CHAPTER ONE

Introduction to Strategic Management

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Basic concepts of strategic management
The word strategy has entered to the field of
management more recently. Originally, the
word strategy has been derived from Greek
word ‘Strategoes’, which means
generalship. The word strategy, therefore,
means the art of the general.
When the term strategy is used in military
sense, it refers to action that can be taken in
the light of action taken by opposite party.

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 Definition of strategic management

Strategic management can be defined as the art and

science of formulating, implementing, and evaluating

cross-functional decisions that enable an organization to
achieve its objectives.
Strategic management has been defined as a process which

is concerned with making decisions about an

organization’s future direction and implementing these
decisions.
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Cont’d
The term strategic management is used synonymously

with strategic planning.

It is also known by subtitle for the capstone/top course in

business administration, because, it integrates material

from all business disciplines .
It is the process of systematically analyzing various

opportunities and threats in relation to organizational

strengths and weaknesses.

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 Stages of Strategic Management
Strategic management can be viewed as a
process encompassing four important phases
Namely:
1. Establishing a hierarchy of strategic intent (target)
2. Formulation and choice of strategies
3. Implementation
4. Evaluation and control

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Stages of Strategic Management

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 Key terms in strategic management
Strategists
 Individuals who are most responsible for the success or
failure of an organization.
 Strategists hold various job titles, such as chief executive
officers/CEO, president, and owner, chair of the board,
executive director, chancellor, dean, or entrepreneur.
Vision statement
 An image or description of the business as you aspire it to
become in the future : “What do we want to become?”

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 Cont’d
Mission statement
Mission statements are “enduring statements of purpose that
distinguish one business from other similar firms.
A mission statement tells why your business exists that mean
the reason firm exist.
It should include the values and priorities of an organization.

A mission statement identifies the scope of a firm’s operations

in product and market terms.

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Cont’d
Internal Strengths and Weaknesses
an organization’s controllable activities
Identifying and evaluating organizational strengths and
weaknesses in the functional areas of a business is an
essential strategic-management activity.
External Opportunities and Threats
Opportunity and treat on PESTLE

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Political factor
Government policies
Taxes laws and tariff
Stability of government
Entry mode regulations

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Economic factor
The inflation rate
The interest rate
Disposable income of buyers
Credit accessibility
Unemployment rates
The monetary or fiscal policies
The foreign exchange rate

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Social factor
 The cultural implications
 The gender and connected demographics
 The social lifestyles
 The domestic structures
 Educational levels
 Distribution of Wealth

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Technological factor
New discoveries
Rate of technological obsolescence
Rate of technological advances
Innovative technological platforms

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Legal factors

Legislative changes take place from time to time.

 Product regulations
 Employment regulations
 Competitive regulations
 Patent infringements
 Health and safety regulations

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Environmental Factors
some environmental factors you can study are:
 Geographical location
 The climate and weather
 Waste disposal laws
 Energy consumption regulation
 People’s attitude towards the environment

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Cont’d
Long-Term Objectives
Objectives can be defined as specific results that an
organization seeks to achieve in pursuing its basic
mission.
Annual Objectives
Annual objectives are short-term milestone that
organizations must achieve to reach long-term objectives.
Objectives must be SMART

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Cont’d
Strategies
the means by which long-term objectives will be
achieved.
Policies
it is a general guideline to achieve the designed
objectives.
Rules
a guideline that shows which one is right and
wrong
Procedures
sequence of activity to reach the objective
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Benefits of strategic management
Strategic management contain both financial and non-final
benefit
Financial benefits
 Research indicates that organizations using strategic-
management concepts are more profitable and successful
than those that do not.
 It exhibit superior long-term financial performance relative
to their industry.

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 Nonfinancial Benefits

Enhanced awareness of external threats

Improved understanding of competitors strengths
 Increased employee productivity
 Reduced resistance to change
Strategic management leads to a culture of problem prevention.
It encourages managers to be proactive
Other benefits in addition to the above
 Framework for operational planning - If strategies are
developed carefully and understood properly by managers,
they provide more consistent framework for operational
planning.
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Cont’d
Clarity in direction of activities - they make the
organizational objectives more clear and specific than vague.
Increase organizational effectiveness and efficiency - The
concept of effectiveness is that the organization is able to
achieve its objectives within the given resources.
Personnel satisfaction - Strategies contribute towards
organization’s effectiveness by providing satisfaction to the
personnel of the organization.

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Looking into the role of strategy, Ross and
Kami have suggested that “without a
strategy the organization is like a ship
without a wheel, going around in circles.
It is like a homeless person; it has no place to
go.
Cause of most business failures is lack of
strategy, or the wrong strategy, or lack of
implementation of a reasonably good strategy.

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Types of strategies

o A strategy of a corporation is a comprehensive plan

stating how the corporation will achieve its mission and
objectives.
o The typical business firm usually considers three types of
strategy:
 Corporate strategy
 Business strategy
 Functional strategy

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 Corporate strategy
Describes a company’s overall direction in terms of its

general attitude toward growth and the management of its

various businesses and product lines.

Corporate directional strategy is conceptualized in terms of

stability, growth, and retrenchment.

Created by the top level managers of the organization

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Cont’d
Corporate strategy is composed of directional strategy,

portfolio analysis, and parenting strategy.

This implies that their responsibility is to achieve the

planned financial performance and non-financial goals.

 Consider social responsibility and the organizational

image.

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 Business Strategy
It is business level strategy or strategy of SBU
SBUs are involved in a single line of business.

Here strategies are about how to meet the competitors

in a particular product market

The managers at this level translate the general

statements of direction to business level.
They identify the most profitable market segment,
where they can excel keeping in focus the vision of the
company.
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Operational level or functional Strategy
is the approach taken by a functional area,
such as Marketing, Finance ,
Production ,research and development, to
achieve corporate and business unit
objectives and strategies by maximizing
resource productivity.
It is concerned with developing and
nurturing a distinctive competence to
provide a company or business unit with a
competitive advantage.
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 The benefits of having clear objectives
 Provide direction by revealing expectations
 Allow synergy
 Help in evaluation by serving as standards
 Establish priorities
 Reduce uncertainty
 Minimize conflicts
 Stimulate exertion/effort
 Help in allocation of resources
 Help in design of jobs
 Provide basis for consistent decision making

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 Financial versus strategic objectives
Two types of objectives are especially
common in organizations: financial and
strategic objectives.
Financial objectives include those
associated with
Growth in revenues and earnings per share
Higher dividends and larger profit margins
Greater return on investment and a rising stock
price
Improved cash flow, and so on.
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Cont’d
While strategic objectives include things
such as:
A larger market share
Quicker on-time delivery than rivals
Shorter design-to-market times than rivals
Lower costs than rivals
Achieving technological leadership
Consistently getting new or improved
products to market ahead of rivals, and so on.
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 Social Responsibilities and Ethics in Strategic Decision Making

Should strategic decision makers be

responsible only to shareholders or should they
have broader responsibilities?
The concept of social responsibility Proposes
that a private firm has responsibilities to
society that extend beyond making a profit.
A decision to retrench by closing some plants
and discontinuing product lines affects not only
the firm’s workforce but also communities.
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 Some business people believe profit maximization is the

primary goal of their firm.

whereas concerned interest groups argue that other goals

should have a priority, such as

 The hiring of minorities and women or

community development.
Strategic managers must be able to deal with these

conflicting interests to formulate a viable strategic plan

in an ethical manner.
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What are the Responsibilities of a Business Firm?

What are the responsibilities of a business

firm and how many of these
responsibilities must strategic managers
fulfill?
 Milton Friedman and Archie Carroll
offer two contrasting views of the
responsibilities of business firms to
society.

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 Traditional View (Milton
Friedman)
If a business person acts “responsibility”
 It cuts the price of the firm’s product
to prevent inflation,
 Making expenditures to reduce
pollution.
 Hiring the hard-core unemployed
 According to friedman, business man
must spending the stockholders’
money for a general social interest.
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Engages in open and free competition
without deception or fraud
By taking on the burden of social cost, the
business becomes less efficient:
Prices go up to pay for increased costs
Investment in new activities & research
is postponed
Firms are responsible to only their
shareholders
Purely economic reasoning

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Modern View (Archie Carroll)
According to Archie Carroll business firms
have four responsibilities:
A. Economic
Produce goods & services of value to society
so that the firm may repay its creditors and
stockholders
B. Legal
Defined by governments in laws that

management is expected obey

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 C. Ethical
Follow generally held beliefs about how one

should act in society

Work with employees & community in planning

for layoffs, even though no laws requiring this.

Many people expect firms to do these things

D. Discretionary
Purely voluntary obligations a firm assumes

Philanthropic contributions, training hard-core

unemployed, providing day-care centers, etc.

Many people do not expect firms to do these

things
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Porter’s Generic Business Level Strategies

porter, classify business level strategies into the

following three types:

1. Cost leadership (Lower cost/broad target)

2. Differentiation (Differentiation/broad target).

3. Focus (Lower cost or differentiation/narrow target)

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 1. Cost Leadership Business Strategy
Value chain analysis is central to identifying where cost
savings can be made at various stages in the value chain
and its internal and external linkages.
Cost leadership depends on the arrangement of value
chain activities so as to:
 Reduce unit costs by copying rather than originating
designs, using cheaper materials, producing products
with no frills/extra cost, reducing labor costs and
increasing labor productivity

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2. Differentiation Business Strategy

A differentiation strategy is based on persuading customers

that a product is superior to that offered by competitors.
Differentiation can be based on premium product features
or simply upon creating consumer perceptions that a
product is superior.
A differentiation strategy is likely to necessitate emphasis
on innovation, design, research and development,
awareness of particular customer needs and
marketing.

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Cont’d
 Mitizberg has provided a series of categories within which firms can
differentiate as described below:
 Design Differentiation-differentiate by design as compare to
rivalry
 Quality Differentiation- buyers believe the product is reliable,
durable, or has superior performance.
 Price Differentiation – if the market is price sensitive
 By creating a strong brand name through design, innovation,
advertising, etc.
 By offering after sales service
 By distinctive or superior product packaging, distribution
channels, etc
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3. Focus Business Strategy

Employing a focus strategy requires the following

circumstances:
 Identification of a suitable target customer group which
forms a distinct market segment.
 Identification of the specific needs of that group
 Establishing the extent of competition within the segment
 Production of products to meet the specific needs of that
group

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Cont’d
 Deciding whether to operate a differentiation or cost
leadership strategy within the market segment
 Establishing that the segment is sufficiently large to
sustain the business

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