business strategy chapter 1

The Nature ofStrategic ManagementChapter One

Copyright 2013 Pearson Education

Chapter ObjectivesDescribe the strategic-management process.Explain the need for integrating analysis and intuition in strategic management.Define and give examples of key terms in strategic management.Discuss the nature of strategy formulation, implementation, and evaluation activities.1-*Copyright 2013 Pearson Education


Chapter Objectives (cont.)Describe the benefits of good strategic management.Discuss the relevance of Sun Tzus The Art of War to strategic management.Discuss how a firm may achieve sustained competitive advantage.

Copyright 2013 Pearson Education1-*


Defining Strategic ManagementStrategic management the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives1-*Copyright 2013 Pearson Education


Defining Strategic ManagementStrategic management is used synonymously with the term strategic planning.Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation.1-*Copyright 2013 Pearson Education


Defining Strategic ManagementA strategic plan is a companys game plan.A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations.1-*Copyright 2013 Pearson Education


Stages of Strategic ManagementStrategy formulation includes developing a vision and mission, identifying an organizations external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue1-*Copyright 2013 Pearson Education


Strategy FormulationDeciding what new businesses to enter, What businesses to abandon, How to allocate resources, Whether to expand operations or diversify, Whether to enter international markets, Whether to merge or form a joint venture,How to avoid a hostile takeover.1-*Copyright 2013 Pearson Education


Stages of Strategic ManagementStrategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executedoften called the action stage1-*Copyright 2013 Pearson Education


Stages of Strategic ManagementStrategy evaluationreviewing external and internal factors that are the bases for current strategies, measuring performance, and taking corrective actions1-*Copyright 2013 Pearson Education


Stages of Strategic ManagementStrategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functionalStrategic management helps a firm function as a competitive team1-*Copyright 2013 Pearson Education


Integrating Intuition and AnalysisMost organizations can benefit from strategic management, which is based upon integrating intuition and analysis in decision makingIntuition is particularly useful for making decisions in situations of great uncertainty or little precedent1-*Copyright 2013 Pearson Education


Adapting to ChangeThe second-largest bookstore chain in the United States, Borders Group, declared bankruptcy in 2011 as the firm had not adapted well to changes in book retailing from traditional bookstore shopping to customers buying online, preferring digital books to hard copiesBorders was on the brink of financial collapse before being acquired in July 2011 by Direct BrandsCopyright 2013 Pearson Education1-*


Key Terms in Strategic ManagementCompetitive advantage anything that a firm does especially well compared to rival firmsStrategists the individuals who are most responsible for the success or failure of an organization1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementMission statements enduring statements of purpose that distinguish one business from other similar firmsidentifies the scope of a firms operations in product and market terms addresses the basic question that faces all strategists: What is our business?1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementExternal opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future1-*Copyright 2013 Pearson Education


Some Opportunities and ThreatsComputer hacker problems are increasing.Intense price competition is plaguing most firms.Unemployment and underemployment rates remain high.Interest rates are rising.Product life cycles are becoming shorter.State and local governments are financially weak.1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementInternal strengths and internal weaknesses an organizations controllable activities that are performed especially well or poorlydetermined relative to competitors1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementObjectives specific results that an organization seeks to achieve in pursuing its basic missionlong-term means more than one yearshould be challenging, measurable, consistent, reasonable, and clear1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementStrategies the means by which long-term objectives will be achievedmay include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementAnnual objectives short-term milestones that organizations must achieve to reach long-term objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritizedshould be established at the corporate, divisional, and functional levels in a large organization1-*Copyright 2013 Pearson Education


Key Terms in Strategic ManagementPoliciesthe means by which annual objectives will be achievedinclude guidelines, rules, and procedures established to support efforts to achieve stated objectivesguides to decision making and address repetitive or recurring situations1-*Copyright 2013 Pearson Education


Benefits of Strategic ManagementHistorically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice1-*Copyright 2013 Pearson Education


Benefits of Strategic ManagementCommunication is a key to successful strategic managementThrough dialogue and participation, managers and employees become committed to supporting the organizationCopyright 2013 Pearson Education1-*


Financial BenefitsBusinesses using strategic-management concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic planning activitiesHigh-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences1-*Copyright 2013 Pearson Education


Nonfinancial BenefitsIt allows for identification, prioritization, and exploitation of opportunities.It provides an objective view of management problems.It represents a framework for improved coordination and control of activities.It minimizes the effects of adverse conditions and changes.1-*Copyright 2013 Pearson Education


Nonfinancial BenefitsIt allows major decisions to better support established objectives.It allows more effective allocation of time and resources to identified opportunities.It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.It creates a framework for internal communication among personnel.1-*Copyright 2013 Pearson Education


Why Some Firms Do No Strategic PlanningLack of knowledge in strategic planningPoor reward structuresFirefightingWaste of timeToo expensiveLazinessContent with success1-*Copyright 2013 Pearson Education


Pitfalls in Strategic PlanningUsing strategic planning to gain control over decisions and resourcesDoing strategic planning only to satisfy accreditation or regulatory requirementsToo hastily moving from mission development to strategy formulationFailing to communicate the plan to employees, who continue working in the darkTop managers making many intuitive decisions that conflict with the formal plan1-*Copyright 2013 Pearson Education


Pitfalls in Strategic PlanningTop managers not actively supporting the strategic-planning processFailing to use plans as a standard for measuring performanceDelegating planning to a planner rather than involving all managersFailing to involve key employees in all phases of planningFailing to create a collaborative climate supportive of change1-*Copyright 2013 Pearson Education


Comparing Business and Military StrategyA fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas military strategy is based on an assumption of conflictBoth business and military organizations must adapt to change and constantly improve to be successful1-*Copyright 2013 Pearson Education


Excerpts from Sun Tzus The Art of War WritingsWar is a matter of vital importance to the state: a matter of life or death, the road either to survival or ruin. Hence, it is imperative that it be studied thoroughlyKnow your enemy and know yourself, and in a hundred battles you will never be defeatedSkillful leaders do not let a strategy inhibit creative counter-movement1-*Copyright 2013 Pearson Education


1-*Copyright 2013 Pearson Education


Describe the strategic-management process.Explain the need for integrating analysis and intuition in strategic management.Define and give examples of key terms in strategic management.Discuss the nature of strategy formulation, implementation, and evaluation activities.

*Describe the benefits of good strategic management.Discuss the relevance of Sun Tzus The Art of War to strategic management.Discuss how a firm may achieve sustained competitive advantage.

*Strategic management is defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives

*Strategic management in this text is used synonymously with the term strategic planningSometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation.

*A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, less desirable courses of action.

*The strategic-management process consists of three stages: strategy formulation, strategy implementation,and strategy evaluation.*Strategy formulation includes developing a vision and mission, identifying an organizations external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue

*Deciding what new businesses to enter, What businesses to abandon, How to allocate resources, Whether to expand operations or diversify, Whether to enter international markets, Whether to merge or form a joint ventureHow to avoid a hostile takeover.

*Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed and is often called the action stage

*Strategy evaluation is defined as reviewing external and internal factors that are the bases for current strategies, measuring performance, and taking corrective actions

*Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functionalStrategic management helps a firm function as a competitive team

*Most organizations can benefit from strategic management, which is based upon integrating intuition and analysis in decision making

Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent

*Competitive advantage is anything that a firm does especially well compared to rival firmsStrategists are the individuals who are most responsible for the success or failure of an organization.

*The Vision statement answers the question What do we want to become? and is often considered the first step in strategic planning

*Mission statements are enduring statements of purpose that distinguish one business from other similar firms. It identifies the scope of a firms operations in product and market terms and addresses the basic question that faces all strategists: What is our business?*External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future

* Availability of capital can no longer be taken for granted. Consumers expect green operations and products. Marketing moving rapidly to the Internet. Commodity food prices are increasing. Political unrest in the Middle East is raising oil prices. Computer hacker problems are increasing. Intense price competition is plaguing most firms. Unemployment and underemployment rates remain high. Interest rates are rising. Product life cycles are becoming shorter. State and local governments are financially weak. Turmoil and violence in Mexico is increasing. Winters are colder and summers hotter than usual. Home prices remain exceptionally low. Global markets offer the highest growth in revenues.*Internal strengths and internal weaknesses are an organizations controllable activities that are performed especially well or poorlyand are determined relative to competitors*Objectives are specific results that an organization seeks to achieve in pursuing its basic mission. Long-term means more than one yearThey should be challenging, measurable, consistent, reasonable, and clear

*Strategies are the means by which long-term objectives will be achieved. They may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures.

*Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. They should be measurable, quantitative, challenging, realistic, consistent, and prioritizedThey should be established at the corporate, divisional, and functional levels in a large organization.

*Strategies currently being pursued by some companies are described in Table 1-1.*Policies are the means by which annual objectives will be achieved. They include guidelines, rules, and procedures established to support efforts to achieve stated objectivesPolicies are guides to decision making and address repetitive or recurring situations

*These are three important questions to answer in developing a strategic plan:Where are we now?Where do we want to go?How are we going to get there?*The framework illustrated in Figure 1-1 is a widely accepted, comprehensivemodel of the strategic-management process.12 This model does not guarantee success, butit does represent a clear and practical approach for formulating, implementing, and evaluating strategies.Relationships among major components of the strategic-management process are shown in themodel, which appears in all subsequent chapters with appropriate areas shaped to show the particularfocus of each chapter.*Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice

*Figure 1-2 illustrates thisintrinsic benefit of a firm engaging in strategic planning. Note that all firms need all employees on amission to help the firm succeed.*Businesses using strategic-management concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic planning activities

High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences

*It allows for identification, prioritization, and exploitation of opportunities.It provides an objective view of management problems.It represents a framework for improved coordination and control of activities.It minimizes the effects of adverse conditions and changes.

*It allows major decisions to better support established objectives.It allows more effective allocation of time and resources to identified opportunities.It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.It creates a framework for internal communication among personnel.* Lack of knowledge or experience in strategic planningNo training in strategic planning. Poor reward structuresWhen an organization assumes success, it often fails to rewardsuccess. When failure occurs, then the firm may punish. FirefightingAn organization can be so deeply embroiled in resolving crises and firefightingthat it reserves no time for planning. Waste of timeSome firms see planning as a waste of time because no marketable productis produced. Time spent on planning is an investment. Too expensiveSome organizations see planning as too expensive in time and money. LazinessPeople may not want to put forth the effort needed to formulate a plan. Content with successParticularly if a firm is successful, individuals may feel there is noneed to plan because things are fine as they stand. But success today does not guaranteesuccess tomorrow.* Fear of failureBy not taking action, there is little risk of failure unless a problem isurgent and pressing. Whenever something worthwhile is attempted, there is some risk offailure. OverconfidenceAs managers amass experience, they may rely less on formalizedplanning. Rarely, however, is this appropriate. Being overconfident or overestimatingexperience can bring demise. Forethought is rarely wasted and is often the mark ofprofessionalism. Prior bad experiencePeople may have had a previous bad experience with planning, thatis, cases in which plans have been long, cumbersome, impractical, or inflexible. Planning,like anything else, can be done badly. Self-interestWhen someone has achieved status, privilege, or self-esteem through effectivelyusing an old system, he or she often sees a new plan as a threat. Fear of the unknownPeople may be uncertain of their abilities to learn new skills, oftheir aptitude with new systems, or of their ability to take on new roles. Honest difference of opinionPeople may sincerely believe the plan is wrong. They mayview the situation from a different viewpoint, or they may have aspirations for themselvesor the organization that are different from the plan. Different people in different jobs havedifferent perceptions of a situation. SuspicionEmployees may not trust management*Using strategic planning to gain control over decisions and resourcesDoing strategic planning only to satisfy accreditation or regulatory requirementsToo hastily moving from mission development to strategy formulationFailing to communicate the plan to employees, who continue working in the darkTop managers making many intuitive decisions that conflict with the formal plan

*Top managers not actively supporting the strategic-planning processFailing to use plans as a standard for measuring performanceDelegating planning to a planner rather than involving all managersFailing to involve key employees in all phases of planningFailing to create a collaborative climate supportive of change

*Table 1-3summarizes important guidelines for the strategic-planning process to be effective.*A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas military strategy is based on an assumption of conflict

Both business and military organizations must adapt to change and constantly improve to be successful

*War is a matter of vital importance to the state: a matter of life or death, the road either to survival or ruin. Hence, it is imperative that it be studied thoroughlyKnow your enemy and know yourself, and in a hundred battles you will never be defeated.Skillful leaders do not let a strategy inhibit creative counter-movement

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