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Chapter One

Strategic
Management
Process

Plans are nothing,


planning is everything.
- Dwight D. Eisenhower

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Even if you are on the right track,


youll get run over if you just sit
there.
- Will Rodgers

Business Strategy: The Concept and Trends in Its

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Where absolute superiority is not


attainable, you must produce a
relative one at the decisive point by
making skillful use of what you
have.
- Karl von Clausewitz,
On War, 1832

2005 John Wiley & Sons

What is Strategy?

Business Strategy: The Concept and Trends in Its Management

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2005 John Wiley & Sons

Strategy is a framework which


guides those choices that determine
the nature and direction of an
organization.
-Benjamin B. Tregoe &
John W. Zimmerman
Top Management Strategy

2005 John Wiley & Sons

Strategy is the creation of a unique


and valuable position, involving a
different set of activities.
-Michael Porter
What is Strategy?
Harvard Business Review

2005 John Wiley & Sons

In terms of the three key players


(competitors, customers, company)
strategy is defined as the way in which a
corporation endeavors to differentiate
itself positively from its competitors,
using its relative corporate strengths to
better satisfy customer needs.
-Kenichi Ohmae
The Mind of the Strategist

2005 John Wiley & Sons

Four dimensions define a business strategy:


the product-market investment strategy, the
customer value proposition, assets and
competencies, and functional strategies and
programs. The first specifies where to compete,
and the remaining three indicate how to
compete to win.
-David Aaker
Strategic Market Management

Exercise
Why should fluorescent tubes be long
and narrow?

2005 John Wiley & Sons

Why should photographs have to go


thru negative stage before it is printed?
Why should companies stockpile
inventories?
What happens when you have tight
controls over sales persons call time?

Why do some organizations


succeed while others fail?
Strategy is a set of related actions that managers
take to increase their companys performance.

Strategic Leadership
Task of most effectively managing a
companys strategy-making process

Strategy Formulation
Task of determining and selecting strategies

Strategy Implementation
Task of putting strategies into action to improve a
companys efficiency and effectiveness

Competitive Advantage

Results when a companys strategies lead to


superior performance compared to competitors
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Superior Performance and


Sustainable Competitive Advantage
Superior Performance
One companys profitability relative to that of other companies in
the same or similar business or industry
Maximizing shareholder value is the ultimate goal of profit making
companies

ROIC (Profitability) = Return On Invested Capital


ROIC

Net profit

Equity + Debt to creditors

Net income after tax


Capital invested

Competitive Advantage
When a companys profitability is greater than the average of all
other companies in the same industry & competing for the same
customers

Sustainable Competitive Advantage

When a companys strategies enable it to maintain


above average profitability for a number of years
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Determinants of
Shareholder Value
Figure 1.1

To increase shareholder value, managers must


pursue strategies that increase the profitability
of the company and grow the profits.
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Strategic degrees of freedom


Outside the manufacturers control
Assumed to be out of bounds
Within manufacturers control

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A Business Strategy
Where to Compete
The product-market investment decision

A Business
Business Strategy
Strategy
A

How to Compete
Value
Assets &
proposition competencies
Business Strategy: The Concept and Trends in Its

Function area
strategies and programs
Figure 1.1

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Companys Business Model


Managements model of how strategy will allow
the company to gain competitive advantage
and achieve superior profitability
A business model encompasses how the company will:
Select its customers
Deliver those goods and
services to the market
Define and differentiate
Organize activities within
its product offerings
the company
Create value for its
Configure its resources
customers
Acquire and keep
Achieve and sustain a
customers
high level of profitability
Produce goods or
Grow the business over
services
time
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Differences in Industry
and Company Performance
A Companys Profitability and
Profit Growth are determined
by two main factors:

The overall performance

of its industry relative


to other industries

Its relative success in its

industry as compared to the


competitors

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Return on Invested Capital


in Selected Industries, 19972003
Figure 1.2

Data Source: Value Line Investment Survey

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Performance in Nonprofit
Enterprises
Nonprofit entities such as government
agencies, universities, and charities:
Are not in business to make a profit
Should use their resources efficiently
and effectively
Set performance goals unique to the
organization
Set strategies to achieve goals and compete
with other nonprofits for scarce resources

A successful strategy gives potential


donors a compelling message as to
why they should contribute.
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Strategic Managers
Corporate Level Managers
Oversee the development of strategies for the
whole organization
The CEO is the principle general manager who
consults with other senior executives

General Managers
Responsible for overall company, business
unit, or divisional performance

Functional Managers
Responsible for supervising a particular task
or operation
e.g. marketing, operations, accounting, human resources

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Levels of Strategic Management


Figure 1.3

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The Five Steps of the


Strategy Making Process

Select the corporate vision, mission, and values


and the major corporate goals and objectives.

Analyze the external competitive environment to


identify opportunities and threats.

Analyze the organizations internal environment


to identify its strengths and weaknesses.
Select strategies that:

Build on the organizations strengths and correct its


weaknesses in order to take advantage of external
opportunities and counter external threats
Are consistent with organizations vision, mission, and values
and major goals and objectives
Are congruent and constitute a viable business model

Implement the strategies.


strat

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Figure 1.4

Main
Components
of the
StrategyMaking
Process

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Crafting the Organizations


Mission Statement

Provides a framework or context within


which strategies are formulated, including:
Mission
The reason for existence what an organization does

Vision
A statement of some desired future state

Values
A statement of key values that an organization is
committed to

Major Goals
The measurable desired future state that an
organization attempts to realize
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The Mission
The mission is a statement of a companys

raison detre, its reason for existence today.

What is it that the company does?


What is the companies business?
Who is being satisfied
(what customer groups)?
What is being satisfied
(what customer needs)?
How customer needs are being satisfied
(by what skills, knowledge, or distinctive competencies)?

A companys mission is best approached from


a customer-oriented business definition.
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The Mission
Customer-Oriented Examples
The mission of Kodak is to provide customers
with the solutions they need to capture, store,
process, output, and communicate images
anywhere, anytime.

Ford Motor Company describes itself as a


company that is passionately committed to
providing personal mobility for people around
the world.We anticipate consumer need and
deliver outstanding produces and services that
improve peoples lives.
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Abells Framework
for Defining the Business
Figure 1.5

Source: D. F. Abell, Defining the Business: The Starting Point of


Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.
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The Vision
What would the company like to achieve?
A good vision is meant to stretch a company by
articulating an ambitious but attainable future state.
The vision of Ford is to become the worlds
leading consumer company for automotive
products and services.

Nokia is the worlds largest manufacturer of


mobile phones and operates with a simple but
powerful vision: If it can go mobile, it will!
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Values
The values of a company should state:
How managers and employees should
conduct themselves
How they should do business
What kind of organization they need to build
to help achieve the companys mission
Organizational culture

The set of values, norms, and standards that control how


employees work to achieve an organizations mission and
goals
Often seen as an important source of competitive advantage

In high-performance organizations, values


respect the interests of key stakeholders.
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Values at Nucor

Management is obligated to manage Nucor in such a


way that employees will have the opportunity to earn
according to their productivity.
Employees should be able to feel confident that if
they do their jobs properly, they will have a job
tomorrow.
Employees have the right to be treated fairly and
must believe that they will be.
Employees must have an avenue of appeal when
they believe they are being treated unfairly.

At Nucor, values emphasizing pay for performance, job


security, and fair treatment for employees help to create
an atmosphere that leads to high employee productivity.
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Major Goals
A goal is a precise and measurable desired
future state that a company must realize
if
it is to attain its vision or mission.
Key characteristics of well-constructed goals:
1.
2.
3.
4.

Precise and measurable

to provide a
yardstick or standard to judge performance
Address crucial issues with a limited
number of key goals that help to maintain focus
Challenging but realistic to provide
employees with incentive for improving
Specify a time period to motivate and
inject a sense of urgency into goal attainment

Focus on long-run performance and


competitiveness.
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External Analysis
Purpose is to identify the strategic opportunities and
threats in the organizations operating environment
that will affect how it pursues its mission.

External Analysis requires an assessment of:


Industry environment in which company operates
Competitive structure of industry
Competitive position of the company
Competitiveness and position of major rivals

The country or national environments


in which company competes
The wider socioeconomic or macroenvironment
that may affect the company and its industry
Social
Government

Legal
International

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Technological

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Internal Analysis
Purpose is to pinpoint the strengths and weaknesses
of the organization. Strengths lead to superior
performance and weaknesses to inferior performance.

Internal analysis includes an assessment of:


Quantity and quality of a
companys resources and
capabilities
Ways of building unique
skills and company-specific
or distinctive competencies

Building & sustaining a competitive advantage


requires a company to achieve superior:
Efficiency Innovations
Quality

Responsiveness to customers

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Selecting Strategies: SWOT


Analysis and Business Model
SWOT analyses help to identify strategies that align
a companys resources and capabilities to its
environment in order to create and sustain a
competitive advantage.
Functional strategies should be consistent with and
support the companys business level and global
strategies.
Functional-level strategy directed at operational effectiveness
Business-level strategy businesses overall competitive themes
Global strategy expand, grow and prosper at a global level
Corporate-level strategy to maximize profitability and profit growth

When taken together, the various strategies


pursued by a company must lead to a
viable business model.
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Strategy Implementation
After choosing a set of congruent strategies to
achieve competitive advantage, managers must
put those strategies into action:

Implementation and execution of the strategic plans


Design of the best organization structure
Consistency of strategy with company culture
Control systems to measure and monitor progress
Governance systems for legal and ethical compliance
Consistency with maximizing profit and profit growth

The feedback loop strategic planning is ongoing


Managers must monitor strategy execution:
To determine if strategic goals and objectives are being achieved
To evaluate to what extent competitive advantage is being
created and sustained

Managers must monitor and reevaluate for the next round of


strategy formulation and implementation
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Planned, Deliberate, Emergent


and Realized Strategies
Figure 1.6

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Intended and Emergent Strategies


Intended or Planned Strategies
Strategies an organization plans to put into action
Typically the result of a formal planning process
Unrealized strategies are the result of unprecedented
changes and unplanned events after the formal planning is
completed

Emergent Strategies
Unplanned responses to unforeseen circumstances
Serendipitous discoveries and events may emerge that can
open up new unplanned opportunities
Must assess whether the emergent strategy fits the
companys needs and capabilities

Realized Strategies
The product of whatever intended strategies are actually put
into action and of any emergent strategies that evolve
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Strategic Planning in Practice


Recent studies suggest that formal planning does have a
positive impact on company performance and should
include the current and future competitive environments.

Scenario Planning
Recognizes that the future is inherently unpredictable
Develops strategies for possible future scenarios

Decentralized Planning
Involves the functional managers
Avoids the ivory tower approach
Perceives procedural justice in the decision making

Strategic Intent
Avoids the strategic fit model, which focuses too much on the
current state
Sets ambitious vision and goals that stretch a company and
then finds ways to build to attain those goals
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Strategic Decision Making


In spite of systematic planning, companies may adopt poor
strategies if groupthink or individual cognitive biases are
allowed to intrude into the decision-making process:

Cognitive biases:
Rules of thumb or heuristics resulting in systematic errors

Prior hypothesis bias


Escalating commitment
Reasoning by analogy
Representativeness
Illusion of control

Groupthink:
Decisionmakers embark on a course of action without
questioning the underlying assumptions
Group coalesces around a person or policy
Decisions based on an emotional rather than an objective assessment
of the correct course of action
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Processes for Improving


Decision Making
Figure 1.7

To bring out all the


reasons that might
make the proposal
unacceptable

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Reveals problems with


definitions, assumptions,
& recommended courses
of action

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Strategic Leadership
Good leaders of the strategy-making process
have a number of key attributes:

Vision, eloquence, and consistency


Commitment
Being well informed
Willingness to delegate and empower
The astute use of power
Emotional intelligence

Self-awareness
Self-regulation
Motivation
Empathy
Social skills

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End of Chapter

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