Strategic Management

Chapter 1

• • • • • •

Dimensions of Strategic Decisions

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

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]

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

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

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

Company Mission

Chapter 2

Four Essential Components:

• • • •

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

Primary Company Goals

• • • Survival – A firm that can’t survive can’t 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.

Company Philosophy—BULLETS

• • • • Customers Employees Management Stockholders

Covers Stakeholders

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

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.

Agency Costs

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

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.

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

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.

Aligning Executive Interests with Owner Interests •

Stock Option Plans

•

Bonus plans

•

Incentives for Long Term Performance

Corporate Social Responsibility and Business Ethics

Chapter 3

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

Types of Social Responsibility

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

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.

Factors Complicating a Cost-Benefit Analysis of CSR: 1.

2.

3.

4.

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

       Sarbanes-Oxley Act of 2002 CEO and CFO must certify every report containing company’s 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

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 company’s chief compliance and chief accounting officers

• •

Social Audit

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

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 society’s 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

3 BASIC Approaches to Questions of Ethics   

Utilitarian Approach Moral Rights Approach Social Justice Approach

The External Environment

Chapter 4

External Environment

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

Remote Environment

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

Economic Factors

1. Prime interest rates 2. Inflation rates 3. Trends in the growth of the gross national product 4. Unemployment rates 5. Globalization of the economy 6. Outsourcing

Social Factors

   Beliefs & Values Attitudes & Opinions Lifestyles

Demographics

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

Political Factors

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

•

Technological Factors

Speed of new developments

• • • • •

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

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.

Ex. 4.8 Forces Driving Industry Competition

• • • • • •

Threats of Entry

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

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 industry’s business The industry is not an important customer of the supplier group

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 industry’s product is unimportant to the quality of the buyers’ products or services The industry’s product does not save the buyer money The buyers pose a credible threat of integrating backward

• • •

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 industry’s product or – produced by industries earning high profits

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

The Global Environment

Chapter 5

•

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.

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 competitor’s domestic operations.

The resulting lost opportunities, reduced income, and limited production can impair the competitor’s ability to invade U.S. markets.

Question: Should firms be proactive or reactive?

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

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

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 company’s international decision making process

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.

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.

Competitive Strategies for Firms in Foreign Markets 1.

2.

3.

4.

5.

6.

Niche Market Exporting Licensing and Contract Manufacturing Franchising Joint Ventures Foreign Branching Acquisition 7.

Wholly Owned Subsidiary LOOK UP EACH OF THESE AND UNDERSTAND

Internal Analysis

Chapter 6

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 company’s strategic situation.

   

SWOT Components

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

• • • •

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

Ex. 6.2

SWOT Analysis Diagram

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

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

Ex. 6.3

The Value Chain

1.

2.

3.

Resource-Based View (RBV) RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages

Three Basic TYPES of Resources

1.

2.

3.

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

What makes a resource VALUABLE?

4 Guidelines:

1.

2.

3.

4.

Is the resource or skill critical to fulfilling a customer’s need better than that of the firm’s 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?

• • • •

Elements of Scarcity

Short Supply Availability of Substitutes Imitation – Isolating Mechanisms :

Physically Unique Resources

–

“Path-Dependent” Resources

–

Casual Ambiguity

–

Economic Deterrence

Using RBV in Internal Analysis • • • • It is helpful to: Disaggregate resources Utilize a functional perspective Look at organizational processes Use the value chain approach

Long-Term Objectives and Strategies

Chapter 7

• •

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 Competitive Position Employee Relations Public Responsibility – Productivity – Employee Development -- Tech Leadership

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

• – There are five criteria that should be used in preparing long-term objectives: Specific—clear about outcomes desired – Measurable—able to quantify – Attainable—able to achieve with current resources – Realistically challenging—provide stimulation to achieve – Timed—stating the time frame in which the objective will be accomplished

The Balanced Scorecard

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

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.

1.

2.

3.

4.

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

GRAND Strategies

 

Grand strategy

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

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

Grand Strategies

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

Grand Strategies

Vertical acquisition—BACKWARD—acquire firms that supply it with inputs (such as raw materials) or FORWARD—are 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 diversification—gives little concern to creating product-market synergy with existing businesses

Grand Strategies

Turnaround—Cost reduction—Asset 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

Bankruptcy • – Chapter 7 Liquidation bankruptcy—agreeing 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 bankruptcy—the managers believe the firm can remain viable through reorganization—management runs the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

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

Business Strategy

Chapter 8

Sustainable Low-Cost Activities

1. Some low-cost advantages reduce the likelihood of buyers’ pricing pressure 2. Truly sustained low-cost advantages may push rivals into other areas 3. New entrants competing on price must face an entrenched cost leader 4. Low-cost advantages should lessen the attractiveness of substitute products 5. Higher margins allow low-cost producers to withstand supplier cost increases

Risks of a Cost Leadership Strategy

1. Many cost-saving activities are easily duplicated 2. Exclusive cost leadership can be a trap 3. Obsessive cost cutting can shrink other competitive advantages 4. Cost differences often decline over time

Ex. 8.2 Evaluating a Business’s Cost Leadership Opportunities

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

• • • 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.

Ex. 8.3 Evaluating a Business’s Differentiation Opportunities

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 today’s intensely competitive global economy

   Risks of Speed-based Strategy Speeding up activities that haven’t 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

Ex. 8.5 Evaluating a Business’s Rapid Response (Speed) Opportunities

• • • 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

• • •

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 business’s success.