Strategic Management/ Business Policy

Power Point Set #1: Definitions of Strategy

The Wisdom of Choice:

To try and fail is at least to learn; to fail to try is to suffer the inestimable loss of what might have been.
Chester Barnard, The Functions of the Executive

What Is Strategic Management About?

Understanding how firms create, capture, and sustain competitive advantage. Analyzing strategic business situations and formulating strategic plans. [strategy content] Implementing strategy and organizing the firm for strategic success. [strategy process]

assess environmental factors

Strategy formulation Strategy implementation

Identify current mission and strategic goals

Conduct competitive analysis: strengths weakness opportunity threats

Develop specific strategies: corporate business functional

carry out strategic plans

maintain strategic control

assess organisational factors

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What Is Strategic Management About?

Sustainable competitive advantage occurs when a firm implements a value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.

An important basis for sustainable competitive advantage is the development of resources and capabilities.
Core competencies are resources and capabilities (often related to functional-level skills) that serve as a source of competitive advantage for a firm over its rivals.

Key Characteristics Of Strategic Decisions

Important;

Typically, under some Uncertainty;

Involves Alternatives, Consequences, and Choice; Significant Commitment of Resources; and

Not Easily Reversible.

Strategy Making :: Design or Process? Strategy Making Design or Process?

Strategy as Design Planning and rational choice Strategy as Process Many decision makers responding to multitude of external and internal forces EMERGENT STRATEGY

INTENDED STRATEGY

REALIZED STRATEGY
Mintzbergs Critique of Formal Strategic Planning: Mintzbergs Critique of Formal Strategic Planning: The fallacy of prediction the future is unknown The fallacy of prediction the future is unknown The fallacy of detachment -- impossible to divorce formulation from The fallacy of detachment -- impossible to divorce formulation from implementation implementation The fallacy of formalization --inhibits flexibility, spontaneity, The fallacy of formalization --inhibits flexibility, spontaneity, intuition and learning. intuition and learning.

The Evolution of Strategic Management The Evolution of Strategic Management

1950s
Budgetary planning & control Financial control

1960s
Corporate planning

Early-mid Late1970s 1970s early 1980s

Corporate strategy Analysis of industry & competition

Late 1980s Late 1990s early 1990s early 2000s

Quest for competitive advantage Competitive advantage Resource analysis. Case competences Strategic innovation The New Economy Innovation & knowledge Dynamic sources of advantage Knowledge management cooperation

DOMINANT THEME

MAIN ISSUES

Planning growth

Diversifica- Positioning ion Portfolio planning. Synergy market share Analysis of industry & competition

CONCEPTS & TECHNIQUES

Budgeting project appraisal

Forecasting & investment planning

IMPLEMENTATION

Emphasis on financial management

Rise of corporate planning departments & formal planning

DiversifiIndustry/market cation. selectivity. Quest for Active asset global management market share

Restructuring Virtual orgaBPR. nization. Refocusing Alliances Outsourcing Quest for critical mass

The Basic Framework The Basic Framework Strategy: the Link between the Strategy: the Link between the Firm and its Environment Firm and its Environment
THE FIRM
Goals & Values Resources & Capabilities Structure & Systems STRATEGY STRATEGY

THE INDUSTRY ENVIRONMENT

Competitors Customers Suppliers

How Does It Compare to Other Business Classes?

Macro level environment Task environment

Finance

Mktg.

Strategy
Acctg. H.R.

Oper .

The firm
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Task Environment
Customers and Markets: Distributors End users Competitors: Competitors for Markets Competitors for Resources

Suppliers:
Suppliers of physical resources Suppliers of financial resources Suppliers of human resources
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Task Environment
Regulatory Groups:

Government Unions Special Interest Groups

Technology:

Rate of Development Substitutes Stage of Product or Industry

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The Role of Strategy In Business is to Generate and Sustain Value via the Linkages Between Position, Resources, and Organization

Positioning

Resources & Capabilities

Organization

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Positioning
Scope of the Firm: Geographic Scope Product-market Scope: Choice of businesses (corporate portfolio analysis) Product Market Positioning within a business Vertical integration decisions

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Resources & Capabilities

Tangible Resources
e.g., physical capital

Organizational Capabilities
e.g., routines and standard operating procedures

Intangible Resources
e.g., trademarks, know-how

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Organization
Structure
Formal Definition of authority Conflict Resolution

Systems
Rules, Routines, Evaluation and rewards

Processes
Informal communication, networks, recruitment
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Definitions of Strategy
The term strategy is intended to focus on the interdependence of the adversaries decisions and on their expectations about each others behavior (Thomas Schelling The Strategy of Conflict) Strategy can be defined as the determination of the basic longterm goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals. (Alfred D. Chandler Strategy and Structure) Strategy is: The pattern or plan that integrates an organizations major goals, policies, and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organizations resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents. (James Brian Quinn, Logical Incrementalism)
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Defining the Business: The Starting Point of Strategy

Example: Fall of the Railroads

They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.
Theodore Levitt Market Myopia

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Mission Statement and Goals

It is the function of the top management team to provide the firms purpose or strategic intent.
Chester Barnard The Functions of the Executive

Alfred Sloan My Years with General Motors

Komatsu ---> Canon ---> Kodak ---> Coca Cola --->

Encircle Caterpillar Beat Xerox Be the leader in the imaging sector To put a Coke within arms reach of every consumer in the world.

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Fundamental question of the choice of Goals: Planning for what purpose(s)?

Profitability (net profits) Efficiency (low costs) Market Share Growth (e.g., increase in total assets, sales, etc) Shareholder Wealth (dividends plus stock price appreciation) Utilization of Resources (e.g., ROE, ROI) Reputation Contribution to Stakeholders (e.g., employees, society) Survival (avoid bankruptcy)
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The Managers role in balancing expectations

Business Roundtable: Balancing the shareholders expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. Understanding corporate strategy means understanding the competing value claims of multiple stakeholders. Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firms performance.

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Key Drivers of Value Creation and Sustainable Competitive Advantage:

Generating economic value can be accomplished through:
REVENUE drivers COST drivers RISK drivers
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Value and Cost Drivers

Figure 2.5

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Sources of Superior Profitability

INDUSTRY ATTRACTIVENESS

RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL

Which businesses should we be in?

CORPORATE STRATEGY

How do we make money?

COMPETITIVE ADVANTAGE

How should we compete?

BUSINESS STRATEGY
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The Levels of Strategy

Corporate - General Electric

Corporate Headquarters Division A

R&D HR

Business - Home Appliances

Division B
R&D HR Finance Production Mktg/Sales

Division C
R&D HR Finance Production Mktg/Sales

Functional - e.g., Production

Finance Production Mktg/Sales

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Corporate Strategy
At the corporate level, value creation can occur if the individual parts of a firm are integrated into a coherent whole. Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities.

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An optimal decision An optimal decision is possible is possible All relevant information All relevant information is available is available All relevant information is All relevant information is understandable understandable All alternatives are known All alternatives are known All possible outcomes known All possible outcomes known
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Managers as Managers as decision makers decision makers

Assumptions of the Assumptions of the Rational Model Rational Model

Rational Rational decision decision making making

BARTOL, MANAGEMENT: A PACIFIC RIM FOCUS 3E

McGraw-Hill Australia 2001

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Time constraints Time constraints

Managers as Managers as decision makers decision makers

Satisficing Satisficing

Limited ability to Limited ability to understand all factors understand all factors Inadequate base Inadequate base of information of information Limited memory of Limited memory of decision-makers decision-makers Poor perception of factors Poor perception of factors to be considered to be considered in decision process in decision process
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Satisficing Satisficing decision decision making making

BARTOL, MANAGEMENT: A PACIFIC RIM FOCUS 3E

McGraw-Hill Australia 2001

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Our Learning Goals:

Pushing Down Through Blooms Taxonomy
1. Knowledge: remember remember
material; know terms, facts, material; know terms, facts, procedures, basic concepts procedures, basic concepts grasp meaning; understand grasp meaning; understand facts, interpret charts, facts, interpret charts, translate verbal to math translate verbal to math estimate consequences estimate consequences material in new situations; material in new situations; apply concepts to real apply concepts to real situations, follow a procedure situations, follow a procedure

4. Analysis: break material break material

2. Comprehension:

into components & understand into components & understand structure; recognize logical structure; recognize logical fallacies, distinguish fact and fallacies, distinguish fact and inference, evaluate relevancy of inference, evaluate relevancy of data data to make a new whole, integrate to make a new whole, integrate learning to solve a problem learning to solve a problem consistency, judge whether consistency, judge whether conclusions are supported by conclusions are supported by facts facts

5. Synthesis: integrate parts integrate parts

3. Application: use use

6. Evaluations: judge logical judge logical

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Summary Takeaways
Providing PURPOSE is an important function for the executive. One important purpose is to CREATE VALUE. Value creation can lead to SUSTAINABLE COMPETITIVE ADVANTAGE.

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