Strategic Management - Lesson 1_2006-2007

Strategic Management – Lesson 1 1. Definition - Strategic management is the process whereby managers establish an organization’s long-term direction, set specific performance objectives, develop strategies to achieve these objectives in the light of all the relevant internal and external circumstances, and undertake to execute the chosen action plans. 2. Strategic management process Mission and Goals

Strategic choice - SWOT Internal Analysis External Analysis Strengths and Weaknesses

Opportunities and Threats

Business-LevelStrategy formulationCorporate-Level Strategy Strategy

Defining Organizational Structure

Designing Control Systems

Strategy implementation

Matching Strategy, Structure and Controls

Feedback

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3. Establishing the mission Defining the business is the first element in setting direction.

Managers need to keep looking beyond the present definition of the business, answering not only to the question what is our business? but what will it be? as well. This forces managers to think ahead. In the best-run organizations, the senior management task of consciously taking actions to shape the organization’s future seems to be grounded firmly in thinking deeply about where the organization is now and where it needs to be headed, what it should and should not be doing and for whom, and when it is time to shift to a new direction and to redefine the business. •The organizational mission reflects the management’s long-term vision of what the organization seeks to do and become. The mission must provide a clear view of what firm is trying to accomplish for its customers, and in the same time, indicates the particular business position desired. Describing the purpose of the organization, the mission statement is aimed at enabling all members of the organization to share the same view of the company’s goals and philosophy. When completed, an effective mission statement will focus on markets rather than products. It will also be achievable, motivating, and specific. Examples of mission statements are presented bellow: Avis Rent-a-Car: Our business is renting cars. Our mission is total customer satisfaction. Saturn Division of GM: To market vehicles developed and manufactured in the U.S. that are world leaders in quality, cost, and customer satisfaction through the integration of people, technology and business systems and to transfer knowledge, technology and experience throughout the GM.

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Levi Starauss & Co.: Levi Strauss & Co. is the world’s largest producer of branded apparel, marketing a broad range of clothing, most of it leisure oriented, to customers of both sexes and all ages throughout the world. The company strives to be among the leading brands – in volume and image – in all markets it serves. The company’s products are sold in approximately 40,000 U.S. retail outlets and through sales facilities lacated in many foreign countries. Principal operating groups are the Jeans Company, which markets jeans and related merchandise in the United States; Battery Street Enterprises, with nonjeans product lines that range from hand-tailored Oxford Clothes to BendOver® women’s slacks; and Levi Strauss International, which sells jeanswear and leisure apparel outside the United States. The managerial value of a clear mission statement is in crystallizing the firm’s long-term direction and in steering entrepreneurial decisions into a coherent pattern. An unambiguous answer to “what is our business and what will it be?” can help managers avoid the trap of trying to march in too many directions at once, and its counterpart, the trap of being unclear about when or where to march at all. When managers don’t have a clear vision of what the organization is trying to do and to become, their decision and actions are as likely to blockade the path ahead as to clear it. 4. Establishing strategic objectives – is the second element in setting direction. Strategic objectives set forth the competitive market position that an enterprise seeks to have and the specific performance targets that management seeks to achieve in pursuing the strategic mission. They:  spells out formally what the organization is trying to achieve;  gives directions to the corporate mission; and  helps guide the formulation of strategy. Some strategic objectives relate externally to the attractiveness and mix of industries the firm is in, the competitive position it aspires to in each industry, the reputation it wants to have with customers and the public, standing it wants in the financial investment community, and its capabilities vis-s-vis competitors; other strategic objectives relate internally to the desired organizational performance and financial results. The most common strategic objectives concern market share, growth in revenues and earnings, return on investment, competitive strength, technological capability, recognition as an industry leader, reputation with customers, overall size and degree of diversification, earnings stability over the cycle of ups and downs in the economy, financial strength, being well represented in industries with attractive prospects, and the like.

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The objectives need to meet five specifications: 1. An objective should relate to a single, specific topic; 2. An objective should relate to a result not to an activity to be performed; 3. An objective should be measurable (stated in quantitative terms whenever feasible); 4. An objective should contain a time deadline for its achievement; 5. An objective should be challenging but achievable. Consider the following examples:  Poor: Our objective is to maximize profits. Remarks: How much is maximum? The statement is not subject to measurement. What criterion or yardstick will management use to determine if and when actual profits are equal to maximum profits? No deadline is specified. Better: Our total profit target in 2003 is $ 1 million.  Poor: Our objective is to increase sales revenue and unit volume. Remarks: How much? Also, because the statement relates to two topics, it may be inconsistent. Increasing unit volume may rquire price cut, and if demand is price inelastic, sales revenue would fall as unit volume rises. No time frame for achievement is indicated. Better: Our ibjective this calendar year is to increase sales revenue from $30 million to $ 35 million: we expect this to be accomplished by selling 1 million units at an average price of $35.  Poor: Our objective in 2003 is to boost advertising expenditures by 15 percent. Remarks: Advertising is an activity, not a result. The advertising objective should be stated in terms of what result the extra advertising is intended to produce. Better: Our objective is to boost our market share from 8 percent to 10 percent in 2003 with the help of a 15 percent increase in advertising expenditures.  Poor: Our objective is to be a pioneer in research and development and become the technological leader in the industry. Remarks: Very sweeping and perhaps overly ambitious; implies trying to march in too many directions at once if the industry is one with a wide range of technological frontiers. More a platitude than an action commitment to a specific result. Better: During the 2003 our objective is to continue as a leader in introducing new technologies and new devices that will allow buyers of electrically powered equipment to conserve on electric energy usage.

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 Poor: Our objective is to be the most profitable company in our industry. Remarks: Not specific enough; by what measures of profit – total dollars or earnings per share or unit profit margin or return on equity investment or all of these? Also, because the objective concerns how well other companies will perform, the objective, while challenging, may not be achievable. Better: We will strive to remain atop the industry in terms of rate of return on equity investment by earning a 25 percent after-tax return on equity investment in 2003. 5. Formulating strategy – is the third element in setting direction. Strategy is the trajectory or flight path toward the target objectives and is made up of the entrepreneurial, competitive, and functional area approaches management intends to employ in positioning the enterprise and in managing its overall portfolio of activities. There are two main levels of strategy: corporate-level strategy and business-level strategy. The task of developing corporate –level strategy has three elements: 1. Developing plans for managing the scope and mix of the firms’ various activities in order to improve corporate performance; 2. Providing for coordination among different businesses in the portfolio; and 3. Establishing investment priorities and allocating corporate resources across the company’s different activities. What to look for in identifying corporate strategy:  Corporate-level strategic objectives and financial performance targets;  How much diversification;  What kind of diversification (related or unrelated or some of both?);  Efforts to create corporate-level competitive advantage;  Criteria and priorities for allocating investment capital to various business units;  Key corporate-level functional area support strategies (especially as concerns finance, R&D, HR);  Use of any distinctive approaches to managing key business units;  Any corporate-level distinctive competence;

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 Use of mergers and acquisitions to build the corporate portfolio;  Actions to divest or sell off weak or unattractive business units. Business strategy is the managerial action plan for directing and running a particular business unit. Business strategy deals explicitly with: 1. How the enterprise intends to compete in that specific business; 2. What the role or thrust of each key functional area will be in building a competitive advantage (thereby contributing to the success of the business in the marketplace); 3. Developing responses to changing industry and competitive conditions; and 4. Controlling the pattern of resources allocation within the business unit. What to look for in identifying business-level strategy:  How the business is being positioned to deal with industry trends, competitive conditions, and emerging opportunities and threats;  Attempts to appeal to particular customer, customer groups, customer needs, and product end-uses;  Degree of vertical integration (full, partial, none) and other traits which define the competitive scope within the industry;  Nature and source of competitive advantage (if any);  Distinctive competences (if any) and other sources of competitive strength;  Competitive approaches to pricing, product differentiation, product quality, customer service, and other important competitive variables (in comparison to approaches of rival firms);  Image and reputation (how the business is viewed by customers and by rivals);  Comprehensiveness of product line in comparison to rival firms;  Nature of recent actions to strengthen competitive position and improve performance;  Key features of major functional area support strategies: personnel/labor relations; marketing, sales and distribution; R&D/technology; manufacturing and production; finance (including criteria for allocating resources and investment capital;  Actual role in the industry (leader, contender, also-ran, etc.) and efforts to change or solidity this role.

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