Strategic Management

Strategic Management

Summarized by: Mohamed EL-Sayed

Introduction of Concepts

Strategic Management: The set of managerial decisions and actions that determines the long-run performance of an organization.

Strategic Planning: The process of determining a company's long-term goals and then identifying the best approach for achieving those goals

Why is strategic management important?

Gives everyone a role Makes a difference in performance levels Provides systematic approach to uncertainties Coordinates and focuses employees

Strategic Management Model

A- Environmental Scanning: is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the organization

B- Strategy Formulation: is the development of long-range plans for the effective management of environmental opportunities and threats in light of organizational strengths and weaknesses (SWOT)

Basic Elements of Strategic Management

C- Strategy implementation: the process by which strategies and policies are put into action through the development of:

Programs Budgets Procedures

D- Evaluation and control: the process in which corporate activities and performance results are monitored so that actual performance can be compared to desired performance

E- Feedback/Learning Process: revise or correct decisions based on performance

Basic Elements of Strategic Management

Strategic Management Process

Strategic Management Process

Step 1: Identifying the organization's current mission, objectives, and strategies Mission: the firm’s reason for being

• Who we are,• What we do, and • Where we are now

Goals: the foundation for further planning• Measurable performance targets

Step 2: Conducting an external analysis The environmental scanning of specific and general

environments Focuses on identifying opportunities and threats

Strategic Management Process (cont’d)

Step 3: Conducting an internal analysis Assessing organizational resources, capabilities, activities

and culture:• Strengths (core competencies) create value for the

customer and strengthen the competitive position of the firm.

• Weaknesses (things done poorly or not at all) can place the firm at a competitive disadvantage.

Steps 2 and 3 combined are called a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats)


Step 4: Formulating strategies Develop and evaluate strategic alternatives Select appropriate strategies for all levels in the

organization that provide relative advantage over competitors

Match organizational strengths to environmental opportunities

Correct weaknesses and guard against threats


Step 5: Implementing strategies Implementation: effectively fitting organizational structure

and activities to the environment Effective strategy implementation requires an

organizational structure matched to its requirements.

Step 6: Evaluating results How effective have strategies been? What adjustments, if any, are necessary?

Mission- the purpose or reason for the organization’s existence

Vision- describes what the organization would like to become

Objectives- the end results of planned activity

Key terms of Strategic Management

Strategies- form a comprehensive master plan that states how the corporation will achieve its mission and objectives Corporate Business Functional

Policies- the broad guidelines for decision making that links the formulation of a strategy with its implementation

Key terms of Strategic Management

Environmental scanning- the monitoring, evaluation and dissemination of information from the external and internal environments to key people within the corporation

Environmental Scanning is performed through 2-level analysis:1- Organization’s Analysis. (SWOT)

2- External Analysis, which is divided into:A- Macro level (Market Societal analysis) (PESTEL)B- Micro level ( Industry analysis) (Porter 5 forces)

A- Environmental Scanning

Environmental Variables

1- Organization’s Analysis (SWOT)

Commonly used strategy tool: Strengths Weaknesses Opportunities Threats

o Controllable activities performed especially well or poorly

o Determined relative to competitors

Step 1: Analyze the organization’s internal environment, identifying its strengths and weaknesses.

Step 2: Analyze the organization’s external environment, identifying its opportunities and threats.

Step 3: Cross-match Strengths with opportunities Weaknesses with threats Strengths with threats Weaknesses with opportunities

1- Organization’s Analysis (SWOT)

Typically located in functional areas of the firm

Management Marketing Finance/Accounting Production/Operations Research & Development Management Information Systems

Internal Strengths and Weaknesses

Assessing the Internal Environment

Internal FactorsPerformance Measures

Ratios

Industry Averages

Survey Data

Internal Strengths and Weaknesses

S.W.O.T. Analysis Example

Natural environment

Societal environment

Task environment

External Environmental Variables

2- External Analysis

Natural environment

Physical resources Wildlife Climate

2- External Analysis (cont’d)

A- Societal environment- social systems that influence long-term decisions

Economic forces Technological forces Political-legal forces Socio-cultural forces


Societal Environmental Variables

B- Task environment- groups that directly affect a corporation and are affected by the corporation

Government Local communities Suppliers Competitors Customers Creditors Unions Special interest groups/trade associations


Industry Analysis (Task Environment)

1- Threat of new entrants- new entrants to an industry bring new capacity, a desire to gain market share and substantial resources

Entry barrier- an obstruction that makes it difficult for a company to enter an industry

Economies of scale Product differentiation Capital requirements Switching costs


2- Rivalry Among Existing Firms- new entrants to an industry bring new capacity, a desire to gain market share and substantial resources

Number of competitors Rate of industry growth Product or service characteristics Amount of fixed costs Capacity Height of exit barriers Diversity of rivals


3- Threat of Substitute Products or Services- products that appear different but can satisfy the same need as another product


4- Bargaining Power of Buyers- ability of buyers to force prices down, bargain for higher quality, play competitors against each other

Large purchases Backward integration Alternative suppliers Low cost to change suppliers Product represents a high percentage of buyer’s cost Buyer earns low profits Product is unimportant to buyer


5- Bargaining Power of Suppliers- ability of suppliers to raise prices or reduce quality

Industry is dominated by a few companies Unique product or service Substitutes are not readily available Ability to forward integrate Unimportance of product or service to the industry


6- Relative Power of Other Stakeholders

Government Local communities Creditors Trade associations Special interest groups Unions Shareholders Complementary products that work well with a firm’s

product


Triggering event: something that acts as a stimulus for a change in strategy and can include:

• New CEO• External intervention• Threat of change of ownership• Performance gap• Strategic inflection point

Initiating Strategy: Triggering Events

B- Strategy Formulation

Strategy is comprehensive plan that states how the company will achieve its mission & objectives.

3 Levels of Business strategy:1- Corporate Strategy2- Business (Competitive) Strategy3- Functional Strategy

Levels of strategy

1) Corporate Strategy

Attitude towards growth & management of various business & product lines, it has to touch stability, growth, retrenchment

2) Business Strategy

Competitive StrategySpecial Business line, It has touch to Cost, Differentiation & Focus

3) Functional Strategy

ProductivityBenchmark – StandardCustomer (Pull Strategy)Lower CostIntegrated ProcessQuality AssuranceSupply ChainMarketing oriented company

Levels of strategy

Directional strategy- the firm’s overall orientation toward growth, stability, or retrenchment

1- Corporate Strategy (Directional)

Growth Strategy

Seeking to increase the organization’s business by expansion into new products and markets.

A- Concentration (Integration)• Vertical• Horizontal

B- Diversification (Penetration)• Concentric• Conglomerate

1.1 Growth Strategy

Concentration and Diversification

Merger- a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives

Acquisition- the purchase of a company that is completely absorbed by the subsidiary or division of the acquiring corporation

1.1 Growth Strategy

A- Concentration strategies

Vertical growth- taking over the function previously provided by a supplier or by a distributor

Vertical integration- the degree to which a firm operates vertically in multiple locations on an industry’s value chain from extracting raw materials to manufacturing to retailing Backward integration- assuming a function

previously provided by a supplier Forward integration- assuming a function previously

provided by a distributor

1.1 Growth Strategy (Concentration)

Vertical Growth

Full integration- a firm internally makes 100% of its key suppliers and completely controls its distributors

Taper integration- a firm internally produces less than half of its own requirements and buys the rest from outside suppliers

Quasi-integration- a company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control

Long-term contracts- agreements between 2 firms to provide agreed-upon goods and services to each other for a specific period of time

Vertical Growth

A- Concentration strategies

Horizontal growth- expansion of operations into other geographic locations and/or increasing the range of products and services offered to current markets

Horizontal growth is achieved through: Internal development Acquisitions Strategic alliances

Horizontal integration- the degree to which a firm operates in multiple geographic locations at the same point on an industry’s value chain

1.1 Growth Strategy (Concentration)

International Entry Options for Horizontal Growth

Exporting Licensing Franchising Joint Venture Acquisitions

Green-Field Development Production Sharing

Turn-key OperationsBOT ConceptManagement Contracts

Horizontal Growth

B- Diversification Strategies

Concentric (Related) Diversification- growth into a related industry when a firm has a strong competitive position but attractiveness is low

Conglomerate (Unrelated) Diversification- growth into an unrelated industry

Management realizes that the current industry is unattractive Firm lacks outstanding abilities or skills that it could easily

transfer to related products or services in other industries

1.1 Growth Strategy (Diversification)

1.1 Growth Strategy (Diversification)

Stability Strategies- continuing activities without any significant change in direction

Pause/Proceed with caution strategy- an opportunity to rest before continuing a growth or retrenchment strategy

No change strategy- continuance of current operations and policies

Profit Strategies- to do nothing new in a worsening situation but instead to act as though the company’s problems are only temporary

1.2 Stability Strategy

Retrenchment Strategies- used when the firm has a weak competitive position in some or all of its product lines from poor performance

1.3 Retrenchment Strategy

Turnaround strategy- emphasizes the improvement of operational efficiency when the corporation’s problems are pervasive but not critical

Contraction- effort to quickly “stop the bleeding” across the board but in size and costs

Consolidation- stabilization of the new leaner corporation

1.3 Retrenchment Strategy (Turnaround)

Captive Company Strategy- company gives up independence in exchange for security

Sell-out strategy- management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the company to another firm

Divestment- sale of a division with low growth potential

1.3 Retrenchment Strategy (cont’d)

Business (or Competitive) Strategy

A strategy focused on how an organization should compete in each of its SBUs (strategic business units).

2- Business Strategy (Competitive)

Cost Leadership Strategy

Seeking to attain the lowest total overall costs relative to other industry competitors.

Differentiation Strategy

Attempting to create a unique and distinctive product or service for which customers will pay a premium.

Focus Strategy

Using a cost or differentiation advantage to exploit a particular market segment rather a larger market.

2- Business Strategy (Competitive)

Cost leadership- a lower-cost competitive strategy that aims at the broad mass market and requires efficient scale facilities, cost reductions, cost and overhead control; avoids marginal customers, cost minimization in R&D, service, sales force and advertising

Provides a defense against competitors Provides a barrier to entry Generates increased market share

2.1 Competitive Strategy (Cost Leadership)

Differentiation- involves the creation of a product or service that is perceived throughout the industry as unique. Can be associated with design, brand image, technology, features, dealer network, or customer service

Lowers customers sensitivity to price Increases buyer loyalty Barrier to entry Can generate higher profits

2.2 Competitive Strategy (Differentiation)

Cost Focus- low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche to the exclusion of others

Differentiation Focus- concentrates on a particular buyer group, product line segment, or geographic market to serve the needs of a narrow strategic market more effectively than its competitors

2.3 Competitive Strategy (Focus)

Competitive Strategies

Competitive Strategies Risks

Functional strategy- the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity

o Marketing strategy deals with pricing, selling and distributing a product

o Financial Strategy- examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action

3- Functional Strategy

o Operations Strategy- determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources and relationships with suppliers

o Logistics Strategy- deals with the flow of products into and out of the manufacturing process

o Human Resource Strategy

o Information Technology Strategy

3- Functional Strategy

Strategy implementation- the sum total of all activities and choices required for the execution of a strategic plan

Who are the people to carry out the strategic plan? What must be done to align company operations in the

intended direction? How is everyone going to work together to do what is

needed?

C- Strategy Implementation

Strategy Implementation Steps

Developing a strategy-supportive culture Creating an effective organizational structure Redirecting marketing efforts Preparing budgets Developing and utilizing information systems Linking employee compensation to organizational

performance

Developing Programs, Budgets and ProceduresPrograms- make strategies action-oriented

Matrix of Change- provides guidance on where, when and how fast to implement change

Budget- provides the last real check on the feasibility of the strategy

Procedures (organizational routines)- detail the various activities that must be carried out to complete a corporation’s programs

Strategy Implementation (cont’d)

Reengineering- the radical redesign of business processes to achieve major gains in cost, service, or time

Program to implement a turnaround strategyLean Six Sigma- incorporates Six Sigma with lean

manufacturing- removes unnecessary production steps and fixes the remaining steps

Job Design- the study of individual tasks in an attempt to make them more relevant to the company and to the employees

Job enlargement Job rotation Job enrichment model

Strategy Implementation Programs

1. Took more time than planned2. Unanticipated major problems3. Poor coordination4. Competing activities and crises created distractions5. Employees with insufficient capabilities6. Poor subordinate training7. Uncontrollable external environmental factors8. Poor departmental leadership and direction9. Inadequately defined implementation tasks and activities10. Inefficient information system to monitor activities

Strategy Implementation Problems

Evaluation and Control ensures that a company is achieving what it set out to accomplish by comparing performance with desired results and taking corrective action as needed

1. Determine what to measure2. Establish standards of performance3. Measure actual performance4. Compare actual performance with the standard5. Take corrective action

D- Strategy Evaluation & Control

Evaluation & Control Process

Primary Measures of Corporate Performance

Return on Investment (ROI) Earnings per share (EPS) Return on equity (ROE) Operating cash flow

Measuring Performance

Shareholder Value- the present value of the anticipated future streams of cash flows from the business plus the value of the company if liquidated

Economic Value Added (EVA)- measures the difference between the pre-strategy and post-strategy values for the business

Market Value Added (MVA)- measures the difference between the market value of a corporation and the capital contributed by shareholders and lenders


Balanced score card– combines financial measures that tell results of actions already taken with operational measures on customer satisfaction, internal processes and the corporation’s innovation and improvement activities

Financial Customer Internal business perspective Innovation and learning

Benchmarking- the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders


Periodic review of the implementation process Obtain feedback from staff/clients/stakeholders Provide regular feedback to major stakeholders, including staff Document and communicate the lessons learnt Acknowledge and share results - achievements and failures Continuous monitoring and review of objectives

Remember that the Strategic Management process is a continuous cycle. It does not end. The real objective is continual improvement!

E- Feedback & Learning

STRATEGIC ACTION PLANNING Summary

SWOT Analysis

VISION

STRATEGIC AREAS FOR DEVELOPMENTSTRATEGIC OBJECTIVES

StrategicAction 4

Strategic Action 3

MISSION

Internal EnvironmentStrengthsWeaknesses- Value systems- Culture- Staffing- Support systems, operating environment

The long range objectives that will drive the development process and stretch the organization to achieve them.

External EnvironmentOpportunitiesThreats- The changing environment- The demand for new products- The economic environment- Availability of resources

Strategic Action 2

StrategicAction 1

EVALUATION/FEEDBACK

The reason for the existence of the organization & establishes the values, beliefs & guidelines for the conduct of business

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Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall

Date post:	06-May-2015
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