Chapter Seven Strategic Management: Planning for Long-Term Success Chapter Objectives • Define the term strategic management and explain its relationship to strategic planning, implementation, and control. • Explain the concept of synergy and identify four kinds of synergy. • Describe Porter’s model of generic competitive strategies. • Identify and explain the major contribution the business ecosystems model makes to strategic thinking. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 2 Chapter Objectives (cont’d) • Identify seven basic Internet business models and four Internet strategy lessons. • Identify and describe the four steps in the strategic management process. • Explain the nature and purpose of SWOT analysis. • Describe the three types of forecasts. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 3 Why All Managers Need an Understanding of Strategic Management • A strategic orientation encourages farsightedness in managers. • Employees who think in strategic terms tend to understand better how top managers think and why they make the decisions they do. • The trend toward greater teamwork and cooperation throughout the planning cycle is eroding the traditional distinction between those who plan and those who implement plans. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 4 Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 5 Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 6 Strategic Management = Strategic Planning + Implementation + Control • Strategic Management – The ongoing process of ensuring a competitively superior fit between an organization and its changing environment • Includes budget control, long-range planning, and strategic planning • Merges strategic planning, implementation, and control to create a dynamic process • Requires every employee to consider the “big picture” • Involves strategy innovation in rethinking the basis for competition (business model) in the industry Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 7 Strategic Management = Strategic Planning + Implementation + Control (cont’d) • Strategy – An integrated externally oriented perception of how to achieve the organization’s mission • Strategic Planning – The process of determining how to pursue the organization’s long-term goals with resources expected to be available Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 8 Thinking Strategically (Including E-Business Strategies) • Synergy – The concept that the whole is greater than the sum of the parts • Types of Synergy – Market synergy: Extending products to new markets – Cost synergy: Savings from combinations of commonbase operations, resources, and facilities – Technological synergy: The transfer and application of technologies to new markets – Management synergy: Complementary skills that make for more effective overall management Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 9 Porter’s Generic Competitive Strategies • Model’s Competitive Variables – Competitive advantage: How to compete in a market – Competitive scope: How broad of a market to target • Cost Leadership Strategy – Having the lowest overall cost in a market to provide a competitive advantage in pricing over competitors • Differentiation Strategy – Providing unique and superior value for the customer that builds brand loyalty Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 10 Figure 7.1: Porter’s Generic Competitive Strategies Source: Reprinted with the permission of The Free Press, a division of Simon & Schuster from THE COMPETITIVE ADVANTAGE OF NATIONS by Michael E. Porter. Copyright © l990, 1998 by Michael E. Porter. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 11 Porter’s Generic Competitive Strategies (cont’d) • Cost Focus Strategy – Attempting to gain a competitive edge in a narrow (or regional) market segment by controlling (competitively dominating) the segment • Focused Differentiation – Achieving a competitive edge by delivering a superior product and/or service to a limited audience Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 12 Business Ecosystems • Business Ecosystem – A business ecosystem is an economic community of organizations and all their stakeholders, including suppliers and customers. – Organizations need to be as good at cooperating as they are at competing if they are to succeed. • Coevolving: Key organizations selectively cooperate and compete to achieve both their individual and collective goals, which they could not achieve on their own. – Greater strategic cooperation is needed to foster the the spread of realized innovation. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 13 E-Business Strategies for the Internet • Internet Strategy Lessons – The Internet changes everything, but it doesn’t change everything overnight. – Some of the old rules still apply. An investment should still either save you money or make you money. – First, we overestimated the Internet; don’t underestimate it now. Its long-term impact will likely exceed expectations. – Evolving Internet technologies are still emerging. – There is no one-size-fits-all Internet strategy. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 14 Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 15 E-Business Strategies for the Internet (cont’d) • Internet Strategy Lessons (cont’d) – Customer loyalty is built with reliable brand names and “sticky” web sites. – Bricks and clicks: Blending the best of two worlds – E-business partnering should not dilute strategic control or ethical standards. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 16 The Strategic Management Process • Four Steps in the Strategic Management Process 1. 2. 3. 4. Formulation of a grand strategy Formulation of strategic plans Implementation of strategic plans Strategic control Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 17 Figure 7.2: The Strategic Management Process Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 18 Formulation of a Grand Strategy • Grand Strategy – A general explanation of how the organization’s mission is to be accomplished • Situational Analysis – Finding the organization’s niche by performing a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis to match unfolding opportunities with resources being acquired – Capability profile: Identifying the organization’s strengths and weaknesses Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 19 Figure 7.3: Determining Strategic Direction Through Situational (SWOT) Analysis Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 20 Formulation of a Grand Strategy (cont’d) • Situational Analysis (cont’d) – Key capabilities for today’s companies • • • • • Quick response to market trends Rapid product development Rapid production and delivery Continuous cost reduction Continuous improvement of processes, human resources, and products • Greater flexibility of operations Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 21 Formulation of a Grand Strategy (cont’d) • The Need for Speed – Speed has become an important competitive advantage. – Speed involves more than just doing the same old things faster. – Reengineering: Radically redesigning the entire business cycle for greater strategic speed Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 22 Criteria for Formulating Strategic Plans • Develop clear results-oriented objectives stated in measurable terms. • Identify activities required to accomplish the objectives. • Assign specific responsibilities to the appropriate personnel. • Estimate times to accomplish activities and their appropriate sequencing. • Determine resources required to accomplish the activities. • Communicate and coordinate the above elements and complete the action plan. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 23 Strategic Implementation and Control • Implementation of Strategic Plans – Developing a systematic filtering-down process that facilitates the implementation process and builds middle-manager commitment requires a company to consider: • • • • Organizational structure People Culture Control systems Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 24 Strategic Implementation and Control (cont’d) • A formal control system should be developed that helps keep strategic plans on track by – Setting up and testing channels for information on progress, problems, and the fit of strategic assumptions to the environment – Using software programs for real-time tracking of production, financial, and marketing reports Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 25 Strategic Implementation and Control (cont’d) • Corrective Action Based on Evaluation and Feedback – Negative feedback should prompt corrective action at the step immediately before the problem occurs. – Possible corrective actions include: • • • • • Updating strategic assumptions Reformulating strategic plans Rewriting policies Making personnel changes Modifying budget allocations Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 26 Forecasting • Forecasts – Predictions, projections, or estimates of future situations • Types of Forecasts – Event outcome forecasts: Predictions of the outcome (effects) of highly probable future events – Event timing forecasts: Predictions of when a given event will occur – Time series forecasts: Estimates of future values in a statistical sequence (e.g., sales forecast) Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 27 Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 28 Forecasting Techniques • Informed Judgment – Forecasts relying on intuitive judgments that are based on how well informed the forecaster is • Scenario Analysis – Preparing written descriptions of alternative but equally likely future situations • Longitudinal scenarios: Describing how the future situations will evolve from the present • Cross-sectional scenarios: Describing future situations at a given point in time Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 29 Forecasting Techniques (cont’d) • Surveys – A forecasting technique involving face-to-face interviews and mail or e-mail questionnaires – Problems with surveys • Construction of the survey instrument • Cost of administration • Errors in data collection and interpretation • Trend Analysis – The hypothetical extension of a past series of events into the future Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 30 Summary • Strategic management sets the stage for virtually all managerial activity. • Strategic thinking is necessary for successful strategic management and planning. • Porter’s generic competitive strategies model helps managers create a profitable “fit” between the organization and its environment. • Competitors coevolve into business ecosystems when they use both competition and cooperation. • Effective use of the correct Internet strategies affords opportunities for competitive advantage. Copyright © Houghton Mifflin Company. All rights reserved. Chapter Seven | 31 Terms to Understand • • • • • • • • • Strategic management Strategy Synergy Differentiation Business ecosystem Grand strategy Situational analysis Capability profile Reengineering Copyright © Houghton Mifflin Company. All rights reserved. • Forecasts • Event outcome forecasts • Event timing forecasts • Time series forecasts • Scenario analysis • Longitudinal scenarios • Cross-sectional scenarios • Trend analysis Chapter Seven | 32