UNDERSTANDING THE NATURE OF STRATEGIC MANAGEMENT

What is Strategy?

A strategy is an integrated and coordinated set of commitments and actions designed to exploit core
competencies and gain competitive advantage. When choosing a strategy, firms make choices among
competing alternatives. In this sense, the chosen strategy indicates what the firm intends to do as well
as what it does not intend to do.

Strategic Management

It is defined as the art and science of formulating, implementing, and evaluating cross-functional
decisions that enable an organization to achieve its objectives.

STRATEGIC MANAGEMENT MODEL

Some Key Terms To Strategic Management

COMPETITIVE ADVANTAGE - anything that a firm does especially well compared to rival firms. Normally,
a firm can only sustain a competitive advantage for only a certain period of time due to rival firms
imitating and undermining the advantage. A firm must strive to sustain competitive advantage by; (1)
continually adapting to changes in external trends and events and internal capabilities, competencies
and resources; and (2) effectively formulating, implementing and evaluating strategies that capitalize
upon those factors.

Strategists - individuals who are more responsible for the success or failure of an organization.
Strategists have various job titles such as chief executive officer, owner, chair of the board, executive
director, chancellor, dean and entrepreneur.

Vision statement - answers the question "what do we want to become?"

Mission statement - enduring statements of purpose. It answers the question, "what is our business?"

External opportunities and threats - refer to economic, social, cultural, demographic, environmental,
political, legal, government, technological and competitive trends and events that could significantly
benefit or harm an organization in the future.

Internal Strengths and Weaknesses - are an organization's controllable activities that are performed
especially well or poorly.

Objectives - specific results that an organization seeks to achieve in pursuing its basic mission

Strategies - means by which long term objectives will be achieved.

Annual Objectives - short-term milestones that organizations must achieve to reach long-term
objectives.

Policies - means by which annual objectives will be achieved. Policies include guidelines, rules and
procedures established to support efforts to achieve stated objectives.
Benefits of Strategic Management

 Financial benefits
 Non-financial Benefits
 Enhanced awareness of external threats
 Improved understanding of competitor's strategies
 Increased employee productivity
 Reduced resistance to change
 Clearer understanding of performance-reward relationships

Why Some Firms Do Not Engage in Strategic Planning

 Poor Reward Self Interest

 Fire Fighting Fear of Unknown
 Waste of Time Honest difference of opinion
 Too Expensive Suspicion
 Laziness Fear of Failure
 Content with Succes

MISSION AND VISSION

Vision Statement

 A vision statement should answer the basic question, “What do we want to become?”
 A clear vision provides the foundation for developing a comprehensive mission statement.
 Many organizations have both a vision and mission statement, but the vision statement should
be established first and foremost.
 The vision statement should be short, preferably one sentence.

Mission Statement

 The mission statement is a declaration of an organization’s “reason for being.”

 It answers the pivotal question “What is our business?”
 A clear mission statement is essential for effectively establishing objectives and formulating
strategies.
 Harvard Business Review has called Drucker “the preeminent management thinker of our time.”

A mission is the primary guidance in creating plans, strategies or making daily decisions. – Peter Drucker

It is an important communication tool that conveys information about organization’s products, services,
targeted customers, geographic markets, philosophies, values and plans for future growth to all of its
stakeholders.
Mission Statement

Sometimes it is called:

 A creed statement,
 A statement of purpose,
 A statement of philosophy,
 A statement of beliefs,
 A statement of business principles, or
 A statement “defining our business,”

A mission statement reveals what an organization wants to be and whom it wants to serve.

Vision Statement Analysis

Starbucks Proposed Vision Statement

“Starbucks strives to ethically find and roast the highest quality Arabica coffee in the world. With stores
around the world, we are the premier roaster and retailer of specialty coffee globally.”

Starbucks “Improved” Vision Statement

Starbucks’ vision is to be the most well-known, specialty coffee, tea, and pastry restaurant in the world,
offering sincere customer service, a welcoming atmosphere, and unequaled quality.

Vision Statement Examples

1. Tyson foods’ vision is to be the world’s first choice for protein solutions while maximizing
shareholder value.
2. General motors’ vision is to be the world leader in transportation products and related services.
3. Dell’s vision is to create a company culture where environmental excellence is second nature.

The Process of Developing Vision and Mission Statements

A widely used approach to developing a vision and mission statement is first to select several articles
about these statements and ask all managers to read these as background information.

Then ask managers themselves to prepare a vision and mission statement for the organization.

Thus, the process of developing a vision and mission statement represents a great opportunity for
strategists to obtain needed support from all managers in the firm.

The Benefits of Mission and Vision Statements

 To make sure all employees/managers understand the firm’s purpose or reason for being.
 To provide a basis for prioritization of key internal and external factors utilized to formulate
feasible strategies.
 To provide a basis for the allocation of resources.
 To provide a basis for organizing work, departments, activities, and segments around a common
purpose.
Ten Benefits of Having a Clear Mission and Vision

1. Achieve clarity of purpose among all managers and employees.

2. Provide a basis for all other strategic planning activities, including internal and external assessment,
establishing objectives, developing strategies, choosing among alternative strategies, devising policies,
establishing organizational structure, allocating resources, and evaluating performance.

3. Provide direction.

4. Provide a focal point for all stakeholders of the firm.

5. Resolve divergent views among managers.

6. Promote a sense of shared expectations among all managers and employees.

7. Project a sense of worth and intent to all stakeholders.

8. Project an organized, motivated organization worthy of support.

9. Achieve higher organizational performance.

10. Achieve synergy among all managers and employees.

Characteristics of a Mission Statement

1. Broad in scope; do not include monetary amounts, numbers, percentages, ratios, or objectives

2. Less than 250 words in length

3. inspiring

4. identify the utility of a firm’s products

5. reveal that the firm is socially responsible

6. reveal that the firm is environmentally responsible

7. include nine components customers, products or services, markets, technology, concern for
survival/growth/profits, philosophy, self-concept, concern for public image, concern for employees

8. reconciliatory

9. Enduring

Two Types of a Mission Statement

Customer-oriented missions. Customer-oriented missions define organization’s purpose in terms of

meeting customer needs or providing solutions for them.

Product-oriented missions. Product-oriented missions focus on what products or services to serve

rather than what solutions to provide for customers
Mission Statement Components

 Customers — Who are the firm’s customers?

 Products or services — What are the firm’s major products or services?
 Markets — geographically, where does the firm compete?
 Technology — is the firm technologically current?
 Concern for survival, growth, and profitability — is the firm committed to growth and financial
soundness?
 Philosophy—What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
 Self-concept—What is the firm’s distinctive competence or major competitive advantage?
 Concern for public image—is the firm responsive to social, community, and

Mission Statement Examples

We aspire to make PepsiCo the world’s (3) premier consumer products company, focused on convenient
foods and beverages (2). We seek to produce healthy financial rewards for investors (5) as we provide
opportunities for growth and enrichment to our employees (9), our business partners and the
communities (8) in which we operate. And in everything we do, we strive to act with honesty, openness,
fairness and integrity (6).

THE EXTERNAL ASSESSMENT

THE NATURE OF AN EXTERNAL AUDIT

The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and
threats that should be avoided. As the term finite suggests, the external audit is not aimed at developing
an exhaustive list of every possible factor that could influence the business; rather, it is aimed at
identifying key variables that offer actionable responses by formulating strategies that take advantage of
external opportunities or that minimize the impact of potential threats.

KEY EXTERNAL FORCES

External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural,
demographic, and natural environment forces; (3) political, governmental, and legal forces; (4)
technological forces; and (5) competitive forces.
RELATIONSHIP BETWEEN KEY EXTERNAL FORCES AND AN ORGANIZATION

 Economic  Competitors
forces  Suppliers
 Social, cultural,  Distributors
demographic,  Creditors
 Customers
and
 Employees An organizations
environmental
 Communities Opportunities and
natural forces
 Managers Threats
 Political, legal,  Stockholders
and  Labor unions
government  Governments
forces  Trade associations
 Technological  Special interest groups
forces  Products
 Competitive  Services
forces  Markets
 Natural environment

THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

1. A company first must gather competitive intelligence and information about economic, social,
cultural, demographic, environmental, political, legal, and technological trends.
2. Once information is gathered, it should be assimilated and evaluated. A meeting or series of
meetings of managers is needed to collectively identify the most important opportunities and
threats facing the firm.

THE INDUSTRIAL ORGANIZATION (I/O) VIEW

The Industrial Organization (O/I) approach to competitive advantage advocates that external (industry)
factors are more important than internal factors in a firm achieving a competitive advantage.

Economic Forces

Availability of credit Unemployment trends

Level of disposable income
Propensity of people to spend
Interest rates
Inflation rates
Money market rates
Governement budget deficits
Gross domestic product trend
Worker productivity levels
Value of dollars in world markets
Stock market trends
Foreign countries economic conditions
Import/ export factors
Demand shifts for different categories of goods
and services
Income differences by region and consumer
groups
 Consumption patterns Tax rates
Price flactuations Organization of petroleum exporting countries
Export of labor and capital from other countries Conditions of lesser developed countries (LDC)
Monetary policies
Fiscal policies

SOCIAL, CULTURAL, DEMOGRAPHIC, AND NATURAL ENVIRONMENT FORCES

Population changes by race, age, and geographic area Attitudes toward retirement
Regional changes in tastes and preferences Energy conservation
Number of marriages Attitudes toward product quality
Number of divorces Attitudes toward customerservice
Number of births Pollution control
Number of deaths Attitudes toward foreign peoples
Immigration and emigration rates Energy conservation
Social Security programs Social programs
Life expectancy rates Number of churches
Per capita income Number of church members
Social media pervasiveness Social responsibility issues

SOME POLITICAL, GOVERNMENTAL AND LEGAL VARIABLES

Government regulations or deregulations Voter participation rates

Changes in tax laws
Special tariffs
Political action committies
Environmental protection
Level of defense expenditures
Legislation of equal employment
Legislation of government subsidies
Antitrust legislation
Country-country relationship
Import-export regulations
Government fiscal and monetary policy changers
Number, severity and allocation of government
protest
Number of patents
Changes in patent laws
Political conditions if foreign countries
Special local, state and federal laws
Lobbying activities
Size of governmenrt budgets
World oil, currency, and labor markets
Location and severity of terrorists activities
Local, state and national election

TECHNOLOGICAL FORCES

Revolutionary technological changes and discoveries are having a dramatic impact on organizations.

The Internet has changed the very nature of opportunities and threats by altering the life cycles of
products, increasing the speed of distribution, creating new products and services, erasing limitations of
traditional geographic markets, and changing the historical trade-off between production
standardization and flexibility.
COMPETITIVE FORCES

 Collecting and evaluating information on competitors isessential for successful strategy

formulation.
 Identifying major competitors is not always easy because many firms have divisions that
compete in different industries.

SEVEN (7) CHARACTERISTICS DESCRIBE THE MOST COMPETITIVE COMPANIES:

1. Market share matters: The 80th share point isn’t as important as the 81st, but don’t let it drop
to 79!
2. Understand and remember precisely what business you are in.
3. Whether it’s broke or not, fix it – make it better; whether it be products or the whole company.
4. Innovate or evaporate; particularly in technology driven businesses, nothing recedes like
success.
5. Acquisition is essential to growth – the most successful purchases are in a niche that add a
technology or a related market.
6. People make a difference.
7. There is no substitute for quality and no greater threat than failing to be cost competitive.

COMPETITIVE INTELLIGENCE PROGRAMS

 Competitive intelligence (CI), is a systematic and ethical process for gathering and analyzing
information about the competition’s activities and general business trends to further a
business’s own goals.

MARKET COMMONALITY AND RESOURCE SIMILARITY

Market commonality can be defined as the number and significance of markets that a firm competes in
with rivals.

Resource similarity is the extent to which the type and amount of a firm’s internal resources are
comparable to a rival.

COMPETITIVE ANALYSIS: PORTER’S FIVE –FORCE MODEL

1. Rivalry among competing firms
Rivalry among competing firms is usually the most powerful of the five competitive
forces. The strategies pursued by one firm can be successful only to the extent that they provide
competitive advantage over the strategies pursued by rival firms. Changes in strategy by one
firm may be met with retaliatory countermoves, such as lowering prices, enhancing quality,
adding features, providing services, extending warranties, and increasing advertising.
2. Potential Entry of New Competitors/Threat of New Entrants
Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms increase. Barriers to entry, however, can include the need to gain
economies of scale quickly, the need to gain technology and specialized know-how, the lack of
experience, strong customer loyalty, strong brand preferences, large capital requirements, lack
of adequate distribution channels, government regulatory policies, tariffs, lack of access to raw
materials, possession of patents, undesirable locations, counterattack by entrenched firms, and
potential saturation of the market.
3. Potential Development of Substitute Products

Competitive pressures arising from substitute products increases as the relative price of
substitute products declines and as consumers’ switching costs decrease. The competitive
strength of substitute products is best measured by the inroads into the market share those
products obtain as well as those firm’s plans for increased capacity and market penetration.

4. Bargaining Power of Suppliers

The bargaining power of suppliers affects the intensity of competition in an industry,
especially when there is a large number of suppliers, when there are only a few good substitute
raw materials, or when the cost of switching raw materials is especially costly. It is often in the
best interestof both suppliers and producers to assist each other with reasonable prices,
improved quality, and development of new services, just in-time deliveries, and reduced
inventory costs, thus enhamcing long-term profitability for all concerned.
5. Bargaining Power of Consumers

When customers are concentrated or large or buy in volume, their bargaining power represents
a major force affecting the intensity of competition in an industry. Rival firms may offer extended
warranties or special services to gain customer loyalty whenever the bargaining power of consumers
is substantial. Bargaining power of consumers also is higher when the products being purchased are
standard or undifferentiated. When this is the case, consumers often can negotiate selling price,
warranty coverage, and accessory packages to a greater extent.
INDUSTRY ANALYSIS: THE EXTERNAL FACTOR EVALUATION (EFE) MATRIX
THE COMPETITVE PROFILE MATRIC (CPM)

MODULE 4: The Internal Assessment

"The idea is to concentrate our strength against our competitor's relative weakness". – Bruce Henderson

The Nature of an Internal Audit

All organizations have strengths and weaknesses in the functional areas of business.

No enterprise is equally strong or weak in all areas. Internal strengths/weaknesses, coupled with
external opportunities/threats and a clear statement of mission, provide the basis for establishing
objectives and strategies. Objectives and strategies are established with the intention of capitalizing
upon internal strengths and overcoming weaknesses.

Key Internal Forces

It is not possible in a strategic-management text to review in depth all the material presented in courses
such as marketing, finance, accounting, management, management information systems, and
production/operations; there are many subareas within these functions, such as customer service,
warranties, advertising, packaging, and pricing under marketing.

A firm's strengths that cannot be easily matched or imitated by competitors are called distinctive
competencies. Building competitive advantages involves taking advantage of distinctive competencies.

Figure 4-1 illustrates that all firms should continually strive to improve on their weaknesses, turning
them into strengths, and ultimately developing distinctive competencies that can provide the firm with
competitive advantages over rival firms.
 Distinctive Competitive
Weaknesses Strengths Competencies Advantages

Figure 4-1 The Process of Gaining Competitive Advantage in a Firm

The Process of Performing an Internal Audit

The process of performing an internal audit closely parallels the process of performing an external audit.
Representatives, managers and employees from throughout the firm need to be involved in determining
a firm's strengths and weaknesses. The internal audit requires gathering and assimilating information
about the firm's management, marketing. finance/accounting, production/operations, research and
development (R&D), and management information systems operations. Key factors should be prioritized
as described in the previous module so that the firm's most important strengths and weaknesses can be
determined collectively.

Compared to the external audit, the process of performing an internal audit provides more opportunity
for participants to understand how their jobs, departments, and divisions fit into the whole organization.
This is a great benefit because managers and employees performbetter when they understand how their
work affects other areas and activities of the firm.

The Resource-Based View

The Resource-Based View (RBV) approach to competitive advantage contends that internal resources
are more important for a firm than external factors in achieving and sustaining competitive advantage.
In contrast to the I/O theory presented in the previous module, proponents of the RBV view contend
that organizational performance will primarily be determined by internal resources that can be grouped
into three all-encompassing categories: physical resources, human resources, and organizational
resources.

Physical resources include all plant and equipment, location, technology, raw materials, machines;
human resources include all employees, training, experience, intelligence, knowledge, skills, abilities;
and organizational resources include firm structure, planning processes, information systems, patents,
trademarks, copyrights, databases, and so on. RBV theory asserts that resources are actually what helps
a firm exploit opportunities and neutralize threats.

For a resource to be valuable, it must be either (1) rare, (2) hard to imitate, or (3) not easily
substitutable. Often called empirical indicators, these three characteristics of resources enable a firm to
implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive
advantage. The more a resource(s) is rare, non-imitable, and non-substitutable, the stronger a firm's
competitive advantage will be and the longer it will last.

Rare resources are resources that other competing firms do not possess. If many firms have the same
resource, then those firms will likely implement similar strategies, thus giving no one firm a sustainable
competitive advantage.
It is also important that these same resources be difficult to imitate. If firms cannot easily gain the
resources, say RBV theorists, then those resources will lead to a competitive advantage more so than
resources easily imitable.

The third empirical indicator that can make resources a source of competitive advantage is
substitutability. Borrowing from Porter's Five-Forces Model, to the degree that there are no viable
substitutes, a firm will be able to sustain its competitive advantage.

However, even if a competing firm cannot perfectly imitate a firm's resource, it can still obtain a
sustainable competitive advantage of its own by obtaining resource substitutes.

Integrating Strategy and Culture

Relationships among a firm's functional business activities perhaps can be exemplified best by focusing
on organizational culture, an internal phenomenon that permeates all departments and divisions of an
organization. Organizational culture can be defined as "a pattern of behavior that has been developed
by an organization as it learns to cope with its problem of external adaptation and internal integration,
and that has worked well enough to be considered valid and to be taught to new members as the
correct way to perceive, think, and feel."

Organizational culture captures the subtle, elusive, and largely unconscious forces that shape a
workplace. Remarkably resistant to change, culture can represent a major strength or weakness for the
firm. It can be an underlying reason for strengths or weaknesses in any of the major business functions.

Value Chain Analysis

According to Porter,the business of a firm can best be described asavalue chain,in which total revenues
minus total costs of all activities undertaken to develop and market a product or service yields value. All
firms in a given industry have a similar value chain, which includes activities such as obtaining raw
materials, designing products, building manufacturing facilities, developing cooperative agreements, and
providing customer service. A firm will be profitable as long as total revenues exceed the total costs
incurred in creating and delivering the product or service. Firms should strive to understand not only
their own value chain operations but also their competitors', suppliers', and distributors' value chains.

Value chain analysis (VCA) refers to the process whereby a firm determines the costs associated with
organizational activities from purchasing raw materialstomanufacturing product(s) to marketing those
products. VCA aims to identify where low-cost advantages or disadvantages exist anywhere along the
value chain from raw material to customer service activities. VCA can enable a firm to better identify its
own strengths and weaknesses, especially as compared to competitors' value chain analyses and their
own data examined over time.

Benchmarking

Benchmarking is an analytical tool used to determine whether a firm's value chain activities are
competitive compared to rivals and thus conducive to winning in the marketplace. Benchmarking entails
measuring costs of value chain activities across an industry to determine "best practices" among
competing firms for the purpose of duplicating or improving upon those best practices. Benchmarking
enables a firm to take action to improve its competitiveness by identifying (and improving upon) value
chain activities where rival firms have comparative advantages in cost, service, reputation, or operation.

The Internal Factor Evaluation (IFE) Matrix

A summary step in conducting an internal strategic-management audit is to construct an Internal Factor

Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and evaluates the major strengths
and weaknesses in the functional areas of a business, and it also provides a basis for identifying and
evaluating relationships among those areas. Intuitive judgments are required in developing an IFE
Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-
powerful technique. A thorough understanding of the factors included is more important than the actual
numbers

The sum of all weights in an IFE must equal to 1.0

Rare Resources Resources that are not controlled or possessed by many competing firms

The Internal Factor Evaluation (IFE) Matrix A strategy-formulation tool that summarizes and evaluates a
firms major strengths and weaknesses in the functional areas of a business, and provides a basis for
identifying and evaluating relationships among those areas.

Human resources The broad category of human efforts, both physical and mental, used to produce
goods and services.

Empirical Indicators Refers to three characteristics of resources (rare, hard to imitate, not easily
substitutable) that enable a firm to gain and sustain competitive advantage.

Resource-Based View A model that argues that rare and inimitable resources help firms maintain
competitive advantage.

Value Chain Analysis Process whereby a firm determines the costs associated with organizational
activities from purchasing raw materials to manufacturing product(s) to marketing those products.

Organizational Culture The set of values, ideas, attitudes, and norms of behavior that is learned and
shared among the members of an organization

Organizational Resources The attributes that give an organization a competitive advantage such as firm
structure, planning processes, information systems, patents, trademarks, copyrights and databases.

Substitutability The degree to which people have alternatives in accessing resources

Weights Column in the IFE which is industry-based.

Ratings Column in the IFE which is company based.

(False)Human Resources Include all plant and equipment, location, technology, raw materials, machines

(True)Benchmarking A process by which a company compares its performance with that of high-
performing organizations
(False)Physical Resources A firms strengths that cannot be easily matched or imitated by competitors.