Executives receive back-loaded compensation.
  • Creating teams of executives across different
    units of a corporation can help to focus
    performance measures on organizational rather
    than personal goals.

16
Aligning Executive Interests with Owner Interests
  • Stock Option Plans
  • Bonus plans
  • Incentives for Long-Term Performance

17
Corporate Social Responsibility and Business
Ethics
  • Chapter 3

18
Dynamics of Social Responsibility
  • Inside vs. Outside Stakeholders
  • Duty to serve society plus duty to serve
    stockholders
  • Flexibility is key
  • Firms differ along
  • Competitive Position
  • Industry
  • Country
  • Environmental Pressures
  • Ecological Pressures

19
Types of Social Responsibility
  • Economic the duty of managers, as agents of the
    company owners, to maximize stockholder wealth
  • Legal the firms obligations to comply with the
    laws that regulate business activities
  • Ethical the companys notion of right and
    proper business behavior.
  • Discretionary voluntarily assumed by a business
    organization.

20
Corporate Social Responsibility Profitability
  • Corporate social responsibility (CSR), is the
    idea that business has a duty to serve society in
    general as well as the financial interests of
    stockholders.
  • The dynamic between CSR and success (profit) is
    complex. They are not mutually exclusive, and
    they are not prerequisites of each other.
  • Better to view CSR as a component in the
    decision-making process of business that must
    determine, among other objectives, how to
    maximize profits.

21
Factors Complicating a Cost-Benefit Analysis of
CSR
  1. Some CSR activities incur no dollar costs at all.
    In fact, the benefits from philanthropy can be
    huge.
  2. Socially responsible behavior does not come at a
    prohibitive cost.
  3. Socially responsible practices may create
    savings, and, as a result, increase profits.
  4. Proponents argue that CSR costs are more than
    offset in the long run by an improved company
    image and increased community goodwill.

22
Sarbanes-Oxley Act of 2002
  • CEO and CFO must certify every report containing
    companys financial statements
  • Restricted corporate control of executives,
    acting, firms, auditing committees, and attorneys
  • Specifies duties of registered public acting
    firms that conduct audits
  • Composition of the audit committee and specific
    responsibilities
  • Rules for attorney conduct
  • Disclosure periods are stipulated
  • Stricter penalties for violations

23
New Corporate Governance Structure
  • Restructuring governance structure in American
    corporations
  • Heightened role of corporate internal auditors
  • Auditors now routinely deal directly with top
    corporate officials
  • CEO information provided directly by the
    companys chief compliance and chief accounting
    officers

24
Social Audit
  • A social audit is an attempt to measure a
    companys actual social performance against its
    social objectives.
  • The social audit may be used for more than simply
    monitoring and evaluating firm social
    performance.

25
Management Ethics
  • The Nature of Ethics in Business
  • Belief that managers will behave in an ethical
    manner is central to CSR
  • Ethics the moral principles that reflect
    societys beliefs about the actions of an
    individual or a group that are right and wrong
  • Ethical standards reflect the end product of a
    process of defining and clarifying the nature and
    content of human interaction

26
3 BASIC Approaches to Questions of Ethics
  • Utilitarian Approach
  • Moral Rights Approach
  • Social Justice Approach

27
The External Environment
  • Chapter 4

28
External Environment
  • The factors beyond the control of the firm that
    influence its choice of direction and action,
    organizational structure, and internal processes

29
Remote Environment
  • Economic Factors
  • Social Factors
  • Political Factors
  • Technological Factors
  • Ecological Factors

30
Economic Factors
  • Prime interest rates
  • Inflation rates
  • Trends in the growth of the gross national
    product
  • Unemployment rates
  • Globalization of the economy
  • Outsourcing

31
Social Factors
  • Beliefs Values
  • Attitudes Opinions
  • Lifestyles

32
Demographics
  • Age
  • Ethnic composition
  • Gender
  • Health considerations
  • Religion
  • Education
  • Quality-of-life issues

33
Political Factors
  • Legal regulatory parameters
  • Fair-trade Decisions
  • Antitrust Laws
  • Tax Programs
  • Minimum Wage Legislation
  • Pollution and Pricing Policies
  • Administrative jawboning
  • Obama care

34
Technological Factors
  • Speed of new developments

35
Ecological Factors
  • Ecology refers to the relationships among human
    beings and other living things and the air, soil,
    and water that supports them.
  • Threats to our life-supporting ecology caused
    principally by human activities in an industrial
    society are commonly referred to as pollution
  • Loss of habitat and biodiversity
  • Environmental legislation
  • Eco-efficiency

36
International Environment
  • Monitoring the international environment
  • involves assessing each non-domestic market on
    the same factors that are used in a domestic
    assessment.
  • While the importance of factors will differ, the
    same set of considerations can be used for each
    country.
  • Economic, political, legal, and social factors
    are used to assess international environments.
  • One complication to this process is that the
    interplay among international markets must be
    considered.

37
Ex. 4.8 Forces Driving Industry Competition
38
Threats of Entry
  • Economies of Scale
  • Product Differentiation
  • Capital Requirements
  • Cost Disadvantages Independent of Size
  • Access to Distribution Channels
  • Government Policy

39
Powerful Suppliers
  • A supplier group is powerful if
  • It is dominated by a few companies and is more
    concentrated than the industry it sells to
  • Its product is unique or at least differentiated,
    or if it has built-up switching costs
  • It is not obliged to contend with other products
    for sale to the industry
  • It poses a credible threat of integrating forward
    into the industrys business
  • The industry is not an important customer of the
    supplier group

40
Powerful Buyers
  • A buyer group is powerful if
  • It is concentrated or purchases in large volumes
  • The products it purchases from the industry are
    standard
  • The products it purchases from the industry form
    a component of its product and represent a
    significant fraction of its cost
  • It earns low profits
  • The industrys product is unimportant to the
    quality of the buyers products or services
  • The industrys product does not save the buyer
    money
  • The buyers pose a credible threat of integrating
    backward

41
Substitute Products
  • By placing a ceiling on the prices it can charge,
    substitute products or services limit the
    potential of an industry
  • Substitutes not only limit profits in normal
    times but also reduce the bonanza an industry can
    reap in boom times
  • Substitute products that deserve the most
    attention strategically are those that are
  • subject to trends improving their
    price-performance trade-off with the industrys
    product or
  • produced by industries earning high profits

42
Jockeying for Position
  • Intense rivalry occurs when
  • Competitors are numerous or are roughly equal
  • Industry growth is slow, precipitating fights for
    market share that involve expansion
  • The product or service lacks differentiation or
    switching costs
  • Fixed costs are high or the product is
    perishable, creating strong temptation to cut
    prices
  • Capacity normally is augmented in large
    increments
  • Exit barriers are high
  • Rivals are diverse in strategy, origin, and
    personality

43
The Global Environment
  • Chapter 5

44
Globalization
  • Globalization refers to the strategy of pursuing
    opportunities anywhere in the world that enable a
    firm to optimize its business functions in the
    countries in which it operates.

45
Why Firms Globalize?
  • U.S. firms can reap benefits from industries and
    technologies developed abroad.
  • Direct penetration of foreign markets can drain
    vital cash flows from a foreign competitors
    domestic operations.
  • The resulting lost opportunities, reduced income,
    and limited production can impair the
    competitors ability to invade U.S. markets.
  • Question Should firms be proactive or reactive?

46
Reasons for Going Global
  • PROACTIVE
  • Additional resources
  • Lowered costs
  • Incentives
  • New, expanded markets
  • Exploitation of firm-specific advantages
  • Taxes
  • Economies of scale
  • Synergy
  • Power and prestige
  • Protect home market
  • REACTIVE
  • Trade barriers
  • International customers
  • International competition
  • Regulations
  • Chance

47
4 Strategic Orientations of Global Firms
  • Ethnocentric orientation
  • When the values and priorities of the parent
    organization guide the strategic decision making
    of all its international operations

48
4 Strategic Orientations of Global Firms (contd.)
  • Polycentric orientation
  • When the culture of the country in which the
    strategy is to be implemented is allowed to
    dominate a companys international decision
    making process

49
4 Strategic Orientations of Global Firms (contd.)
  • Regiocentric orientation
  • When a parent company blends its own
    predisposition with those of its international
    units to develop region-sensitive strategies.

50
4 Strategic Orientations of Global Firms (contd.)
  • Geocentric orientation
  • When an international firm adopts a systems
    approach to strategic decision making that
    emphasizes global integration.

51
Competitive Strategies for Firms in Foreign
Markets
  • Niche Market Exporting
  • Licensing and Contract Manufacturing
  • Franchising
  • Joint Ventures
  • Foreign Branching
  • Acquisition
  • Wholly Owned Subsidiary
  • LOOK UP EACH OF THESE AND UNDERSTAND

52
Internal Analysis
  • Chapter 6

53
SWOT Analysis
  • A traditional approach to internal analysis
  • SWOT is an acronym for the internal Strengths and
    Weaknesses of a firm and the environmental
    Opportunities and Threats facing that firm.
  • SWOT analysis is a historically popular technique
    through which managers create a quick overview of
    a companys strategic situation.

54
SWOT Components
  • An opportunity is a major favorable situation in
    a firms environment
  • A threat is a major unfavorable situation in a
    firms environment
  • A strength is a resource or capability relative
    to its
  • A weakness is a limitation or deficiency in a
    firms resources or capabilities relative to its
    competitors

55
S.W.O.T. Analysis
  • S.W.O.T. information is only as important as the
    analysis derived from it.
  • There is no magic number of strengths or
    weaknesses compared to a magic number of
    opportunities and threats.
  • Do you have the strengths to 1. Take advantage
    of new opportunities? Or 2. Survive a threat?
    Or 3. To compensate for your weaknesses?
  • To appropriately use the S.W.O.T. study the
    following slide

56
Ex. 6.2 SWOT Analysis Diagram
57
Value Chain
  • A perspective in which business is seen as a
    chain of activities that transforms inputs into
    outputs that customers value.
  • Examines the contributions of different
    activities within the business that create
    customer value
  • A process point of view

58
Value Chain Analysis (contd.)
  • Primary Activities
  • The activities in a firm of those involved in the
    physical creation of the product, marketing and
    transfer to the buyer, and after-sales support
  • Support Activities
  • The activities in a firm that assist the firm as
    a whole by providing infrastructure or inputs
    that allow the primary activities to take place
    on an ongoing basis

59
Ex. 6.3 The Value Chain
60
Resource-Based View (RBV)
  1. RBV is a method of analyzing and identifying a
    firms strategic advantages based on examining
    its distinct combination of assets, skills,
    capabilities, and intangibles
  2. The RBVs underlying premise is that firms differ
    in fundamental ways because each firm possesses a
    unique bundle of resources
  3. Each firm develops competencies from these
    resources, and these become the source of the
    firms competitive advantages

61
Three Basic TYPES of Resources
  1. Tangible assets are the easiest resources to
    identify and are often found on a firms balance
    sheet
  2. Intangible assets are resources such as brand
    names, company reputation, organizational morale,
    technical knowledge, patents and trademarks, and
    accumulated experience
  3. Organizational capabilities are not specific
    inputs. They are the skills that a company uses
    to transform inputs into outputs

62
What makes a resource VALUABLE?
  • 4 Guidelines
  • Is the resource or skill critical to fulfilling a
    customers need better than that of the firms
    competitors?
  • Is the resource scarce? Is it in short supply or
    not easily substituted for or imitated?
  • Appropriability Who actually gets the profit
    created by a resource?
  • Durability How rapidly will the resource
    depreciate?

63
Elements of Scarcity
  • Short Supply
  • Availability of Substitutes
  • Imitation
  • Isolating Mechanisms
  • Physically Unique Resources
  • Path-Dependent Resources
  • Casual Ambiguity
  • Economic Deterrence

64
Using RBV in Internal Analysis
  • It is helpful to
  • Disaggregate resources
  • Utilize a functional perspective
  • Look at organizational processes
  • Use the value chain approach

65
Long-Term Objectives and Strategies
  • Chapter 7

66
Long-Term Objectives
  • Strategic managers recognize that short-run
    profit maximization is rarely the best approach
    to achieving sustained corporate growth and
    profitability
  • To achieve long-term prosperity, strategic
    planners commonly establish long-term objectives
    in seven areas
  • Profitability Productivity
  • Competitive Position Employee Development
  • Employee Relations -- Tech Leadership
  • Public Responsibility

67
Qualities of Long-Term Objectives S.M.A.R.T.
  • There are five criteria that should be used in
    preparing long-term objectives
  • Specificclear about outcomes desired
  • Measurableable to quantify
  • Attainableable to achieve with current resources
  • Realistically challengingprovide stimulation to
    achieve
  • Timedstating the time frame in which the
    objective will be accomplished

68
The Balanced Scorecard
  • The balanced scorecard is a set of four measures
    that are directly linked to the companys
    strategy
  • allows managers to evaluate the company from four
    perspectives
  • financial performance
  • customer knowledge
  • internal business processes
  • learning and growth

69
Generic Strategies
  • A long-term or grand strategy must be based on a
    core idea about how the firm can best compete in
    the marketplace. The popular term for this core
    idea is generic strategy.

70
The 4 GENERIC Strategies
  • Striving for overall low-cost leadership in the
    industry.
  • Striving to create and market unique products for
    varied customer groups through differentiation.
  • Striving to have special appeal to one or more
    groups of consumers or industrial buyers, focus
    on their cost or differentiation concerns.
  • SPEED rapid response to customer requests or
    market and technological changes

71
GRAND Strategies
  • Grand strategy
  • A master long-term plan that provides basic
    direction for major actions for achieving
    long-term business objectives

72
Grand Strategies
  • Concentrated growth the strategy that directs
    resources to the growth of a dominant product, in
    a dominant market, with a dominant technology
  • Market development consists of marketing present
    products to customers in related market areas by
    adding channels of distribution or by changing
    the content of advertising or promotion
  • Product development substantial modification of
    existing products or the creation of new but
    related products that can be marketed to current
    customers through established channels

73
Grand Strategies
  • Innovation companies seek high profits associated
    with customer acceptance of a new or greatly
    improved productsearch for other original or
    novel ideasseek to create a new product life
    cycle and make similar existing products obsolete
  • Horizontal acquisitiongrowth through the
    acquisition of one or more similar firms
    operating at the same stage of the
    production-marketing chain

74
Grand Strategies
  • Vertical acquisitionBACKWARDacquire firms that
    supply it with inputs (such as raw materials) or
    FORWARDare customers for its outputs (such as
    warehouses for finished products)
  • Concentric diversification involves the
    acquisition of businesses that are related to the
    acquiring firm in terms of technology, markets,
    or products
  • Conglomerate diversificationgives little concern
    to creating product-market synergy with existing
    businesses

75
Grand Strategies
  • TurnaroundCost reductionAsset reduction
  • Divestiture strategy the sale of a firm or a
    major component of a firm
  • Liquidation the firm typically is sold in parts
    for its tangible asset value and not as a going
    concern

76
Bankruptcy
  • Chapter 7 Liquidation bankruptcyagreeing to a
    complete distribution of firm assets to
    creditors, most of whom receive a small fraction
    of the amount they are owed
  • Chapter 11 Reorganization bankruptcythe
    managers believe the firm can remain viable
    through reorganizationmanagement runs the
    day-to-day business operations but all
    significant business decisions must be approved
    by a bankruptcy court.

77
Grand Strategies
  • Joint ventures relationship between two or more
    parties to pursue a set of agreed upon goals or
    to meet a critical business need while remaining
    independent organizations
  • Strategic alliances is a business agreement in
    which parties agree to develop, for a finite
    time, a new entity and new assets by contributing
    equity
  • Company A B form Company C

78
Business Strategy
  • Chapter 8

79
Sustainable Low-Cost Activities
  • Some low-cost advantages reduce the likelihood of
    buyers pricing pressure
  • Truly sustained low-cost advantages may push
    rivals into other areas
  • New entrants competing on price must face an
    entrenched cost leader
  • Low-cost advantages should lessen the
    attractiveness of substitute products
  • Higher margins allow low-cost producers to
    withstand supplier cost increases

80
Risks of a Cost Leadership Strategy
  • Many cost-saving activities are easily duplicated
  • Exclusive cost leadership can be a trap
  • Obsessive cost cutting can shrink other
    competitive advantages
  • Cost differences often decline over time

81
Ex. 8.2 Evaluating a Businesss Cost Leadership
Opportunities
82
Evaluating Differentiation
  • Differentiation requires that the business have
    sustainable advantages that allow it to provide
    buyers with something uniquely valuable to them
  • Differentiation usually arises from one or more
    activities in the value chain that create a
    unique value important to buyers

83
risks associated with A differentiation strategy
  • Competitors may be able to imitate the unique
    features,
  • Customers may lose interest in the unique
    features, or
  • Low cost competitors may be able to undercut
    prices erode brand loyalty.

84
Ex. 8.3 Evaluating a Businesss Differentiation
Opportunities
85
Evaluating Speed as a Competitive Advantage
  • Speed-based strategies, or rapid response to
    customer requests or market and technological
    changes, have become a major source of
    competitive advantage for numerous firms in
    todays intensely competitive global economy

86
Risks of Speed-based Strategy
  • Speeding up activities that havent been
    conducted in a fashion that prioritizes rapid
    response should only be done after considerable
    attention to training, reorganization, and/or
    reengineering
  • Some industries may not offer much advantage to
    the firm that introduces some forms of rapid
    response
  • Customers in such settings may prefer the slower
    pace or the lower costs currently available, or
    they may have long time frames in purchasing

87
Ex. 8.5 Evaluating a Businesss Rapid Response
(Speed) Opportunities
88
Evaluating Market Focus as a Way to Competitive
Advantage
  • Market focus the extent to which a business
    concentrates on a narrowly defined market
  • Small companies, at least the better ones,
    usually thrive because they serve narrow market
    niches
  • Market focus allows some businesses to compete on
    the basis of low cost, differentiation, and rapid
    response against much larger businesses with
    greater resources

89
Risks of Market Focus
  • The risk of focus is that you attract major
    competitors who have waited for your business to
    prove the market
  • Publicly traded companies built around focus
    strategies become takeover targets for large
    firms seeking to fill out a product portfolio
  • Slipping into the illusion that it is focus
    itself, and not low cost, etc. that is creating
    the businesss success.
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