Chapter 1

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives1. Explain the concept of strategic management2. Describe how strategic decisions differ from

other decisions that managers make3. Name the benefits and risks of a participative

approach to strategic decision making4. Understand the types of strategic decisions

for which different managers are responsible5. Describe a comprehensive model of strategic

decision making6. Appreciate the importance of strategic

management as a process7. Give examples of strategic decisions that

companies have recently made

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The Nature and Value of Strategic Management

Strategic management:The set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives

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Nine Critical Tasks of Strategic Management -- Tasks 1-5:

Formulate the company’s missionConduct an internal analysisAssess the external environment –

competitive and general contextsAnalyze the company’s options by

matching its resources with the external environment

Identify the most desirable options in light of the mission

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Nine Critical Tasks of Strategic Management -- Tasks 6-9:

Select a set of long-term objectives and grand strategies that will achieve the most desirable options

Develop annual objectives and short-term strategies that are compatible with long-term objectives and grand strategies

Implement the strategic choicesEvaluate the success of the strategic

process for future decision making

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What is Strategy?

Large-scale, future-oriented planUsed to interact within competitive environment to achieve company goals

Provides a framework for managerial decisions

Reflects a company’s awareness of the main elements of competition

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Dimensions of Strategic DecisionsStrategic issues require top-

management decisionsStrategic decisions overarch

several areas of a firm’s operations

Usually only top management has the perspective needed to understand their broad implications

Usually only top managers have the power to authorize necessary resource allocations

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Dimensions of Strategic Decisions (contd.)

Strategic issues require large amounts of the firm’s resourcesThey involve substantial allocations

of people, physical assets, and money

Strategic decisions commit the firm to actions over an extended period

In highly competitive firms, achieving and maintaining customer satisfaction frequently involves commitment from every facet of the firm

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Dimensions of Strategic Decisions (contd.)Strategic issues often affect the firm’s long-

term prosperityStrategic decisions commit the firm for

a long time, typically 5 years; however the impact lasts much longer

Once a firm has committed itself to a strategy, its image and competitive advantages are usually tied to that strategy

Firms become known for what they do and where they compete. Shifting away from that can jeopardize their previous gains.

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Dimensions of Strategic Decisions (contd.)

Strategic issues are future-orientedThey are based on what

managers forecast, rather than what they know

Emphasis is on the development of solid projections that will enable a firm to seek the most promising strategic options

A firm will succeed only if it takes a proactive (anticipatory) stance toward change

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Dimensions of Strategic Decisions (contd.)

Strategic issues usually have multifunctional or multibusiness consequences. Strategic decisions have

complex implications for most areas of the firm

Decisions about customer mix, competitive emphasis, or organizational structure involve a number of the firm’s SBUs, divisions, or program units

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Dimensions of Strategic Decisions (contd.)

Strategic issues require considering the firm’s external environmentAll businesses exist in an open

system. They affect and are affected by external conditions that are largely beyond their control

Successful positioning requires that strategic managers look beyond operations and consider what relevant others are likely to do

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Three Levels of StrategyCorporate level: board of directors, CEO & administration [Highest]

Business level: business and corporate managers [Middle]

Functional level: Product, geographic, and functional area managers [Lowest]

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Ex. 1.3 Alternative Strategic Management Structures

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Characteristics of Strategic Management Decisions: Corporate

Often carry greater risk, cost, and profit potential

Greater need for flexibilityLonger time horizonsChoice of businesses, dividend policies, sources of long-term financing, and priorities for growth

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Characteristics of Strategic Management Decisions: Functional

Implement the overall strategy formulated at the corporate and business levels

Involve action-oriented operational issuesRelatively short range and low riskModest costs: depend upon available

resourcesRelatively concrete and quantifiable

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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

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Formality in Strategic ManagementFormality is the degree to which participation, responsibility, authority, and discretion in decision-making are specified in strategic management

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Forces Determining FormalityOrganizational

SizePredominant

Management Styles

Complexity of Environment

Production Process

Problems in the Firm

Purpose of the Planning System

Stage of Firm’s Development

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Three Modes of FormalityEntrepreneurial Mode – most small

firmsPlanning Mode – most large firmsAdaptive Mode – most medium size

firms

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Strategy MakersIdeal strategic team includes decision makers from all three levels

Top managers must give final approval

Strategic decisions coincide with managers’ responsibilities

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Strategy Makers: The CEOA firm’s CEO plays a dominant

role in strategic planningThe CEO’s principal duty is

giving long-term direction to the firm

The CEO bears ultimate responsibility for the firm’s success and strategic success

CEOs are typically strong-willed, company-oriented individuals

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Benefits of Strategic ManagementManagers at all levels interact in planning

and implementing strategySimilar to participative decision makingAssessing strategy formulation requires

looking at nonfinancial evaluations as well as financial ones

Promoting positive behavioral consequences enables achievement of financial goals

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Risks of Strategic Management

Managers’ time away from other responsibilities

Unrealistic expectations promised by strategy formulators

Possible disappointment of participating subordinates if goal is not reached

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Strategic Management ProcessBusinesses vary in formulation and other

processes The basic components of the models used to

analyze strategic management are similarStrategic management is a process—a flow of

information through interrelated stages of analysis toward the achievement of some goal

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Ex. 1.6 Strategic Management Model

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Components of Strategic Management Model

Company MissionExternal AnalysisLong-Term

ObjectivesShort-Term

ObjectivesPolicies

Empowering ActionStrategic Control &

Continuous Improvement

Internal AnalysisStrategic Analysis

& ChoiceGeneric & Grand

StrategiesFunctional TacticsRestructuring,

Reengineering & Refocusing

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