Strategic Management Chapter 1

Strategic Management - Chapter 1

• Strategic Management is an integrated approach, defined by Hill, Jones, and Schilling.
• The 11th edition is used in the course material.
• Strategic leadership involves effective strategy-making process for competitive advantage.

Learning Objectives

• Explain competitive advantage.
• Discuss the strategic role of managers at different organizational levels.
• Identify primary steps in strategic planning.
• Analyze the common pitfalls in planning and discuss how to avoid those pitfalls.
• Outline cognitive biases and their impact on strategic decisions.
• Explain how to overcome these biases.
• Discuss the role of strategy leaders in the strategy-making process.

Strategy

• A set of related actions by managers to improve company performance.
• Strategic leadership creates competitive advantage through effective management of the strategy-making process.
• Strategy formulation is selecting strategies based on analysis of external and internal environment.
• Strategy implementation is putting strategies into action.

Determinants of Shareholder Value

• Effectiveness of strategies
• Profitability (ROIC)
• Profit growth
• Shareholder value

Superior Performance

• Risk capital: Equity capital where there's no guarantee of investment recoup or reasonable return.
• Shareholder value: Returns that shareholders gain from company shares. Source is capital appreciation and dividend payment.
• Profitability: Return on the company’s capital investment in the enterprise.
• Return on Invested Capital (ROIC): Net profit over invested capital.
• Profit growth: Increase in net profit over time, achieved via selling products in rapidly growing markets or gaining market share from rivals.

Competitive Advantage

• Occurs when a company's profitability is higher than the industry average.
• Sustained competitive advantage maintains above-average profitability over several years.

Business Model

• How strategies work together to achieve competitive advantage and deliver strong profitability and growth.
• Involves selecting, acquiring, and retaining customers; defining and differentiating products; creating value; producing goods/services; lowering costs; organizing resources and activities; and achieving and maintaining profitability and growth.

Figure 1.3 - Return on Invested Capital (ROIC) in Selected Industries (2002-2011)

• Visualizes ROIC trends in various industries over time. (Specific data from the chart needs to be extracted and interpreted, as the image does not show the precise numbers.)

Levels of Strategic Management

• General managers: Responsible for company-overall performance or specific major subunits.
• Functional managers: Supervise specific functions, activities, or tasks.
• Multidivisional company: Competes in numerous businesses with divisions managing each individually.
• Figure 1.4: Illustrates different levels—Corporate, Business, Functional.

Corporate-Level Managers

• Oversee the development of strategies for the entire organization.
• Link strategic development with shareholders.
• Ensure business strategies support maximizing profitability and profit growth.

Business-Level Managers

• Head of business units, leading divisions providing products/services for a specific market.
• Translate strategic intentions into concrete strategies.
• Address strategies particular to individual businesses.

Functional-Level Managers

• Responsible for specific business functions.
• Develop functional strategies to meet business- and corporate-level objectives.
• Provide information to formulate realistic and attainable strategies.

Steps in Formal Strategic Planning Process

• Select corporate mission and goals.
• Analyze organization's external competitive environment and internal operating environment.
• Select strategies that build on strengths, correct weaknesses, align with mission/goals, and create a viable business model.
• Implement strategies.

Main Components of the Strategic Planning Process (Figure 1.8)

• Illustrates the interconnectedness of strategic formulation and implementation, with key analysis areas like external analysis (opportunities/threats), internal analysis (strengths/weaknesses), SWOT, and strategic choice. Feedback mechanisms are also shown.

Components of a Mission Statement

• Mission: Purpose of the company or what it strives to do.
• Vision: Articulation of desired achievements, or future state.
• Values: How employees should conduct business to achieve the company mission.
• Goal: Precise and measurable desired future state that the company wants to achieve.

Defining the Business (Figure 1.6)

• Who is being satisfied (customer groups)?
• What is being satisfied (customer needs)?
• How are customer needs being satisfied (distinctive competencies)?

External and Internal Analysis

• External analysis determines strategic opportunities/threats affecting how an organization fulfills its mission.
• Includes examining industry, country/national, and macro environments.
• Internal analysis entails reviewing resources, capabilities, and a company's competencies. Goal is to determine company strengths and weaknesses.

SWOT Analysis

• Compares strengths, weaknesses, opportunities, and threats.
• Guides the creation of strategies to exploit opportunities, build/protect strengths, correct weaknesses, and address threats.
• Affirms a company-specific business model; aligning resources & capabilities with environmental demands.

SWOT Strategies

• Functional-level strategies focus on improving operations within a company.
• Business-level strategies define a company’s overall competitive theme in the marketplace to achieve competitive advantage.
• Various position strategies exist for different industry settings.
• Global strategies outline how to expand operations internationally.
• Corporate-level strategies determine the businesses a company should be in to maximize profitability and growth and how to achieve a competitive edge.

Strategy Implementation and Feedback Loop

• Strategy implementation translates strategic plans into action at functional, business, and corporate levels.
• This involves the creation of an organizational structure, culture, and controls supporting the strategy. Use of feedback loops enables information on achieving strategic goals and creating a well-maintained competitive advantage.

Criticisms of Formal Planning Models

• Unforeseen circumstances affect strategic plans.
• Excessive importance is allocated to top management, possibly neglecting lower-level managers.
• Many successful strategies may result from serendipity rather than formal planning.

Figure 1.7 - Emergent and Deliberate Strategies

• Illustrates how unforeseen shifts can lead to emergent strategies impacting the planned strategy. Deliberate strategies can be influenced by serendipity events and/ or autonomous lower-level manager actions/decisions.
• Shows the potential divergence between planned and realized strategies.

Scenario Planning (Figure 1.8)

• Formulates plans based on different possible future scenarios or “what-if” situations.
• Encourages managers to be flexible, think outside the box, and anticipate probable scenarios.
• Supports the realization that successful strategic planning requires input and participation from all levels within a company.

Cognitive Biases and Strategic Decision Making

• Cognitive biases are systematic errors in human decisions arising from how people process information.
• Common biases include: Prior hypothesis bias, Escalating commitment, Reasoning by analogy, Representative bias, Illusion of control and Availability errors. (Specific details on each are available in relevant text segments.)

Techniques of Improving Decision Making

• Devil's advocacy: A member of a decision-making team identifies potential downsides of proposals.
• Dialectic inquiry: Generating a plan and its counter-plan to foster strategic thinking.
• Outside view: Examining past successful/failed initiatives to understand if they'll work for the current project.

Characteristics of Good Strategic Leaders

• Vision, eloquence, and consistency.
• Articulation of a business model.
• Commitment.
• Well-informed.
• Delegation and empowerment.
• Use power effectively.
• Emotional intelligence (self-awareness, self-regulation, motivation, empathy, social skills).