chapter 1 introduction: a model of strategic management copyright © 1999 by harcourt brace &...

Chapter 1Chapter 1

Introduction: A Model of Introduction: A Model of Strategic ManagementStrategic Management

Chapter 1Chapter 1

Introduction: A Model of Introduction: A Model of Strategic ManagementStrategic Management

Copyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

Describe the dynamic characteristics of the business environments in which general managers must formulate and implement strategies.

Define the concept of strategy. Describe how the study of strategic management is

unique and what makes strategy and strategic management “strategic.”

Define and illustrate the concept of mental models.


Chapter Objectives Chapter Objectives (cont.)(cont.)Chapter Objectives Chapter Objectives (cont.)(cont.)

Describe how managerial thinking influences strategic decisionmaking and firm performance outcomes.

Provide a model of strategic management that will serve as an organizing framework for this book.


Competitive Competitive Landscape of the Landscape of the 1990s1990s

Competitive Competitive Landscape of the Landscape of the 1990s1990s

Rapid Rate of Change Consumer demographics Tastes and preferences Nature of products and services Technologies “High-velocity environments,” such as PCs.

• Managers must react quickly to changes in industry environments.

– IBM and Sears examples of companies who did not react fast enough.


Competitive Competitive Landscape of the Landscape of the 1990s 1990s (cont.)(cont.)


Traditional boundaries around markets, nations, and companies are being redrawn. Deregulation in many markets causes profound

changes in these industries. Nearly all U.S. firms now realize that they compete

in global markets against many foreign competitors.

Companies are being re-engineered.• Outsourcing becoming more popular.




Continued fragmentation of societies. Advertising on network TV may not reach

majority of population -- cable TV has drawn customers away from the networks.

Companies must now be very responsive to institutional investors. Mutual funds and pension/retirement funds have

huge investments in the stock of today’s companies.




• Results in growing shift toward greater concentration of corporate ownership and how managers respond to short-term and long-term priorities.

• Institutional investors have begun to demand consistently high levels of performance from companies.

SeeExhibit

1.1




Products and services are increasingly knowledge-intensive. Importance of raw materials and labor has become

almost trivial in most manufactured products. Shift towards more costs allocated to technological

knowledge embedded in developing these products, as well as the highly specialized equipment that is required to fabricate the finished product.




Shift in relative importance of “fixed” versus “human” capital. Growing importance of human capital.

• Much more important role for human resource in recruitment, training, motivation, and retention of human capital.

Consequences and implications New challenges which complicate strategic management.

• Managers must anticipate and respond quickly to industry changes.


The Field of StrategyThe Field of StrategyThe Field of StrategyThe Field of Strategy

How managers formulate and implement strategies that lead to sustained competitive advantage. The reason why some firms enjoy higher levels of

performance than their rivals. Level of analysis of strategic management -- see

Exhibit 1.2 on following slide. Task of general managers is knowledge-intensive job

in which they use information gleaned from experience and other sources to make key -- strategic -- decisions.


Exhibit 1.2:Exhibit 1.2: Strategy’s Strategy’s Level of Analysis Is Level of Analysis Is UniqueUnique

Exhibit 1.2:Exhibit 1.2: Strategy’s Strategy’s Level of Analysis Is Level of Analysis Is UniqueUnique

Field of Study Macroeconomics Microeconomics Strategy Finance Marketing Organizational behavior Operations management

Level of Analysis

The economy Industries & markets Firms & businesses Investment projects Products & services Individuals Plants


Strategy: A Pattern in Strategy: A Pattern in a Stream of Decisionsa Stream of DecisionsStrategy: A Pattern in Strategy: A Pattern in a Stream of Decisionsa Stream of Decisions

Must understand managerial decision making and how managers’ decisions affect the performance of firms and businesses. Strategies emerge over time as decisions

accumulate to form coherent recognizable patterns of action.

• Different from conventional “grand plan” view.– Strategies emerge after careful analyses of competitive

environments and organizational capabilities.


Strategy: A Pattern in a Strategy: A Pattern in a Stream of Decisions Stream of Decisions (cont.)(cont.)


“Unrealized strategies” and the “emergent” nature of business strategies. Many intended plans do not get implemented --

they become “unrealized strategies.”• Plans are simply poorly conceived or inappropriate.

• Problems will arise that prevent implementation.

• Often, the task of dealing with day-to-day issues and crises prevents managers from implementing their plans.




Second, one must acknowledge that many strategies emerge without ever being part of a formal plan.

• New issues arise frequently and quite unexpectedly.– Competitor lowers prices.

– Rival’s new marketing strategy negatively impact your company’s sales.

– New products are introduced by other firms.

• New strategies emerge as patterns develop in streams of decision making.

See Exhibit 1.3


Exhibit 1.3:Exhibit 1.3: Strategy Strategy Formulation as a Product of Formulation as a Product of Intended & Emergent Intended & Emergent ProcessesProcesses

Exhibit 1.3:Exhibit 1.3: Strategy Strategy Formulation as a Product of Formulation as a Product of Intended & Emergent Intended & Emergent ProcessesProcesses

Intended Strategy:"The Plan"

Deliberate Strategy

Realized Strategy

Unrealized Strategy

Emergent Strategy




Some illustrations Honda entering U.S. motorcycle market in 1960s and 70s.

• Honda admitted that they “…had no strategy other than the idea of seeing if we could sell something in the United States.”

General Mills’ cereal business (see Exhibit 1.4 (A) and (B) on the following slides).

• Announced strategy of maintaining premium pricing with coupons.

– Pursued pricing strategy, but only 2% of coupons were redeemed by consumers.


Exhibit 1.4 (A):Exhibit 1.4 (A): Strategy Strategy Formulation Activities at Formulation Activities at General Mills’ Cereal General Mills’ Cereal BusinessBusiness

Exhibit 1.4 (A):Exhibit 1.4 (A): Strategy Strategy Formulation Activities at Formulation Activities at General Mills’ Cereal General Mills’ Cereal BusinessBusiness

IntendedStrategy:"The Plan"

+ Maintain premium

prices

+ Couponing

Deliberate Strategy

Realized Strategy

Unrealized Strategy

Emergent Strategy


Exhibit 1.4 (B):Exhibit 1.4 (B): Strategy Strategy Formulation Activities at Formulation Activities at General Mills’ Cereal BusinessGeneral Mills’ Cereal Business

Exhibit 1.4 (B):Exhibit 1.4 (B): Strategy Strategy Formulation Activities at Formulation Activities at General Mills’ Cereal BusinessGeneral Mills’ Cereal Business

IntendedStrategy:"The Plan"

+ Maintain premium

prices

+ Couponing

Deliberate Strategy+ Maintain

premium prices

Realized Strategy

+ Premium

prices

+ Lower market

share

Unrealized Strategy

+ Couponing

Emergent Strategy

+ Store brands,

generics


What Makes Strategic What Makes Strategic Management Management ““Strategic?”Strategic?”

What Makes Strategic What Makes Strategic Management Management ““Strategic?”Strategic?”

Strategic decisions have the potential to affect the health or direction of a business in a profound way: Strategic decisions are important. Strategic decisions involve significant reallocations

of resources. Strategic decisions tend to involve more than one

functional department. Strategic decisions are not tactical decisions, which

are made on routine corporate matters.


Managerial ThinkingManagerial ThinkingManagerial ThinkingManagerial Thinking According to conventional approaches to strategic

management. Firm performance is largely a function of industry structure. Firms operating in less competitive industries will

enjoy higher performance than firms operating in highly competitive environments.

This course emphasizes that managerial thinking is the result of their mental models: Deeply ingrained assumptions, generalizations, or

even pictures that influence how they understand the world and how they take action.


Managerial ThinkingManagerial Thinking (cont.)(cont.)Managerial ThinkingManagerial Thinking (cont.)(cont.)

Mental models tell us what is and is not important to us, what we like and do not like, what we should and should not notice.

Managerial thinking -- contained in managers’ mental models -- influences strategic decision making and the actions firms take.

See Exhibit 1.5 on next slide.


Exhibit 1.5:Exhibit 1.5: Relationships Relationships among Managers’ Mental among Managers’ Mental Models, Decision Making, Models, Decision Making, Strategies, and Performance Strategies, and Performance OutcomesOutcomes

Exhibit 1.5:Exhibit 1.5: Relationships Relationships among Managers’ Mental among Managers’ Mental Models, Decision Making, Models, Decision Making, Strategies, and Performance Strategies, and Performance OutcomesOutcomes

MentalModels

DecisionMaking

StrategiesPerformance

Outcomes

Feedbackreinforces or suggestschanges in managers'

mental models


A Model of Strategic A Model of Strategic ManagementManagementA Model of Strategic A Model of Strategic ManagementManagement

See Exhibits 1.6 and 1.7 on following slides. This course will focus on four types of mental

models and decisions: Mental models about industry environments and

how these beliefs influence decisions about business definition and positioning (chapters 4, 5, and 6).

Beliefs about how to compete and how these mental models influence decisions about business strategy (chapters 7 and 8).


A Model of Strategic A Model of Strategic Management Management (cont.)(cont.)


Types of mental models and decisions (cont.): Beliefs about the appropriate scale and scope of the

business enterprise, beliefs about how firms’ businesses are related, and beliefs about how diversification should be managed and how these mental models influence decisions about corporate strategy (chapter 9).

Beliefs about how to organize and how these mental models influence decisions about organizational structure (chapter 10).


Exhibit 1.6:Exhibit 1.6: Model of Model of Strategic ManagementStrategic ManagementExhibit 1.6:Exhibit 1.6: Model of Model of Strategic ManagementStrategic Management

Feedbackreinforces or

suggests changes

in managers'

mental models

Managers' Mental Models

+ Industry environments + How to compete + Appropriate size/diversity, how businesses are related, how diversification should be managed + How to organize

Decisions about

Business Definition

Decisions about

Organizational

Structure

Decisions about

Business Strategy

Decisions about

Corporate Strategy

and Diversification

Market Position,

Resources, and

Capabilities

Performance

and

Competitive

Advantage


Tech

nolo

gi

es

Business

Strategy

Capabilities

How toCom

pete

Busi

nes

s

Defi

nitio

n

The

Indust

ry

Siz

e an

d

Div

ersi

fica

tio

nCor

por

ate

Stra

teg

y

Organizational

StructureHow toOrganize

Cu

stom

er

s

Products & Services

The Firm

The Industry orCompetitive Environment

Managers’Mental Models

Exhibit 1.7




This course will look at general managers and the task of building competitive advantage (chapters 2 and 3).

Course concludes with a look at the problem of organizational responsiveness (chapters 11 and 12).


Three Key Themes for Three Key Themes for this Bookthis BookThree Key Themes for Three Key Themes for this Bookthis Book

Managers and managerial thinking. We must understand the thinking that causes

managers to make a particular set of decisions rather some other set of decisions.

Change and the need to think dynamically about strategic management. Today's strategies will be ineffective in the future --

due to the changing nature of industries and competitive environments.


Three Key Themes for Three Key Themes for this Book this Book (cont.)(cont.)

Three Key Themes for Three Key Themes for this Book this Book (cont.)(cont.)

Importance of organizational learning. As the business world becomes increasingly

knowledge-intensive, the ability to learn, store, retrieve, and exploit new knowledge and information will become a key source of sustained competitive advantage.


A Look AheadA Look AheadA Look AheadA Look Ahead

Model of strategic management in Exhibits 1.6 and 1.7 explains many business situations of today, including the erratic performance of two very large American companies who failed to keep pace with changing business environments: General Motors

• Market share dropped from 50+% in 1980 to just over 30% by end of 1980s.

– GM’s cars became dated.– It fell behind technologically and lost its manufacturing

competitive advantage.


A Look Ahead A Look Ahead (cont.)(cont.)A Look Ahead A Look Ahead (cont.)(cont.)

– GM’s internal structures had become ossified.

• Their managers failed to anticipate or quickly respond to profound changes in automobile industry.

IBM• Their managers did not anticipate, or could not

accept, the dramatic pace at which the industry shifted focus to the PC.

– They continued their “mainframe mentality” for many years, while competitors grabbed important market share from them.


A Look Ahead A Look Ahead (cont.)(cont.)A Look Ahead A Look Ahead (cont.)(cont.)

However, Gillette is a company who has enjoyed a sustained competitive advantage in its field. Due largely to the belief of the company’s top

managers that innovation and renewal are essential to its success.


ConclusionConclusionConclusionConclusion

This chapter reviewed some of the important characteristics of today’s business environments.

Introduction to field of strategic management. Strategy defined as “a pattern in a stream of

decisions.” The “emergent” nature of the strategy formulation

and implementation processes were described. Model of strategic management was introduced.

Will serve as the organizing framework for this book.


Key Points Introduced Key Points Introduced in Chapter 1in Chapter 1Key Points Introduced Key Points Introduced in Chapter 1in Chapter 1

Context of strategic management in dynamic. Today’s business world is one of profound changes. Changes present managers with great

opportunities, but also pose significant challenges. Strategy’s focus or level of analysis is unique.

In today's business schools, strategy focuses on overall management of firms and businesses.

• Most business courses focus on functional areas (finance, marketing, etc.).


Key Points Introduced Key Points Introduced in Chapter 1 in Chapter 1 (cont.)(cont.)


This book emphasizes critical role of general managers and strategic thinking in understanding industry environments, defining or positioning businesses in their competitive arenas, developing and maintaining capabilities, and developing organizational structures. In contrast, most textbooks on strategic

management stress importance of industry structure as primary influence on firm performance.




Focus on managers’ mental models. Mental models are simplified representations of

phenomena we encounter.• Models contain our attitudes, beliefs, and

understandings about these phenomena. This book organized around model of strategic

management which emphasizes importance of managers’ mental models about: Industry environments and how those beliefs

influence business decisions.




Model of strategic management (cont.) How businesses should compete and how those

decisions influence business strategy. Appropriate scale and scope of their firms. How their firms’ businesses are related. How diversification should be managed and how

those beliefs influence corporate strategic decisions. How to organize and how those beliefs influence

decisions about organizational structure.

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