Strategic Management (Quickstudy Reference Guides - Academic)

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DEFINITIONS Strategic Management is a process for conducting the entrepreneurial activities of a firm for organizational renewal, growth, and transformation. The major tasks are: (1) set a mission and goals, (2) assess the environment, (3) appraise company capabilities, (4) craft the strategy, (5) implement the strategy, and (6) evaluate and control the strategy. Business Policy is a set of prescribed and discretionary statements, limiting actions of individuals in the firm, as set forth in directives and guides. Mission is the reason for which the firm exists, and what it will do. Basically, it describes the products/services to be supplied, the markets to be served, and the technology applied (if important). Vision Statement answers the question, What do we want to become? Goals express the aspirations of the firm, general ends that cannot be measured. Ex. “In unrelenting pursuit of perfection.” Objectives are specific targets to be accomplished by a specified time. Ex. “Profits will grow at the rate of 5% annually for the next five years.” Long-term objectives (5 years or more) are strategic objectives and define the desired character of the company, at the specified time. Strategy is simply the means or general actions to be taken to achieve long-term objectives. Strategic management is the work of the General Manager. General Manager is a person who is responsible for a profit center, as opposed to a functional manager who is responsible only for a cost or revenue center. Generic Strategy is the name for a group of similar specific strategies. Levels of Strategy 1. Corporate level. What types of businesses should we be in? 2. Business level. How do we compete? 3. Functional component level. What should our organization do to synchronize with the business-level strategy? Opportunity is a set of circumstances that, if acted upon at the right moment, will produce a gain. Threat is the probability of a future event and its potentially harmful impact on the firm.

Mission & Vision Evaluation Capabilities

Forecast the Environment

Strengths

Opportunities

Weaknesses

Threats Set Long-Term Objectives

Craft the Strategy

COMPANY MISSION: WHAT IS OUR BUSINESS? 1. 2. 3. 4. 5. 6.

Basic product or service Primary markets Principal technology used (if relevant) Customer satisfaction, quality, and societal goals Company philosophy Self-concept (identity)

THE ENVIRONMENT THE REMOTE (MACRO) ENVIRONMENTAL FACTORS

1. 2. 3. 4. 5. 6.

Economic Social-demographic Political-legal Technological Cultural Ecological-natural

TASK (IMMEDIATE, OPERATING) ENVIRONMENTAL FACTORS

1. The task environment comprises all persons, groups, or entities that have an interest in the company. These are called stakeholders. 2. A narrower definition refers to those stakeholders with whom the firm has contact from time to time, as follows: a. Customers b. Suppliers c. Financial institutions d. Competitors e. Trade associations f. Activist groups g. Federal, state, and local government agencies h. Media representatives i. Unions

Evaluate & Control Strategy Fig. 1, The Strategic Management Model

THREAT

A threat is an event, as defined by its impact on your company and the probability of its occurrence, that will result in harm to your company. It is an attack on company underpinnings, such as: 1. Support of stakeholder groups 2. Resources: human, financial 3. Customer base 4. Capabilities, such as technology, products, processes, management, and functional 5. Artificial barriers to competition: laws, regulations, patents, and licenses 6. Social changes and customer preferences 4. Potential computer entrants 2. Buyers 1.

DEFINING AN INDUSTRY

1. Products 2. Competitors 3. Structure (number, size, relative strength, market share of competitors, product differentiation) 4. Economic traits 5. Critical success factors 6. Entry barriers

Rivalry among existing firms

3.

COMPETITIVE ENVIRONMENT: MICHAEL E. PORTER’S 5-FORCE MODEL

See Figure 2. As Porter says, the nature and intensity of competition in an industry is a composite of five competitive forces: 1. Rivalry among competitors in the industry 2. The bargaining power of buyers 3. The bargaining power of suppliers 4. The potential entry of new competitors 5. The power of firms with substitute products Industry-driving forces increase incentive for the industry to change. Examples of driving forces are industry growth rate, product innovation, customer preferences, firms entering and leaving the industry, cost and productivity, and increasing globalization. OPPORTUNITY

Implement the Strategy

2. Advances in technology, e.g., fiber optics, gene manipulation. 3. A misfortune befalls a major competitor who then shuts down, liquidates, or goes bankrupt. 4. A competing company is put up for sale at a good price. 5. A chance occurs for you to hire a noted expert that you need. 6. A breakthrough in your product or process (“Research & Development”) that makes possible a gain in market share.

An opportunity is a combination of events or circumstances that arise, which, if acted upon at a certain time, will result in profit, gain, or victory. Such circumstances may be caused by changes in the environment or by changes in the company, relative to the environment. Examples: 1. Opportunities arise for the firm as it is. These include product and market extensions through mergers, failures of competitors, and legal change. 1

Suppliers 5. Potential competitive substitutive products from firms in other industries

Fig. 2, Porter’s Force Model

EVOLUTION OF COMPANY CAPABILITIES SITUATION ANALYSIS 1. 2. 3. 4.

How well is the company’s strategy working? What are the company’s strengths and weaknesses? What are its core products and competencies? What benchmarks are being used for measuring its situation?

APPROACHES TO INTERNAL SCANNING & ANALYSIS Value Chain Analysis 1. Basic concept: Value analysis identifies the primary and support activities that create value. 2. It may be used to analyze and reduce business costs and compare one business’ value chain with those of competing companies. See Fig. 3 (next page).

Evolution of Company Capabilities (continued) Functional Analysis of Strengths & Weaknesses of the Firm 1. Establish a table with column headings: Factors, Strengths/Weaknesses, Standards and Comparison. For each factor to be evaluated, the question must be asked, “Compared to what?” 2. Standards or criteria may be: a. The industry average for the factor being evaluated b. The best firm’s values c. The best value of any firm on each criterion d. A previously set objective e. A previous forecast 3. Functional factors should be selected from the following functional areas: a. Marketing b. Operations/Production c. Finance and accounting d. Human resources, especially management and organization e. Information systems f. Quality of all transactions, relationships, and outputs Support activities and costs

Technology development and product and process improvement

Human Resources Management

General Administration

Primary activities and costs

Purchased supplies and inbound logistics Operations Outbound logistics Sales and Marketing Service Profit Margin

Fig. 3, The Value Chain MATCH OF STRATEGY & STRUCTURE

1.Culture 2.Images 3.Identity 4.Leadership 5.Mission, goals, objectives, and organizational structure RESOURCE-BASED ANALYSIS This approach to strengths and weaknesses is based on two fundamental assumptions: (1) resource heterogeneity - a firm is a bundle of resources and these resources are different for each firm, and (2) resource immobility, which says that if these resources are difficult to copy, they are a potential source of competitive advantage. Lists of firm attributes that may be thought of as resources may be divided into four categories: 1. Financial capital 2. Plant capital 3. Human capital 4. Organizational capital PIMS ANALYSIS Profit Impact of Marketing Strategy, offered by the Strategic Planning Institute, is based on a database of about 3,000 businesses. Their research is directed at identifying principles that will guide companies in establishing successful strategies, or evaluating their own.

SETTING STRATEGIC (LONG-TERM) OBJECTIVES Characteristics of Long-Term Objectives 1. Acceptable to managers 2. Adaptable to extraordinary changes in the environment 3. Clearly measurable against specified criterion 4. Motivating - not too high and not too low 5. Understandable GENERIC GROUPS OF LONG-TERM OBJECTIVES Within each generic strategy objective group below, specific objectives may be selected. 1. Product/Market scope 2. Profitability 3. Competitive edge 4. Financial specifications, expenditures, net worth, etc. 5. Innovation and technology 6. Employee development/Productivity 7. Sources of, and deployment of, resources 8. Synergy 9. Risk 10. Legitimacy (satisfaction of stakeholders) 11. Ideological leadership

CRAFTING CORPORATELEVEL STRATEGY OBJECTIVES

Corporate Level What business should we be in? A. Choose GENERIC corporate-level strategies. 1. Feasible corporate-level strategies.

competitive strength

industry attractiveness 2. Choose final generic strategy option.

Options Opportunity Long-term objectives Generic strategy (appropriate feasible)

Select options to get final gene strategies.

Corporate-level strategy is directed toward: 1. Maintaining corporate-wide consistency of direction of the total company toward long-range, usually global, goals called strategic intent. 2. Leveraging resources for long-range goals. 3. Reducing financial risk by building a balanced portfolio of businesses with a balanced portfolio of advantages. 4. Investing in core competencies for the businesses (usually called Strategic Business Units or SBUs). 5. In general, corporate strategy is designed to answer the question: What businesses should we be in? THE PROCESS

The process of developing corporate-level strategy is shown in Fig. 4 and explained as follows: CHOOSE GENERIC CORPORATE-LEVEL STRATEGIES

Generic Strategy is a group of corporate-level strategies that are first determined so that the decision maker is guided toward making an appropriate specific strategy (See Fig. 5.5, 6 & 7). A list of generic strategies generally used is as follows: Concentration - the corporation concentrates its efforts and resources on current business or businesses. Concentric diversification - the company decides to diversify into products related to its present products through similar marketing methods, production processes, or products. Conglomerate diversification - diversification into products unrelated to the firm’s present products. Vertical backward integration - the company buys, or otherwise competes with, its suppliers. Forward integration - the company buys companies that are customer businesses. Joint ventures - two or more companies combine equity in a new company to gain an advantage or minimize individual weaknesses. Divestiture - a company sells off, spins off in various ways, a portion or an entire SBU. Turnaround/Restructuring - a defensive strategy followed by a company in need of immediate improvement. Bankruptcy - a means for getting respite from creditors and used by very healthy companies, as well as those which need to be reorganized and obtain additional capital. Liquidation - the company sells its assets and goes out of business.An 2

B. Choose SPECIFIC corporate-level strategy, guide by final generic strategy to yield. Portfolio of businesses = answers to the origin of the question Fig. 4, Corporate Strategy Formulation ANALYSIS & EVALUATION OF THE PORTFOLIO

General Electric 9-Cell Business Screen 1. Fig. 6 shows a 9-cell matrix of the positioning of SBUs, in terms of competitive strength vs. industry attractiveness. 2. The areas of the circles represent the sales of each SBU. The segments represent market share. 3. The position of a business on the grid may be determined either subjectively, or quantitatively, by using a weighted rating system for the factors shown. 4. Corporate strategy implications from the matrix are: a. Suggest investment priorities. b. Incorporate a wide variety of strategic variables (others in addition to those shown may be incorporated). c. Indication of possible life-cycle stages of the SBUs. d. Indicate balance or lack of balance in the portfolio. e. Compare performance among business units. SELECTING A GENERIC STRATEGY

1. Plot the company’s current (and potential) SBUs on Fig. 5, a competitive strength vs. industry attractiveness matrix. Each circle (area) is proportional to the sales of the particular SBU (See Fig. 5). 2. Select feasible corporate-level generic strategies from the cells in which the SBUs fall. 3. Find a match of an opportunity, a set of long-term objectives, and a generic strategy from Fig. 5. Such a set represents a strategic option. 4. Find a number of strategic options and select, judgmentally, the ones that your resources can support. This will give you your final feasible generic strategies.

Rapid Market Growth

1. Turnaround or retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Divestiture 5. Liquidation

Drug Store Group

Strong Competitive Position

1. Concentric diversification 2. Conglomerate diversification 3. Joint ventures

Slow Market Growth Source: John A. Pearce & Richard B. Robinson, Strategic Management, Homewood, Illinois: Irwin, Inc., 1982 p. 210.

Many environmental opportunities

1. Internal growth 2. Vertical integration of related businesses 3. Mergers 4. Horizontal diversification

Cell B Moderate environmental opportunities and threats

Weak Competitive Position

Specialty Shop Group

Fig. 5, Feasible Corporate Generic Strategies

1. Mergers 2. Horizontal integration 3. Strategic alliances

1. Turnaround 2. Divestment

Cell E

1. Vertical integration of related businesses 2. Horizontal related diversification

Cell C

Critical environmental threats

Supermarket Group

Weak Cell G

Average Cell D

Strong Cell A

1. Concentration 2. Vertical integration 3. Concentric diversification

State of the External Environment

1. Reformation of concentration 2. Horizontal integration 3. Divestiture 4. Liquidation

Competitive Status of the Corporation’s Business Units

Cell H

1. Stability 2. Mergers 3. Horizontal integration 4. Strategic alliances 5. Divestment

1. Turnaround 2. Divestment

Cell I

Cell F

1. Horizontal-related diversification 2. Horizontal-unrelated diversification (conglomerate) 3. Vertical integration of unrelated businesses 4. Divestment

1. Divestment 2. Horizontal-related diversification 3. Horizontal-unrelated diversification 4. Stability

1. Liquidation

CHOOSE THE SPECIFIC CORPORATE-LEVEL STRATEGY (PORTFOLIO OF BUSINESS UNITS)

STRATEGIC FIT ANALYSIS

Market size and growth rate Industry profit margins Competitive intensity Bargaining power of customers and supplier

Cyclicality of demand Financial norms Economies of scale Barriers to entry Capital intensity

Invest aggressively Invest selectively Harvest or divest

Competitive Position

Industry Attractiveness High

Strong Average Weak

Low Development

High Relative market share Profit margins Cost position Level of differentiation Technological capability Response time Financial strength Human assets Fig. 6, GE 9-Cell Screening Grid 3

Stage of Product/Market Evolution

Business Strength

Medium

LIFE CYCLE MATRIX

The Life Cycle Matrix is similar to the G.E. Matrix, except that it focuses on the life cycles of the products, rather than the industry attractiveness. In Fig. 7, the competitive position is shown for each SBU, but the stage of the SBU’s life cycle is also shown. Small sales at the beginning and end of the life cycle, with a strong competitive position, for example, may be considered favorable. If all SBUs are in different stages of the life cycle, but in the strong competitive position, this may also be a favorable condition. If all SBUs are in the strong competitive position and maturity stage, this indicates trouble later, because no new businesses are in the company’s portfolio.

1. Does each business fit with other businesses in the portfolio? Compare the value analysis chains of each. 2. Does each business fit the strategic direction of the total company? Does each business contribute heavily to corporate financial performance?

Low

2. For each generic strategy, decide the business, if any, that you wish to add to or subtract from your portfolio. For example, if you were a manufacturer of golf carts and decided to follow a concentric diversification strategy, you might select the purchase of a power lawn mower company to add to your portfolio. 3. When you have reviewed all your feasible generic strategies and made such decisions, the companies remaining represent your portfolio and set the direction for the total company. Using SWOT (Strength, Weaknesses, Opportunities, Threats) to derive generic corporate strategies (P. Wright, M. J. Kroll, and J. Parnell) SWOT analysis ties together strengths, weaknesses, opportunities, and threats vs. competitive position. Place each SBU in a cell, giving recommended feasible generic strategies (Fig 5.5).

Fig. 5.5, SWOT Portfolio Framework

Medium

1. Specific Corporate-Level Strategy answers the question: “What businesses should we be in?”

Growth

Shakeout Maturity Saturation Decline

Fig. 7, Life Cycle Matrix

BUSINESS STRATEGIES FOR SBUS & SINGLE-PRODUCT COMPANIES THE FIRST STEP IN CRAFTING THE COMPETITIVE STRATEGY FOR SBU

Decide on the generic strategy or strategies to follow. The basic four generic strategies that may be used are shown in Fig. 8 (below) as (1) low-cost leadership, (2) differentiation, (3) niche or focus market segment with low cost, and (4) focus on a market segment using differentiation. Use low-cost leadership when: 1. Price competition among rival sellers is especially intense. 2. The product is essentially a commodity with many sellers. 3. There are few ways to differentiate the products that have value to the user. 4. Buyers have low switching costs and can change to lower-priced sellers. 5. Buyers are large and can bargain down prices. Use differentiation strategy when: 1. Differentiation of a product can command a premium price for its product. 2. Brand loyalty can be won over. 3. The cost of differentiation is less than the premium price that can be obtained. Use focus strategy when: 1. The segment of the market focused on is large enough to be profitable. 2. The segment is not important to the success of major competitors. 3. The segment has good potential for growth. 4. The company can provide excellent service and goodwill within the segment. GENERIC BUSINESS STRATEGY OPTIONS

1. A business generic strategy option consists of a match of an opportunity, a long-term business objective, and a generic strategy. See Fig. 8. 2. At this point, the generic strategy is honed by deciding on the emphasis to be placed on or allocation of resources to: competitor orientation, market orientation, and product/service orientation. 3. Avoid “stuck-in-the-middle” strategies that lead to engaging in each generic strategy, and thereby failing to achieve any of them. 4. Select the option or options to obtain the final generic strategies. DEVELOP THE SPECIFIC BUSINESS-LEVEL STRATEGY

1. The specific business strategy describes specifically what the firm will do to compete. 2. The generic strategies and long-term objectives restrict the statement of the business-level strategy. 3. Each functional manager prepares his/her component of the total business strategy, showing major additions and programs for the next f ive years. 4. The General Manager then directs the reconciliation of all functional programs and budgets, as indicated in Fig. 8 (this page, at right).

IMPLEMENTING THE STRATEGY IMPLEMENTING WITH STRUCTURE

Implementing strategy is the conversion of concepts into action and results. It is the total and detailed activities to fulfill the strategy and achieve the longterm objectives. The first part consists of:

1. Communicating the strategy to the organization to prepare every employee with an understanding of what will follow and the things in general that must be done. 2. Prepare and disseminate a list of major annual objectives for the organization. 3. Establish policies and procedures for actions. 4. Prepare annual plans and budgets for resource allocations. 5. Prepare an organization STRUCTURE that matches the new strategy (portfolio and SBUs). 6. Install best practices for each department, based on the value chain and benchmarks.

2. Is the strategy consistent with the environment? 3. Is the strategy appropriate in view of the available resources? 4. Does the strategy involve an acceptable degree of risk? 5. Does the strategy have an appropriate time framework? 6. Is the strategy workable? Stage Criteria The strategy may be evaluated at each stage of its development shown in Fig. 1 (see page 1), as well as after implementation at selected times. * Source: Seymour Tilles, “How to Evaluate Corporate Strategy,” Harvard

IMPLEMENTING WITH ORGANIZATIONAL LEADERSHIP

1. Staff the organization with committed leaders capable of driving implementation. 2. Avoid resistance to change through employee development and communication with employees. 3. Tie rewards and incentives to achievement of performance objectives. 4. Develop a strategy-supporting culture. IMPLEMENTING WITH THE FUNCTIONAL COMPONENTS OF STRATEGY

Each functional manager should prepare his/her functional component of the business strategy and plans for execution. These are reconciled and approved by the business managers and upper management. The typical functional areas are shown with examples of a few issues that may arise in implementation: 1. Marketing: product policies, distribution policies, ethics, customer relations, pricing policies. 2. Production/operations: equipment, layout, method of delivery of services, work methods, production planning,quality control, outsourcing. 3. R&D/design: estimating the time for new product development, quality and cost balance in design, continuing education of creative workers, outsourcing of design work. 4. Accounting/finance: increasing labor costs, increasing sales expense, economic value added, taxes, exchange rate between U. S. and other currencies, transfer pricing. 5. Human Resource management: assignment of people to new projects, salary and bonus payments, promotions and dismissals, major human errors, recruitment and selection. 6. Corporate information and communication systems: management information system, personalcommunications, mass communications, communicating policies. IMPLEMENTING WITH CONCERN FOR LAWS, ENVIRONMENTAL & SOCIAL CONCERNS

Implementation must be carried out with concern for factors that may not always be spelled out, but must represent good citizenship.

Business Review 41 (1963): 111-121.

Business Level How should we compete? A.Choose GENERIC business-level strategies. 1. Feasible business strategies Low-cost leadership

Differentiation

Niche low Focused differentiation cost 2. Choose final generic business strategy option.

Options Opportunities Long-term objectives Generic strategies (feasible) Competitor-Directed Market-Directed Product-Directed

Select options to get final generic strategies Year 1 2 3 4 5 Marketing Production Research & Development Finance

Long-term objectives

Generic Strategies

Fig. 8, Business Strategy Formation Fig. 1, The Strategic Management Model

CREDITS Layout: A. Thomas Fenik

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NOTE TO STUDENT This QUICKSTUDY® guide is an outline of the basic topics taught in Management courses. Due to its condensed format, use it as a study guide but not as a replacement for assigned class work. All rights reserved. No part of this publication may be reproduced or transmitted in any form, or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission from the publisher. ©2001 BarCharts, Inc. 0508

ISBN-13: 978-142320707-8 ISBN-10: 142320707-6

STRATEGY EVALUATION FOUNDATION FOR STRATEGY EVALUATION

Foundation for Evaluation of Strategy The basis for evaluation is to compare strategy with quantitative or qualitative criteria. In addition, strategy may be evaluated at different stages. Quantitative Criteria 1. Overall financial performance, such as ROI, ROE, profit margin, market share, earnings per share. 2. Time of implantation vs. planned time. 3. Increase in productivity, quality, number of employees, etc. Qualitative Criteria (from S. Tilles *) 1. Is the strategy internally consistent? 4

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