GARETH R. JONES /CHARLES W. L. HILL
Theory of Strategic Management
10th ed.
Chapter
1
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Student Version
Prepared by C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

OVERVIEW
 A strategy is a set of related actions that managers take to increase their company’s performance.
 Strategic leadership is how to most effectively manage a company’s strategymaking process to create competitive advantage.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to explain what is meant by
“competitive advantage.”
 To increase shareholder value, managers must pursue strategies that increase the profitability of the company and ensure that profits grow.
 To do this, a company must be able to outperform its rival. In other words, it must have a competitive advantage .
 A company has competitive advantage over its rivals when its profitability is greater than the average profitability and profit growth of other companies competing for the same set of customer.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

SUPERIOR PERFORMANCE
 Risk capital is capital that cannot be recovered if a company fails and goes bankrupt.
 Shareholder value is the return that a shareholder earns from purchasing shares in a company.
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SUPERIOR PERFORMANCE
 Profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs.
The sum of
 The profit growth of a company can be time.
 Together, profitability and profit growth are the
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to discuss the strategic role of managers at different levels within the organization.
PRIMARY TYPES OF MANAGERS
The general manager bears the responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions.
The functional manager is responsible for supervising a particular function, task, activity, or operation .
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LEVELS OF STRATEGIC MANAGEMENT
 Corporate-Level Managers
 Oversee development of strategies for whole organization
 CEO is principle general manager who consults with other senior executives
 Business-Level Managers
 Responsible for business unit that provides product/service to particular market
 Functional-Managers
 Supervise particular function/operation (e.g. marketing, operations, accounting, human resources)
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to identify the primary steps in a strategic planning process.
STRATEGY PLANNING PROCESS
1.
Select the corporate mission and major corporate goals.
2.
Analyze the organization’s external competitive environment to identify opportunities and threats.
3.
Analyze the organization’s internal operating environment to identify the organization’s strengths and weaknesses.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)

STRATEGY PLANNING PROCESS
4.
Select strategies that build on the organization’s strengths and corrects its weaknesses in order to take advantage of external opportunities and counter external threats.
5.
Implement the strategies.
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STRATEGY PLANNING PROCESS
The Mission Statement
 A mission statement describes what the company does.
 The vision of a company articulates, often in bold terms, what the company would like to achieve.
 The values of a company state how managers and employees should conduct themselves in business.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGY PLANNING PROCESS
The Mission Statement
 Managers should establish precise and measureable major goals that address critical issues.
 These goals should be challenging but realistic and, if appropriate, specify a time period in which the goals should be achieved.
 Well-constructed goals provide a means by which the performance of managers can be evaluated .
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGY PLANNING PROCESS
External Analysis
 The essential purpose of the external analysis is to identify strategic opportunities and threats within the organization’s operating environment that will affect how it pursues its mission.
 Analyzing the industry environment requires an assessment of the competitive structure of the company’s industry, including the competitive position of the company and its major rivals.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGY PLANNING PROCESS
SWOT Analysis and the Business Model
 The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis .
 The goal of a SWOT analysis:
 Create, affirm, or fine-tune a company-specific business model.
 Design a model that will best align, fit, or match a company’s resources and capabilities to the demands of the environment in which it operates.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGY PLANNING PROCESS
SWOT Strategies
 Functional-level strategies are directed at improving the effectiveness of operations within a company.
 Manufacturing, marketing, materials management, product development, and customer service.
 Business-level strategies
 The way a company positions itself in the marketplace to gain a competitive advantage.
 The different position strategies that can be used in different industry settings.
(continued)
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STRATEGY PLANNING PROCESS
SWOT Strategies
 Global strategies address how to expand operations outside the home country.
 How to grow and prosper in a world where competitive advantage is determined at a global level.
 Corporate-level strategies address what business should the company be in to maximize profitability.
 How should a company enter and increase its presence to gain a competitive edge.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGY PLANNING PROCESS
Strategy Implementation
 Strategy implementation involves taking action at the functional, business, and corporate levels to execute a strategic plan.
 Putting quality improvement programs into place.
 Changing the way a product is designed.
 Positioning the product differently in the marketplace.
 Offering different versions of the product to different consumers.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to discuss the common pitfalls of planning and how those pitfalls can be avoided.
Criticisms of Formal Planning Models
 Uncertainty, complexity, and ambiguity can have a large and unpredictable outcome.
 Too much importance is attached to the role of top management, particularly the CEO.
 Radical new technology changes the dominant paradigm in an industry.
 Many strategies are the result of serendipity.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to outline the cognitive biases that might lead to poor strategic decisions, and explain how these biases can be overcome.
Scenario Planning
 Scenario planning involves formulation plans that are based upon “what-if” scenarios about the future.
 Teams of managers are asked to develop specific strategies to cope with each scenario.
 The great virtue of the scenario approach is that it can push managers to think outside the box.
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STRATEGY DECISION MAKING
Cognitive Biases and Strategic Decision Making
 The rationality of decisionmaking is bound by one’s cognitive capabilities .
 When managers make decisions, they tend to fall back on certain rules of thumb.
 Sometimes these rules lead to severe errors, called cognitive biases .
 Prior hypothesis bias refers to making decisions based on a belief, even when evidence proves that the belief is incorrect.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Cognitive Biases and Strategic Decision Making
 Escalating commitment occurs when decision makers, having committed significant resources to a project, commit even more despite feedback that tells them the project is failing.
 The use of simple analogies to make sense out of a complex problem is reasoning analogy , which may flawed by invalid reasoning.

Generalizing from a small sample or a single vivid anecdote is representativeness .
 The illusion of control is the tendency to overestimates one’s ability to control events.
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Techniques for Improving Decision Making
 Devil’s advocacy requires the generation of a plan, and a critical analysis of that plan.
 Dialectic inquiry requires the generation of a plan and a counter-plan that reflects plausible but conflicting courses of action.
 Strategic managers listen to a debate between advocates of the plan and counter-plan and then decide which will lead to higher performance.
 This approach may reveal problems with definitions, recommended courses of action, and assumptions of both plans.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to discuss the role strategy leaders play in the strategy-making process.
Characteristics of Good Strategic Leaders
1) Vision, Eloquence, and Consistency a) A strong leader gives an organization a sense of direction.
b) Examples: Winston Churchill, Martin Luther King, Sam
Walton
2) Articulation of a Business Model a) Knowing how the various strategies that the company pursues fit together.
b) Examples: Michael Dell (Dell, Inc.), Steve Jobs (Apple)
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Characteristics of Good Strategic Leaders
3) Commitment a) A strong leader demonstrates his or her commitment to a vision and business model with action and words.
b) Example: Ken Iverson (Nucor)
4) Being Well Informed a) Effective leaders develop a network of formal and informal sources who to keep them well informed about what is going on within their company.
b) Example: Jim Donald (Starbucks)
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Characteristics of Good Strategic Leaders
5) Willingness to Delegate and Empower a) Avoids being overloaded with responsibilities.
b) Understands that delegation is a good motivational tool.
6) The Astute Use of Power a) Power comes from control over resources that are important to the organization: budgets, capital, positions, information, and knowledge.
b) Politically astute managers use these resources to critically place allies who can help them attain their strategic objectives.
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Characteristics of Good Strategic Leaders
7) Emotional Intelligence a) Self-awareness —the ability to understand one’s own moods, emotions, and drives.
b) Self-regulation —the ability to control or redirect disruptive impulses or moods.
c) Motivation —a passion for work that goes beyond money or status.
d) Empathy —the ability to understand the feelings and viewpoints of subordinates.
e) Social skills —friendliness with a purpose.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.