Chapter 1 - The Nature of Strategic Management PDF

CHAPTER ONE The Nature of Strategic Management Asres Abitie (PhD)  Definition of Strategy Came from the Greek term “strategos" meaning the "art of being a general” or “the art of the general”. Refers to an important plan to deploy the available resources in a manner t...

CHAPTER ONE The Nature of Strategic Management Asres Abitie (PhD)  Definition of Strategy Came from the Greek term “strategos" meaning the "art of being a general” or “the art of the general”. Refers to an important plan to deploy the available resources in a manner to defeat the enemy.  Definition of Strategy “Strategy is a unified, comprehensive and integrated plan relating the strategic advantages of the firm to the challenges of the environment. It is designed to ensure that basic objectives of the enterprise are achieved.” (Guleck, 1980:9)  Definition of Strategy Goal-directed decisions and actions in which capabilities and resources are matched with the opportunities and threats in the environment. Strategy Involves ❖ Organization’s goals ❖ Goal-directed decisions and actions ❖ Matching key internal strengths with external opportunities and threats  Definition of Strategic Management ❖ The art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. ❖ Implies, focuses on integrating HR, marketing, finance, operations, R&D, and information systems to achieve organizational success.  Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business:... that is, of asking the question, “What is our business?” This leads to the setting of objectives, the development of strategies, and the making of today’s decisions for tomorrow’s results.  Definition of Strategic Management The process of analyzing the current situation, developing appropriate strategies, putting those strategies into action and evaluating, modifying, or changing those strategies as needed. Basic Model of Strategic Management Four Basic Elements Characteristics of Strategic Management Interdisciplinary Four aspects of External focus Strategic Management Internal focus Future direction  Strategic Management in Action Analyzing Deciding Putting Evaluating and Current on Strategies Changing Situation Strategies in Action Strategies Situation Strategy Strategy Strategy Analysis Formulation Implementation Evaluation Organizational External Context Analysis Functional Competitive Internal Analysis Corporate  The Strategic Management Process Situation Analysis entails scanning and evaluating ❖ Organizational context ❖Industrial Organization View (I/O) ❖Resource-Based View (RBV) ❖ Externalenvironment ❖ Organizational environment The Strategic Management Process  The Strategic Management Process ❖ Changing context of strategy formulation ❖Decline of smockstack manufacturing industries & the growth of services ❖Rise in the proportion of women in the active work force ❖Increase in the proportion of knowledge workforce ❖Increase in the utilization of IT ❖Increasing globalization of markets ❖Protection of the environment Levels of Strategies Corporate What direction are we going and what business(es) are we in or do we want to be in? Competitive: How are we going to compete in our chosen business(es)? Functional What resources and capabilities do we have to support the corporate and competitive strategies? The Strategic Management Process Strategy Implementation ⚫ Putting the organization’s various strategies into action. Strategy Evaluation ⚫ Evaluating how the strategy has been implemented as well as the outcomes of the strategy. The Strategic Management Process ❖ A continuous cycle of Situation analysis Strategy formulation Strategy implementation Strategy evaluation Importance of Strategic Management ❖ Globalization: The survival for business ❖ E-Commerce: A business tool ❖ Earth environment has become a major strategic issue  Stages of Strategic Management The strategic management process consists of three stages: ❖ Strategy Formulation (strategy planning) ❖ Strategy Implementation ❖ Strategy Evaluation  Strategy Formulation ❖ Strategy formulation includes: ❖ Developing vision and mission statements ❖ The conduct of SWOT analysis Strategy Formulation ❖ The considerations for the best strategy formulation should be as follows: Allocation of resources Business to enter or retain Business to divest or liquidate To get into Joint ventures or mergers Whether to expand or not Moving into foreign markets Trying to avoid takeover  Strategy Implementation ❖ Requires a firm to establish annual objectives, devise policies, motivating employees & allocate resources so that formulated strategies can be executed. ❖ It includes: ⚫ Developing strategy supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information system and linking employee compensation to organizational performance. ❖ It is often considered to be most difficult stage of strategic management. It requires personal discipline, commitment and sacrifice. ❖ Strategy formulated but not implemented serve no useful purpose. Strategy Implementation  Strategy Evaluation ❖ It is the primary means for obtaining information whether a given strategy is successful or not. ❖ Three fundamental strategy-evaluation activities are: (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. ❖ It is needed because success today is no guarantee of success tomorrow! Environmental Context: Old Economy and New Economy Comparisons  Competitive Advantage ❖ “Anything that a firm does especially well compared to rival firms.” ❖ When a firm can do something that rival firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage.  Strategists  Strategists are the individuals who are most responsible for the success or failure of an organization.  Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur.  “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.” “Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders”  Vision and Mission Statements Vision Statement: ❖ Answers the question “What do we want to become?” ❖ Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Mission Statement: ❖ “Enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market terms.” ❖ It addresses the basic question: “What is our business?” ❖ Describes the values and priorities of an organization. ❖ Compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities.  Vision and Mission Statements ❖ Broadly charts the future direction of an organization. ❖ A constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune at risk to breathe life into their dreams.  Opportunities and Threats ❖ Opportunities and threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. ❖ In a global economic recession, a few opportunities and threats that face many firms are listed here: Availability of capital can no longer be taken for granted. Consumers expect green operations and products. Marketing is moving rapidly to the Internet. Consumers must see value in all that they consume. Global markets offer the highest growth in revenues.  Opportunities and Threats As the price of oil is fluctuating, oil rich countries are focused on supporting their own economies, rather than seeking out investments in other countries. Too much debt can crush even the best firms. Layoffs are rampant among many firms as revenues and profits fall and credit sources dry up. Demand for health services does not change much in a recession. Dramatic slowdowns in consumer spending are apparent in virtually all sectors, except some discount retailers and restaurants.  Opportunities and Threats Borrowers are faced with much bigger collateral requirements than in years past. Equity lines of credit often now are not being extended (due to a relatively weak global economy). Firms that have cash or access to credit have a competitive advantage over debt-laden firms. Discretionary spending has fallen dramatically; consumers buy only essential items; this has crippled many luxury and recreational businesses such as boating and cycling. The double whammy of falling demand and intense price competition is plaguing most firms, especially those with high fixed costs. The business world has moved from a credit-based economy to a cash-based economy. There is reduced capital spending in response to reduced consumer spending.  Opportunities and Threats ❖ The passage of a law, the introduction of a new product by a competitor, a national catastrophe, a competitor’s strength could be a threat. ❖ Unrest in the Middle East, rising energy costs, or the war against terrorism could represent an opportunity or a threat. ❖ Acts of terrorism in eastern Africa (by Alshabab), the expansion of ISIS, the looming tension between Russia and the West, the fight between Israel & Hamas, outbreak of Ebola virus in Western Africa, Ethiopian government continued effort to join WTO, the internal conflict in South Sudan, etc.  Strategic Plan ❖ There are three important questions to answer in developing a strategic plan: Where are we now? (current position) Where do we want to go? (aspiration) How are we going to get there? (strategy)  Internal Strengths and Weaknesses ❖ Strengths and weaknesses are determined relative to competitors. ❖ Relative deficiency or superiority is important information. ❖ Also, strengths and weaknesses can be determined by elements of being than performance.  Long-Term Objectives ❖ Objectives are essential for organizational success because: State direction Aid in evaluation Create synergy Reveal priorities Focus coordination, and Provide a basis for effective planning, organizing, motivating, and controlling activities. ❖ Objectives should be challenging, measurable, consistent, reasonable and clear.  Strategies ❖ Strategies are potential actions that require top management decisions and large amounts of the firm’s resources. ❖ Strategies are the means by which long-term objectives will be achieved. ❖ Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures.  Annual Objectives ❖ Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. ❖ Annual objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. ❖ Annual objectives represent the basis for allocating resources.  Policies ❖ Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. ❖ Policies are guides to decision making and address repetitive or recurring situations. ❖ Policies are most often stated in terms of HRM, marketing, finance, operations, R&D, and computer information systems activities. A Comprehensive Strategic Management Model A Comprehensive Strategic Management Model Benefits of Strategic Management  Benefits of Strategic management Major benefits ⚫ Proactive in shaping firm’s future ⚫ Initiate and influence actions ⚫ Formulate better strategies (systematic, logical, rational approach) Financial benefits: ⚫ Improved sales ⚫ Improved profitability Non-Financial benefits: ⚫ Increased employee productivity ⚫ Improved understanding of competitors’ strategies ⚫ Greater awareness of external threats ⚫ Understanding of performance-reward relationships ⚫ Better problem-avoidance ⚫ Lesser resistance to change  Benefits of Strategic Management Greenly stated that strategic management offers the following benefits: 1. It allows for identification, prioritization, and exploitation of opportunities. 2. It provides an objective view of management problems. 3. It represents a framework for improved coordination and control of activities. 4. It minimizes the effects of adverse conditions and changes. 5. It allows major decisions to better support established objectives. 6. It allows more effective allocation of time and resources to identified opportunities.  Benefits of Strategic Management 7. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions. 8. It creates a framework for internal communication among personnel. 9. It helps integrate the behavior of individuals into a total effort. 10. It provides a basis for clarifying individual responsibilities. 11. It encourages forward thinking. 12. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and opportunities. 13. It encourages a favorable attitude toward change. 14. It gives a degree of discipline and formality to the management of a business. Who’s Involved with Strategic Management? ❖ Board of Directors Elected representatives of stockholders Play significant role in corporate governance ❖ Top Management Team Ultimately responsible for every decision and action of every organizational employee Act as strategic leaders ❖ Other Strategic Managers and Organizational Employees Responsible for strategy implementation and evaluation Effective Strategic Leadership Involves Determining Organizational Purpose or Vision Establishing Exploiting and Appropriately Maintaining Balanced Controls Core Competencies Effective Strategic Emphasizing Leadership Ethical Decisions Developing and Practices Human Capital Creating and Sustaining Strong Organizational Culture Strategic Management in Today’s World ❖ Three important issues affecting strategic management in today’s world: Globalization Corporate governance E-business Key Terms in Strategic Management ❖ Competitive Advantage ❖ Strategists ❖ Vision & Mission Statements ❖ External Opportunities and Threats ❖ Internal Strengths and Weaknesses ❖ Long-Term Objectives ❖ Strategies ❖ Annual Objectives ❖ Policies  Excerpts from Sun Tzu’s The Art of War Writings 1. War is a matter of vital importance to the state: a matter of life or death, the road either to survival or ruin. Hence, it is imperative that it be studied thoroughly. 2. Warfare is based on deception. When near the enemy, make it seem that you are far away; when far away, make it seem that you are near. Hold out baits to lure the enemy. Strike the enemy when he is in disorder. Avoid the enemy when he is stronger. 3. If your opponent is of choleric temper, try to irritate him. If he is arrogant, try to encourage his egotism. If enemy troops are well prepared after reorganization, try to wear them down. If they are united, try to sow dissension among them. Attack the enemy where he is unprepared, and appear where you are not expected. These are the keys to victory for a strategist. It is not possible to formulate them in detail beforehand. 4. A speedy victory is the main object in war. If this is long in coming, weapons are blunted and morale depressed. When the army engages in protracted campaigns, the resources of the state will fall short. Thus, while we have heard of stupid haste in war, we have not yet seen a clever operation that was prolonged. 5. Generally, in war the best policy is to take a state intact; to ruin it is inferior to this. To capture the enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or a squad is better than to destroy it. To win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the supreme excellence. Those skilled in war subdue the enemy’s army without battle. 6. The art of using troops is this: When ten to the enemy’s one, surround him. When five times his strength, attack him. If double his strength, divide him. If equally matched, you may engage him with some good plan. If weaker, be capable of withdrawing. And if in all respects unequal, be capable of eluding him. 7. Know your enemy and know yourself, and in a hundred battles you will never be defeated. When you are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant both of your enemy and of yourself, you are sure to be defeated in every battle. 8. He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to the scene and rushes into the fight is weary. And therefore, those skilled in war bring the enemy to the field of battle and are not brought there by him. Thus, when the enemy is at ease, be able to tire him; when well fed, be able to starve him; when at rest, be able to make him move. 9. Analyze the enemy’s plans so that you will know his shortcomings as well as his strong points. Agitate him to ascertain the pattern of his movement. Lure him out to reveal his dispositions and to ascertain his position. Launch a probing attack to learn where his strength is abundant and where deficient. It is according to the situation that plans are laid for victory, but the multitude does not comprehend this. 10. An army may be likened to water, for just as flowing water avoids the heights and hastens to the lowlands, so an army should avoid strength and strike weakness. And as water shapes its flow in accordance with the ground, so an army manages its victory in accordance with the situation of the enemy. And as water has no constant form, there are in warfare no constant conditions. 11. Thus, one able to win the victory by modifying his tactics in accordance with the enemy situation may be said to be divine. 12. If you decide to go into battle, do not announce your intentions or plans. Project “business as usual.” 13. Unskilled leaders work out their conflicts in courtrooms and battlefields. Brilliant strategists rarely go to battle or to court; they generally achieve their objectives through tactical positioning well in advance of any confrontation. 14. When you do decide to challenge another company (or army), much calculating, estimating, analyzing, and positioning bring triumph. Little computation brings defeat. 15. Skillful leaders do not let a strategy inhibit creative counter-movement. Nor should commands from those at a distance interfere with spontaneous maneuvering in the immediate situation. 16. When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold their position and give their rivals the opportunity to surrender or merge. They do not allow their forces to be damaged by those who have nothing to lose. 17. Brilliant strategists forge ahead with illusion, obscuring the area(s) of major confrontation, so that opponents divide their forces in an attempt to defend many areas. Create the appearance of confusion, fear, or vulnerability so the opponent is helplessly drawn toward this illusion of advantage. Source: Based on The Art of War and from www.ccs.neu.edu/home/thigpen/html/art_of_war.html Chapter One ? Questions