CHAPTER 1
Basic Concepts
of Strategic
Management
STRATEGIC MANAGEMENT & BUSINESS POLICY
11TH EDITION
THOMAS L. WHEELEN
Prentice Hall, Inc. © 2008
J. DAVID HUNGER
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Strategic Management Defined
Set of top-level managerial decisions and
actions that determines the long-run
performance of a firm.
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Examples of Strategic Options
Businesses to abandon
Retrenchment
Growth through Internal
Resources & Capabilities
Vertical Expansion or
diversification
Entry to International
markets
Mergers or joint ventures
Avoidance of hostile
takeover
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Key Elements:Southwest Airlines’ Strategy
• Grow the business by gradually adding more flights on
existing routes and initiating service to new airports
• Make friendly service a company trademark
• Maintain an aircraft fleet of only Boeing 737s
• Encourage customers to make reservations and purchase
tickets at the company’s Web site
• Avoid flying into congested airports
• Employ a point-to-point route system
• Economize on
– Amount of time it takes terminal personnel to check passengers
in and on-load passengers
– Costs
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Basic Concepts of Strategic Management
Highly Rated Benefits
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Clearer sense of strategic vision
Sharper focus on strategic importance
Improved understanding of changing
environment
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Basic Concepts of Strategic Management
Basic Questions Concerning Strategic
Decision Making
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Where is the organization now? (not where
do we hope it is)
If no changes are made, where will the
organization be in 1,2,5 or 10 years? Where
do we want go?
What specific actions should management
undertake in order to achieve long-term
objectives? How do we get there?
What are the risks and payoffs?
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Basic Concepts of Strategic Management
Basic Elements of the Strategic
Management Process
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Environmental Scanning Defined
Monitoring, evaluation, and disseminating
information from external and internal
environments –to key people in the firm
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Basic Concepts of Strategic Management
Environmental
Variables
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Environmental Scanning
SWOT Analysis-A Tool for Strategic
Audit and Problem Definition
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Strengths – Weaknesses
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Opportunities - Threats
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Strategy Formulation
Development of long-range plans for
effective management of opportunities
and threats (which are external factors
that are relevant for firm’s market
success and survival) in light of
corporate strengths and weaknesses
(which are made up of resources and
capabilities that lead to competencies)
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Resources, Capabilities and Competencies
• Resources are valuable inputs, upon which an
organization can confer a right, and thus
become a firm’s assets.
• They are not necessarily tangible, but since they
are valued by market and traded they are
observable. Nike’s brand name, Lipitor’s patent,
Ford’s truck inventory.
• They can be transformed into valuable outputs.
• Resources generally pertain to stock values and
are usually assessed by conventional
accounting methods.
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Resources, Capabilities and Competencies
• Capabilities refer to high-level organizational routines,
which, taken together with related input flows, confers
upon an organization’s management a set of decision
options for producing significant and valuable outputs.
• Capabilities are not directly observable, generally
intangible and cannot be traded or valued in the market.
• They are embedded in an organizations human agents,
their interactions and patterned work processes. Nike’s
marketing capability, Wal-mart’s logistics capability,
Toyota’s production capability.
• Capabilities have value on their own and can add value
to resources, which they utilize.
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Resources, Capabilities and Competencies
• A competence is the product of organizational learning
and experience and represents real proficiency in
performing an internal activity.
• A competence is indeed a capability which provides
competitive advantage to the organization.
• A core competence is a well-performed
internal activity central (not peripheral or incidental)
to a company’s competitiveness and profitability.
• A distinctive competence is a competitively valuable
activity a company performs better than its rivals.
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Vision & Mission Statements
Vision
“What do we want to
become?”
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Vision
Clear Business
Vision
Comprehensive
Mission Statement
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Vision Statement Examples
General Motors’ vision is to be the world
leader in transportation products and
related services.
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Vision Statement Examples
Wyeth
Our vision is to lead the way to a healthier world. By
carrying out this vision at every level of our organization,
we will be recognized by our employees, customers, and
shareholders as the best pharmaceutical company in the
world, resulting in value for all. We will achieve this by:
• Leading the world in innovation by linking pharmaceutical,
biotech, and vaccines technologies
• Making quality, integrity, and excellence hallmarks
of the way we do business
• Attracting, developing, and motivating the best people
• Continually growing improving our business
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Strategy Formulation
Mission Statement
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Purpose/reason for organization
Promotes shared expectations
Communicates public image
Who we are; what we do; what we
aspire to
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Strategy Formulation
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Mission Statement Examples
We aspire to make PepsiCo the world’s
premier consumer products company, focused
on convenient foods and beverages. We seek
to produce healthy financial rewards for
investors as we provide opportunities for
growth and enrichment to our employees, our
business partners and the communities in
which we operate. And in everything we do, we
strive to act with honesty, openness, fairness
and integrity.
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• Koç Topluluğu, çalışanlarıyla birlikte,
müşterilerinin tatminini sağlayarak sağlıklı
gelişmeyi, evrensel kalite ve standartlarda
ürün ve hizmetler sunmayı amaçlar. Bu
suretle ülkesi, müşterileri, ortakları, bayileri
ve yan sanayii için güvenilirlik, devamlılık
ve saygınlık simgesi olmayı hedefler
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Otosan
• Vizyon
Otomotiv ürün ve hizmetlerinde Türkiye'nin lider tüketici
odaklı şirketi olmak.
• Misyon
Müşteri ihtiyaç ve beklentilerine en uygun otomotiv ürün
ve hizmetlerini sunarak Türkiye otomotiv pazarının lideri
olmak. Ford Avrupa'nın ticari araç üretim ve geliştirme
merkezi olmak.
Ford Motor Company
• Vizyon
Otomotiv üretim ve hizmet sektöründe dünyanın lider
kuruluşu olmak.
• Misyon
Ford Motor Company tüketici ihtiyaçlarını öngörerek
insanların hayatlarını geliştiren seçkin ürünler sunar.
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Garanti Bank Vision & Mission
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Organizational Adaptation
Strategic flexibility
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Demands long-term commitment to
development of critical resources
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Demands firm become a learning
organization- develop dynamic
capabilities-
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Learning Organizations
An organization skilled at creating,
acquiring, and transferring
knowledge and at modifying its
behavior to reflect new knowledge
and insights
Outcome of being a learning
organization is having competitively
valuable intellectual capital
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Learning Organizations
4 Chief Activities
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Systematic problem solving
New approach experimentation
Learning from experiences
Intra-organization knowledge transfer
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The Concept of Business Model & Its Relationship with Strategy
Strategy - Deals with a
company’s competitive
initiatives and business
approaches
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Business Model Concerns whether
revenues and costs
flowing from the
strategy demonstrate
the business can be
amply profitable and
viable
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Basic Concepts of Strategic Management
Hierarchy of
Strategy
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Levels of Strategy-Making in a Diversified Company
Corporate-Level
Managers
Corporate
Strategy
Two-Way Influence
Business-Level
Managers
Business Strategies
Two-Way Influence
Functional
Managers
Functional Strategies
Two-Way Influence
Operating
Managers
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Operating Strategies
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Goals & Objectives
Corporate Goals/Objectives
–Profitability (net profit, EPS)
–Growth
–Resource utilization (ROE, ROI)
–Market leadership
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Strategic and Financial Objectives
Examples: Financial Objectives
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X % increase in annual revenues
X % increase annually in after-tax profits
X % increase annually in earnings per share
Annual dividend increases of X %
Profit margins of X %
X % return on capital employed (ROCE)
Increased shareholder value
Strong bond and credit ratings
Sufficient internal cash flows to fund 100% of new capital
investment
• Stable earnings during periods of recession
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Strategic and Financial Objectives
Examples: Strategic Objectives
• Winning an X % market share
• Achieving lower overall costs than rivals
• Overtaking key competitors on product performance or quality or
customer service
• Deriving X % of revenues from sale of new products introduced
in past 5 years
• Achieving technological leadership
• Having better product selection than rivals
• Strengthening company’s brand name appeal
• Having stronger national or global sales and distribution
capabilities than rivals
• Consistently getting new or improved products to market ahead
of rivals
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Strategic and Financial Objectives
Unilever’s Strategic and Financial Objectives
• Grow annual revenues by 5-6% annually
• Increase operating profit margins from 11% to
16% within 5 years
• Trim company’s 1200 food, household, and
personal care products down to 400 core brands
• Focus sales and marketing efforts on those
brands with potential to become respected,
market-leading global brands
• Streamline company’s supply chain
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Basic Concepts of Strategic Management
3 Types of Strategy
–Corporate strategy
–Business strategy
–Functional strategy
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Basic Concepts of Strategic Management
Corporate Strategy
–Stability
–Growth
–Retrenchment
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Basic Concepts of Strategic Management
Business Strategy
–Competitive strategies
–Cooperative and Complementary strategies
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Basic Concepts of Strategic Management
Functional Strategy
–Technological leadership
–Technological followership
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Basic Concepts of Strategic Management
Strategic
Decision-Making
Process
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Strategic Decision Making
Strategic Decisions
–Rare
–Consequential
–Directive
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Corporate Governance
The relationship among the board of
directors, top management, and
shareholders – determining the direction
and performance of the corporation
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Corporate Governance
Role of Board
–Monitor
–Evaluate and influence
–Initiate and determine
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Board of Directors Continuum
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Board of Directors
Members -–Inside directors
•“management directors”
•Officers or execs employed by the firm
–Outside directors
•“non-management directors”
•Execs of other firms not employed by the
board’s corporation
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Agency Theory
Agency Problem –
–Objectives of owners & agents in conflict
–Difficult for owners to verify agent performance
Risk Sharing Problem –
–Owners & agents risk assessment in conflict
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Stewardship Theory
Executives more motivated to act in best
interest of the corporation than their own
self-interests. Theory that over time, senior
executives tend to view corporation as
extension of selves.
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Board of Directors
When Outsiders can be considered Insiders
–Affiliated Directors
–Retired Directors
–Family Directors
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Board of Directors
Codetermination
–The inclusion of a corporation’s employees on its
board of directors
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Board of Directors
Interlocking Directorates
–Direct Interlocking
–Indirect Interlocking
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Board of Directors
Sarbanes-Oxley(2002)
–Enforces a Code of Ethics for companies
–No loans to be given to officers
–Encouraging whistle-blowing
–Auditors cannot provide both external and
internal auditing services to the same company
–Audit, Nominating, and Compensation
Committees all outside directors
–Independent finance expert serving on the
auditing committee
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Organization of the Board
Board of Directors
–Size (for US average 11, 8 of whom are outsiders)
–Turkish boards are fewer in number in large
Holdings, composed of family and an increasing
trend for appointing pseudo-family members.
–Central firms of large Holdings have more family
presence than peripheral companies.
–Although there is a tendency to adopt corporate
governance principles such as accountability by
Turkish firms, family holding structures do not
seem to bring about a radical change.
–Turkish boards are well-educated and are
predominantly engineers. Female board members
are rare as it is the case elsewhere.
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Board of Directors
Corporate Governance
–Review & shaping of strategy
–Pressure for corporate performance
–Demand for executive stock ownership
–Outside directors increasing
–Impact of Sarbanes-Oxley
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Board of Directors
Successful CEO’s
–Strategic vision
–Passion for the company
–Strong communication
–charisma
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Board of Directors
Executive Leadership
–Strategic vision
–Role model
–Communication of performance standards
–Demonstrates confidence in abilities of followers
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