Chapter 1

BASIC CONCEPTS OF STRATEGIC MANAGEMENT

Strategic management

- is the set of managerial decisions and actions that determines the long-run
performance of a corporation

Business policy

- has general management orientation and tends primarily to look inward with
its concern for properly integrating the corporation’s many functional
activities

Phases of strategic Management:

1. Phase 1. Basic Financial Planning – managers initiate serious planning when they are
requested to propose next year’s budget.
2. Phase 2. Forecast-based Planning – as annual budgets become less useful at stimulating
long-term planning, managers attempt to propose five-year plans.
3. Phase 3. Externally Oriented Planning (strategic Planning) – frustrated with highly
political, yet ineffectual five-year plans, top management takes control of the planning
process by initiating strategic planning.
4. Phase 4. Strategic Management – realizing that even the best strategic plans are
worthless without the input and commitment of lower level managers, top management
forms planning groups of managers and key employees at many levels from various
departments and work groups.

Benefits of strategic management:

1. Clearer sense of strategic vision for the firm.

2. Sharper focus on what is strategically important.
3. Improved understanding of a rapid changing environment.

Globalization and Electronic Commerce: Challenge to strategic Management

The internet may have been useful for research, but until recently it was not seriously viewed as
a means to actually conduct normal business transactions.

Impact of Globalization

Globalization
 - The internationalization of markets and corporations has changed the way
modern corporations do business.

Impact of Electronic commerce

Electronic commerce

- refers to the use of internet to conduct business transactions

Seven trends to the rise of the internet:

1. The internet is forcing companies to transform themselves.

2. New network channels are changing market access and branding, causing
disintermediation (breaking down) of traditional distribution channels.
3. The balance of power is shifting to the customer.
4. Competition is changing.
5. The pace of business is increasing drastically.
6. The internet is pushing corporations out of their traditional boundaries.
7. Knowledge is becoming a key asset and a source of competitive advantage.

Theories of organizational adaptation

A. Theory of population ecology – proposes that once an organization successfully

established in a particular environmental niche, it is unable to adapt to changing
conditions.
B. Institution theory – proposes that organizations can and do adapt to changing
conditions by imitating other successful organizations.
C. Strategic choice perspective – goes one step further by proposing that not only do
organizations adapt to a changing environment, but also have the opportunity and
power to reshape their environment.
D. Organizational learning theory – adjust defensively to a changing environment and use
knowledge

Creating a learning organization

Strategic management has now evolved to the point that its primary value is in helping the
organization operate successfully in a dynamic and complex environment.

Strategic flexibility

- Demands a long-term commitment to the development and nurturing of

critical resources.
 Organizational learning

- Is a critical component of competitiveness in a dynamic environment.

Four skills of learning organizations:

1. Solving problems systematically

2. Experimenting new approaches
3. Learning from their own experiences and past history as well as from the experiences of
others.
4. Transferring knowledge quickly and efficiently throughout the organization.

Organizations that are willing to experiment and are able to learn from their experiences are
more successful than those that do not.

Basic model of strategic management

Four basic elements of strategic management:

1. Environmental scanning
2. Strategy formulation
3. Strategy implementation
4. Evaluation and control
A. Environmental scanning
- Is the monitoring of information from the external and internal; environments
to key people within the corporation.
- Its purpose is to identify strategic factors – those external and internal
elements that will determine the future of the corporation.

Basic elements of the strategic management process:

Environmental Strategy Strategy Evaluation and

Scanning Formulation Implementation Control

Feedback

Internal Environment
- Consists of variables that are within the organization itself and are not usually
within the short-run control of top management.
B. Strategy Formulation
- Is the development of long-range plans for the effective management of
environmental opportunities and threats, in light of corporate strengths and
weaknesses.

Mission

- Is the purpose or reason for the organization’s existence.

- A statement that describe the present condition of the organization.

Vision

- A statement that describe the organization in the future.

Broad Mission

- Is a statement that is used by many corporations.

Narrow mission

- Very clearly states the organization’s primary business.

Objectives

- Is the end result of planned activity.

Goal

- Is an open-ended statement of what one wants to accomplish with no

qualification of what is to be achieved and no time criteria for completion.

Some areas in which the corporation might establish its goals and objectives:

1. Profitability
2. Efficiency
3. Growth
4. Shareholder wealth
5. Utilization of resources
6. Reputation
7. Contributions to employees
8. Contributions to society
9. Market leadership
10. Technological leadership
11. Survival
 12. Personal needs of top management

Strategies

- Form a comprehensive master plan stating how the corporation will achieve
its mission and objectives.

Three types of strategy:

1. Corporate strategy – describes a company’s overall direction in terms of its general

attitude toward growth and the management of its various business and product lines.
2. Business strategy – usually occurs at the business unit or product level, and it emphasizes
improvement of the competitive position of a corporation’s products or services in the
specific industry or market segment served by that business unit.
3. Functional strategy – is the approach taken by a functional area to achieve corporate and
business unit objectives and strategies by maximizing resources productivity.

Hierarchy strategy

Is the grouping of strategy types by level in the organization.

- Is a nesting of one strategy within another so that they complement and
support one another.

Policies

- Are broad guidelines for decision making that links the formulation of
strategy with its implementation.
C. Strategy implementation
- Is the process by which strategies and policies are put into action through
the development of programs, budgets, and procedures.

Program

- Is a statement of the activities or steps needed to accomplish single-use plan.

Budget

- is a statement of a corporation’s programs in terms of dollars.

Procedures/Standard Operating Procedures (SOP)

- Are systems of sequential steps or techniques that describe in detail how a

particular task or job is to be done.
Evaluation and control

- Is the process in which corporate activities and performance results are

monitored so that actual performance can be compared with desired
performance.

Performance

- Is the end result of activities.

Feedback or learning process

- It is the reaction of the organization from what was implemented.

Initiation of strategy: triggering events

Triggering events

- Is something that acts for a change in strategy.

Some possible triggering events:

1. New CEO
2. External Intervention
3. Threat of a change in Ownership
4. Performance Gap
5. Strategic Inflection Point

Strategic Decision Making

What makes decision strategic?

1. Rare – decisions are unusual and typically have no precedent to follow.

2. Consequential – strategic decision commits substantial resources and demand a great
deal of commitment from people at all levels.
3. Directive – strategic decisions set precedents for lesser decisions and future actions
throughout the organization.

Mintzberg’s modes of strategic decision making:

a. Entrepreneurial mode – strategy is made by one powerful individual.

b. Adaptive mode/muddling through – is characterized by reactive solutions to existing
problems rather than a proactive search for new opportunities.
 c. Planning mode – involves the systematic gathering of appropriate information for
situation analysis, the generation of feasible alternative strategies, and the rational
selection of most appropriate strategy.
d. Logical incrementalism – top management has a reasonably clear idea of the
corporation’s mission and objectives, but, in its development of strategies it chooses to
use an interactive process in which the organization probes the future, experiments and
learn from a series of partial commitments rather than through global formulations of
total strategies.

Strategic decision-making process: aid to better decisions

Eight-step decision-making process:

1. Evaluate current performance results in terms of (a) return on investment, profitability,

and so forth, and (b) the current mission, objectives, strategies, and policies.
2. Review corporate governance, that is, the performance or the firm’s board of directors
and top management.
3. Scan and asses the external the environment to determine the strategic factors that pose
opportunities and threats.
4. Scan and asses the internal corporate environment to determine the strategic factors
that are strengths and weaknesses.
5. Analyze strategic factors to (a) pinpoint problem areas, and (b) review and revise the
corporate mission and objectives as necessary.
6. Generate, evaluate, and select the best alternative strategy in light of the analysis
conducted in step 5.
7. Implement selected strategies via programs, budgets, and procedures.
8. Evaluate implemented strategies via feedback systems and control of activities to ensure
their minimum deviation from plans.