Chapter 8
STRATEGIC
MANAGEMENT
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Learning Objectives
You should learn to:
– Explain the importance of strategic management
– Describe the steps in the strategic management
process
– Explain SWOT analysis
– Differentiate corporate-, business-, and
functional-level strategies
– Explain what competitive advantage is and why
it’s important to organizations
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Learning Objectives (cont.)
You should learn to:
– Describe the five competitive forces
– Identify the various competitive strategies
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The Importance Of Strategic Management
What Is Strategic Management?
– A set of managerial decisions and actions that
determines the long-run performance of an
organization
Purposes of Strategic Management
– involved in many decisions that managers make
– companies with formal strategic management
systems have higher financial returns than
companies with no such system
– important in profit and not-for-profit
organizations
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The Strategic Management Process
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The Strategic Management Process
1. Identifying the Organization’s Current Mission,
Objectives, and Strategies
– mission - statement of the purpose of an
organization
• important in profit and not-for-profit
organizations
• important to identify the goals currently in
place and the strategies currently being pursued
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Components of a Mission Statement
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The Strategic Management Process (cont.)
2. Analyzing the Environment
– successful strategies are aligned with the
environment
– examine both the specific and general
environments to determine what trends and
changes are occurring
3. Identifying Opportunities and Threats
– opportunities - positive trends in the external
environmental
– threats - negative trends in the external
environment
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The Strategic Management Process (cont.)
4. Analyzing the Organization’s Resources and
Capabilities
– examine the inside of the organization
– available resources and capabilities always
constrain the organization in some way
– core competence - a unique and exceptional
capability or resource
• the organization’s major value-creating,
competitive weapon
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The Strategic Management Process (cont.)
5. Identifying Strengths and Weaknesses
– strengths - activities the organization does well or any
unique resource
– weaknesses - activities the organization does not do well
or resources it needs but does not possess
– organization’s culture has its strengths and weaknesses
• strong culture - new employees easily identify the
organization’s core competencies
– may serve as a barrier to accepting change
• influence managers’ preferences for certain strategies
– SWOT analysis - analysis of the organization’s strengths,
weaknesses, opportunities, and threats
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Identifying the Organization’s Opportunities
Organization’s
Organization’s
Resources/Abilities Opportunities
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Opportunities in
the Environment
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The Strategic Management Process (cont.)
6. Formulating Strategies
– require strategies at the corporate, business, and
functional levels of the organization
– strategy formulation follows the decision-making
process
7. Implementing Strategies
– a strategy is only as good as its implementation
8. Evaluating Results
– control process to determine the effectiveness of a
strategy
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Levels of Organizational Strategy
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Types Of Organizational Strategies
Corporate-Level Strategy
– determines
• what businesses a company should be in or wants to
be in
• the direction that the organization is going
• the role that each business unit will play
– Grand Strategy - Stability
• no significant change is proposed
• organization’s performance is satisfactory
• environment appears to be stable and unchanging
• few organizations today pursue this strategy
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Types Of Organizational Strategies (cont.)
Corporate-Level Strategy (cont.)
– Grand Strategy - Growth
• seeks to increase the level of the organization’s
operations
• concentration - growth through direct expansion of
organization’s own business operations
• vertical integration
– backward - become your own supplier
– forward - become your own distributor
• horizontal integration - grow by combining with
other organizations in the same industry
– needs approval by U.S. Federal Trade Commission
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Types Of Organizational Strategies (cont.)
Corporate-Level Strategy (cont.)
– Grand Strategy - Growth (cont.)
• related diversification - grow by merging with
or acquiring firms in different, but related,
industries
–“strategic fit”
• unrelated diversification - grow by merging
with or acquiring firms in different and
unrelated industries
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Types Of Organizational Strategies (cont.)
Corporate-Level Strategy (cont.)
– Grand Strategy - Growth (cont.)
• retrenchment - designed to address
organizational weaknesses that are leading to
performance declines
–intended to:
»stabilize operations
»revitalize organizational resources and
capabilities
»prepare to compete once again
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Critical
Weaknesses
Firm Status
Valuable
Strengths
SWOT Analysis And Grand Strategies
Corporate
Growth
Strategies
Corporate
Stability
Strategies
Corporate
Stability
Strategies
Corporate
Retrenchment
Strategies
Abundant
Environmental
Opportunities
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Environmental Status
Critical
Environmental
Threats
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Types of Organizational Strategies (cont.)
Corporate-Level Strategy (cont.)
– Corporate Portfolio Analysis - used when corporate
strategy involves a number of business
• Boston Consulting Group (BCG) matrix - provides a
framework for understanding diverse businesses
– helps managers establish priorities for making
resource allocation decisions
– businesses classified in terms of
» market share
» anticipated market growth
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The BCG Matrix
Market Share
Low
High
High
Stars
Question
Marks
Cash
Cows
Dogs
Low
Anticipated
Growth
Rate
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Types of Organizational Strategies (cont.)
Corporate-Level Strategy (cont.)
– BCG matrix (cont.)
• strategic implications of the matrix
– cash cows - “milk”
» use cash to invest in stars and question marks
– stars - require heavy investment
» eventually will become cash cows
– question marks - two strategies
» invest to transform them into stars
» divest
– dogs - sold off or liquidated
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Types Of Organizational Strategies (cont.)
Business-Level Strategy
– determines how an organization should compete in each
of its businesses
– strategic business units - independent businesses that
formulate their own strategies
– Role of Competitive Advantage
• competitive advantage - sets an organization apart by
providing a distinct edge
– comes from the organization’s core competencies
– not every organization can transform core
competencies into a competitive advantage
– once created, must be able to sustain it
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Types Of Organizational Strategies (cont.)
Business-Level Strategy (cont.)
– Competitive Strategies
• Michael Porter - industry analysis based on
five competitive forces
–Threat of new entrants - affected by barriers
to entry
–Threat of substitutes - affected by buyer
loyalty and switching costs
–Bargaining power of buyers - affected by
number of customers, availability of
substitute products
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Types Of Organizational Strategies (cont.)
Business-Level Strategy (cont.)
– Competitive Strategies (cont.)
• Porter’s competitive forces analysis (cont.)
–Bargaining power of suppliers - affected by
degree of supplier concentration
–Existing rivalry - affected by industry
growth rate, demand for firm’s product or
service, and product differences
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Forces In The Industry Analysis
New
Entrants
Bargaining
Power or
Suppliers
Threat of
New Entrants
Industry
Competitors
Suppliers
Current Rivalry
Threat of
Substitutes
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Buyers
Bargaining
Power or
Buyers
Substitutes
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Types of Organizational Strategies (cont.)
Business-Level Strategy (cont.)
– Competitive strategies (cont.)
• Porter’s three generic strategies
–cost leadership - goal is to become the
lowest-cost producer in the industry
»tries to identify efficiencies in all
operations
»overhead kept to a minimum
»product or service must be perceived to be
of comparable quality to that offered by
competitors
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Types of Organizational Strategies (cont.)
Business-Level Strategy (cont.)
– Competitive strategies (cont.)
• Porter’s three generic strategies (cont.)
–differentiation - offer unique products that
are widely valued by customers
»sets the firm apart from competitors
»differentiation based on quality, service,
product design, brand image
»customers must be willing to pay a price
premium that exceeds the cost of
differentiation
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Types of Organizational Strategies (cont.)
Business-Level Strategy (cont.)
– Competitive strategies (cont.)
• Porter’s three generic strategies (cont.)
–focus - aims at a cost advantage or
differentiation advantage in a narrow
segment
»no attempt to serve the broad market
»feasibility of strategy depends on the size
of the segment and the ability of the firm
to support the cost of focusing
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Requirements for Successfully Pursuing Porter’s Competitive Strategies
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Types Of Organizational Strategies (cont.)
Functional-Level Strategy (cont.)
– used to support the business-level strategy
– creates an appropriate supporting role for each
functional area of the organization
• e.g., manufacturing, marketing, human
resources
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