Basic Concepts of Strategic Management "Effective managers live in the present – but concentrate on the future." James L. Hayes What is Strategy? • A combination of the words stratos, which meant “army”, and agein meaning “to lead”. Greek Language (6th century BC) What is Strategy? • A strategy is a comprehensive action plan that identifies long-term direction and guides resource utilization to accomplish organizational goals with sustainable competitive advantage. Strategic Management Process of formulating, implementing, and evaluating, strategies to accomplish long-term goals and sustain competitive advantage. Strategic Audit 21st Century Challenges in Strategic Management • • • Process is more an “art” than “science” Should strategies be visible or hidden from stakeholders Should process be more top-down or bottom up Phases of Strategic Management Basic financial planning: Forecast-based planning: Strategic planning: Strategic management: -little analysis; -more thorough analysis; -more thorough -analysis; -info coming from within the firm; -internal info + environmental data; -internal info + environmental data + forecast future trends; -analysis of external and internal environment; -only managers are involved; -only managers are involved; -takes 2-3 weeks; -made by planning staff (top managers) + consultants; -takes one month; - one year plan -three to five years -plan -implementation, evaluation and control; -meet once a year; -made by lower level managers+ top managers+ consultants; -throughout the year; - five-year plans - five-year plans Benefits of Strategic Management • Clear sense of strategic vision of the firm • Sharper focus on what is strategically important • Improved understanding of a rapidly changing environment Main Questions • • • • Where is organization now? If no changes are made, where will the organization be in 1,2,5 years? If the answers are not acceptable, what specific actions should management undertake? What are risks and payoffs involved? Basic Model of Strategic Management Environmental Scanning Strategy Formulation Strategy Implementation Evaluation and Control Environmental Scanning External: Social Environment External: Task Environment Internal: Structure Internal: Culture Internal: Resources Environmental Scanning Opportunities & Threats (External) Analysis of Trends: • Economic • Social • Cultural • Demographic/Environmental • Political, Legal, Governmental • Technological • Competitors Environmental Scanning Strengths & Weaknesses (Internal) Typically located in functional areas of the firm • Management • Marketing • Finance/Accounting • Production/Operations • Research & Development • Computer Information Systems Strategy Formulation Vision & Mission Objectives Strategies Policies Strategy Formulation Vision Statement – What do we want to become? Mission Statement – What is our business? Strategy Formulation Key Strategic Questions by Peter Drucker • What is our business mission? • Who are our customers? • What do our customers consider value? • What have been our results? • What is our plan? Vision Examples To be the happiest place on earth. To be the world’s best quick service restaurant. Mission Statement Example We should build good ships here – at a profit if we can – at a loss if we must – but always good ships -- Newport News Shipbuilding (since foundation in 1886) Mission Statement Example The Bellevue Hospital, with respect, compassion, integrity, and courage, honors the individuality and confidentiality of our patients, employees, and community, and is progressive in anticipating and providing future health care services. -- The Bellevue Hospital WellPont health Network’s Vision and Mission WellPoint redefine our industry: through a new generation of consumer-friendly products that put individuals back in control of their future. The WellPoint companies provide health security by offering a choice of quality branded health and related financial services designed to meet the changing expectations of individuals, families, and their sponsors throughout a lifelong relationship. Importance of Mission Benefits from a strong mission Unanimity of Purpose Resource Allocation Mission Organizational Climate Focal point for work structure Customers Products Services Markets Technology Employees Public Image Mission Elements Survival Growth Profit Self-Concept Philosophy Strategy Formulation Objectives The end results of planned activity: • what is to be accomplished • by when • it should be quantified if possible “…increase profits 10% over last year” Strategy Formulation Types of Strategies Corp Level A Large Company Division Level Functional Level Operational Level Strategy Formulation Strategies • Corporate strategy directs the organization as a whole toward sustainable competitive advantage. • Business strategy sets the strategic direction for a single business unit or product line. • Functional strategy guides the use of resources to implement business strategy. Being Better versus Being Different Playing the Game Better Focus on your existing strategic position and try to improve it and make it better. Practices such as restructuring, refocusing, process reengineering, quality programs, empowering employees, and the like, all aim to achieve this Playing the Game Differently Try to identify: • new or unexploited customer segments to focus on (a new “WHO”) • new customer needs that no competitor is currently satisfying (a new “WHAT”) • new ways of producing, delivering, selling or distributing your products or services (a new “HOW”) …to be successful, a company must be able to do BOTH! Constantinos Markides Strategy Formulation Policies A policy is a broad guideline for decision making that links the formulation of strategy with its implementation. • Maytag Company: Maytag will not approve any cost reduction proposal if it reduces product quality in any way. • 3M: Researches should spend 15% of their time working on something other than their primary project. • GE: GE must be number one or two wherever it competes. • Intel: Intel cannibalizes its own product line with better products before a competitor does so. Strategy Implementation Programs Budgets Procedures Strategy Implementation • A program is a statement of the activities or steps needed to accomplish a single-use plan. • A budget is a statement of a corporation’s program in terms of dollars. • Procedures are a system of steps or techniques that describe in detail how a particular task or job is to be done. Strategy Evaluation & Control Internal Review External Review Measuring Performance Strategic audit Feedback/Learning Process Internal/External Review Revision of Decisions Corrective Actions Strategic Decisions Characteristics: • Rare: strategic decisions are unusual and typically have no precedent to follow • Consequential: strategic decisions commit substantial resources and demand a great deal of commitment from people on all levels. • Directive: strategic decisions set precedents for lesser decisions and future actions throughout an organization.