Introduction to Strategic Management
Rev: Feb, 2012
Euiho (David) Suh, Ph.D.
POSTECH Strategic Management of Information and Technology Laboratory
(POSMIT: http://posmit.postech.ac.kr)
Dept. of Industrial & Management Engineering
POSTECH
Contents
※
Discussion Questions
1
Introduction of Strategic Management
2
Strategic Management Process
3
1)
Understand Company Mission
2)
Analyze External Environment
3)
Analyze Internal Environment
4)
Set Long Term Objectives
5)
Craft the Strategy
6)
Implement the Strategy
7)
Evaluate the Strategy
Case Study
Discussion Questions (1/2)
■ What are three levels of strategies? How does the hierarchy of the strategy work?
■ What is strategic management? Why is it named that way?
■ Which environmental factor is believed to be most important and why?
■ What is the model used for the external environment analysis? What external force is
do you think most important?
■ Name one portfolio analysis and explain it. What are the advantages and
disadvantages of the portfolio analysis?
■ In the case study, what were strengths, weaknesses, opportunities, and threats of
Megastudy to strengthen its position as an educational institute? From the analysis,
what strategies were driven for further improvements? Explain them for each part of
the analysis (S-O, S-T, W-O, W-T)
3
Discussion Questions (2/2)
■ Case 1 in textbook (pp. 45~46, Chapter 2)
– What are the business and political challenges that are likely to occur as a result of the
transformation of IT from a support activity to a partner role? Use examples from the case to
illustrate your answer.
■ Discussion Questions in textbook (p. 67, Chapter 2)
– Suppose your are a manager being asked to develop computer-based applications to gain a
competitive advantage in an important market for your company. What reservations might you
have about doing so? Why?
– How can Internet technologies help a business form strategic alliances with its customers,
suppliers, and others?
4
Strategy (1/2)
1. Introduction of Strategic Management
■ Strategy
– The means or general actions to be taken to achieve long term objectives
■ Levels of Strategy
– Corporate strategy
• Overarching strategy of the diversified firm
 “Which businesses should we be in?”
 “How does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a
whole?”
– Business strategy
• Aggregated strategy of single business firm or a strategic business unit (SBU) in a diversified corporation
• Incorporating either cost leadership, differentiation, or focus
to achieve a sustainable competitive advantage and long-term success [Michael Porter]
• Blue Ocean Strategy [W. Chan Kim and Renée Mauborgne]:
Breaking the previous value-cost trade off by simultaneously pursuing both differentiation and low cost
 “How do we complete?”
– Functional strategy
• Short and medium term strategy limited to the domain of each department’s functional responsibility
 “What should our organization do to synchronize with the business level strategy?”
5
Strategy (2/2)
1. Introduction of Strategic Management
■ Hierarchy of Strategy
Corporate strategy
Business strategy
(decision level)
Functional
strategy
6
Strategic Management
1. Introduction of Strategic Management
■ Definition of Strategic Management [Lamb, 1984]
– Ongoing process that
•
•
•
•
evaluates and controls the business and the industries in which the company is involved
assesses its competitors
sets goals and strategies to meet all existing and potential competitors
reassesses each strategy annually or quarterly
(i.e. regularly to determine how it has been implemented and whether it has succeeded or needs
replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new
economic environment, or a new social, financial, or political environment)
■ Strategic management for type of organization
– Global/transnational organization: employing more structured strategic management model,
due to its size, scope of operations, and need to encompass stakeholder views and
requirements
– SME (Small and Medium Enterprise): employing an entrepreneurial approach, due to its
comparatively smaller size and scope of operations, as well as possessing fewer resources
• SME's CEO (or general top management) may simply outline a mission, and pursue all activities under that
mission.
7
Strategic Management Process
2. Strategic Management Process
■ Basic Elements of the Strategic Management Process
Environmental
scanning
Strategic
formulation
Strategy
implement
Evaluation
control
■ Strategic Management Process
1
Opportunity
& Threat
2
Today’s Coverage
Understand
Company Mission
3
Analyze
External Environment
4
5
6
Analyze
Internal Environment
Set
Long term Objectives
Craft the Strategy
Implement
the Strategy
Feedback
7 Evaluate & Control
the Strategy
8
Strength
& Weakness
2. Strategic Management Process
Company Mission
1) Understand Company Mission
■ Mission
– The reason for which the firm exists, and what it will do
– Describing
• The products/services to be supplied,
• The markets to be served,
• The technology applied
■ What is our Business?
–
–
–
–
–
–
Basic Product or Service
Primary markets
Principal technology used (if relevant)
Customer Satisfaction, Quality, and Societal Goals
Company philosophy
Self-concept (identity)
9
2. Strategic Management Process
Environmental Variables
2) Analyze External Environment
Remote environment
Economic
forces
Technological
forces
Task environment
(industry)
shareholders
governments
Special interest
groups
Internal
Environment
Structures
Culture
resources
Customers
Creditors
suppliers
Employees
Labor unions
competitors
Trade associations
Communities
Sociocultural
forces
Political-legal
forces
10
Remote (Macro) Environmental Factors
2. Strategic Management Process
2) Analyze External Environment
Economic
Technological
Sociocultural
GDP trends /
Inflation rates
Total government
Lifestyle changes
Spending for R&D
Career expectations
Interest rates /
money supply
Total industry spending
for R&D
Consumer activism
Disposable and
Focus of technological
efforts
Discretionary income
Unemployment level
Wage/price control
Devaluation/revaluation
Patent protection
Rate of family
Formation
Growth rate of
Population
Age distribution of
New products
New developments in
technology transfer from
lab to marketplace
11
Political-legal
Antitrust regulations
Environmental
protection laws
Tax laws
Special incentives
Population
Foreign trade
regulations
Regional shifts in
Attitudes toward
Population
Foreign companies
Life expectancies
Laws on hiring and
Birth rates
Promotion
Task (Immediate, Operating) Environmental Factors
2. Strategic Management Process
2) Analyze External Environment
■ All persons, groups, or entities that have an interest in the company
■ Stakeholders
–
–
–
–
–
–
–
–
–
–
Stockholders
Customers
Suppliers
Financial Institutions
Competitors
Trade Associations
Activist Groups
Federal, State, and Local Government Agencies
Media Representatives
Unions
12
2. Strategic Management Process
Defining an Industry
2) Analyze External Environment
■ Products
■ Competitors
■ Structure
–
Number, size, relative strength, market share of competitors, product differentiation
■ Economic Traits
■ Critical Success Factors (CSF)
■ Entry barriers
13
2. Strategic Management Process
Mapping strategic Groups
2) Analyze External Environment
■ U.S restaurant chain industry
high
Red lobster
Olive Garden
Chichi’s
Perkins
Ponderosa
bonanza
Price
Shoney’s
Denny’s
Country kitchen
KFC
Pizza hut
Burger King
McDonald’s
low
limited menu
Product-line breadth
14
Full menu
2. Strategic Management Process
Industry matrix
2) Analyze External Environment
Strategic
factors
Weight
2
1
Total
Company A
rating
Company A
weighed
score
Company B
rating
Company B
weighted
score
3
4
5
6
1.00
15
2. Strategic Management Process
Issues priority matrix
2) Analyze External Environment
Probable impact on corporation
High
Probability
of
Occurrence
Medium
low
high
medium
Low
High
priority
High
priority
Medium
High
Medium
Low
priority
priority
priority
Medium
Low
Low
priority
priority
priority
16
priority
2. Strategic Management Process
Porter’s 5-Force Model
2) Analyze External Environment
■ Nature and intensity of competition in an industry is a composite of five competitive
forces
–
–
–
–
–
Rivalry among competitors in the industry
The bargaining power of buyers
The bargaining power of suppliers
The potential entry of new competitors
The power of firms with substitute products
■ Industry driving forces
–
–
–
–
–
–
–
Increase incentive for the industry to change
Industry growth rate
Product innovation
Customer preferences
Firms entering and leaving the industry
Cost and productivity
Increasing globalization
Suppliers
17
Threat of
new entrants
Buyers
Rivalry among
existing firms
Substitutive
Products
Other
Stakeholders
2. Strategic Management Process
Opportunity & Threat
2) Analyze External Environment
■ Opportunity
– A combinations of events or circumstances that arise, which, if acted upon at a certain time,
will result in profit, gain, or victory
•
•
•
•
•
•
Product and market extensions through mergers, failure of competitors, and legal change
Advances in technology
A misfortune befalls a major competitor who then shuts down, liquidates, or goes bankrupt
A competing company is put up for sale at a good price
A chance occurs for you to hire a noted expert that you need
A breakthrough in your product or process that makes possible a gain in market share
■ Threat
– An event, as defined by its impact on your company and the probability of its occurrence, that
will result in harm to your company
•
•
•
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Support of stakeholder groups
Resources: human, financial
Customer base
Capabilities such as technology, products, processes, management, and functional
Artificial barriers to competition: laws, regulations, patents, and licenses
Social changes and customer preferences
18
2. Strategic Management Process
Scanning the external environment
2) Analyze External Environment
Analysis of societal environment
Economic, sociocultural, technological, political-legal factors
Market
analysis
Competitor
analysis
Community
analysis
Interest
Group
analysis
Supplier
analysis
Selection of
Strategic factors
Opportunities
threats
19
Governmental
analysis
2. Strategic Management Process
Situation Analysis
3) Analyze Internal Environment
How well is the company’s
strategy working?
What are the company’s
strengths and weaknesses?
What are its core products and
competencies?
What benchmarks are being used
for measuring its situation?
20
2. Strategic Management Process
Internal Scanning and Analysis (1/2)
3) Analyze Internal Environment
■ Value Chain Analysis
– Identifying the primary and support activities that create value
– Analyzing and reducing business costs and compare one business’ value chain with those of
competing companies
Firm infrastructure
Support
Human Resource Management
Activity
Technology Development
Procurement
Primary
Activity
Inbound
Logistics
Operation
Outbound
Logistics
21
Competitive
Marketing
After
And
Sales
Sales
Service
Advantage
2. Strategic Management Process
Internal Scanning and Analysis (2/2)
3) Analyze Internal Environment
■ Match of strategy and structure
–
–
–
–
–
Culture
Images
Identity
Leadership
Mission, Goals, Objectives, and Organizational Structure
■ PIMS Analysis (Profit Impact of Marketing Strategy)
– Offered by the Strategic Planning Institute
– Based on a database of about 3,000 businesses
– Directed at identifying principles that will guide companies in establishing successful strategies,
or evaluating their own
22
2. Strategic Management Process
Strength & Weakness (1/2)
3) Analyze Internal Environment
■ Strength
– Company’s resource or capability that can be used for developing a competitive advantage
•
•
•
•
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•
Patents
Strong brand names
Good reputation among customers
Cost advantages from proprietary know-how
Exclusive access to natural resources
Good access to distribution networks
■ Weakness
– The absence of certain strengths
•
•
•
•
•
Lack of patent protection
A weak brand name
Poor reputation among customers
High cost structure
Lack of access to best natural resources
• Lack of access to key distribution channels
23
2. Strategic Management Process
Strength & Weakness (2/2)
3) Analyze Internal Environment
■ Functional Analysis of Strengths and Weaknesses of the firm
– Establish a table with column heading: Factors, Strengths/Weaknesses, Standards and
Comparison
• For each factor to be evaluated, the question must be asked, “Compared to what?”
– Standards or criteria may be:
•
•
•
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The industry average for the factors being evaluated
The best firm’s values
The best value of any firm on each criterion
A previously set objective
A previous forecast
– Functional factors should be selected from the following functional areas:
•
•
•
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Marketing
Operations/Production
Finance and accounting
Information Systems
Human resources, especially management and organization
Quality of all transactions, relationships, and outputs
24
2. Strategic Management Process
Portfolio Analysis (1/6)
3) Analyze Internal Environment
■ Definition of Business Portfolio
– A business portfolio is the collection of Strategic Business Units that make up a corporation.
– The optimal business portfolio is one that fits perfectly to the company's strengths and
helps to exploit the most attractive industries or markets
■ Aim of a portfolio analysis
– Analyze its current business portfolio and decide
which SBU's should receive more or less investment
– Develop growth strategies for adding new products and businesses to the portfolio
– Decide which businesses or products should no longer be retained
– The BCG Matrix is the best-known portfolio planning framework.
And the GE / McKinsey Matrix is a later and more advanced form of the BCG Matrix
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2. Strategic Management Process
Portfolio Analysis (2/6)
3) Analyze Internal Environment
■ SWOT Analysis
Internal Factors
Strength
Weakness
Aggressive
Strategy
Defensive
Strategy
Turn-around Diversification
Strategy
Strategy
Opportunity
Threat
External Factors
– Tying together strengths, weaknesses, opportunities, and threats vs. competitive position
– Development of the idea of matching the organization’s internal factors with external
environmental circumstances [Philip Selznick, 1957]
26
2. Strategic Management Process
Portfolio Analysis (3/6)
■ BCG Matrix
3) Analyze Internal Environment
■ Stars (=high growth, high market share)
–
use large amounts of cash and are leaders in the business so
they should also generate large amounts of cash.
■ Cash Cows (=low growth, high market share)
–
profits and cash generation should be high, and because of the
low growth, investments needed should be low. Keep profits high
■ Dogs (=low growth, low market share)
–
–
avoid and minimize the number of dogs in a company.
deliver cash, otherwise liquidate
■ Question Marks
(= high growth, low market share)
–
–
have the worst cash characteristics of all, because high demands
and low returns due to low market share
either invest heavily or sell off or invest nothing and generate
whatever cash it can. Increase market share or deliver cash
■ Limitations of BCG Matrix
–
–
–
The link between market share and profitability is questionable since increasing market share can be very
expensive
The approach may overemphasize high growth, since it ignores the potential of declining markets
The model considers market growth rate to be a given. In practice the firm may be able to grow the market
27
2. Strategic Management Process
Portfolio Analysis (4/6)
3) Analyze Internal Environment
■ GE/Mckinsey Matrix
Competitive Strength
Medium
Low
Medium
Invest aggressively
Invest selectively
Harvest or divest
High
Market
Attractiveness
Low
High
■ GE/Mckinsey matrix attempt to improve upon the BCG Matrix
– Market (Industry) attractiveness replaces market growth as the dimension of industry
attractiveness
– Competitive strength replaces market share as the dimension by which the competitive
position of each SBU is assessed
– GE / McKinsey Matrix works with a 3 x 3 grid, while the BCG Matrix has only 2 x 2.
This also allows for more sophistication
28
2. Strategic Management Process
Portfolio Analysis (5/6)
3) Analyze Internal Environment
■ GE/Mckinsey Matrix (Cont’d)
Market Attractiveness
-
Competitive Strength
Market size
Market growth rate
Pricing trends
Competitive intensity / rivalry
Overall risk of returns in the industry
Demand variability
Segmentation
-
Strength of assets and competencies
Relative brand strength
Market share
Market share growth
Customer loyalty
Record of technological or other innovation
■ Strategic Business Units are portrayed as a circle plotted in the GE McKinsey Matrix
– The size of the circles represent the Market Size
– The size of the pies represent the Market Share of the SBU's
– Arrows represent the direction and the movement of the SBU's in the future
■ Limitations of GE/Mckinsey Matrix
– Core competencies are not represented
– Interactions between Strategic Business Units are not considered
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2. Strategic Management Process
Portfolio Analysis (6/6)
3) Analyze Internal Environment
■ Advantages and limitation of Portfolio analysis
– Portfolio offers certain advantages
• It encourages top management to evaluate each of the corporation’s businesses individually and to set
objectives and allocate resources for each
• It stimulates the use of externally oriented data to supplement management’s judgment
• It raises the issue of cash flow availability for use in expansion and growth
• Its graphic depiction facilitates communication
– Portfolio have some very real limitations Matrix
•
•
•
•
It
It
It
It
is not easy to define market segments
suggests the use of standard strategies that can miss opportunities or be impractical
provides an illusion of scientific rigor when in reality positions are based on subjective judgments
is not always clear what makes an industry attractive or what stage a product is at in its lifecycle
30
Case Study
31
Reference
■ Euiho Suh, “Strategic management 1 (PPT Slide)”, POSMIT Lab.
(POSTECH Strategic Management of Information and Technology Laboratory)
■ Euiho Suh, “Strategic management 2 (PPT Slide)”, POSMIT Lab.
(POSTECH Strategic Management of Information and Technology Laboratory)
■ O’Brien & Marakas, “Introduction to Information Systems – Fifteenth Edition”,
McGraw – Hill, Chapter 2, pp. 43~71
■ Dr. Kevin Lance Jones, “SWOT (Strengths, Weaknesses, Opportunities & Threats)
Analysis”, page 7-8
32