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Strategic Management/ Business Policy Power Point Set #1: Definitions of Strategy The Wisdom of Choice: “To try and fail is at least to learn; to fail to try is to suffer the inestimable loss of what might have been.” – Chester Barnard, The Functions of the Executive 2 What Is Strategic Management About? Understanding how firms create, capture, and sustain competitive advantage. Analyzing strategic business situations and formulating strategic plans. Implementing strategy and organizing the firm for strategic success. 3 assess environmental factors Identify current mission and strategic goals Strategy formulation Strategy implementation Conduct competitive analysis: •strengths •weakness •opportunity •threats Develop specific strategies: •corporate •business •functional carry out strategic plans maintain strategic control assess organisational factors 64 What Is Strategic Management About? Sustainable competitive advantage occurs when a firm implements a valuecreating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate. An important basis for sustainable competitive advantage is the development of resources and capabilities. Core competencies are resources and capabilities (often related to functional-level skills) that serve as a source of competitive advantage for a firm over its rivals. 5 Key Characteristics Of Strategic Decisions Important Not Easily Reversible Significant Commitment Of Resources Involves Alternatives, Consequences, and Choice Some Level of Uncertainty Typically Involved 6 Strategy Strategy Making Making :: Design Design or or Process? Process? Strategy as Design Strategy as Process Planning and rational choice Many decision makers responding to multitude of external and internal forces INTENDED STRATEGY EMERGENT STRATEGY REALIZED STRATEGY Mintzberg’s Mintzberg’sCritique Critiqueof ofFormal FormalStrategic StrategicPlanning: Planning: •The fallacy of prediction – the future •The fallacy of prediction – the futureisisunknown unknown •The fallacy of detachment -impossible •The fallacy of detachment -- impossibleto todivorce divorceformulation formulationfrom from implementation implementation •The •Thefallacy fallacyof offormalization formalization--inhibits --inhibitsflexibility, flexibility,spontaneity, spontaneity, intuition intuitionand andlearning. learning. 7 The The Evolution Evolution of of Strategic Strategic Management Management DOMINANT THEME MAIN ISSUES CONCEPTS & TECHNIQUES IMPLEMENTATION 1950s 1960s Early-mid Late1970s 1970s early 1980s Late 1980s Late 1990s early 1990s early 2000s Budgetary planning & control Corporate planning Corporate strategy Quest for competitive advantage Financial control Planning growth Diversifica- Positioning ion Competitive advantage Budgeting project appraisal Forecasting & investment planning Portfolio planning. Synergy market share Resource analysis. Case competences Emphasis on financial management Rise of corporate planning departments & formal planning DiversifiIndustry/market cation. selectivity. Quest for Active asset global management market share Analysis of industry & competition Analysis of industry & competition Strategic innovation The “New Economy” Innovation & knowledge Dynamic sources of advantage Knowledge management cooperation Restructuring Virtual orgaBPR. nization. Refocusing Alliances Outsourcing Quest for critical mass 8 The The Basic Basic Framework Framework Strategy: Strategy: the the Link Link between between the the Firm Firm and and its its Environment Environment THE FIRM Goals & Values Resources & Capabilities Structure & Systems STRATEGY STRATEGY THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers 9 How Does It Compare to Other Business Classes? Macro level environment Task environment Finance Mktg. Strategy Acctg. Oper . H.R. The firm 10 Task Environment Customers and Markets: Distributors End users Competitors: Competitors for Markets Competitors for Resources Suppliers Suppliers of physical resources Suppliers of financial resources Suppliers of human resources 11 Task Environment Regulatory Groups Government Union Special Interest Groups Technology Rate of Development Substitutes Stage of Product or Industry 12 The Role of Strategy In Business is to Generate and Sustain Value via the Linkages Between Position, Resources, and Organization Positioning Resources & Capabilities Organization 13 Positioning Scope of the Firm: Geographic Scope Product-market Scope: Choice of businesses (corporate portfolio analysis) Product Market Positioning within a business Vertical integration decisions 14 Resources Tangible Resources e.g., physical capital Organizational Capabilities e.g., routines and standard operating procedures Intangible Resources e.g., trademarks, “know-how” 15 Organization Structure Formal Definition of authority Conflict Resolution Systems Rules, Routines, Evaluation and rewards Processes Informal communication, networks, recruitment 16 Definitions of Strategy The term “strategy” is intended to focus on the interdependence of the adversaries’ decisions and on their expectations about each other’s behavior” (Thomas Schelling The Strategy of Conflict) “Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.” (Alfred D. Chandler Strategy and Structure) Strategy is: The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment , and contingent moves by intelligent opponents. (James Brian Quinn, Logical Incrementalism) 17 18 19 20 Defining the Business: The Starting Point of Strategy Example: Fall of the Railroads “They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.” Theodore Levitt “Market Myopia” 21 Mission Statement and Goals It is the function of the top management team to provide the firm’s purpose or “strategic intent.” Chester Barnard The Functions of the Executive Alfred Sloan My Years with General Motors Komatsu ---> “Encircle Caterpillar” Canon ---> “Beat Xerox” Kodak ---> “Be the leader in the imaging sector” Coca Cola ---> “To put a Coke within ‘arms reach’ of every consumer in the world.” 22 Fundamental question of the choice of Goals: Planning for what purpose(s)? Profitability (net profits) Efficiency (low costs) Market Share Growth (e.g., increase in total assets, sales, etc) Shareholder Wealth (dividends plus stock price appreciation) Utilization of Resources (e.g., ROE, ROI) Reputation Contribution to Stakeholders (e.g., employees, society) Survival (avoid bankruptcy) 23 The Manager’s role in balancing expectations Business Roundtable: “Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management.” Understanding corporate strategy means understanding the competing value claims of multiple stakeholders. Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance. 24 25 Key Drivers of Value Creation and Sustainable Competitive Advantage: Generating economic value can be accomplished through: REVENUE drivers COST drivers RISK drivers 26 Sources of Superior Profitability INDUSTRY ATTRACTIVENESS RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL How do we make money? Which businesses should we be in? CORPORATE STRATEGY COMPETITIVE ADVANTAGE How should we compete? BUSINESS STRATEGY 27 The Levels of Strategy Corporate Headquarters Corporate - General Electric Business - Home Appliances Functional - e.g., Production Division A Division B Division C R&D R&D R&D HR HR HR Finance Finance Finance Production Production Production Mktg/Sales Mktg/Sales Mktg/Sales 28 Corporate Strategy At the corporate level, value creation can occur if the individual parts of a firm are integrated into a coherent whole. Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities. 29 An An optimal optimal decision decision isis possible possible All All relevant relevant information information isis available available All All relevant relevant information information isis understandable understandable All All alternatives alternatives are are known known Managers Managers as as decision decision makers makers Assumptions Assumptions of of the the Rational Rational Model Model Rational Rational decision decision making making All All possible possible outcomes outcomes known known 9 BARTOL, MANAGEMENT: A PACIFIC RIM FOCUS 3E © McGraw-Hill Australia 2001 30 Time Time constraints constraints Limited Limited ability ability to to understand understand all all factors factors Inadequate Inadequate base base of of information information Limited Limited memory memory of of decision-makers decision-makers Managers Managers as as decision decision makers makers Satisficing Satisficing ‘Satisficing’ ‘Satisficing’ decision decision making making Poor Poor perception perception of of factors factors to to be be considered considered in in decision decision process process 10 BARTOL, MANAGEMENT: A PACIFIC RIM FOCUS 3E © McGraw-Hill Australia 2001 31 32 33 34 35 A snapshot of some key issues and Aanalytical snapshottools of some key issues and analytical tools Environmental Analysis (O & T) Structure-ConductPerformance framework Five Forces Model Organizational Analysis (S & W) VRIO Strategic Coherence Appraisal Matrix Value Chain Chain Strategic Choices Use of value chain for competitive positioning (cost vs. differentiation) Segmentation analysis TWOS matrix Strategic Choices under uncertainty Scenario Analysis Real Options Analysis Strategic (game theoretic) analysis 36 Our Learning Goals: Pushing Down Through Bloom’s Taxonomy 1. Knowledge: remember remember material; material; know know terms, terms, facts, facts, procedures, procedures, basic basic concepts concepts 2. Comprehension: grasp grasp meaning; meaning; understand understand facts, facts, interpret interpret charts, charts, translate translate verbal verbal to to math math estimate estimate consequences consequences 3. Application: use use material material in in new new situations; situations; apply apply concepts concepts to to real real situations, situations, follow follow aa procedure procedure 4. Analysis: break break material material into into components components & & understand understand structure; structure; recognize recognize logical logical fallacies, fallacies, distinguish distinguish fact fact and and inference, inference, evaluate evaluate relevancy relevancy of of data data 5. Synthesis: integrate integrate parts parts to to make make aa new new whole, whole, integrate integrate learning learning to to solve solve aa problem problem 6. Evaluations: judge judge logical logical consistency, consistency, judge judge whether whether conclusions conclusions are are supported supported by by facts facts 37 Summary “Takeaways” Providing PURPOSE is an important function for the executive. One important purpose is to CREATE VALUE. Value creation can lead to SUSTAINABLE COMPETITIVE ADVANTAGE. 38