MGT201 - CH9 - Strategic Planning

Strategic
Planning
09
Copyright © 2012 Pearson Education, 09-1
Inc. Publishing as Prentice Hall
Learning Outcome
• Define strategic management and explain why

it’s important
• Explain what managers do during the six steps
of the strategic management process
• Describe the three types of corporate strategies
• Describe competitive advantage and the
competitive strategies organizations use to get it
• Discuss current strategic management issues
Copyright © 2012 Pearson Education, 10-2

What Is Strategic Management?
• Strategic management - what managers
do to develop the organization’s
strategies.
• Strategies - the plans for how the
organization will do what it’s in business to
do, how it will compete successfully, and
how it will attract and satisfy its customers
in order to achieve its goals.
Copyright © 2012 Pearson Education,

Inc. Publishing as Prentice Hall 9-3
10-3
What Is Strategic Management?
• Business model - how a company is
going to make money.
• Focus of Business model
– whether customers will value what the
company is providing
– whether the company can make any money
doing that

10-4
Why Is Strategic
Management Important?
1. It results in higher organizational

performance.
2. It requires that managers examine and
adapt to business environment changes.
3. It coordinates diverse organizational
units, helping them focus on
organizational goals.

10-5
What is the Strategic
Management Process?
• Strategic management process - a six-
step process that encompasses strategic
planning, implementation, and evaluation.

10-6
Exhibit 9-1: Strategic
Management Process

10-7
Strategic Management Process
• Step 1: Identifying the organization’s current
mission, goals, and strategies
– Mission: a statement of the purpose of an
organization
• The scope of its products and services
– Goals: the foundation for further planning
• Measurable performance targets
– Knowing company’s current goals gives managers a
basis for assessing where the goals need to be
changed. For the same reason, it is important for
managers to identify current strategies
10-8
Exhibit 9-2: Components of a
Mission Statement

10-9
Components of a Mission Statement
Copyright © 2012 Pearson Education, 10 10-10

• Step 2: Doing an external analysis
– The environmental scanning of specific and general
environments
• Focuses on identifying opportunities and threats
– In an external analysis, managers should examine the
economic, demographic, political/legal, sociocultural,
technological, and global components to see the
trends and changes.
– Managers need to know what the competitors are
doing, what pending legislations might effect the
organization and what is the labor supply like

10-11
• Step 2: Doing an external analysis (contd.)
− After analyzing the environment, managers need to
assess what they have learned in terms of:
• Opportunities they can exploit (+ve trends in
external env factors)
• Threats they may face (-ve trend in external env
factors)
− The same environment can present opportunity to
one organization and pose threat to the other in the
same industry because of their different resources
and capabilities

10-12
• Step 3: Doing an internal analysis
– Assessing organizational resources, capabilities, and activities:
• Strengths create value for the customer and strengthen the
competitive position of the firm.
• Weaknesses can place the firm at a competitive disadvantage.
– Analyzing financial and physical assets is fairly easy, but

assessing intangible assets (employee skills, culture, corporate
reputation, etc.) isn’t as simple.
• Steps 2 and 3 combined are called a SWOT analysis.

(Strengths, Weaknesses, Opportunities, and Threats)

10-13
SWOT Analysis
• SWOT analysis - an analysis of the
organization’s strengths, weaknesses,
opportunities, and threats.
• Resources - an organization’s assets that
are used to develop, manufacture, and
deliver a product to its customers.
• Capabilities - an organization’s skills and
abilities in doing the work activities needed
in its business.
10-14
Strengths and Weaknesses
• Strengths - any activities the organization
does well or any unique resources that it
has.
• Weaknesses - activities the organization
does not execute well or needed
resources it does not possess.
• Core competencies - the organization’s
major value-creating capabilities that
determine its competitive weapons.
10-15
• Step 4: Formulating strategies
− Once SWOT analysis is complete, managers
need to
• Develop and evaluate strategic
alternatives and then
• Select strategies that –
 capitalize on organization’s strength,
 exploit environmental opportunities,
 correct organization’s weaknesses
 buffer against threats

10-16
• Step 4: Formulating strategies (contd.)
– Select appropriate strategies for all levels in
the organization
− Strategies need to be established for the
corporate, business and functional levels of
the organizations
− This step is complete when managers have
developed a set of strategies that give the
organization a relative advantage over its
rivals
10-17
• Step 5: Implementing strategies
− After strategies are formulated, they must be
implemented
− Strategy is only as good as its implementation
− Effective strategy implementation requires an
organizational structure matched to its
requirements
– The environment dictates the chosen strategy;
effective strategy implementation requires an
organizational structure matched to its
requirements.
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• Step 6: Evaluating results
– How effective have strategies been?
– What adjustments, if any, are necessary?

10-19
Exhibit 9-3: Types of
Organizational Strategies
• Organizational strategies includes strategies at:
− Corporate level
− Business level
− Functional level

10-20
Corporate Strategies
• Corporate strategy - An organizational strategy
that determines what businesses a company is in
or wants to be in
• Reflects the direction in which the organization is
going and the role each business unit will play in
pursuing that direction
• Types of Corporate Strategies
• Growth: expansion into new products and markets.
• Stability: maintenance of the status quo.
• Renewal: examination of organizational
weaknesses that are leading to performance
declines.
10-21
Corporate Strategies (cont.)
• Growth strategy - a corporate strategy
that’s used when an organization wants to
expand the number of markets served or
products offered, through either its current
business(es) or new business(es).
− By pursuing a growth strategy, an organization may
− Increase sales revenue
− Increase number of employees
− Increase market share
− Other quantitative measures

10-22
• Growth strategy (contd.)
– Types of growth strategies
• Concentration
• Vertical integration
• Horizontal integration
• Diversification

10-23
Types of Growth Strategies
• Concentration
– focuses on its primary line of business and
increases the number of products offered or
markets served in this primary business.
− No mergers or acquisitions
− Company grows by increasing its own
business operation
− Eg. Bose Corporation

10-24
• Vertical Integration
– A company also might choose to grow either
backward or forward or both.
− Backward – become your own supplier
− Forward – become your own distributor
• Horizontal Integration: company grows
by combining with organizations in the
same industry – combining operations with
its competitors
− Needs approval by US Federal Trade Commission (in USA)
10-25
• Diversification
– Related diversification happens when a
company combines with other companies in
different, but related, industries.
– Unrelated diversification is when a company
combines with firms in different and unrelated
industries.
• Many companies use a combination of
these approaches to grow

10-26
• Stability strategy - a corporate strategy in
which an organization continues to do what it is
currently doing.
− A corporate level strategy characterized by an
absence of significant change
− Includes
 Serving the same client by
 Offering the same product or services
 Maintaining market share
 Sustaining the organization’s return on investment
results
10-27
• Stability strategy (contd.)
− Why?
Organizations resources, capabilities, core
competencies are stretched to their limits
Industry’s external forces rapidly changing
and making the future uncertain
Industry is facing slow or no growth
opportunities
Owners or mangers of small business are
satisfied with organization’s performance
10-28
• Renewal strategy - a corporate strategy
designed to address declining performance.
− Mainly two types:
− Retrenchment strategy: a short-run renewal
strategy used in situations when performance
problems aren’t as serious
• When an organization is facing minor performance
setbacks, retrenchment strategy helps to stabilize
operation, revitalize organizational resources and
capabilities and prepare to compete once again
• Eg. Proctor & Gamble, Reebok, Kodak, IBM, etc.
10-29
Types of Renewal Strategies
− Turn-around strategy: a renewal strategy for
situations in which the organization’s
performance problems are more serious –
declining or no profits at all
• Eg. Sears, Apple, Daimler-Chrysler,
Mitsubishi, etc.
• Managers do two things for both renewal
strategies:
– cut costs
– restructure organizational operations.
10-30
Competitive/Business Level Strategy
• Competitive strategy - an organizational
strategy for how an organization will compete in
each of its business(es).
– Smalls organizations in only one line of
business or large organizations that has not
diversified into different products or markets,
the business level strategy typically overlaps
with the organization’s corporate level
strategy
• Competitive advantage - what sets an
organization apart; its distinctive edge.
10-31
The Role of Competitive Advantage
− Competitive advantage - what sets an
organization apart; its distinctive edge. –
comes from organization’s core competencies
− Developing an effective business level
strategy requires an understanding of
competitive advantage
• Competitive advantage is a capability or
circumstance that enables a corporation to earn
higher than average profits in a particular
industry
10-32
The Role of Competitive Advantage
− Quality as a competitive advantage
− Differentiates the firm from its competitors.
− Can create a sustainable competitive advantage
− Represents the company’s focus on quality
management to achieve continuous improvement and
meet customers’ demand for quality.
− Sustainable Competitive Advantage
− It is not enough for an organization simply to create a
competitive advantage; it must be able to sustain it. A
sustainable competitive advantage enables the
organization to keep its edge despite competitors’
actions or evolutionary changes in the industry
10-33
SBU
• Strategic Business Unit (SBU) - the
single independent businesses of an
organization that formulate their own
competitive strategies.
• BCG matrix - a strategy tool that guides
resource allocation decisions on the basis
of market share and growth rate of SBUs.

10-34
Corporate Portfolio Analysis
• Corporate Portfolio Analysis
− When an organization’s corporate strategy
involves a number of businesses, managers
can manage this collection or portfolio of
business by using a corporate portfolio matrix
− The first portfolio matrix developed by the
Boston Consulting Group (BCG matrix)
− Organizations business can be evaluated in a
2x2 matrix to identify which ones offer high
potential and which are a drain on
organization’s resources
10-35
Exhibit 9-4: BCG Matrix

10-36
− Cash Cows: low growth, high market share
− Generate large amount of cash but prospects of future
growth are limited
− Strategic implication: milk cash cows, limit new investment
in them, use the money generated in Stars and Question
Marks
− Stars: high growth, high market share
− Their contribution to cash flow depends on their need for
resources
− Strategic implication: heavy investment in Stars will help
take advantage of market growth and maintain high market
share
− Stars will eventually develop into cash cows as their
market mature and growth
Copyright slows
© 2012 Pearson Education,
10-37
− Question Mark: high growth, low market share
− Business in attractive industry but holds low market share
− Strategic implication: hard decision for managers – need
careful analysis
− Some will be sold-off, some will become Stars
− Dogs: low growth, low market share
− Business in this category do not produce or consume much
cash. No promise for improved performance
− Strategic implication: should be sold-off or liquidated
− BCG very useful strategic management tool. Provides a
framework for understanding diverse business and help
managers establish priorities for resource allocation
decisions
10-38
Five Competitive Forces
• Many important ideas in strategic management
have come from the work of Michael Porter.
• Porter’s Five Forces Model – Industry analysis
based on five competitive forces
• In any industry, five competitive forces dictate
the rules of competition.
• Together, these five forces determine industry
attractiveness and profitability, which managers
assess using these five factors:

10-39
Exhibit 9-5: Five Forces Model

10-40
• Threat of New Entrants
– The ease or difficulty with which new competitors
can enter an industry
• Threat of Substitutes
– The extent to which switching costs and brand
loyalty affect the likelihood of customers adopting
substitute products and services
• Bargaining Power of Buyers
– The degree to which buyers have the market
strength to hold sway over and influence
competitors in an industry

10-41
• Bargaining Power of Suppliers
– The relative number of buyers to suppliers
and threats from substitutes and new entrants
affect the buyer-supplier relationship.
• Current Rivalry
– Intensity among rivals increases when
industry growth rates slow, demand falls, and
product prices descend.
• Once managers assess the five forces and
determined what threats and opportunities exists,
they are ready to select the appropriate competitive
strategy Copyright © 2012 Pearson Education,
10-42
Types of Competitive Strategies
− Porter proposes that managers select a

strategy that will give the organization a
competitive advantage, which arises out of
either having lower cost than all other
competitors or by being significantly
different from competitors
− On that basis, managers can choose one
of three strategies

10-43
Types of Competitive Strategies
– Cost Leadership Strategy

• Seeking to attain the lowest total overall costs
relative to other industry competitors
– Differentiation Strategy
• Attempting to create a unique and distinctive
product or service for which customers will pay a
premium
– Focus Strategy
• Using a cost or differentiation advantage to exploit
a particular market segment as opposed to a larger
market Copyright © 2012 Pearson Education,
10-44
What is a Functional Strategy?
• Functional strategy -
the strategies used by
an organization’s various
functional departments
to support the
competitive strategy.
 Creates an appropriate
supporting role for each
functional area of the
organization. Eg.
Manufacturing, marketing,
finance, etc.
10-45
The Need for Strategic Flexibility
• Strategic flexibility -
the ability to
recognize major
external changes, to
quickly commit
resources, and to
recognize when a
strategic decision was
a mistake.

10-46

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Strategic

• Define strategic management and explain why

Copyright © 2012 Pearson Education, 10-2

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

1. It results in higher organizational

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education, 10 10-10

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

– Analyzing financial and physical assets is fairly easy, but

• Steps 2 and 3 combined are called a SWOT analysis.

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

Copyright © 2012 Pearson Education,

− Porter proposes that managers select a

Copyright © 2012 Pearson Education,

– Cost Leadership Strategy

Copyright © 2012 Pearson Education,

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