CHAPTER 1

Basic Concepts
of Strategic
Management

STRATEGIC MANAGEMENT & BUSINESS

POLICY
11TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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 1.1 THE STUDY OF STRATEGIC MANAGEMENT

Set of managerial decisions and actions

that determines the long-run performance
of a firm.

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 Phases of strategic management

4 Phases of Strategic Management

• Basic financial planning: little analysis w/ internal
info. Time horizon: 1 year (typical)
• Forecast-based planning: consider longer than 1
yr projects. More external data used. Politics
involved for larger share among managers.
• Externally-oriented (strategic) planning: seeks to
increase responsiveness to changing markets
and competition. Involve Sr. level w/consultant.
• Strategic management: use ≠ levels w/in firm to
solicit inputs to achieve firm’s primary objectives.
Details the implementation, evaluation, & control
issues instead of forecasting for 5 yrs.
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 Benefits of strategic management

Highly rated benefits of strategic

management – survey of nearly 50
corps. worldwide:

• Clearer sense of strategic vision

• Sharper focus on strategic importance
• Improved understanding of changing
environment

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 Benefits of Strategic Management

Need Not Always be a Formal Process

• Where is the organization now? (not

where do we hope it is)
• If no changes are made, where will the
organization be in 1,2,5 or 10 years?
• What specific actions should
management undertake?
• What are the risks and payoffs?

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1.2 Globalization and E-Commerce: challenges to strategic management

Impact of Globalization
Internationalization of markets and corporations
Global (worldwide) markets rather than national markets.
NAFTA, EU, Mercosur, CAFTA, ASEAN, ....

Electronic Commerce
Use of the Internet to conduct business transactions
Basis for competition on a more strategic level rather than
traditional focus on product features and costs

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1.2 Globalization and E-Commerce: challenges to strategic management

Electronic Commerce -- Trends

• Forcing company transformation: electronically

networking customers, suppliers, and partners.
• Market access & branding changing – breaking
down (disintermediation) of traditional distribution
channels by working directly w/customers.
• Balance of power shift to consumer: more options
– knowledge of product specs; more sub-products
• Competition changing: more innovative and
efficient

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1.2 Globalization and E-Commerce: challenges to strategic management

Electronic Commerce -- Trends

• Pace of business increasing: info needed,

expectation increased  feeling of dog year.
• Internet purchasing beyond traditional
boundaries: use of extranet to link suppliers,
manufacturers, and customers.
• Knowledge key asset – source of competitive
advantage: traditional accounting assets reduced
& replaced by intangible assets such as powerful
brands, intellectual capital (key relationships,
proprietary processes, & skilled employees).
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 1.3 THEORIES OF ORGANIZATIONAL ADAPTATION

Organization “fit” with environment

• Theory of population ecology: successful niche

prevents changes of a firm.
• Institution theory: reversed of population
ecology – by imitating successful firms.
• Strategic choice perspective: firms can change
and reshape their environment.
• Organizational learning theory: firm adjusts
defensively to its environment & uses
knowledge offensively to improve the fit between
itself and its environment.
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 1.4 CREATING A LEARNING ORGANIZATION

A learning organization is a company that

has evolved to the point that its primary
value is in helping itself to operate
successfully in a dynamic, complex
environment.
• Demand a long term commitment to the
development and nurturing of critical
resources.
• Demand an organization skilled at
creating, acquiring, and transferring
knowledge and at modifying its behavior
to reflect new knowledge and insights.

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 1.4 Learning Organizations

4 Chief Activities

• Systematic problems solving

• New approach experimentation
• Learning from experiences
• Intra-organization knowledge transfer

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 1.5 BASIC MODEL OF STRATEGIC MANAGEMENT

Four Basic Elements of the Strategic

Management Process

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 1.5 a. Environmental Scanning

is defined as the monitoring, evaluation, and

disseminating information to key people in
the firm. Its purpose is to identify strategic
factors (from external and internal elements)
that will determine the future of the corporation.

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 1.5 a. Environmental Scanning

Environmental Variables

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 1.5 a. Environmental Scanning Defined

SWOT Analysis
• External environment: consists of variables
(opportunities & threats) that are outside of an
organization & not w/in the short-run control of
top management (they may be general forces
and trends w/in the overall societal environment
or specific factors operated w/in an org’s specific
task environment – namely its industry.
• Internal environment: includes the corp’s
structure, culture, and resources; core
competencies used by a firm to gain competitive
advantage.
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 1.5 b. Strategy Formulation

Development of long-range plans for effective

management of opportunities and threats,
in light of corporate strengths and
weaknesses (SWOT). It includes defining
the corporate mission, specifying
achievable objectives, developing
strategies, and setting policy guidelines.

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 1.5 b Strategy Formulation

1. Mission (statement of a corporation)

An organization’s mission is the Purpose or

reason for the organization’s existence:
tell what the firm provides to society.
The mission statement:
• promotes a sense of shared expectations in
employees and
• communicates public image to important
stakeholder groups in the company’s task
environment
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 1.5 b.1 Strategy Formulation

A mission statement describes what the organization

is now.
A vision statement delineates what the organization
would like to become.
A value statement lists the company’s value and
philosophy of doing business.
Ex. “To improve the quality of home life by designing,
building, marketing, and servicing the best
appliances in the world” – Maytag Corp.
Ex. “We shall build good ships here – at a profit if we
can – at a loss if we must – but always good ships”
– Newport News Shipbuilding (since 1886)
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 1.5 b Strategy Formulation

2. Objectives:
a. are the end results of planned activities. S/B
stated as action verbs (tell what’s accomplished by
when & quantifiable if possible)
b. Goal is defined as open ended statement of what
one wants to accomplish, w/no quantification of
what is to be achieved and no time criteria for
completion.

They goals and objectives are sometimes used

interchangeably.

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 1.5 Goals & Objectives
Corporate
Goals/Objectives - Contributions to
employees (security,
- Profitability (net profits) wages, diversity)
- Efficiency (low costs,...) - Contributions to society
- Growth (total assets, (taxes paid, charity, ...)
sales, ...) - Market leadership
- Shareholder wealth (share)
(dividends + stock price - Technological
appreciation) leadership (innovations)
- Utilization of resources - Survival (avoid
(ROE or ROI) bankruptcy)
- Reputation - Personal needs of top
management (job for
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 1.5 b Strategy Formulation

3. Strategies:
A strategy of a corp. forms a comprehensive master
plan that states how the corporation will achieve its
mission and objectives. It maximizes competitive
advantage and minimizes competitive disadvantage.

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 Strategy Formulation

Three types of strategy

– Corporate strategy: overall direction – stability, growth,
and retrenchment (reduce expenses, economize).
– Business strategy: occurs at the business unit or
product level. Grouped into 2 categories:
• Competitive: to differentiate by adding extra activities. Staples as
a retail store and add services such as copying, UPS shipping, ...
• Cooperative: is used to support competitive. Intel in alliance with
Microsoft to differentiate itself from AMD.

– Functional strategy: concern w/developing & nurturing

a distinctive competence to maintain a competitive
advantage.
• Technological follower-ship: imitation of products of other
companies.
• Technological leadership: pioneering of an innovation.
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 Basic Concepts of Strategic Management

Hierarchy of
Strategy:
Nesting within one
another to
complement and
support one another.
Functional supports
Business, and
Business supports
Corporate.

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 1.5 b Strategy Formulation

4. Policies:
is a broad guideline for decision making that links the
formulation of a strategy with its implementation.
Companies use policies to make sure that
employees throughout the firm make decisions and
take actions that support the corporation’s mission,
objectives, and strategies.
Ex. When Cisco decided on a strategy of growth through
acquisitions, it established a policy to consider only
companies with no more than 75 employees, 75% of
whom were engineers.

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 1.5 c Strategy Implementation

Strategy implementation is a process by which

strategies and policies are put into action
through the development of programs,
budgets, and procedures.

1. Program: Boeing implemented a series of

programs to regain its industry leadership on
Boeing 787.
2. Budgets: used in planning and control, serves as
a detailed plan of new strategy and/or pro forma.
3. Procedures (SOP): a system of sequential steps
or techniques that describe in detail how a
particular task or job is to be done.
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 1.5 d Evaluation and Control

Evaluation and Control is a process in which

corporate activities and performance results
are monitored so that actual performance can
be compared with the desired performance.

Managers at all levels use the resulting information to

take corrective action and resolve problems.

Performance includes the actual outcomes of the

strategic management process. The practice of
strategic management is justified in terms of its
ability to improve an org’s performance (in terms of
profits and ROI).
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 1.6 INITIATION OF STRATEGY: TRIGGERING EVENTS

Henry Mintzberg discovered that strategy formulation

is typically not a regular, continuous process: “It is
most often an irregular, discontinuous process,
proceeding in fits and starts. There are periods of
stability in strategy development, but also there are
periods of flux, of groping, of piecemeal change,
and of global change.”
Human tendency is to continue on a particular course
of action until something goes wrong or a person is
forced to question his or her actions.
Most large corporations tend to follow a particular
strategic orientation for about 15 to 20 years
before making a significant change in direction
(known as punctuated equilibrium).
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 1.7 STRATEGIC DECISION MAKING

What makes a decision strategic?

Strategic decisions deal with the long-run future of an
entire organization and have 3 characteristics:
• Rare: strategic decision are unusual and typically
have no precedent to follow.
• Consequential: strategic decisions commit
substantial resources and demand a great deal of
commitment from people at all levels.
• Directive: strategic decisions set precedents for
lesser decisions and future actions through out an
organization.

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 1.7 Strategic Decision Making

Mintzberg’s modes of strategic decision making

(1st three, 4th was added by Quinn):
• Entrepreneurial mode: made by one powerful individual
mainly for the growth of a firm.
• Adaptive mode: by reactive solutions to existing problems
rather than a proactive search for new opportunities.
• Planning mode: involves systematic gathering of
appropriate info for situation analysis, the generation of
feasible alternative strategies, & the rational selection of
the most appropriate strategy. It includes both reactive and
proactive solutions.
• Logical incrementalism: corporate headquarters
established the mission and objectives but allowed
business units to propose strategies to achieve them.
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 1.7 Strategic Decision Making

Strategic decision making process: aids to

better decisions.
Depending on unique situations, different modes can be used.
However, in general, research has founded planning
mode is a more rationale in most situations which includes
more analytical and less political than other modes.

See page 22 for more details.

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Strategic
Decision-Making
1-31

Process
 1.8 THE STRATEGIC AUDIT: AID TO STRATEGIC DECISION MAKING

A strategic audit provides a checklist of

questions, by area or issue, that enables a
systematic analysis to be made of various
corporate functions and activities (see
Appendix 1.A on pages 26 through 33).

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 1.9 CONCLUSION

Strategy Scholars Donald Hambrick and James

Fredrickson propose that a good strategy
has five elements, providing answers to five
questions:
• Arenas: where will we be active?
• Vehicles: How will we get there?
• Differentiators: How will we win in the market
places?
• Staging: What will be our speed and sequence of
moves?
• Economic logic: How will we obtain our returns?

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