Lecture Outline

Chapter 1 & 2

Strategic Management

SM (Strategic Management) is the process of developing a mission and a vision for the company, setting
objectives, formulating and executing company strategies to achieve those objectives and evaluating
performance for necessary adjustments. In essence, SM spells-out the growth direction for the firm and helps
it achieve the intended growth.

Good strategy and good strategy execution are the most trustworthy signs of good management

The standards for god management rest to a very great extent on how well conceived the company’s strategy
is and how competently it is executed.

However, good strategy combined with good strategy execution does not guarantee that a company will
avoid periods of so-so or even sub-par performance due to unexpected shifts in market conditions or
uncontrollable technology delays or unanticipated costs.

It is the responsibility of a company’s management team to adjust to unexpected conditions by undertaking

strategic defences and business approaches that can overcome adversity. Indeed, the essence of good
strategy making is to build a market position strong enough and an organization capable enough to produce
successful performance despite unforeseeable events, potent competition, a rash a delays, or cost surprises.

The better conceived a company’s strategy and the more competently it is executed, the more likely it is that
the company will be a standout performer and exhibit enviable business practices.

THE FIVE TASKS OF STRATEGIC MANAGEMENT

The strategy-making strategy implementing process consists of five interrelated managerial tasks :

1. Forming a strategic vision of where the organization is headed-so as to provide long – term
direction, delineate what kind of enterprise the company is trying to become and infuse the
organization with a sense of purposeful action.
2. Setting objectives – converting the strategic vision into specific performance outcomes for the
company to achieve.
3. Crafting a strategy to achieve the desired outcomes.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Evaluating performance and initiating corrective adjustments in vision, long-term direction,
objectives, strategy, or execution in light of actual experience, changing conditions, new ideas
and new opportunities.

DEVELOPING A STRATEGIC VISION

Management’s views and conclusions about

• What the organization’s long term direction should be

• The technology –product-customer focus it intends to pursue, and its future business scope
constitutes strategic vision for the company.

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THE THREE ELEMENTS OF A STRATEGIC VISION
Managers have three discernible tasks in forming a strategic vision and making it a useful direction-setting
tool:
• Coming up with a mission statement that defines what business the company is presently in and
conveys the essence of “Who we are, what we do, and where we are now”.
• Using the mission statement as a basis for deciding on a long-term course, making choices about
“Where we are going” and charting a strategic path for the company to pursue.
• Communicating the strategic vision in clear, exciting terms that arouse organization wide
commitment.

A strategic vision thus reflects management’s aspirations for the organization and its business, providing a
view of “Where we are going” and giving specifics about its future business plans. It spells out long-term
business purpose and molds organizational identity. A strategic vision points an organization in a particular
direction and charts a strategic path for it to follow.

Strategic visions should have a time ;horizon of five years or more unless the industry is very new or market
conditions are so volatile ;and uncertain that it is difficult to see far down the road with any decree of
confidence.

THE DIFFERENCE BETWEEN A STRATEIC VISION AND A MISSION STATEMENT

A strategic vision portrays a company’s future business scope (“Where we are going”=. Whereas a
company’s mission statement describes its present business cope (Who we are and what we do”). Thus,
mission states company’s present products and services, types of customers it serves, and technological and
business capabilities it has.

AN EXAMPLE OF VISION STATEMENT

WHO ARE WE ?
John Deere has grown and prospered through a long standing partnership with the world’s most productive
farmers. Today, John Deere is a global company with several equipment operations and complementary
service business. These businesses are closely interrelated, providing the company with significant growth
opportunities and other synergistic benefits.

WHERE ARE WE GOING?

Deere is committed to providing genuine value to the company’s stakeholders,, including our customers,
dealers, shareholders, employees and communities. In support of that commitment. Deere aspires to:

• Grow and pursue leadership positions in each of our business.

• Extend our pre-eminent leadership position in the agricultural equipment market worldwide.
• Create new opportunities to leverage the John Deere brand globally.

HOW WILL WE GET THREE?

By pursuing the broader corporate goals of profitable growth the continuous improvement, each of the
company’s business is expected to :

• Achieve` world-class performance by attaining a strong competitive position in target markets.

• Exceed customer expectations for quality and value.

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 • Earn in excess of the cost of capital over a business cycle.
Microsoft Corporation

“A computer on every desk and in every home using great software as an empowering tool”. But the
emergence of the Internet and non-PC devices like handled computers and TV set top boxes as increasingly
integral parts of everyday life prompted Microsoft in 1999 to broaden its vision to “Empower people
through great software anytime, any place and on any device” Bill Gates observed.” We see a world where
people can use any computing device to do whatever they want to do anytime anywhere. The PC will
continue to have central role ....... but it will be joined by an incredibly rich variety of digital devices
assessing the power of the Internet.”

The Real Payoffs of a Well-Conceived, Well-Worded Vision Statement: A well-conceived, well-stated

strategic vision pays off in several respects (1) it crystallizes senior exe4cutives` own views about the firm’s
long-term direction (2) it conveys organizational purpose in ways that motivate organizational purpose in
way that motivate organization members to go all out (3) it provides a beacon that lower-level managers can
use to form departmental missions. set departmental objectives, and craft functional and departmental
strategies that are in line with the company’s overall strategy (4) it helps an organization prepare for the
future. When these five benefits have been successfully completed.

Developing A Mission

Incorporating What, Who and How into the Mission Statement

A strategically revealing mission statement incorporates three elements:

1. Customer needs, or what is being satisfied.

2. Customer groups, or who is being satisfied.
3. The company’s activities, technologies, and competencies, or how the enterprise goes about
creating and delivering value to customers and satisfying their needs.

Defining a business in terms of what to satisfy, whom to satisfy, and how to produce the satisfaction
identified the substance of what a company does to create value for its customers.
Technology, competencies, and activities are important because they indicate how much of the industry’s
total production – distribution chain its operations will span.

Mission should have specific and narrow definition not a board definition like the following:

Broad Definition Narrow/More Specific Definition

* Furniture business * Wrought-iron lawn furniture business
* Telecommunications business * Long-distance telephone service business

Example:

• The business of major international oil companies like Exxon, Mobil, BP Amoco, and Royal
Dutch/shell covers all stages of the oil industry’s production distribution chain – these
companies lease drilling sites, drill wells, pump oil in their own ships and pipelines to their own
refineries, and sell gasoline and other refined products through their own networks of branded
distributors and service station outlets.
• General Motors is a partially integrated company that makes between 30 and 50 percent of the
parts and components used in assembling GM vehicles; the remainder of the needed parts and

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 system components come from independent suppliers, and GM relies on a network of
independent, franchised dealers to handle retail sales and customer service functions.

• PFIZER INC
Pfizer is a research based global pharmaceutical company. We discover and develop innovative,
value – added products that improve the quality of life of people around the world and help
them enjoy longer, healthier, and more productive lives. The company has three business
segments: health care, animal health and consumer health care. Our products and available in
more than 150 countries.

• The US postal Service successfully operates with a broad definition, providing global mail-
delivery services to all types of senders. Federal Express, however, operates with a narrow
business definition based on handling overnight package deliver for customers who have
emergencies or tight deadlines.

SETTINGT OBJECTIVES

The purpose of setting objectives is to convert managerial statements of strategic vision and business
mission into specific performance targets – results and outcomes the organization wants to achieve.

Objective setting is required for all managers. When company wide objects are broken down into specific
targets for each organizational unit and lower-level managers are held accountable for achieving them, a
result-oriented climate builds throughout the enterprise.
Objectives :
• Financial
• Strategic

Financial Objectives concern the financial results viz. Earnings growth, an acceptable ROI, Dividend
growth, stock price appreciation, good cash flow and creditworthiness.

In contrast, Strategic Objectives aim at results that reflect increased competitiveness and a stronger
business position, such as winning additional market share, overtaking key competitors on product quality or
customer service or product innovation, achieving lower overall coasts than rivals, boosting the company’s
reputation with customers, winning a stronger foothold in international markets, exercising technological
leadership, gaining a sustainable competitive advantage and capturing attractive growth opportunities.
Financial performance need to be achieved to satisfy creditors and shareholders and to finance needed
initiatives/ventures Failure to achieve financial objectives puts the survival at risk.

Strategic objectives are essential to sustain and improve the company’s long-term market position and
competitiveness.

What kind of objectives to Set

Achieving acceptable financial performance is a must; otherwise the organization’s financial standing can
alarm creditors and shareholders, impair its ability to fund needed initiatives and perhaps even put its very
survival at risk. Achieving acceptable strategic performance is essential to sustaining and improving the
company’s long-term market position and competitiveness. Representative kinds of financial and strategic
performance objectives are listed below :

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 Financial Objectives Strategic Objectives
* Growth in revenues * A bigger market share
* Growth in earnings * Quicker design-to-market times than rivals
(an ability to get newly developed products to
market quicker).
* Higher dividends * Higher product quality than rivals.

Strategic objectives versus Financial Objectives: Which Take Precedence? Strategic performance always
takes precedence over financial performance as it enhances business position and competitiveness.

Even though an enterprise places high priority on achieving both financial and strategic objectives, situations
arise where a trade-off has to be made.

Should a company under pressure to pay down its debt elect to kill or postpone investments in strategic
moves that hold promise for strengthening the enterprise’s future business and competitive position.”

A company that consistently passes up opportunities to strengthen its long-term competitive position in
order to realize better near-term financial gains risks diluting its competitiveness, losing momentum in its
markets and impairing its ability to stave off market challenges from ambitious rivals.

The danger of trading off long-term gains in market position for near-tern gains in bottom-line performance
is greatest when

1. there are lasting first-mover advantages in being a market pioneer (many Internet start-us, for
example, are incurring big short-term losses in their rush to stake our leadership positions in fast-
emerging “industries of the future”) and
2. a profit conscious market leader has competitors who invest relentlessly in gaining market share,
striving to become big and strong enough to out compete the leader in a head-to-head market battle.

Contrary to the rule:

1) Financial scarcity
2) Strategically beneficial moves would take several years to achieve the intended goals.
3) Proposed strategic moves are risky and have uncertain bottom line payoff.
Illustration:

GENERAL ELECTRIC (Strategic Objectives)

• Become the most competitive enterprise in the world.
• Be number one or number two in each business we are in
• Globalize every activity in the company.

MOTOROLA (Financial Objectives)

• Revenue growth of 15 percent annually.
• An average return on assets of 13 to 15 percent.
• An average return on shareholders equity investment of 16 to 18 percent

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The need for top-down objective setting:

Objective setting need to be more of a top down than a bottom up process in order to guide lower level
managers and organizational units toward outcomes that support the achievement of overall business and
company objectives.

Two advantages:
• Produces cohesion among objectives and strategies of different units of the company.
• Unify internal efforts to move the company along the chosen strategic course.

Crafting Strategy:

Strategy comprises of competitive moves and business approaches adopted by management to produce
successful performance. It is the game plan of management for strengthening the organization’s position,
pleasing customers and achieving performance targets.

Company strategies concern how to grow the business, how to satisfy customers, how to out compete rivals,
how to respond to changing market conditions, how to manage each functional piece of the business and
develop needed organizational capabilities, how to achieve strategic and financial objectives?

Objectives are the “end,” and strategy is the “means” of achieving them.
A company’s strategies are typically a blend of

(1) deliberate and purposeful actions.

(2) As needed, reactions to unanticipated developments and fresh market conditions and
competitive pressures and
(3) The collective learning of the organization over time – not just the insights gained from its
experiences.

The strategy marking task thus involves developing and intended strategy (proactive) ; adapting it as events
unfold i.e. switching to adaptive/reactive strategy : and linking the firm’s business approaches, actions and
competitive initiatives closely to as competencies and capabilities. In short, a company’s actual strategy is
something managers shape and reshape as events transpire outside the company and as the company’s
competitive assets and liabilities evolve in ways the enhance of diminish its competitiveness.

EXAMPLE McDONALD`S GROWTH STRAT6EGY

• Penetrate the market not currently served by adding 1,750 restaurants annually (an average of
one every five hours), some company-owned and some franchised, with about 910 percent
outside the United States, Establish a leading market position in foreign countries ahead of
competitors.
• Promote more frequent customer visits via the addition of attraction menu items low price
specials. Extra value Meals, and children’s play areas.

Why Company Strategies Evolve:

Strategy making is an on going process, not a one time event. Every company encounters occasions in
which it needs to adapt its strategy to shifting industry and competitive conditions.

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The America Online – Time Warner Merger represented a quantum strategy change for both companies.

It is normal, indeed necessary, for a company’s strategy to change sometimes gradually and sometimes
rapidly. Sometimes reactively (when new developments dictate a response) and sometimes proactively
(when attractive new opportunities are spotted or new capabilities are acquired). Consequently, Managers
are obliged to re-evaluate strategy regularly, refining and recasting it as often and as much as needed to
match the organization’s changing external and internal circumstance.

Another important facet of strategic change is the need for actions to improve on how the company is
competing today and the need for actions to prepare for tomorrow’s markets and competitive conditions.

Implementing and Executing the strategy

The Managerial task of implementing and executing the chosen strategy entails close-to-the-scene
administrative task that includes the following principal aspects:
• Building an organization capable to carrying out the strategy successfully.
• Allocating company resources so that organizational units charged with performing strategy-
critical activities and implementing new strategic initiatives have sufficient people and funds to
do their work successfully.
• Establishing strategy-supportive policies and operating procedures.
• Putting a freshly chosen strategy into place.
• Motivating people in ways that induce them to pursue the target objectives energetically and, if
need be modifying their duties and job behaviour to better fit the strategy requirements of
successful execution.
• Tying the reward structure to the achievement of targeted results.
• Creating a company culture and work climate conducive to successful strategy implementation
and execution.
• Installing information, communication, and operating systems that enable company personnel to
carry out their strategic roles effectively day in, day out.
• Instituting best practices and programs for continuous improvement.
• Exerting the internal leadership needed to drive implementation forward and to keep improving
no how the strategy is being executed.

WHO PERFORMS THE FIVE TASKS OF STRATEGIC MANAGEMENT?

Ultimate responsibility for leading the tasks of forming, implementing, and executing a strategic plan for the
whole organization rests with the CEO even though other senior managers normally have significant
leadership roles also.
In diversified companies where the strategies of several different businesses have to be managed, there are
usually four distinct levels of strategy managers:

• The chief executive officer and other senior corporate-level executives who have primary
responsibility and personal authority for big strategic decisions affecting the total enterprise and
the collection of individual businesses in to which the enterprise has diversified.

• Managers who have profit-and loss responsibility for one specific business unit and who are
delegated a major leadership role in crafting and executing a strategy for that business.

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 • Functional area managers within a given business unit who have direct authority over a major
piece of the business (manufacturing, marketing and sales, finance, R&D, personal) and whose
role it is to support the business unit’s overall strategy with strategic actions in their own areas.

• Managers of major operating units (plants, sales districts, local offices) who have on-the-
scene responsibility for developing the details of strategic efforts in their areas and for executing
their piece of the overall strategic plan at the grassroots level.

Single-business Enterprises need no more than three of these levels-a business level strategy manager,
Functional area strategy managers, and Operating-Level strategy managers). Proprietorships, partnerships
and owner-managed enterprises typically have only one or two strategy managers since in small-scale
enterprises the whole strategy-making/strategy-implementing function can be handled by just a few key
people.

The Strategy-Making Pyramid

As we emphasized in Chapter 1. strategy making is not just a task for senior executives. In large enterprises,
decisions about what business approaches to take and that new moves to initiate involve senior executives in
the corporate office, heads of business units and product divisions, the heads of ;major functional areas
within a business or division (manufacturing, marketing and sales, finance, human resources, and the like),
plant managers, products managers, district and regional sales managers and lower-level supervisors. In
diversified enterprises, strategies are initiated at four distinct organization levels. There’s strategy for the
company and all of its businesses as a whole (corporate strategy). There’s a strategy for each separate
business the company has diversified into (business strategy). Then there is a strategy for each specific
functional unit with a business (functional strategy). Each business usually has a production strategy, a
marketing strategy, a finance strategy and so on. And, finally, there are still narrower strategies for basic
operating units-plants, sales districts and regions and departments within functional areas (operating
strategy). In single-business enterprises, there are only three levels of strategy making (business strategy,
functional strategy and operating strategy) unless diversification into other businesses becomes an active
consideration. Figure 2.1 on page 52 shows the strategy-making pyramids for diversified and single-business
companies.

Illustration capsule

Bank One’s New Internet Banking Strategy

In 1999, after having acquired over 100 banks during the past 15 years and built an interstate banking
franchise Bank One created an independent Internet bank named Wingspan Bank. com.
Bank One’s initial strategy for Wingspan included the following elements.

• Creating the capability to approve or reject customer applications for loans in less than a minute.
• Providing credit cards offering a 5 percent discount on purchases from selected Internet
retailers, such as Amazon.com.

Corporate Strategy

Corporate Strategy is the overall managerial game plan for a diversified company to establish business
positions in different industries and the approaches used to manage the company’s group of ;businesses.
Crafting corporate strategy for a diversified company ;involves four kinds of initiatives:

1. Making the moves to establish positions in different businesses and achieve diversification.

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 2. Initiating actions to boost the combined performance of the business the firm has diversified in to –
Corporate parents can help their ;business subsidiaries be more successful by financing additional
capacity and efficiency ;improvements by supply missing skills and managerial know-how and so
on.
3. Pursing ways to capture valuable cross-business strategic fits and turn them into competitive
advantage-when a company diversifies into business with related technologies, similar operating
characteristics, common distribution channels or customers, or some other synergistic factor, it gains
competitive advantage potential not open to a company that diversifies into to totally unrelated
business.

4. Establishing Investment priorities and steering corporate resources into the most attractive business
units – This facet of corporate strategy making involves channelling resources into areas where
earnings potentials are higher and away from areas where they are lower.

Corporate strategy is crafted at the highest levels of management. Major strategic decisions are
usually reviewed and approved by the company’s board of directors.

Business Strategy
The term business strategy (or business-level strategy) refers to the managerial game plan for a single
business.

Crafting a business strategy that yields sustainable competitive advantage has three facets:

1. Deciding what product/service attributes (lower costs and prices, a better products, a wider product
line, superior customer service, emphasis on a particular market niche) offer the best chance to win
a competitive edge.
2. Developing expertise, resource, strengths and competitive, capabilities that set the company apart
from rivals.
3. Trying to insulate the business as much as possible from the actions of rivals and other threatening
competitive developments.

Functional Strategy

A company’s marketing strategy, for example, represents the managerial game plan for running the
marketing part of the business, A company’s new product development strategy represents the managerial
game plan for keeping the company’s product line up fresh and in tune with what buyers are looking for. A
company needs a functional strategy for every major business activity and organizational unit.

Operating Strategy

Operating Strategy concerns even narrower strategic initiatives and approaches for managing key operating
units (plants, sales, districts, distribution centers) and for handling daily operating tasks with strategic
significance (advertising campaigns, materials purchasing, inventory control, maintenance, shipping), A
district sales managers needs a sales strategy customized to the district’s particular situation and sales
objectives.

Operating strategies, while of limited scope, add further detail and completeness to functional strategies
delegate lead responsibility to front-line managers, subject to review and approval by higher-ranking
managers.

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THE FACTORS THAT SHAPE A COMPANY’S STRATEGY

• EXTERNAL

Societal, Political, Regulatory and Citizenship Considerations

What an enterprise can and cannot do strategy wise is always constrained by what is legal, by what complies
with government policies and regulatory requirements, by what is considered ethical and by what is in
accord with societal expectations and the standards of good community citizenship.

Competitive Conditions and Overall Industry Attractiveness

An industry’s competitive conditions and overall attractiveness are big strategy determining factors. A
company’ strategy has to be tailored to the nature and mix of competitive factors in play-price, product
quality, performance features, warranty etc. A company’s strategy can’t produce real market success unless I
fits the industry and competitive situation.

The Company’s Market Opportunities and External Threats

• INTERNAL FACTORS

Company Resource Strengths, Competencies and Competitive Capabilities. One of the most pivotal
strategy-shaping internal considerations is whether a company has or can acquire the resources,
competencies and capabilities needed to execute a strategy proficiently Intel’s long-standing global
leadership in microprocessors for PCs, servers, multibillion dollar R&D program, its state-of-the-art chip-
making plants, and its ability to spend $5 billion annually on new chip-making plants and the latest chip-
making equipment.

The Personal Ambitions, Business Philosophies and Ethical Beliefs of Managers

Both casual observation and formal studies indicate that manager’s ambitions. values, business philosophies,
attitudes toward risk and ethical beliefs have important influences on strategy. As one expert noted in
explaining the relevance of personal factors to strategy, “People have to have their hearts in it.”

The Influence of Shared Values and Company Culture on Strategy

An organization’s policies, practices, traditions, philosophical beliefs and ways of doing things combine to
create a distinctive culture. Strong cultural influences partly account for why companies gain reputations for
such strategic traits as leadership in technology and product innovation, dedication to superior
craftsmanship, a tendency for financial wheeling and dealing, a desire to grow rapidly by acquiring other
companies, having a strong people orientation and being an especially good company to work for, or
unusual emphasis on customer service and total customer satisfaction.

LINKING STRATEGY WITH ETHICS AND SOCIAL RESPONSIBILITY

Strategy ought to be ethical. It should involve rightful actions, not wrongful ones otherwise it won’t pass the
test of moral scrutiny.
Every business has an ethical duty to each of five constituencies: owners/shareholders, employees,
customers, suppliers and the community at large. Each of these constituencies affects the organization and is
affected by it.

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