Chapter 6: Strategic Management: how exceptional managers realize a grand design Business plan: a document that outlines a proposed firms goals, the strategy for achieving them, and the standards for measuring success

1) Define strategy and strategic management 2) Explain why strategic planning is important 3) Describe 3 key principles that underlie strategic positioning 4) Discuss strategic management in large vs small firms

Strategy A large scale action plan that sets the direction for an organization Find out what customers want, then provide it to them as cheaply and quickly as possible Walmart Needs to be revisited from time to time, every year or two

Strategic management A process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals

Strategic planning Determines not only the organizations long term goals for the next 1-5 years regarding growth and profits But also how to achieve them

Why strategic management and strategic planning are important 3 reasons:

1) Provide direction and momentum 2) Encourage new ideas 3) Develop a sustainable competitive advantage

Provide direction and momentumEncouraging new ideasDeveloping a sustainable competitive advantage

Help people focus on the most critical problems, choices and opportunities Strategy can determine the very structure of an organization Unless a strategic plan is in place, managers may just focus on whatever is in front of them, until they get an unpleasant jolt when a competitor moves out in front because it has been able to take a long-range view of things Bad planning usually results from faulty assumptions about the future, poor assessment of an organisations capabilities, ineffective group dynamics, and information overload Strategic planning can help encourage ideas by stressing the importance of innovation in achieving long-range success Strategic innovation, is the ability to reinvent the basis of competition within existing industries

The ability of an organization to produce goods or services more effectively than its competitors, thereby outperforming them Stay ahead in 4 areas: 1) In being responsive to customers 2) In innovating 3) In quality 4) In effectiveness

What is an effective strategy? 3 principles

Strategic positioning : attempts to achieve sustainable competitive advantage by preserving what is distinctive about the company

3 principles underline strategic positioning:

1) Strategy is the creation of a unique and valuable position Serve a few needs of many customers Serve the broad needs of a few customers Serve the broad needs of many customers

2) Strategy requires trade-offs in competing A company has to choose not only which strategy to follow, but also, what not to follow

3) Strategy involves creating a fit among activities Fit has to do with the ways a companys activities interact and reinforce one another. Does strategic management work for small as well as large firms? Companies with fewer than 100 employees could benefit as well Although the improvement in financial performance was small the small improvement in performance is not worth the effort involved in strategic planning unless a firm is in a very competitive industry where small differences in performance may affect the firms survival potential 5 steps in the strategic management process

1. Establish the mission and the vision Mission: reason for being/purpose Vision: Long term goal, describing what it wants to become vision statement. Should be positive and inspiring 2. Establish the grand strategy Grand strategy, which, after an assessment of current organizational performance, then explains how the organisations mission is to be accomplished 1) First determine where it is presently headed 2) Determine where it should be headed

3 COMMON GRAND STRATEGIES: Growth Stability Defensive

Growth Grand strategy that involves expansion Sales revenues, market share, number of employees, number of customers or nonprofit clients served

Stability Involves little or no significant change

Defensive Also known as retrenchment strategy Reduction in organisations efforts

3. Formulate strategic plans The grand strategy must be translated into more specific strategic plans Determine the organisations long-term goals should be for the next 1-5 years Like all goals, they should be SMART: Specific, Measurable, Attainable, Results-oriented, and specifying Target dates

Strategy Formulation: process of choosing among different strategies and altering them to best fit the organisations needs. Time consuming process Use porters competitive forces and strategies 4. Carry out the strategic plans Strategy implementation Need to overcome resistance from people who feel that the plans threaten their livelihood or influence Especially so when the plans must be implemented rapidly 5. Strategic control Consists of monitoring the execution of strategy and making adjustments, if necessary Control systems: Constitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies Need to do the following: Engage people Keep planning simple Stay focused, stay concentrated on the important things Keep moving: move towards your vision of the future

Establishing the grand strategy 3 Kinds of Strategic-planning tools and Techniques1) Competitive intelligence 2) SWOT 3) Forecasting

Competitive intelligence Gaining information about ones competitors activities so that you can anticipate their moves and react appropriately Public sources(prints and advertising) Investor relations (reports filed with the Securities and Exchange commission and through corporate annual reports) Informal sources (Trade shows, International Consumer Electronics Show)

SWOT Environmental scanning (careful monitoring of an organisations internal and external environments to detect early signs of opportunities and threats that may influence the firms plans ) Situational analysis, Strengths Weakenesses Opportunities Threats

ForecastingTrend analysis and contingency planning

Strengths -Organisational strengths: The skills and capabilities that give the organization special competencies and competitive advantages in executing strategies in pursuit of its mission (INTERNAL)Weaknesses- Organisational weaknesses: Drawbacks that hinder an organization in executing strategies in pursuit of its mission

(INTERNAL)

Opportunities- Environmental factors that the organization may exploit for competitive advantage

(EXTERNAL)Threats Environmental factors that hinder an organisations achieving a competitive advantage (EXTERNAL)

Forecast: predicting the future Forecast Definition A vision or projection of the future

Trend analysis: A hypothetical extension of a past series of events into the future -Basic assumption: The picture of the present can be projected into the future. However, it is subjected to surprises -Time-series forecast: Predicts future data based on patterns of historical data. -Used to predict long-term trends, cyclic patterns, and seasonal variations

Contingency planning: Predicting alternative futures -Also known as scenario planning and scenario analysis: the creation of alternative hypothetical but equally likely future conditions - May be created with spreadsheet software such as Microsoft Excel to present alternative combinations of different factors- different economic pictures, different strategies by competitors, different budgets etc Porters 5 competitive forces-Business level strategies originate in 5 primary competitive forces in the firms environment

Threats of new entrants New competitors can affect an industry overnight, taking away customers from existing organizations

Bargaining power of suppliers Some companies are readily able to switch suppliers to get component or services, but others are not

Bargaining power of buyers Customers who buy a lot of products or services from an organization have more bargaining power than those who dont Customers who use the internet to shop around also can negotiate a better price

Threats of substitute products or services Because of the internet, an organization is in a better position to switch to other products or services when circumstances threaten their usual channels

Rivalry among competitors Internet has intensified rivalries among all kinds of organizations

Porters 4 competitive strategies

Cost leadership To keep the costs, and hence prices, of a product or service below those of competitors and to target a wide market Pressure on R&D managers to develop products or services that can be created cheaply Product managers to reduce costs Marketing: to reach a wide variety of customers as inexpensively as possible

Differentiation Offer products or services that are unique and superior value compared with those of competitors but to target a wide market Creating brands to differentiate themselves from competitors

Cost focus To keep the costs, and hence prices, of a product or service below those of competitors and to target a narrow market Eg, low-end products sold in discount stores

Focused differentiation To offer products or services that are of unique and superior value compared to those of competitors To target a narrow market

Single-product strategy vs diversification strategy The single-product strategy: focused but vulnerable A company makes and sells only 1 product within its market Eg, small retail businesses in a small town

Benefits Focus marketing and manufacturing efforts on just that product Become savvy about repairing defects, upgrading production lines, scouting the competition, doing highly focused advertising and sales

Detriments Vulnerability. If you do not focus on all aspects of that business, natural disasters or rivals sudden competitive action may cause the business to go under.

Diversification strategy: operating different businesses to spread the risk 2 kinds: related and unrelated

Related diversification An organization under one ownership operates separate businesses that are related to one another Advantages: 1) Reduced risk, due to more than 1 product 2) Management efficiencies: administration spread over several businesses. EG: obligatory administrative costs- accounting, legal, taxes and so on 3) Synergy- the sum is greater than the parts: Eg, when a company is special strengths in 1 business, it can apply those to its other related businesses Synergy: the economic value of separate, related businesses under one ownership and management is greater together than the businesses are worth separately

Unrelated diversification Operating several businesses under one ownership that are not related to one another

BCG matrix -Evaluate strategic business units on the basis of 1) Their business growth rates 2) Their share of the market

Stars: High growth, high market shareCashcows: Slow growth, high market share Question marks: High growth, low market share Dogs: Low growth, low market share

How does effective execution help managers during the strategic management process? Strategic implementation

Larry Bossidy and Ram Charan: Execution is not simply tactics, it is a central part of any companys strategy. It consists of using questioning, analysis and follow-through to mesh strategy with reality, align people with goals, and achieve the results promised

3 Core Processes of Business:

A companys overall ability to execute is a function of effectively executing according to 3 processes: People, Strategy, Operations.

People You need to consider who will benefit you in future An effective leader evaluates talent by linking people to particular strategic milestones, developing future leaders, dealing with non-performers, and transforming the mission and operations of the human resource department

Strategy Organization will take a realistic and critical view of its capabilities and competencies

Operations Need to consider what path will be followed Defines where an organization wants to go, and the people process defines whos going to get it done

Foundation of execution

1) Know your people and your business, engage intensely with your employees 2) Insist on realism Dont let others avoid reality 3) Set clear priorities focus on a few rather than many goals 4) Follow through Establish accountability and check on results 5) Reward the doers Show top performers that they matter 6) Expand peoples capabilities develop the talent 7) Know yourself Do the hard work of understanding who you are Leaders must develop emotional fortitude based on honest self-assessments. 4 core qualities are authenticity, self-awareness, self-mastery and humility