MANAGEMENT

Chapter

7
Strategic
Management
LEARNING OUTLINE
Follow this Learning Outline as you read and study this chapter.

The Importance of Strategic Management

• Define strategic management, strategy, and business
model.
• Explain why strategic management is important.

The Strategic Management Process

• List the six steps in the strategic management process.
• Describe what managers do during external and internal
analyses.
• Explain the role of resources, capabilities, and core
competencies.
• Define strengths, weaknesses, opportunities, and threats.
L E A R N I N G O U T L I N E (cont’d)
Follow this Learning Outline as you read and study this chapter.

Types of Organizational Strategies

• Describe the three major types of corporate strategies.
• Discuss the BCG matrix and how it’s used.
• Describe the role of competitive advantage in business-
level strategies.
• Explain Porter’s five forces model.
• Describe Porter’s three generic competitive strategies and
the rule of three.
L E A R N I N G O U T L I N E (cont’d)
Follow this Learning Outline as you read and study this chapter.

Strategic Management in Today’s Environment

• Explain why strategic flexibility is important.
• Describe strategies applying e-business techniques.
• Explain what strategies organizations might use to
become more customer oriented and to be more
innovative.
Strategic Management

• What managers do to develop the

organization’s strategies.

Strategies
• The decisions and actions that determine the
long-run performance of an organization.
Why is Strategic Management Important

1. It results in higher organizational performance.

2. It requires that managers examine and adapt to

business environment changes.

3. It coordinates diverse organizational units, helping

them focus on organizational goals.

4. It is very much involved in the managerial decision-

making process.
Exhibit 7–1 The Strategic Management Process
Strategic Management Process

• Step 1: Identifying the organization’s current mission,

goals, and strategies

 Mission: the firm’s reason for being

 The scope of its products and services

 Goals: the foundation for further planning

 Measurable performance targets

Components of Mission Statement
Strategic Management Process

• Step 2: Doing an external analysis

 The environmental scanning of specific and general

environments

 Focuses on identifying opportunities and threats by exploring

three layers of environment;

 Natural environment

 Societal environment

 Task environment
Strategic Management Process (cont’d)

• Step 3: Doing an internal analysis

 Assessing organizational resources, capabilities, and activities:

 Strengths create value for the customer and strengthen the
competitive position of the firm.
 Weaknesses can place the firm at a competitive
disadvantage.
 Analyzing financial and physical assets is fairly easy, but
assessing intangible assets (employee’s skills, culture, corporate
reputation, and so forth) isn’t as easy.
• Steps 2 and 3 combined are called a SWOT analysis.
SWOT analysis

• SWOT matrix is a strategic planning technique used to

help a person or organization identify strengths,
weaknesses, opportunities, and threats related to
business competition or project planning.
SWOT analysis

• Strengths: characteristics of the business or project that

give it an advantage over others.

• Weaknesses: characteristics of the business that place

the business or project at a disadvantage relative to
others.
SWOT analysis

• Opportunities: elements in the environment that the

business or project could exploit to its advantage.

• Threats: elements in the environment that could cause

trouble for the business or project.
SWOT analysis
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.

 The environment dictates the chosen strategy;

effective strategy implementation requires an
organizational structure matched to its requirements.
Strategic Management Process (cont’d)

• Step 6: Evaluating results

 How effective have strategies been?

 What adjustments, if any, are necessary?

Types of Organizational Strategies

• Organizations use three types of strategies:

 Corporate Strategies
 Competitive Strategies
 Functional Strategies
Types of Organizational Strategies
 Types of Organizational Strategies

• Top level managers typically are responsible for

corporate strategies.
• Middle managers are responsible for competitive
strategies.
• Lower level managers are responsible for functional
strategies.
Corporate Strategies

• Corporate strategy is one that determines what

businesses a company is in or want to be in and what it
wants to do with those businesses.

• Top management’s overall plan for the entire

organization and its strategic business units.

Types of Corporate Strategies

• Growth: expansion into new products and markets

• Stability: maintenance of the status quo

• Renewal: redirection of the firm into new markets

Corporate Strategies Growth Strategy

• Growth Strategy

• A growth strategy is when an organization expands the

number of market served or products offered, either
through its current business(es) or through new
business(es).

 Seeking to increase the organization’s business by

expansion into new products and markets.
Corporate Strategies Growth Strategy

• Because of growth strategy, an organization may

increase its:
 Revenues

 Number of employees

 Market shares
Corporate Strategies Growth Strategy

• Types of Growth Strategies

 Concentration
 Vertical integration
 Horizontal integration
 Diversification
Growth Strategies
• Concentration

• Focusing on a primary line of business and increasing

the number of products offered or markets served.

 Example of a company using concentration is Bose

Corporation, which focuses on developing innovative
audio products. It has become one of the world’s
leading manufacturers of speakers for home
entertainment, and professional audio markets with
annual sales of more than $3 billion.
Growth Strategies
• Vertical Integration

• Backward vertical integration: attempting to gain control

of inputs (become a self-supplier).

 For instance, Walmart plans to build a dairy-

processing plant in Indiana to supply private-label
milk to hundreds of its stores at a lower cost than
purchasing milk from an outside supplier.
Growth Strategies
• Vertical Integration

• Forward vertical integration: attempting to gain control of

output through control of the distribution channel or
provide customer service activities (eliminating
intermediaries).

 For example, Apple has more than 400 retail stores

worldwide to distribute its products.
Growth Strategies (cont’d)

• Horizontal Integration
• Combining operations with another competitor in the
same industry to increase competitive strengths and
lower competition among industry rivals.
 For instance, Bank of America has acquired MBNA,
Summit Bancorp, NationsBank, U.S. Trust, and Fleet
Financial.
Growth Strategies (cont’d)
• Diversification
• Finally, an organization can grow through diversification,
either related or unrelated.

• Related Diversification
• Expanding by combining with firms in different, but
related industries that are “strategic fits.”
 For example, Google has acquired a number of
businesses (some 150 total), including YouTube,
DoubleClick, Nest, and Motorola Mobility.
Growth Strategies (cont’d)

• Diversification
• Unrelated Diversification
• Growing by combining with firms in unrelated industries
where higher financial returns are possible.
 For instance, the Tata Group of India has businesses
in chemicals, communications and IT, consumer
products, energy, engineering, materials, and
services.
Corporate Strategies Stability Strategy

• Stability Strategy
• A corporate strategy in which an organization continues
to do what it is currently doing
 Examples of this strategy include continuing to serve
the same clients by offering the same product or
service, maintaining market share, and sustaining the
organization’s current business operations.
 The organization doesn’t grow, but doesn’t fall behind,
either.
Corporate Strategies Renewal Strategy

• Renewal Strategies

• Developing strategies to counter organization weaknesses

that are leading to performance declines.

 Retrenchment: focusing of eliminating non-critical

weaknesses and restoring strengths to overcome current
performance problems.

 For instance, Biogen reduced its workforce by 11

percent to cut costs. With those savings, the company
has increased spending for R & D.
Corporate Strategies Renewal Strategy

• Renewal Strategies

 Turnaround: addressing critical long-term performance

problems through the use of strong cost elimination measures
and large-scale organizational restructuring solutions.

 For example, the CIT Group’s declining profits prompted

management to cut costs by $125 million and sell the
company’s aircraft financing business unit to more effectively
focus on commercial lending and leasing.
How Are Corporate Strategies Managed?

• When an organization’s corporate strategy

encompasses a number of businesses,
managers can manage this collection, or
portfolio, of businesses using a tool called
corporate portfolio matrix.
How Are Corporate Strategies Managed?

• The first portfolio matrix—the BCG matrix—introduced

the idea that an organization’s various businesses could
be evaluated, to identify which ones offered high
potential and which were a drain on organizational
resources.

• A business unit is evaluated using a SWOT analysis and

placed in one of the four categories of BCG matrix.
Corporate Portfolio Analysis

• Managers manage portfolio (or collection) of businesses

using a corporate portfolio matrix such as the BCG
Matrix.
• BCG Matrix
 Developed by the Boston Consulting Group
 Considers market share and industry growth rate
 Classifies firms as:
 Cash cows: low growth rate, high market share
 Stars: high growth rate, high market share
 Question marks: high growth rate, low market share
 Dogs: low growth rate, low market share
Exhibit 7–2 The BCG Matrix
What are the strategic implications of
the BCG matrix?

• The dogs should be sold off or liquidated as they have

low market share in markets with low growth potential.
• Managers should “milk” cash cows for as much as they
can, limit any new investment in them, and use the large
amounts of cash generated to invest in stars and
question marks with strong potential to improve market
share.
What are the strategic implications of
the BCG matrix?
• Heavy investment in stars will help take advantage of the
market’s growth and help maintain high market share.
The stars, of course, will eventually develop into cash
cows as their markets mature and sales growth slows.
• The hardest decision for managers relates to the
question marks. After careful analysis, some will be sold
off and others strategically nurtured into stars.
Competitive Strategy

• Competitive Strategy
 A strategy focused on how an organization should
compete in each of its SBUs (strategic business
units).
 SBUs : The single independent businesses of an
organization that formulate their own competitive
strategies
The Role of Competitive Advantage

• Competitive Advantage

• An organization’s distinctive competitive edge.

 Apple has created the world’s best and most powerful

brand using innovative design and merchandising
capabilities
The Role of Competitive Advantage

• Quality as a Competitive Advantage

 Differentiates the firm from its competitors.

 Can create a sustainable competitive advantage.

 Represents the company’s focus on quality

management to achieve continuous improvement and
meet customers’ demand for quality.
Five Competitive Forces
• In any industry, five competitive forces dictate the rules of
competition. Together, these five forces determine industry
attractiveness and profitability, which managers assess using these
five factors:
• Threat of New Entrants

 The ease or difficulty with which new competitors can enter an

industry.
• Threat of Substitutes

 The extent to which switching costs and brand loyalty affect the
likelihood of customers adopting substitutes products and
services.
Five Competitive Forces
• Bargaining Power of Buyers

 The degree to which buyers have the market strength to hold

sway over and influence competitors in an industry.
• Bargaining Power of Suppliers

 The relative number of buyers to suppliers and threats from

substitutes and new entrants affect the buyer-supplier
relationship.
• Current Rivalry

 Intensity among rivals increases when industry growth rates

slow, demand falls, and product prices descend.
Exhibit 6-3 Forces in the Industry Analysis
Types of Competitive Strategies
• Once managers have assessed the five forces and done a SWOT
analysis, they’re ready to select an appropriate competitive strategy.

• Cost Leadership Strategy

 Seeking to attain the lowest total overall costs relative to other

industry competitors.

 For example, you won’t find many embellishments in Ross

Stores. Low overhead costs allow Ross to sell quality apparel
and home items at 20 to 60 percent less than most department
store prices, and the company is profitable
Types of Competitive Strategies
• Differentiation Strategy

 Attempting to create a unique and distinctive product or

service for which customers will pay a premium.

 L.L.Bean (customer service) is best example of

differentiation strategy.

 L.L.Bean (clothing and shoe company) allows customers

to return merchandise at any time if not completely
satisfied.
Types of Competitive Strategies
• Focus Strategy

 involves a cost advantage (cost focus) or a differentiation

advantage (differentiation focus) in a narrow segment or
niche.

 For example, Denmark’s Bang & Olufsen, whose revenues

exceed $490 million, focuses on high-end audio equipment
sales. Whether a focus strategy is feasible depends on the
size of the segment and whether the organization can
make money serving that segment.
Functional Strategy
• A strategy used by an organization’s various functional
departments to support the competitive strategy
 For example, when R. R. Donnelley & Sons Company, a
Chicago-based printer, wanted to become more competitive and
invested in high-tech digital printing methods, its marketing
department had to develop new sales plans and promotional
pieces, the production department had to incorporate the digital
equipment in the printing plants, and the human resources
department had to update its employee selection and training
programs.
CURRENT strategic management issue
• Following are three strategic management
issues:
 Need for strategic leadership
 Need for strategic flexibility
 Important organizational strategies for today’s
environment
Need for strategic leadership
• The ability to anticipate, envision, maintain flexibility,

think strategically, and work with others in the

organization to initiate changes that will create a viable

and valuable future for the organization

Strategic Leadership
Need for strategic flexibility

• The ability to recognize major external changes,

to quickly commit resources, and to recognize
when a strategic decision was a mistake
Develop strategic flexibility
Important Organizational Strategies for
Today’s Environment

• E-business Strategies
• Customer Service Strategies
• Innovation Strategies
 First Mover
First Mover