Strategic Management

1
Strategic Management

• Chapter 1

2
Dimensions of Strategic Decisions

• Strategic issues require top-management decisions
• Strategic issues require large amounts of the
  firms resources
• Strategic issues often affect the firms
  long-term prosperity
• Strategic issues are future oriented
• Strategic issues usually have multifunctional or
  multibusiness consequences
• Strategic issues require considering the firms
  external environment

3
Three Levels of Strategy

• Corporate level board of directors, CEO
  administration Highest
• Business level business and corporate managers
  Middle
• Functional level Product, geographic, and
  functional area managers Lowest

4
Characteristics of Strategic Management
Decisions Corporate

• Often carry greater risk, cost, and profit
  potential
• Greater need for flexibility
• Longer time horizons
• Choice of businesses, dividend policies, sources
  of long-term financing, and priorities for growth

5
Characteristics of Strategic Management
Decisions Business

• Help bridge decisions at the corporate and
  functional levels
• Less costly, risky, and potentially profitable
  than corporate-level decisions
• More costly, risky, and potentially profitable
  than functional-level decisions
• Include decisions on plant location, marketing
  segmentation, and distribution

6
Characteristics of Strategic Management
Decisions Functional

• Implement the overall strategy formulated at the
  corporate and business levels
• Involve action-oriented operational issues
• Relatively short range and low risk
• Modest costs depend upon available resources
• Relatively concrete and quantifiable

7
Company Mission

• Chapter 2

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Four Essential Components

• Basic Product or Service
• Primary Market--WHO
• Where
• Financial position

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Primary Company Goals

• Survival A firm that cant survive cant
  satisfy its stakeholders. (Often taken for
  granted)
• Profitability the mainstay goal of a business.
• Growth is tied to survival and profitability.
  Broadly defined in terms of market share, etc.

10
Company PhilosophyBULLETS

• Covers

• Stakeholders

• Customers
• Employees
• Management
• Stockholders

• Suppliers
• Community
• Social responsibility
• Taxes
• Environmental protection

11
Agency Theory

• Agency theory --based on the belief that the
  separation of the ownership from management
  creates a situation where managers will spend the
  stockholders money in ways they would not spend
  their own.

12
Agency Costs

• The cost of agency problems plus the cost of
  actions taken to minimize agency problems are
  collectively termed agency costs.

13
How Agency Problems Occur

• Moral hazard problem--Executives have
  disproportionate access to company information.
• Adverse selection--a problem caused by the
  limited ability of stockholders to determine the
  competencies and priorities of executives they
  hire.

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Problems Resulting from Agency

• Executives pursue growth in company size rather
  than earnings
• Executives attempt to diversify their corporate
  risk
• Executives avoid healthy risk
• Managers act to optimize their personal payoffs
• Executives protect their status

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Solutions to Agency Problem

• Owners pay executives a premium for their service
  to increase loyalty
• Executives receive back-loaded compensation.
• Creating teams of executives across different
  units of a corporation can help to focus
  performance measures on organizational rather
  than personal goals.

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Aligning Executive Interests with Owner Interests

• Stock Option Plans
• Bonus plans
• Incentives for Long-Term Performance

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Corporate Social Responsibility and Business
Ethics

• Chapter 3

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Dynamics of Social Responsibility

• Inside vs. Outside Stakeholders
• Duty to serve society plus duty to serve
  stockholders
• Flexibility is key
• Firms differ along
• Competitive Position
• Industry
• Country
• Environmental Pressures
• Ecological Pressures

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Types of Social Responsibility

• Economic the duty of managers, as agents of the
  company owners, to maximize stockholder wealth
• Legal the firms obligations to comply with the
  laws that regulate business activities
• Ethical the companys notion of right and
  proper business behavior.
• Discretionary voluntarily assumed by a business
  organization.

20
Corporate Social Responsibility Profitability

• Corporate social responsibility (CSR), is the
  idea that business has a duty to serve society in
  general as well as the financial interests of
  stockholders.
• The dynamic between CSR and success (profit) is
  complex. They are not mutually exclusive, and
  they are not prerequisites of each other.
• Better to view CSR as a component in the
  decision-making process of business that must
  determine, among other objectives, how to
  maximize profits.

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Factors Complicating a Cost-Benefit Analysis of
CSR

1. Some CSR activities incur no dollar costs at all.
   In fact, the benefits from philanthropy can be
   huge.
2. Socially responsible behavior does not come at a
   prohibitive cost.
3. Socially responsible practices may create
   savings, and, as a result, increase profits.
4. Proponents argue that CSR costs are more than
   offset in the long run by an improved company
   image and increased community goodwill.

22
Sarbanes-Oxley Act of 2002

• CEO and CFO must certify every report containing
  companys financial statements
• Restricted corporate control of executives,
  acting, firms, auditing committees, and attorneys
• Specifies duties of registered public acting
  firms that conduct audits
• Composition of the audit committee and specific
  responsibilities
• Rules for attorney conduct
• Disclosure periods are stipulated
• Stricter penalties for violations

23
New Corporate Governance Structure

• Restructuring governance structure in American
  corporations
• Heightened role of corporate internal auditors
• Auditors now routinely deal directly with top
  corporate officials
• CEO information provided directly by the
  companys chief compliance and chief accounting
  officers

24
Social Audit

• A social audit is an attempt to measure a
  companys actual social performance against its
  social objectives.
• The social audit may be used for more than simply
  monitoring and evaluating firm social
  performance.

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Management Ethics

• The Nature of Ethics in Business
• Belief that managers will behave in an ethical
  manner is central to CSR
• Ethics the moral principles that reflect
  societys beliefs about the actions of an
  individual or a group that are right and wrong
• Ethical standards reflect the end product of a
  process of defining and clarifying the nature and
  content of human interaction

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3 BASIC Approaches to Questions of Ethics

• Utilitarian Approach
• Moral Rights Approach
• Social Justice Approach

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The External Environment

• Chapter 4

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External Environment

• The factors beyond the control of the firm that
  influence its choice of direction and action,
  organizational structure, and internal processes

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Remote Environment

• Economic Factors
• Social Factors
• Political Factors
• Technological Factors
• Ecological Factors

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Economic Factors

• Prime interest rates
• Inflation rates
• Trends in the growth of the gross national
  product
• Unemployment rates
• Globalization of the economy
• Outsourcing

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Social Factors

• Beliefs Values
• Attitudes Opinions
• Lifestyles

32
Demographics

• Age
• Ethnic composition
• Gender
• Health considerations
• Religion
• Education
• Quality-of-life issues

33
Political Factors

• Legal regulatory parameters
• Fair-trade Decisions
• Antitrust Laws
• Tax Programs
• Minimum Wage Legislation
• Pollution and Pricing Policies
• Administrative jawboning
• Obama care

34
Technological Factors

• Speed of new developments

35
Ecological Factors

• Ecology refers to the relationships among human
  beings and other living things and the air, soil,
  and water that supports them.
• Threats to our life-supporting ecology caused
  principally by human activities in an industrial
  society are commonly referred to as pollution
• Loss of habitat and biodiversity
• Environmental legislation
• Eco-efficiency

36
International Environment

• Monitoring the international environment
• involves assessing each non-domestic market on
  the same factors that are used in a domestic
  assessment.
• While the importance of factors will differ, the
  same set of considerations can be used for each
  country.
• Economic, political, legal, and social factors
  are used to assess international environments.
• One complication to this process is that the
  interplay among international markets must be
  considered.

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Ex. 4.8 Forces Driving Industry Competition
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Threats of Entry

• Economies of Scale
• Product Differentiation
• Capital Requirements
• Cost Disadvantages Independent of Size
• Access to Distribution Channels
• Government Policy

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Powerful Suppliers

• A supplier group is powerful if
• It is dominated by a few companies and is more
  concentrated than the industry it sells to
• Its product is unique or at least differentiated,
  or if it has built-up switching costs
• It is not obliged to contend with other products
  for sale to the industry
• It poses a credible threat of integrating forward
  into the industrys business
• The industry is not an important customer of the
  supplier group

40
Powerful Buyers

• A buyer group is powerful if
• It is concentrated or purchases in large volumes
• The products it purchases from the industry are
  standard
• The products it purchases from the industry form
  a component of its product and represent a
  significant fraction of its cost
• It earns low profits
• The industrys product is unimportant to the
  quality of the buyers products or services
• The industrys product does not save the buyer
  money
• The buyers pose a credible threat of integrating
  backward

41
Substitute Products

• By placing a ceiling on the prices it can charge,
  substitute products or services limit the
  potential of an industry
• Substitutes not only limit profits in normal
  times but also reduce the bonanza an industry can
  reap in boom times
• Substitute products that deserve the most
  attention strategically are those that are
• subject to trends improving their
  price-performance trade-off with the industrys
  product or
• produced by industries earning high profits

42
Jockeying for Position

• Intense rivalry occurs when
• Competitors are numerous or are roughly equal
• Industry growth is slow, precipitating fights for
  market share that involve expansion
• The product or service lacks differentiation or
  switching costs
• Fixed costs are high or the product is
  perishable, creating strong temptation to cut
  prices
• Capacity normally is augmented in large
  increments
• Exit barriers are high
• Rivals are diverse in strategy, origin, and
  personality

43
The Global Environment

• Chapter 5

44
Globalization

• Globalization refers to the strategy of pursuing
  opportunities anywhere in the world that enable a
  firm to optimize its business functions in the
  countries in which it operates.

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Why Firms Globalize?

• U.S. firms can reap benefits from industries and
  technologies developed abroad.
• Direct penetration of foreign markets can drain
  vital cash flows from a foreign competitors
  domestic operations.
• The resulting lost opportunities, reduced income,
  and limited production can impair the
  competitors ability to invade U.S. markets.
• Question Should firms be proactive or reactive?

46
Reasons for Going Global

• PROACTIVE
• Additional resources
• Lowered costs
• Incentives
• New, expanded markets
• Exploitation of firm-specific advantages
• Taxes
• Economies of scale
• Synergy
• Power and prestige
• Protect home market

• REACTIVE
• Trade barriers
• International customers
• International competition
• Regulations
• Chance

47
4 Strategic Orientations of Global Firms

• Ethnocentric orientation
• When the values and priorities of the parent
  organization guide the strategic decision making
  of all its international operations

48
4 Strategic Orientations of Global Firms (contd.)

• Polycentric orientation
• When the culture of the country in which the
  strategy is to be implemented is allowed to
  dominate a companys international decision
  making process

49
4 Strategic Orientations of Global Firms (contd.)

• Regiocentric orientation
• When a parent company blends its own
  predisposition with those of its international
  units to develop region-sensitive strategies.

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4 Strategic Orientations of Global Firms (contd.)

• Geocentric orientation
• When an international firm adopts a systems
  approach to strategic decision making that
  emphasizes global integration.

51
Competitive Strategies for Firms in Foreign
Markets

• Niche Market Exporting
• Licensing and Contract Manufacturing
• Franchising
• Joint Ventures
• Foreign Branching
• Acquisition
• Wholly Owned Subsidiary
• LOOK UP EACH OF THESE AND UNDERSTAND

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Internal Analysis

• Chapter 6

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SWOT Analysis

• A traditional approach to internal analysis
• SWOT is an acronym for the internal Strengths and
  Weaknesses of a firm and the environmental
  Opportunities and Threats facing that firm.
• SWOT analysis is a historically popular technique
  through which managers create a quick overview of
  a companys strategic situation.

54
SWOT Components

• An opportunity is a major favorable situation in
  a firms environment
• A threat is a major unfavorable situation in a
  firms environment
• A strength is a resource or capability relative
  to its
• A weakness is a limitation or deficiency in a
  firms resources or capabilities relative to its
  competitors

55
S.W.O.T. Analysis

• S.W.O.T. information is only as important as the
  analysis derived from it.
• There is no magic number of strengths or
  weaknesses compared to a magic number of
  opportunities and threats.
• Do you have the strengths to 1. Take advantage
  of new opportunities? Or 2. Survive a threat?
  Or 3. To compensate for your weaknesses?
• To appropriately use the S.W.O.T. study the
  following slide

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Ex. 6.2 SWOT Analysis Diagram
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Value Chain

• A perspective in which business is seen as a
  chain of activities that transforms inputs into
  outputs that customers value.
• Examines the contributions of different
  activities within the business that create
  customer value
• A process point of view

58
Value Chain Analysis (contd.)

• Primary Activities
• The activities in a firm of those involved in the
  physical creation of the product, marketing and
  transfer to the buyer, and after-sales support
• Support Activities
• The activities in a firm that assist the firm as
  a whole by providing infrastructure or inputs
  that allow the primary activities to take place
  on an ongoing basis

59
Ex. 6.3 The Value Chain
60
Resource-Based View (RBV)

1. RBV is a method of analyzing and identifying a
   firms strategic advantages based on examining
   its distinct combination of assets, skills,
   capabilities, and intangibles
2. The RBVs underlying premise is that firms differ
   in fundamental ways because each firm possesses a
   unique bundle of resources
3. Each firm develops competencies from these
   resources, and these become the source of the
   firms competitive advantages

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Three Basic TYPES of Resources

1. Tangible assets are the easiest resources to
   identify and are often found on a firms balance
   sheet
2. Intangible assets are resources such as brand
   names, company reputation, organizational morale,
   technical knowledge, patents and trademarks, and
   accumulated experience
3. Organizational capabilities are not specific
   inputs. They are the skills that a company uses
   to transform inputs into outputs

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What makes a resource VALUABLE?

• 4 Guidelines
• Is the resource or skill critical to fulfilling a
  customers need better than that of the firms
  competitors?
• Is the resource scarce? Is it in short supply or
  not easily substituted for or imitated?
• Appropriability Who actually gets the profit
  created by a resource?
• Durability How rapidly will the resource
  depreciate?

63
Elements of Scarcity

• Short Supply
• Availability of Substitutes
• Imitation
• Isolating Mechanisms
• Physically Unique Resources
• Path-Dependent Resources
• Casual Ambiguity
• Economic Deterrence

64
Using RBV in Internal Analysis

• It is helpful to
• Disaggregate resources
• Utilize a functional perspective
• Look at organizational processes
• Use the value chain approach

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Long-Term Objectives and Strategies

• Chapter 7

66
Long-Term Objectives

• Strategic managers recognize that short-run
  profit maximization is rarely the best approach
  to achieving sustained corporate growth and
  profitability
• To achieve long-term prosperity, strategic
  planners commonly establish long-term objectives
  in seven areas
• Profitability Productivity
• Competitive Position Employee Development
• Employee Relations -- Tech Leadership
• Public Responsibility

67
Qualities of Long-Term Objectives S.M.A.R.T.

• There are five criteria that should be used in
  preparing long-term objectives
• Specificclear about outcomes desired
• Measurableable to quantify
• Attainableable to achieve with current resources
• Realistically challengingprovide stimulation to
  achieve
• Timedstating the time frame in which the
  objective will be accomplished

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The Balanced Scorecard

• The balanced scorecard is a set of four measures
  that are directly linked to the companys
  strategy
• allows managers to evaluate the company from four
  perspectives
• financial performance
• customer knowledge
• internal business processes
• learning and growth

69
Generic Strategies

• A long-term or grand strategy must be based on a
  core idea about how the firm can best compete in
  the marketplace. The popular term for this core
  idea is generic strategy.

70
The 4 GENERIC Strategies

• Striving for overall low-cost leadership in the
  industry.
• Striving to create and market unique products for
  varied customer groups through differentiation.
• Striving to have special appeal to one or more
  groups of consumers or industrial buyers, focus
  on their cost or differentiation concerns.
• SPEED rapid response to customer requests or
  market and technological changes

71
GRAND Strategies

• Grand strategy
• A master long-term plan that provides basic
  direction for major actions for achieving
  long-term business objectives

72
Grand Strategies

• Concentrated growth the strategy that directs
  resources to the growth of a dominant product, in
  a dominant market, with a dominant technology
• Market development consists of marketing present
  products to customers in related market areas by
  adding channels of distribution or by changing
  the content of advertising or promotion
• Product development substantial modification of
  existing products or the creation of new but
  related products that can be marketed to current
  customers through established channels

73
Grand Strategies

• Innovation companies seek high profits associated
  with customer acceptance of a new or greatly
  improved productsearch for other original or
  novel ideasseek to create a new product life
  cycle and make similar existing products obsolete
  
• Horizontal acquisitiongrowth through the
  acquisition of one or more similar firms
  operating at the same stage of the
  production-marketing chain

74
Grand Strategies

• Vertical acquisitionBACKWARDacquire firms that
  supply it with inputs (such as raw materials) or
  FORWARDare customers for its outputs (such as
  warehouses for finished products)
• Concentric diversification involves the
  acquisition of businesses that are related to the
  acquiring firm in terms of technology, markets,
  or products
• Conglomerate diversificationgives little concern
  to creating product-market synergy with existing
  businesses

75
Grand Strategies

• TurnaroundCost reductionAsset reduction
• Divestiture strategy the sale of a firm or a
  major component of a firm
• Liquidation the firm typically is sold in parts
  for its tangible asset value and not as a going
  concern

76
Bankruptcy

• Chapter 7 Liquidation bankruptcyagreeing to a
  complete distribution of firm assets to
  creditors, most of whom receive a small fraction
  of the amount they are owed
• Chapter 11 Reorganization bankruptcythe
  managers believe the firm can remain viable
  through reorganizationmanagement runs the
  day-to-day business operations but all
  significant business decisions must be approved
  by a bankruptcy court.

77
Grand Strategies

• Joint ventures relationship between two or more
  parties to pursue a set of agreed upon goals or
  to meet a critical business need while remaining
  independent organizations
• Strategic alliances is a business agreement in
  which parties agree to develop, for a finite
  time, a new entity and new assets by contributing
  equity
• Company A B form Company C

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Business Strategy

• Chapter 8

79
Sustainable Low-Cost Activities

• Some low-cost advantages reduce the likelihood of
  buyers pricing pressure
• Truly sustained low-cost advantages may push
  rivals into other areas
• New entrants competing on price must face an
  entrenched cost leader
• Low-cost advantages should lessen the
  attractiveness of substitute products
• Higher margins allow low-cost producers to
  withstand supplier cost increases

80
Risks of a Cost Leadership Strategy

• Many cost-saving activities are easily duplicated
  
• Exclusive cost leadership can be a trap
• Obsessive cost cutting can shrink other
  competitive advantages
• Cost differences often decline over time

81
Ex. 8.2 Evaluating a Businesss Cost Leadership
Opportunities
82
Evaluating Differentiation

• Differentiation requires that the business have
  sustainable advantages that allow it to provide
  buyers with something uniquely valuable to them
• Differentiation usually arises from one or more
  activities in the value chain that create a
  unique value important to buyers

83
risks associated with A differentiation strategy

• Competitors may be able to imitate the unique
  features,
• Customers may lose interest in the unique
  features, or
• Low cost competitors may be able to undercut
  prices erode brand loyalty.

84
Ex. 8.3 Evaluating a Businesss Differentiation
Opportunities
85
Evaluating Speed as a Competitive Advantage

• Speed-based strategies, or rapid response to
  customer requests or market and technological
  changes, have become a major source of
  competitive advantage for numerous firms in
  todays intensely competitive global economy

86
Risks of Speed-based Strategy

• Speeding up activities that havent been
  conducted in a fashion that prioritizes rapid
  response should only be done after considerable
  attention to training, reorganization, and/or
  reengineering
• Some industries may not offer much advantage to
  the firm that introduces some forms of rapid
  response
• Customers in such settings may prefer the slower
  pace or the lower costs currently available, or
  they may have long time frames in purchasing

87
Ex. 8.5 Evaluating a Businesss Rapid Response
(Speed) Opportunities
88
Evaluating Market Focus as a Way to Competitive
Advantage

• Market focus the extent to which a business
  concentrates on a narrowly defined market
• Small companies, at least the better ones,
  usually thrive because they serve narrow market
  niches
• Market focus allows some businesses to compete on
  the basis of low cost, differentiation, and rapid
  response against much larger businesses with
  greater resources

89
Risks of Market Focus

• The risk of focus is that you attract major
  competitors who have waited for your business to
  prove the market
• Publicly traded companies built around focus
  strategies become takeover targets for large
  firms seeking to fill out a product portfolio
• Slipping into the illusion that it is focus
  itself, and not low cost, etc. that is creating
  the businesss success.