CHAPTER 1 Strategic Management: Creating Competitive Advantages Copyright Anatoli Styf/Shutterstock Learning Objectives After reading this chapter, you should have a good understanding of: 1-1 The definition of strategic management and its four key attributes. 1-2 The strategic management process and its three interrelated and principal activities. 1-3 The vital role of corporate governance and stakeholder management as well as how “symbiosis” can be achieved among an organization’s stakeholders. 1-4 The importance of social responsibility, including environmental sustainability, and how it can enhance a corporation’s innovation strategy. 1-5 The need for greater empowerment throughout the organization. 1-6 How an awareness of a hierarchy of strategic goals can help an organization achieve coherence in its strategic direction. ©McGraw-Hill Education. The Importance of Leadership Consider… Maintaining competitive success or even surviving over long periods of time is difficult for companies of any size. SO how much credit (or blame) does a leader deserve? ©McGraw-Hill Education. Two Perspectives of Leadership External control perspective: External forces determine the organization’s success. • Economic downturns OR Romantic view: A leader is the key force in the organization’s success. • Steve Jobs ©McGraw-Hill Education. Leaders Can Make a Difference Be proactive - anticipate change. Refine strategies continually. Be aware of external opportunities and threats. Understand thoroughly the firm’s resources and capabilities. Make strategic management both a process and a way of thinking throughout the organization. ©McGraw-Hill Education. Defining Strategic Management Strategic management involves: • Analysis • Strategic goals (vision, mission, strategic objectives) • Internal and external environment • Decisions - Formulation • What industries should we compete in? • How should we compete in those industries? • Actions – Implementation of strategy • Allocate necessary resources. • Design the organization to bring intended strategies to reality. ©McGraw-Hill Education. Two Fundamental Questions 1. How should we compete in order to create a competitive advantage in the marketplace? 2. How can we create competitive advantages in the marketplace that are unique, valuable, and difficult for rivals to copy or substitute? NOTE: Operational effectiveness is not enough to sustain a competitive advantage. ©McGraw-Hill Education. Strategic Management Key attributes of strategic management: • Directs the organization toward overall goals and objectives. • Includes multiple stakeholders in decision making. • Needs to incorporate short-term and long-term perspectives. • Recognizes trade-offs between efficiency and effectiveness. ©McGraw-Hill Education. Strategic Management Trade-offs Managers need to be ambidextrous. Focus on long-term effectiveness. • Expand product-market scope by proactively exploring new opportunities. At the same time: • Focus on short-term efficiency. • Align resources to take advantage of existing product markets. ©McGraw-Hill Education. Question (1 of 2) According to Henry Mintzberg, the realized strategies of a firm A. are a combination of deliberate and emergent strategies. B. are a combination of deliberate and differentiation strategies. C. must be based on a company’s strategic plan. D. must be kept confidential for competitive reasons. ©McGraw-Hill Education. Intended vs. Realized Strategies The business environment is far from predictable. Intended strategy • Organizational decisions are determined only by analysis. • Intended strategies rarely survive in the original form. VERSUS Realized strategy • Decisions are determined by both analysis (deliberate) and unforeseen environmental developments, unanticipated resource constraints, and/or changes in managerial preferences (emergent). ©McGraw-Hill Education. Strategic Management Process Exhibit 1.3 The Strategic Management Process Jump to Appendix 1 for long description. ©McGraw-Hill Education. Strategy Analysis (1 of 3) Strategy analysis is the starting point in the strategic management process. The analysis needs to be done to effectively formulate and implement strategies. It involves careful analysis of the overarching goals of the organization. It requires a thorough analysis of the organization’s external and internal environment. ©McGraw-Hill Education. Strategy Analysis (2 of 3) Analyzing organizational goals & objectives • Establish a hierarchy of goals. • Vision • Mission • Strategic Objectives Analyzing the external environment of the firm • Managers must monitor and scan the environment as well as analyze competitors. • General environment • Industry environment ©McGraw-Hill Education. Strategy Analysis (3 of 3) Assessing the internal environment of the firm • Analyze strengths & relationships among activities that constitute a firm’s value chain. • Analysis can uncover potential sources of competitive advantage. Assessing a firm’s intellectual assets • Knowledge workers & other intellectual assets drive competitive advantage & wealth creation. • Networks & relationships plus technology enhance collaboration, accumulates & stores knowledge. ©McGraw-Hill Education. Strategy Formulation (1 of 3) Based on strategy analysis, strategy formulation is developed at several levels. • Business-level strategy how to compete in a given business to attain competitive advantage • Corporate-level strategy what businesses to compete in; how businesses can be managed to achieve synergy • International strategy what strategies are needed as the business ventures beyond its national boundaries • Entrepreneurial initiatives how can businesses create new value ©McGraw-Hill Education. Strategy Formulation (2 of 3) Formulating business-level strategy • Successful firms develop bases for sustainable competitive advantage through: • Cost leadership and/or • Differentiation, as well as • Focusing on a narrow or industrywide market segment. Formulating corporate-level strategy • Addresses a firm’s portfolio (or group) of businesses ©McGraw-Hill Education. • What business or businesses should we compete in? • How can we manage this portfolio of businesses to create synergies? Strategy Formulation (3 of 3) Formulating international strategy • What is the appropriate entry strategy? • How do we go about attaining competitive advantage in international markets? Entrepreneurial strategy and competitive dynamics • How do we recognize viable opportunities? • How do we formulate effective strategies? ©McGraw-Hill Education. Strategy Implementation (1 of 5) Strategy implementation takes action to implement the formulated strategy. • Ensure proper strategic control systems. • Establish an appropriate organizational design, coordinating & integrating activities within the firm. • Coordinate activities with suppliers, customers, alliance partners. • Leadership ensures organizational commitment to excellence & ethical behavior. • Promote learning & continuous improvement. • Act entrepreneurially in creating new opportunities. ©McGraw-Hill Education. Strategy Implementation (2 of 5) Strategic control & corporate governance • Informational control • Monitor & scan the environment • Respond effectively to threats & opportunities • Behavioral control • Proper balance of rewards & incentives • Appropriate cultures & boundaries (or constraints) • Effective corporate governance ©McGraw-Hill Education. Strategy Implementation (3 of 5) Creating effective organizational designs • Organizational structures must be consistent with strategy. • Organizational boundaries must be flexible & permeable. • Strategic alliances must capitalize on capabilities of other organizations. ©McGraw-Hill Education. Strategy Implementation (4 of 5) Creating a learning organization & an ethical organization • Effective leaders • Set a direction. • Design the organization. • Develop an organization committed to excellence & ethical behavior. • Create a “learning organization” • Benefit from individual & collective talents ©McGraw-Hill Education. Strategy Implementation (5 of 5) Fostering corporate entrepreneurship • Firms must continually improve & grow. • Firms must find new ways to renew themselves. • Entrepreneurship & innovation provide for new opportunities enhance a firm’s innovative capacity. ©McGraw-Hill Education. Corporate Governance & Stakeholder Management Appropriate strategic management requires an effective & appropriate corporate structure. Corporate governance is the relationship among various participants in determining the direction and performance of corporations. Primary participants: • Shareholders • Management (led by the Chief Executive Officer) • The Board of Directors (BOD) ©McGraw-Hill Education. Corporate Governance Board of Directors Elected representatives of the owners Ensure interests & motives of management are aligned with those of the owners: • Create an effective and engaged board. • Address shareholder activism. • Provide proper managerial rewards & incentives. • Establish external control mechanisms. Exhibit 1.4 The Key Elements of Corporate Governance Jump to Appendix 2 for long description. ©McGraw-Hill Education. Stakeholder Management Stakeholder Group Nature of Claim Employees Wages, benefits, safe working environment, job security Suppliers Payment on time, assurance of continued relationship Creditors Payment of interest, repayment of principal Customers Value, warranties Government Taxes, compliance with regulations Community Good citizenship behavior such as charities, employment, not polluting the environment Exhibit 1.5 An Organization’s Key Stakeholders & the Nature of Their Claims ©McGraw-Hill Education. Two Views of Stakeholder Management Two views of stakeholder management Zero sum • Stakeholders compete for attention & resources. • The gain of one is a loss to the other. OR Symbiosis • Stakeholders are dependent upon each other for success & well-being. • Stakeholders receive mutual benefits. ©McGraw-Hill Education. Question (2 of 2) P&G created a cleaning product that led to a change in consumer shopping habits and also a revolution in industry supply chain economics. According to the text, this is an example of A. zero-sum relationship among stakeholders. B. stakeholder symbiosis. C. rewarding stakeholders. D. emphasizing financial returns. ©McGraw-Hill Education. Social Responsibility & Environmental Sustainability Firms have multiple stakeholders and must go beyond a focus solely on financial results. Social responsibility is the expectation that businesses or individuals will strive to improve the overall welfare of society. Firms can measure a triple bottom line, assessing financial, social, AND environmental performance. Sustainability projects can yield substantial benefits even when they are difficult to quantify. ©McGraw-Hill Education. Empowered Strategic Management Strategic management requires an integrative view of the organization. ALL functional areas & activities must fit together to achieve goals & objectives. Leaders are needed throughout. • Local line leaders – have profit & loss responsibility • Executive leaders – champion & guide ideas • Internal networkers – hold little positional power, but have conviction & clarity of ideas ©McGraw-Hill Education. Coherence in Strategic Direction (1 of 5) Organizations express priorities best through stated goals & objectives that form a hierarchy of goals. • Vision evokes powerful & compelling mental images of a shared future. • Mission encompasses the organization’s current purpose, basis of competition, & competitive advantage. • Strategic objectives operationalize the mission statement with specific yardsticks. ©McGraw-Hill Education. Coherence in Strategic Direction (2 of 5) Exhibit 1.6 A Hierarchy of Goals ©McGraw-Hill Education. Jump to Appendix 3 for long description. Coherence in Strategic Direction (3 of 5) Organizational vision • A “massively inspiring” goal, overarching, long term • A destination driven by & evoking passion • Developed & implemented by leadership • A fundamental statement of an organization’s values, aspirations, and goals • Captures both the minds & hearts of employees • BUT can backfire and erode a company’s credibility ©McGraw-Hill Education. Coherence in Strategic Direction (4 of 5) Mission statement • Encompasses both the purpose of the company and the basis of competition and competitive advantage • More specific than the vision • Focuses on the means by which the firm will compete • Incorporates stakeholder management • Communicates why an organization is special & different • Can & should change when competitive conditions change ©McGraw-Hill Education. Coherence in Strategic Direction (5 of 5) Strategic objectives • Used to operationalize the mission statement • Provide guidance on how to fulfill mission & vision • Measurable, specific, appropriate, realistic & timely • Channel all employees’ efforts toward common goals • Can be both financial and nonfinancial • Should be challenging, yet help resolve conflicts • Provide a yardstick for rewards & incentives • BUT too many objectives can result in lack of focus ©McGraw-Hill Education.
