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					Chapter 1
The Nature of Strategic Management



    Strategic Management:
      Concepts & Cases
          12th Edition
          Fred David




Copyright © 2009 Pearson Education, Inc.   Ch 1 -1
Publishing as Prentice Hall
  Themes in the Text
      • Global Considerations –
     impact virtually all strategic decisions

      • E-commerce –
        vital strategic management tool
      • Natural Environment –
     important strategic issue



Copyright © 2009 Pearson Education, Inc.        Ch 1 -2
Publishing as Prentice Hall
 Strategic Management –
 Defined


    Art & science of formulating,
    implementing, and evaluating, cross-
    functional decisions that enable an
    organization to achieve its objectives



Copyright © 2009 Pearson Education, Inc.   Ch 1 -3
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 Strategic Management




 In essence, the strategic plan is a company’s
 game plan.




Copyright © 2009 Pearson Education, Inc.    Ch 1 -4
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 Strategic management
 achieves a firm’s success
 through integration ––


                    Management                  Marketing

               Finance/Accounting          Production/Operations

            Research & Development                 MIS




Copyright © 2009 Pearson Education, Inc.                           Ch 1 -5
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        Strategy Formulation

                                                  Vision & Mission

                                           External Opportunities & Threats

                                           Internal Strengths & Weaknesses

                                                Long-Term Objectives

                                                Alternative Strategies

                                                  Strategy Selection




Copyright © 2009 Pearson Education, Inc.                                      Ch 1 -6
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Issues in Strategy
Formulation

                                   • New business
                                     opportunities
                                   • Businesses to abandon
                                   • Allocation of resources
                                   • Expansion or
                                     diversification
                                   • International markets
                                   • Mergers or joint ventures
                                   • Avoidance of hostile
                                     takeover




Copyright © 2009 Pearson Education, Inc.                         Ch 1 -7
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       Strategy Implementation



                                            Annual Objectives


                                                Policies


                                           Employee Motivation


                                           Resource Allocation




Copyright © 2009 Pearson Education, Inc.                         Ch 1 -8
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Strategy
Implementation

                                    Action Stage of Strategic
                                    Management

                                     • Most difficult stage
                                     • Mobilization of
                                       employees & managers
                                     • Interpersonal skills
                                       critical
                                     • Consensus on goal
                                       pursuit




Copyright © 2009 Pearson Education, Inc.                        Ch 1 -9
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           Strategy Evaluation



                                             Internal Review


                                             External Review


                                           Performance Metrics


                                           Corrective Actions




Copyright © 2009 Pearson Education, Inc.                         Ch 1 -10
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Strategy
Evaluation
                               Final Stage of Strategic
                               Management

                                • Subject to future
                                  modification
                                • Today’s success no
                                  guarantee of future
                                  success
                                • New & different problems
                                • Complacency leads to
                                  demise




Copyright © 2009 Pearson Education, Inc.                     Ch 1 -11
Publishing as Prentice Hall
 Prime Task of
 Strategic Management


    Peter Drucker: Think through the
    overall mission of a business. Ask the
    key question: “What is our
    Business?”



Copyright © 2009 Pearson Education, Inc.   Ch 1 -12
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 Integrating Intuition &
 Analysis



  The strategic management process attempts
  to organize quantitative and qualitative
  information under conditions of uncertainty.




Copyright © 2009 Pearson Education, Inc.    Ch 1 -13
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 Integrating Intuition &
 Analysis

  Intuition is based on:
   • Past experiences
   • Judgment
   • Feelings



  Intuition is useful for decision making in:
   • Conditions of great uncertainty
   • Conditions with little precedent




Copyright © 2009 Pearson Education, Inc.        Ch 1 -14
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 Integrating Intuition &
 Analysis

         Intuition & Judgment



                   Involve management at all levels



                          Influence all analyses




Copyright © 2009 Pearson Education, Inc.              Ch 1 -15
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 Integrating Intuition &
 Analysis

                            Analytical Thinking




                               Intuitive Thinking




Copyright © 2009 Pearson Education, Inc.            Ch 1 -16
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 Adapting to Change



   Organizations must monitor events
         o   Ongoing process
         o   Internal and external events
         o   Timely changes




Copyright © 2009 Pearson Education, Inc.    Ch 1 -17
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 Strategic Management is
 Gaining and Maintaining
 Competitive Advantage



   “Anything that a firm does especially
   well compared to rival firms”




Copyright © 2009 Pearson Education, Inc.   Ch 1 -18
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 Achieving Sustained
 Competitive Advantage

   1. Adapting to change in external trends,
   internal capabilities, and resources


   2. Effectively formulating, implementing, and
   evaluating strategies



Copyright © 2009 Pearson Education, Inc.           Ch 1 -19
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 Adapting to Change


   Rate & magnitude of change increasing
   dramatically
                                      E-commerce

                                    Demographics


                                       Technology

Copyright © 2009 Pearson Education, Inc.            Ch 1 -20
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 Adapting to Change


   Effective Adaptation


              Requires long-term focus




Copyright © 2009 Pearson Education, Inc.   Ch 1 -21
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 Adapting to Change – Key
 Strategic Management
 Questions

       • What kind of business should
         we become?
       • Are we in the right fields?
       • Are there new competitors?
       • What strategies should we
         pursue?
       • How are our customers
         changing?

Copyright © 2009 Pearson Education, Inc.   Ch 1 -22
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  Key Terms

 Strategists – Firm’s success/failure


       Various Job Titles:
        • Chief Executive Officer (CEO)
        • Chief Strategy Officer (CSO)
        • President
        • Owner
        • Board Chair
        • Executive Director

Copyright © 2009 Pearson Education, Inc.   Ch 1 -23
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 Key Terms


    Vision Statement –
    What do we want to become?


    Mission Statement –
    What is our business?


Copyright © 2009 Pearson Education, Inc.   Ch 1 -24
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 Key Terms


  Opportunities & Threats (External)



      • Largely beyond the control of a single
        organization




Copyright © 2009 Pearson Education, Inc.         Ch 1 -25
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 Key Terms

    Opportunities & Threats (External)
    Analysis of Trends:
     • Economic
     • Social
     • Cultural
     • Demographic/Environmental
     • Political, Legal, Governmental
     • Technological
     • Competitors




Copyright © 2009 Pearson Education, Inc.   Ch 1 -26
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 Key Terms
 Opportunities & Threats


  Environmental Scanning (Industry Analysis)



  • Process of conducting research and gathering
    and assimilating external information




Copyright © 2009 Pearson Education, Inc.     Ch 1 -27
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 Key Terms
 Opportunities & Threats

  Basic Tenet of Strategic Management

                                           Take advantage of
                                             External Opportunities

             Strategy Formulation



                                           Avoid/minimize impact of
                                                External Threats


Copyright © 2009 Pearson Education, Inc.                        Ch 1 -28
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 Key Terms


   Strengths & Weaknesses (Internal)


     • Controllable activities performed especially
       well or poorly




Copyright © 2009 Pearson Education, Inc.          Ch 1 -29
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 Key Terms

    Strengths & Weaknesses (Internal)

   Typically located in functional areas of the firm
    • Management
    • Marketing
    • Finance/Accounting
    • Production/Operations
    • Research & Development
    • Computer Information Systems




Copyright © 2009 Pearson Education, Inc.               Ch 1 -30
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 Key Terms
 Strengths & Weaknesses
  Assessing the Internal Environment

                                             Financial Ratios


                                           Performance Metrics
            Internal Factors
                                            Industry Averages


                                              Survey Data


Copyright © 2009 Pearson Education, Inc.                         Ch 1 -31
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 Key Terms


  Long-term Objectives



      • Mission-driven pursuit of specified results
        more than one year out




Copyright © 2009 Pearson Education, Inc.              Ch 1 -32
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 Key Terms

    Long-term Objectives

   Essential for ensuring the firm’s success
    • Provide direction
    • Aid in evaluation
    • Create synergy
    • Focus coordination
    • Basis for planning, motivating, and
      controlling




Copyright © 2009 Pearson Education, Inc.       Ch 1 -33
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 Key Terms


  Strategies


      • Means by which long-term objectives are
        achieved




Copyright © 2009 Pearson Education, Inc.          Ch 1 -34
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 Key Terms

    Strategies
      Some Examples
       • Geographic expansion
       • Diversification
       • Acquisition
       • Market penetration
       • Retrenchment
       • Liquidation
       • Joint venture




Copyright © 2009 Pearson Education, Inc.   Ch 1 -35
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 Key Terms


  Annual Objectives


      • Short-term milestones that firms must
        achieve to attain long-term objectives




Copyright © 2009 Pearson Education, Inc.         Ch 1 -36
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 Key Terms


  Policies


      • Means by which annual objectives will be
        achieved




Copyright © 2009 Pearson Education, Inc.           Ch 1 -37
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Example Strategies in Action in 2007
                             McDonald’s Corp
The world’s largest restaurant chain by number of outlets, Big Mac is
doing fantastic both in the United States and abroad. In past months,
McDonald’s began opening drive-through restaurants in China, closed 25
sites in the United Kingdom, and disposed of a supply-chain operation in
Russia. Big Mac in 2007 opened 800 new restaurants in China, Japan,
and Russia. Shares of McDonald’s stock increased 42 percent in 2006 as
sales for the year eclipsed $41 billion. Big Mac is working to eliminate
trans fats from their food (New York City is requiring this of all restaurants
in 2007). McDonald’s plans in 2008 to turn ownership of about 2,300
restaurants in Canada and the United Kingdom over to licensees.




Copyright © 2009 Pearson Education, Inc.                              Ch 1 -38
Publishing as Prentice Hall
Example Strategies in Action in 2007
                             American General
A Fortune 500 company based in Piscataway, New Jersey, American
General split into three businesses in 2007: Air-conditioning systems,
Bath-and-kitchen business, and vehicle-control systems. The firm also
is renaming itself Trane, after its flagship air-conditioning brand name.
The company plans to divest the bath-and-kitchen division and to spin
off its vehicle control division into a publicly traded company named
Wabco. Led by CEO Fred Poses, American General employs about
62,000 persons and has manufacturing operations in 28 countries.




Copyright © 2009 Pearson Education, Inc.                             Ch 1 -39
Publishing as Prentice Hall
 Figure 1.1 Comprehensive Strategic-Management Model

              External
               Audit




              Chapter
                3
                          Long-                  Implemen     Implemen     Measure
                          Term       Generate,         t            t          &
                         Objective   Evaluate,    Strategie    Strategie   Evaluate
 Vision
                             s        Select          s:           s:      Performa
    &
                                     Strategie      Mgmt      Marketing      nce
 Mission
                                         s         Issues           ,
                                                               Fin/Acct,
                                      Chapter                  R&D, CIS
Chapter 2                Chapter                 Chapter      Chapter      Chapter
                                        6
                           5                       7            8            9
              Internal
               Audit




              Chapter
                4


Copyright © 2009 Pearson Education, Inc.                                   Ch 1 -40
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 Strategic Management Model


  Strategic Management Process


      • Dynamic & continuous
      • More formal in larger organizations




Copyright © 2009 Pearson Education, Inc.      Ch 1 -41
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 Strategic Management Model

    1.   Identify Existing

         •   Vision
         •   Mission
         •   Objectives
         •   Strategies




Copyright © 2009 Pearson Education, Inc.   Ch 1 -42
Publishing as Prentice Hall
 Strategic Management Model


     1.Audit external environment
     2.Audit internal environment
     3.Establish long-term objectives
     4.Generate, evaluate, and select strategies
     5.Implement selected strategies
     6.Measure & evaluate performance




Copyright © 2009 Pearson Education, Inc.      Ch 1 -43
Publishing as Prentice Hall
 Benefits of Strategic
 Management

  • Proactive in shaping firm’s future
  • Initiate and influence firm’s activities
  • Formulate better strategies
      o   Systematic, logical, rational




Copyright © 2009 Pearson Education, Inc.       Ch 1 -44
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 Benefits of Strategic
 Management

Financial Benefits

     • Improvement in sales
     • Improvement in profitability
     • Productivity improvement




Copyright © 2009 Pearson Education, Inc.   Ch 1 -45
Publishing as Prentice Hall
 Benefits of Strategic
 Management

Nonfinancial Benefits

   • Improved understanding of competitors’
     strategies
   • Enhanced awareness of threats
   • Reduced resistance to change
   • Enhanced problem-prevention capabilities



Copyright © 2009 Pearson Education, Inc.        Ch 1 -46
Publishing as Prentice Hall
 Benefits of Strategic
 Management (Greenley)

  1.Identification of opportunities
  2.Objective view of management problems
  3.Improved coordination & control
  4.Minimizes adverse conditions & changes
  5.Decisions that better support objectives




Copyright © 2009 Pearson Education, Inc.       Ch 1 -47
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 Benefits of Strategic
 Management (Greenley – cont’d)

  1.Effective allocation of time & resources
  2.Internal communication among personnel
  3.Integration of individual behaviors
  4.Clarify individual responsibilities
  5.Encourage forward thinking




Copyright © 2009 Pearson Education, Inc.   Ch 1 -48
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 Benefits of Strategic
 Management (Greenley – cont’d)



     11. Encourages favorable attitude toward
     change
     12. Provides discipline and formality to the
     management of the business




Copyright © 2009 Pearson Education, Inc.       Ch 1 -49
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 Why Some Firms Do No
 Strategic Planning

  •   Poor reward structures
  •   Fire-fighting
  •   Waste of time
  •   Too expensive
  •   Laziness
  •   Content with success




Copyright © 2009 Pearson Education, Inc.   Ch 1 -50
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 Why Some Firms Do No
 Strategic Planning

  •   Fear of failure
  •   Overconfidence
  •   Prior bad experience
  •   Self-interest
  •   Fear of the unknown
  •   Suspicion




Copyright © 2009 Pearson Education, Inc.   Ch 1 -51
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 Business Ethics & Strategic
 Management


  Business ethics defined –


      • Principles of conduct within organizations
        that guide decision making and behavior




Copyright © 2009 Pearson Education, Inc.             Ch 1 -52
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 Business Ethics & Strategic
 Management


  Good business ethics –


      • Prerequisite for good strategic management




Copyright © 2009 Pearson Education, Inc.        Ch 1 -53
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 Business Ethics & Strategic
 Management


  Code of business ethics –


      • Provides basis on which policies can be
        devised to guide daily behavior and
        decisions in the workplace


Copyright © 2009 Pearson Education, Inc.          Ch 1 -54
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 Business Ethics & Strategic
 Management

  Business practices always considered unethical –


       •   Misleading advertising
       •   Misleading labeling
       •   Harm to the environment
       •   Insider trading
       •   Dumping flawed products on foreign markets
       •   Poor product or service safety
       •   Padding expense accounts

Copyright © 2009 Pearson Education, Inc.            Ch 1 -55
Publishing as Prentice Hall
Natural Environment Perspective
Using ISO 14000 Certification to Gain Strategic Advantage

 • What are ISO 14000 & 14001?
 • Requirements for ISO 14001
 • Environmental Management
   Systems (EMS)




Copyright © 2009 Pearson Education, Inc.            Ch 1 -56
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 The Nature of Global
 Competition

  International/multinational corporations


       • Parent company
       • Host country




Copyright © 2009 Pearson Education, Inc.     Ch 1 -57
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 The Nature of Global
 Competition

  Strategy implementation may be difficult


       • Cultural differences
            o   Norms
            o   Values
            o   Work ethic




Copyright © 2009 Pearson Education, Inc.     Ch 1 -58
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 Advantages of International
 Operations


 •   Absorb excess capacity
 •   Reduce unit costs
 •   Spread risk over wider markets
 •   Low-cost production facilities




Copyright © 2009 Pearson Education, Inc.   Ch 1 -59
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 Advantages of International
 Operations (cont’d)



 • Less intense competition
 • Lower taxes
 • Economies of scale




Copyright © 2009 Pearson Education, Inc.   Ch 1 -60
Publishing as Prentice Hall
 Disadvantages of International
 Operations



 •   Difficult communications
 •   Underestimate foreign competition
 •   Cultural barriers to effective management
 •   Complications arising from currency
     differences



Copyright © 2009 Pearson Education, Inc.         Ch 1 -61
Publishing as Prentice Hall
      All rights reserved. No part of this publication may be reproduced, stored in a
         retrieval system, or transmitted, in any form or by any means, electronic,
       mechanical, photocopying, recording, or otherwise, without the prior written
            permission of the publisher. Printed in the United States of America.




Copyright © 2009 Pearson Education, Inc.                                           Ch 1 -62
Publishing as Prentice Hall

				
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