Chapter 1

The Nature of Strategic

Management

Strategic Management:
Concepts and Cases.9th edition
Fred R. David

Ch. 1-1
Fred R. David
Prentice Hall
 The Nature of Strategic
Management
• A global perspective is a matter of
survival for businesses.
• E-commerce is a vital strategic
management tool.
• The natural environment is an important
strategic issue.

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 Strategic Management Achieves
Organizational Success
Process of Integrating:
– management
– marketing
– finance/accounting
– production/operations
– research and development
– computer information systems
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Three-Stage Process

Strategy Formulation

Strategy Implementation

Strategy Evaluation
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Strategy Formulation

Vision & Mission

Opportunities & Threats

Strengths & Weaknesses

Long-Term Objectives

Alternative Strategies

Strategy Selection

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 Strategy Formulation

Issues include:
– What new businesses to enter
– What businesses to abandon
– How to allocate resources
– Expand operations or diversify
– Enter international markets
– Merge or form joint venture
– Avoidance of hostile takeover
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Strategy Implementation

Annual Objectives

Policies

Employee Motivation

Resource Allocation

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 Strategy Implementation

Action Stage of strategic management:

– Most difficult stage
– Mobilizing employees and managers
– Interpersonal skills are critical
– Consensus on pursuing goals

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Strategy Evaluation

Internal Review

External Review

Performance Measurement

Corrective Action

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 Strategy Evaluation

Final stage of strategic management:

– All strategies subject to future modification
– Success today is no guarantee of success
tomorrow
– Success creates new and different
problems
– Complacency leads to demise

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 Prime Task of
Strategic
Management
According to Peter Drucker…
The prime task is to think through the
overall mission of a business
Ask the question:
What is our Business?

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 Integrating Intuition and Analysis

The strategic management process

attempts to organize quantitative and
qualitative information under
conditions of uncertainty.

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 Integrating Intuition and Analysis

Intuition based on:

– Past experiences
– Judgment
– Feelings
Useful for decision making
– Conditions of great uncertainty
– Conditions with little precedent
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 Levels of
Strategy
1) Corporate Level Strategy
2) Business-Level Strategy
3) Functional-Level strategy
 CORPORATE LEVEL
STRATEGY
 Top Management’s overall plan
for the entire organization and
its SBU’s.

 Corporate level strategy

occupies heights level of
the
DECISION MAKING.
 Forms of Corporate Level
Strategy
1. Growth:- Expansion into new products
and markets.

2. Stability:- Maintenance of the status of

the Organization.

3. Retrenchment/Renewal:- Redirection of
the firm into new markets.
 Corporate Level
Strategy
1. Growth Strategy
-Seeking to increase the
organization’s business by
expansion into new products
and markets.
 Types of Growth
Strategies
Two types of Growth Strategies:

 Concentration
-Vertical Integration
-Horizontal Integration
 Diversification

 Concentration:
The company concentrates more resources on the
product line to increase its participation in the
value
chain of the product. The two main types
of Concentration strategies are:-
 Types of Growth
Strategies
Vertical Integration:
1. Backward vertical Integration
2. Forward Vertical Integration

Horizontal Integration:

 Diversification: A company is diversified when it is

in two or more lines of business operating in
distinct and diverse market environments.
 Types of Growth
Strategies
1. Related Diversification:
Some similar factors can be used by
diversification. For e.g. A tea company starts
producing other food products to take advantage of
its distribution network etc.

2.Unrelated Diversification:
Company enters entirely different product-market
segments.
Why to Pursue
Growth?
1. Growth is necessary for survival in future
2. Growth offers large scale of operation
3. Growth strategy is up because
taken motivation to do so
4. Intangible advantage of
growth
 Corporate Level Strategy
2. Stability Strategy:
In simple words, stability strategy
refers to the company’s policy of
continuing the same business
and with the same objectives.
 WHY TO PURSUE THE
STABILLITY
1. It is less risky
STRATEGY?

2. The environmental faced is relatively stable.

3. Expansion may be perceived as being threatening.

Retrenchment/Renewal
Strategy
 Corporate Level Strategy

Renewal/Retrenchment
strategies are pursued when a
company’s product lines are
performing poorly as a result of
finding itself in a weak
competitive position or a general
decline in industry or markets.
 Forms o f
Retrenchment
Strategy
1. Turnaround Strategy

2. Divestment Strategy

3. Liquidation Strategy
 Integrating Intuition and Analysis

Intuition and judgment

– Management at all levels
– Analyses are influenced

Analytical thinking and intuitive thinking

– Complement each other

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 Adaptation to Change

Organizations must monitor events

– On-going process
– Internal and external events
– Timely changes

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 Adaptation to Change

Rate and magnitude of changes

– Increasing dramatically
• E-commerce
• Demographics
• Technology
• Merger-mania
– Effective Adaptation
• Long-run focus

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Strategic Management
Process
 Key Terms

Vision Statement
– What do we want to become?

Mission Statement
– What is our business?

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 Key Terms

External Opportunities and Threats

– Significantly benefit or harm the organization in the
future.

– Include the following trends:

• Economic
• Social
• Cultural
• Demographic Environmental
• Political, legal, governmental
• Technological
• Competitive trends
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 Key Terms

External Opportunities and Threats

– Largely beyond the control of a single
organization.

– Basic tenet of strategic management

• Strategy formulation to:
– Take advantage of external opportunities
– Avoid or reduce impact of external threats
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 Key Terms

Environmental Scanning

– Industry Analysis
• Process of conducting research and
gathering and assimilating external
information

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 Key Terms

Internal Strengths and Weaknesses

– Controllable activities performed especially
well or poorly.

– Arise in functional areas of the business:

• Management
• Marketing
• Finance/accounting
• Production/operations
• Research & development
• Computer Information Systems
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 Key Terms

Determining Internal Factors:

– Financial ratios
– Measuring performance
– Industry averages
– Survey data

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 Key Terms

Long-term objectives:

– Mission-driven pursuit of specific results more

than one-year out.
– Essential for organizational success
• State direction
• Aid in evaluation
• Create synergy
• Focus coordination
• Basis for planning, motivating and controlling
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 Key Terms

Strategies:
– Means by which long-term objectives will be
achieved.

– May include:
• Geographic expansion, diversification
• Acquisition
• Product development, market penetration
• Retrenchment, divestiture
• Liquidation, joint venture

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 Key Terms

Annual Objectives:
– Short-term milestones that organizations must
achieve to reach long-term objectives.

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 Key Terms

Policies:
– Means by which annual objectives will be
achieved.

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 Comprehensive Strategic Management Model

External
Audit

Chapter 3

Long-Term Generate, Implement Implement Measure &

Vision
Evaluate, Strategies: Evaluate
&
Objectives Select Strategies: Performanc
Missio Mgmt Issues
n Strategies Marketing, e
Fin/Acct,
Chapter 5 Chapter 6 Chapter 7 R&D, CIS
Chapter 2
Chapter 8 Chapter 9

Internal
Audit

Chapter 4

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 Strategic-Management Model

Strategic-Management Process –

• Dynamic and Continuous

• More formal in larger organizations

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 Strategic-Management Model

1.Identify Organization’s existing:

• Vision
• Mission
• Objectives
• Strategies

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 Strategic-Management Model

2. Perform External Audit

3. Perform Internal Audit
4. Establish long-term objectives
5. Generate, evaluate, select strategies
6. Implement strategies
7. Measure and evaluate performance

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 Benefits of Strategic
Management

• Proactive in shaping organization’s future

• Initiate and influence activities
• Formulate better strategies
– Systematic, logical, rational approach

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 Benefits of Strategic
Management

• Financial benefits
– Improvement in sales
– Improvement in profitability
– Improvement in productivity

Ch. 1-47
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 Benefits of Strategic
Management
• Non-Financial benefits
– Enhanced awareness of xternal threats
– Improved understanding of competitors’
strategies
– Increased employee productivity
– Reduced resistance to change
– Understanding of performance-reward
relationships
– Enhances problem-prevention
capabilities
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 Benefits of Strategic
Management
1. Identification of opportunities
2. Objective view of management problems
3. Improved coordination and control
4. Minimizes adverse conditions and
changes
5. Decisions to better support
objectives
6. Effective allocation of time and
resources
7. Internal communication
Fred R. David among
Ch. 1-49

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 Benefits of Strategic
Management

8. Integration of individual behaviors

9.Clarifies individual responsibilities
10.Encourages forward thinking
11.Encourages favorable attitude toward
change
12.Discipline and formality to the
management of the business

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 Why Some Firms Do No
Strategic Planning

• Poor reward structures

• Fire-fighting
• Waste of time
• Too expensive
• Laziness
• Content with success

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 Why Some Firms Do No
Strategic Planning
(Cont’d)
• Fear of failure
• Overconfidence
• Prior bad experience
• Self-interest
• Fear of the unknown
• Suspicion

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 Business Ethics and
Strategic
Management
Business ethics defined:
– Principles of conduct within
organizations that guide decision
making and behavior.

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 Business Ethics and
Strategic
Management
Good business ethics:

– prerequisite for good strategic

management

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 Business Ethics and
Strategic
Management
Code of business ethics:

– Provides basis on which policies can

be devised to guide daily behavior
and decisions at the workplace

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 Business Ethics and
Strategic
Management
Internet privacy

– Emerging ethical issue of immense

proportion

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 Business Ethics and
Strategic
Management
Internet and business ethics --

– 38% of companies store and review

employees email messages
– Up from 15% in 1997
– 54% of companies monitor
employees’ Internet connections
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 Business Ethics & Strategic
Planning
Business actions always unethical include:

• Misleading advertising
• Misleading labeling
• Environmental harm
• Poor product or service safety
• Padding expense accounts
• Insider trading
• Dumping flawed products on foreign markets

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Nature of Global Competition

Companies conduct business across

borders
 International or multinational
corporations
 Parent company
 Host country

• Strategy implementation more

difficult
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 Advantages of International
Operations
• Absorb excess capacity
• Reduce unit costs
• Spread economic risks over wider
markets
• Low-cost production facilities
• Competition may be less intense
• Reduced tariffs, lower taxes
• Economies of scale
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 Disadvantages of International
Operations
• Different social, cultural demographic,
legal forces may create difficult
communication
• Weaknesses of foreign competition may
be underestimated
• Barriers to communication and effective
management of personnel
• Complications from different monetary
systems
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