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)
Strategic Management Process (cont’d)
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
Strategic Management Process (cont’d)
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
2- External Analysis (cont’d)
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
2- External Analysis (cont’d)
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
Industry Analysis (Task Environment)
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
Industry Analysis (Task Environment)
3- Threat of Substitute Products or Services- products that appear different but can satisfy the same need as another product
Industry Analysis (Task Environment)
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
Industry Analysis (Task Environment)
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
Industry Analysis (Task Environment)
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
Industry Analysis (Task Environment)
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
Measuring Performance
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
Measuring Performance
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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