Chapter 1:Introduction

Strategy – a set of related actions that managers take to increase their

company’s performance goals.

Objectives of Strategic Management:

 to identify and describe the strategies that managers can
pursue to achieve superior performance and provide their company
with a competitive advantage.
 to give you a thorough understanding of the analytical techniques
and skills necessary to identify and implement strategies
successfully.
 to describe in more detail what superior performance and
competitive advantage mean and to explain the pivotal role that
managers play in leading the strategy-making process.

Strategy Making Process:

 Strategic leadership is about how to most effectively manage
a company’s strategy-making process to create competitive
advantage. The strategy-making process is the process by which
managers select and then implement a set of strategies that aim to
achieve a competitive advantage.
 Strategy formulation is the task of selecting strategies.
 Strategy implementation is the task of putting strategies into
action, which includes designing, delivering, and supporting
products; improving the efficiency and effectiveness of operations;
and designing a company’s organization structure, control systems,
and culture.
Strategic leadership is concerned with managing the strategy-making
process to increase the performance of a company, thereby increasing the
value of the enterprise to its owners, its shareholders. It must have a
competitive advantage.

Superior Performance
 The major goal of companies is to maximize the returns that
shareholders receive from holding shares in the company. To
maximize shareholder value, managers must pursue strategies that
result in high and sustained profitability and in profit growth.
  The profitability of a company can be measured by the return that
it makes of the capital invested in the enterprise. The profit
growth of a company can be measured by the growth in earnings
per share. Profitability and profit growth are determined by the
strategies managers adopt.
 A company has a competitive advantage over its rivals when it is
more profitable than the average for all firms in its industry. It
has a sustained competitive advantage when it is able to maintain
above average profitability over a number of years. In general,
a company with a competitive advantage will grow its profits more
rapidly than its rivals.

Business Model - is managers’ conception of how the set of strategies their

company pursues should work together as a congruent whole, enabling the
company to gain a competitive advantage and achieve superior
profitability and profit growth.

A business model encompasses the totality of how a company will:

 Select its customers.  Deliver goods and services
 Define and differentiate its to the market.
product offerings.  Organize activities within
 Create value for its the company.
customers.  Configure its resources.
 Acquire and keep  Achieve and sustain a high
customers. level of profitability.
 Produce goods or services.  Grow the business over
 Lower costs. time.

Performance in Nonprofit Enterprises

 nonprofit enterprises such as government agencies, universities,
and charities are not in “business” to make profits.
 managers of nonprofits need to map out strategies to attain
these goals.
 planning and thinking strategically are as important for managers
in the nonprofit sector as they are for managers in profit-
seeking firms.

Strategic Managers
  General managers
Managers who bear responsibility for the overall performance of
the company or for one of its major self-contained subunits or divisions
 Functional managers - Managers responsible for supervising a
particular function, that is, a task, activity, or operation, such as
accounting, marketing, research, and development (R&D),
information technology, or logistics.
 Corporate-Level Managers - consists of the chief executive
officer (CEO), other senior executives, and corporate staff.
 Business-Level Managers - the head of the division
 Functional-Level Managers - responsible for the specific
business functions or operations (human resources, purchasing,
product development, customer service, etc.) that constitute a
company or one of its divisions.

Corporate Strategic Planning is a companywide approach at the business

unit and corporate level for developing strategic plans to achieve a
longer-term vision.

Importance of Corporate Strategic Planning:

- it gives every employee a set of guidelines they can use in their
everyday work to move toward certain targets, which promote the vision
and mission of the company.
- it improves efficiency within the organization and helps identify
unseen bottlenecks or pain-points.

Steps involved in strategic corporate planning:

1) Competitive Analysis - understanding the trends that could
impact the success of your strategy.
2) Strategic Goals & Priorities - includes not only what is to be
accomplished, but how it will be accomplished including high level
plans, budgets, human resources, etc.
3) Communication - the information needs to be communicated and
shared with leadership inside the business unit so that priorities
and plans can be aligned and integrated within a single budget.

The Strategy-Making Process

The formal strategic planning process has five main steps:
  1. Select the corporate mission and major corporate goals.
 2. Analyze the organization’s external competitive environment to
identify opportunities and threats.
 3. Analyze the organization’s internal operating environment to
identify the organization’s strengths and weaknesses.
 4. Select strategies that build on the organization’s strengths
and correct its weaknesses in order to take advantage of
external opportunities and counter external threats. These
strategies should be consistent with the mission and major goals
of the organization. They should be congruent and constitute a
viable business model.
 5. Implement the strategies.

Terms to Remember:
Sustained competitive advantage
Risk Capital - Equity capital for - A company’s strategies enable it
which there is no guarantee that to maintain above-average
stockholders will ever recoup profitability for a number of
their investment or earn a decent years.
return.
Multidivisional company - A
Shareholder value - Returns that company that competes in several
shareholders earn from different businesses and has
purchasing shares in a company. created a separate self-contained
division to manage each.
Profitability - The return a
company makes on the capital Business unit - A self-contained
invested in the enterprise. division that provides a product
or service for a particular market.
Profit growth - The increase in
net profit over time.

Competitive Advantage - The

achieved advantage over rivals
when a company’s profitability is
greater than the average
profitability of firms in its
industry.
Chapter 2: Business, Mission, Vision, Goals, and Objectives

A company’ s stakeholders are Goals – a precise and measurable

individuals or groups with an desired future state that a
interest, claim, or stake in the company attempts to realize.
company, in what it does, and in
how well it performs. Four main characteristics
of well-constructed goals
Mission – refers to the purpose of (1) They are specific and
an organization. “What is our measurable. (2) They address
business? What will it be? What crucial issues. (3) They are
should it be? (Overall purpose of challenging but realistic. (4) They
the business, what your business specify a time period.
does, what’s important to your
business) Objectives – are the need results
of a planned activity. They are
Vision – lays out some desired stated quantifiable terms.
future state—it articulates, often - stated differently at
in bold terms, what the company various levels of
would like to achieve. (Where do management.
you want to be?) - play a very important role
in enhancing the
Values – statements of how efficiency and
managers and employees of a effectiveness of an
company should conduct organization.
themselves, how they should do - serve as measurable
business, and what kind of benchmarks that will help
organization they should build to a destination reach its
help a company achieve its mission. goals.

Organizational Culture – the set Objectives should be SMART

of values, norms, and standards (Specific, Measurable,
that control how employees work Attainable, Relevant, Time
to achieve an organization’ s bound). They should help in
mission and goals. the achievement of the
 organization’ s mission and vision.

Agency Theory – is a theory perhaps also illegal. A concept used

dealing with the problems that can to explain the important
arise in a business relationship relationships between principals
when one person delegates and their relative agents. Because
decision-making authority to the principal relies heavily on the
another. Offers a way of agent to make the decision, there
understanding why managers do may be an assortment of conflicts
not always act in the best or disagreements.
interests of stakeholders, and also
why they might sometimes engage Agency Relationship – a
in actions that are unethical, and relationship that arises whenever
one-party delegates decision- principals and agents and to
making authority or control over monitor and control agents. The
resources to another. purpose of governance mechanisms
is to reduce the scope and
Principal – a person delegating frequency of the agency problem:
authority to an agent, who acts on to help ensure that agents act in a
the principal’s behalf. manner that is consistent with the
best interests of their principals.
Agents – a person to whom
authority is delegated by a
principal.

Governance Mechanism – are

mechanisms that principals put in
place to align incentives between

ROOTS OF UNETHICAL
BEHAVIOR
- Personal Ethical Code BEHAVING ETHICALLY
- Lack of Ethical - Hiring and Promotion
Consideration - Organization Culture and
- Organizational Structure Leadership
- Pressure form Top - Ethics Officers
Management - Decision Making Processes
- Leadership Influence - Strong Corporate
Governance
- Moral Courage

BASIS MISSION VISION

CONCEPT defines the purpose communicates both the
and primary purpose and values
objectives
ANSWER THE How will you get to Where you want to be?
QUESTION where you want to be?
PURPOSE Inform what the Inspire and motivate
organization does people
TIME FRAME Present leads to Future
future

BASIS OBEJCTIVES GOALS

CONCEPT represents managerial refers to the long-
commitment term purpose
MEASUREMENT easy to measure difficult to measure
TIME PERIOD mid-term or short long term in nature
term in nature
ACTION Specific action Generic action
CHAPTER 3: External Analysis (The identification of Opportunities and
Threats)

Industry Life Cycle Analysis – a useful tool for analyzing the effects of industry
evolution on competitive forces in the industry life cycle model, which identifies
5 sequential stages in the evolution of an industry that leads to five distinct kinds
of industry environment: embryonic, growth, shakeout, mature, and decline.

EMBRYONIC

- new industries are just starting out. Growth is slow. Entry barriers are
mainly about knowing how to make the products. Competition focuses
on educating customers, finding places to sell products, and making
them better.

GROWTH

- demand for the industry ' s product rapidly expands as new customers
enter the market. Prices fall, distribution channels improve, and the
industry grows. Entry barriers decrease, but competition from potential
competitors is high. Rivalry among existing companies remains
relatively low. This stage offers opportunities for companies to prepare
for future competition

SHAKEOUT

- Industry growth slows down and demand levels off. Rivalry among
companies intensifies as they continue adding capacity. Excess capacity
leads to price wars, causing inefficient companies to go bankrupt, which
discourages new entrants. Rivalry between companies becomes intense.
Demand is no longer growing at historic rates.

MATURE

- The market is full, and growth is slow. Entry barriers increase, so new
competitors are less likely. Companies focus on cutting costs and
building customer loyalty. Often have a few big companies, and they try
to avoid price wars. This stability allows them to set prices and make
more profit.

DECLINE

- industries start to shrink. This can happen because of new technology,

changes in society, fewer people needing the product, or competition
from other countries. Competition among companies usually gets
stronger. When demand goes down, companies still have too much
stuff, so they start cutting prices. This can lead to price wars. Exit
 barriers make it hard for companies to leave, so they keep fighting over
prices.

SWOT ANALYSIS (Strengths, Weaknesses, Opportunities, Threats)

- used to help assess the internal and external factors that contribute to a
company’s relative advantages and disadvantages.
- generally used in conjunction with other assessment frameworks, like
PESTEL and Porter’s 5-Forces

STRENGTH – representing internal factors that denote excellence, uniqueness,

and advantages within your business.

WEAKNESSES – indicating internal areas where your business falls short.

OPPORTUNITIES – denoting external factors that could be leveraged for

growth.

THREATS – representing external factors that could pose risks to your business.

GENERAL ENVIRONMENT – can be defined as a variety of external influences. It

is composed of dimensions in the broader society that influence an industry and
the firms within it.
PESTEL Analysis (Political, Economic, Socio-cultural, Technological,
Environmental, Legal)

- is one important tool that executives can rely on to organize factors

within the general environment and to identify how these factors
influence industries and the firms within them.

POLITICAL – factors include elements such as tax policies, changes in trade

restrictions and tariffs, and the stability of governments.

ECONOMIC – factors include elements such as interest rates, inflation rates,

gross domestic product, unemployment rates, levels of disposable income, and
the general growth or decline of the economy.

SOCIO-CULTURAL – factors include trends in demographics such as

population size, age, and ethnic mix, as well as cultural trends such as attitudes
toward obesity and consumer activism.

TECHNOLOGICAL – factors include, for example, changes in the rate of new

product development, increases in automation, and advancements in service
industry delivery.

ENVIRONMENTAL – factors, also called ecological factors, include, for

example, natural disasters, global warming, pollution, and weather patterns.
LEGAL – factors include laws involving issues such as employment, health and
safety, discrimination, and antitrust.
CHAPTER 4: Internal Analysis ( Distinctive Competencies, Competitive
Advantage, and Profitability)

Financial ratio analysis – exemplifies the complexity of relationships among the

functional areas of business.

The Resource-Based View (RBV) – approach to competitive advantage

contends that internal resources are more important for a firm than external
factors in achieving and sustaining competitive advantage. Proponents of the
RBV view contend that organizational performance will primarily be determined
by internal resources that can be grouped into three all-encompassing categories:
physical resources, human resources, and organizational resources. For a resource to be
valuable, it must be either (1) rare, (2) hard to imitate, or (3) not easily
substitutable. Often called empirical indicators, these three characteristics of
resources enable a firm to implement strategies that improve its efficiency and
effectiveness and lead to a sustainable competitive advantage.

Cultural products – values, beliefs, rites, rituals, ceremonies, myths, stories, etc
are levers that strategists can use to influence and direct strategy formulation,
implementation, and evaluation activities.

THE FUNCTIONS OF MANAGEMENT CONSIST OF FIVE BASIC

ACTIVITIES:

1. Planning – consists of all those managerial activities related to preparing for

the future. Most important in Strategy Formulation

2. Organizing – includes all those managerial activities that result in a structure

of task and authority relationships. Most important in Strategy Implementation

3. Motivating – involves efforts directed toward shaping human behavior. Most

important in Strategy Implementation

4. Staffing – activities are centered on personnel or human resource

management. Most important in Strategy Implementation
5. Controlling – refers to all those managerial activities directed toward ensuring
that actual results are consistent with planned results. Most important in Strategy
Evaluation

Marketing can be described as the process of defining, anticipating, creating,

and fulfilling customers ’ needs and wants for products and services.

There are seven basic functions of marketing:

(1) customer analysis, (2) selling products/services, (3) product and service
planning, (4) pricing, (5) distribution, (6) marketing research, and (7)
opportunity analysis.

Understanding these functions helps strategists identify and evaluate marketing

strengths and weaknesses

Customer analysis—the examination and evaluation of consumer needs, desires,

and wants.

Selling – successful strategy implementation generally rests upon the ability of

an organization to sell some product or service.

Product and Service Planning – includes activities such as test marketing;

product and brand positioning; devising warranties; packaging; determining
product options, features, style, and quality; deleting old products; and providing
for customer service. Important when a company is pursuing product
development or diversification

Pricing – refers to deciding the amount an individual must exchange to receive a

firm’s product offering. Pricing strategies are often based on costs, demand, the
competition, or on customers’ needs. Five major stakeholders affect pricing
decisions: consumers, governments, suppliers, distributors, and competitors.

Distribution – includes warehousing, distribution channels, distribution

coverage, retail site locations, sales territories, inventory levels and location,
transportation carriers, wholesaling, and retailing.

Marketing Research – examines consumer behavior and trends in the economy

to help a business develop and fine-tune its business idea and strategy. It helps a
business understand its target market by gathering and analyzing data.

Cost/Benefit Analysis involves assessing the costs, benefits, and risks associated
with marketing decisions. Three steps are required to perform a cost/benefit analysis: (1)
compute the total costs associated with a decision, (2) estimate the total benefits
from the decision, and (3) compare the total costs with the total benefits

Finance / Accounting Function

1. Investment decision, also called capital budgeting, is the allocation and

reallocation of capital and resources to projects, products, assets, and divisions of
an organization

2. Financing decision determines the best capital structure for the firm and
includes examining various methods by which the firm can raise capital
3. Dividend decisions concern issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and the repurchase or
issuance of stock

BASIC TYPES OF FINANCIAL RATIOS

Financial ratios are a type of performance measurement used by businesses and

investors to measure the health of a company’s finances. These are computed
from an organization’s income statement and balance sheet.

Liquidity ratios - measure a firm’s ability to meet maturing short-term

obligations.

Leverage ratios - measure the extent to which a firm has been financed
by debt.

Activity ratios - measure how effectively a firm is using its resources.

Profitability ratios - measure management’s overall effectiveness as

shown by the returns generated on sales and investment.

Growth ratios – measure the firm’s ability to maintain its economic

position in the growth of the economy and industry.

Financial ratio analysis must go beyond the actual calculation and

interpretation of ratios. The analysis should be conducted on three separate
fronts: 1. How has each ratio changed over time? 2. How does each ratio compare
to industry norms? 3. How does each ratio compare with key competitors?

Production/operations management in business involves converting inputs into

goods and services.

Basic Functions (Decisions) Within Production/Operations

Process, Capacity, Inventory, Workforce, Quality

Research and Development – fifth significant aspect of internal operations that

requires evaluation for its strengths and weaknesses. Requires a strategic
partnership between R&D and other business areas, fostering collaboration and
trust among managers.

Internal and External R&D – Cost distributions among R&D activities vary by
company and industry, but total R&D costs generally do not exceed
manufacturing and marketing start-up costs.
Four Approaches to determining R&D budget allocations commonly are
used:

- Financing as many project proposals as possible.

- using a percentage-of-sales method
- budgeting about the same amount that competitors spend for R&D
- deciding how many successful new products are needed and working
backward to estimate the required R&D investment.

Two basic Forms

- Internal R&D, in which an organization operates its own R&D

department.
- Contract R&D, in which a firm hires independent researchers or
independent agencies to develop specific products.

Rings of Defense – layers or levels of defense mechanisms or strategies employed

by companies to protect themselves against various risks and uncertainties.

Management Information System – Information represents a major source of

competitive management advantages or disadvantage. Assessing a firm ’ s
internal strengths and weaknesses in information systems is a critical dimension
of performing an internal audit.

"Information is the lifeblood of the company. "

Strategic planning software enables organizations to realize their goals via

transparency and agility.

Value chain analysis is a strategic process that can increase profit margins and
provide a competitive advantage for companies of all sizes. Within this analysis,
businesses identify areas where the value of specific production and sales
activities can be increased.

BENCHMARKING – comparing your strategy to other successful companies'

strategies to determine the differences and identify opportunities.

Internal Factor Evaluation (IFE) Matrix – a strategy tool used to evaluate a

firm's internal environment and to reveal its strengths as well as weaknesses.
CHAPTER 5: Strategies Into Action (The Concept of Mission to Strategy,
Identification and Differentiation (Business Strategy, Corporate Strategy))

COMPETITIVE POSITIONING AND THE BUSINESS MODEL

Three key elements

1. Customer needs 2. Target customer groups 3. Distinctive competencies

FORMULATING THE BUSINESS MODEL: Customer needs and Product

Differentiation

Customer needs – are desires, wants, or cravings that can be satisfied by means
of the attributes or characteristics of a product (a good or service)

Product differentiation – is the process of designing products to satisfy

customers’ needs.

FORMULATING THE BUSINESS MODEL: Customer groups and Market

Segmentation
Customer groups – are the sets of people who share a similar need for a
particular product.

Market segmentation – is the way a company decides to classify its customers,

based on important differences in their needs or preferences, to gain a
competitive advantage.

3 Approaches to Market Segmentation

1. No Market Segmentation – a product is targeted at the “average customer”.

2. High Market Segmentation – a different product is offered to each market

segment.

3. Focused Market Segmentation – a product is offered to one or a few market

segments.
IMPLEMENTING THE BUSINESS MODEL: Building Distinctive
Competencies

To develop a successful business model, strategic managers must devise a set of

strategies that determine (1) how to differentiate and price their product, and (2) how much
to segment a market and how wide a range of products to develop.

A company pursuing a cost-leadership business model chooses strategies that do

everything possible to lower its cost structure so that the company can make and
sell goods or services at a lower cost than its competitors.

DIFFERENTIATION – process of distinguishing a product or service from

others in the market. This can be achieved through various means such as unique
features, superior quality, branding, customer service, or pricing strategy.

FOCUS DIFFERENTIATION – a strategy that involves targeting a specific

market segment or niche and tailoring the product or service to meet the unique
needs and preferences of that segment.

Vertical integration – increases product differentiation, lowers costs, or reduces

industry competition when it:

1. facilitates investments in efficiency-enhancing specialized assets,

2. protects product quality, and

3. results in improved scheduling

Problems with Vertical Integration:

1.Increasing Cost Structure

2.Technological Change

3.Demand Unpredictability

Vertical Disintegration – when a company decides to exit industries either

forward or backward in the industry value chain to its core industry to increase
profitability.

Transfer Pricing – the price that one division of a company charges another
division for its products, which are the inputs the other division requires to
manufacture its own products.

Alternatives to Vertical Integration: Cooperative Relationships

Strategic Alliances – long-term agreements between two or more companies to

jointly develop new products or processes that benefit all companies concerned.

BUILDING LONG-TERM COOPERATIVE RELATIONSHIPS

Hostage Taking – a means of exchanging valuable resources to guarantee that

each partner in an agreement will keep its side of the bargain.

Credible Commitments – a believable promise or pledge to support the

development of a long-term relationship between companies.

Maintaining Market Discipline – a company seeking to form a mutually

beneficial, long-term strategic alliance needs to possess some kind of power that
it can use to discipline its partner.

Strategic Outsourcing – the decision to allow one or more of a company’s value-

chain activities to be performed by independent, specialist companies that focus
on just one kind of activity to increase performance

BENEFITS OF OUTSOURCING

Lower Cost Structure – when the price that must be paid to a specialist
company is less than what it would cost the company to internally perform that
activity in house.

Enhanced Differentiation – a company may also be able to differentiate its final

products better by outsourcing certain noncore activities to specialists.
Focus on the Core Business – a final advantage of strategic outsourcing is to
allow managers to focus their energies and their company’s resources on
performing core activities that have the most potential to create value and
competitive advantage.

RISKS OF OUTSOURCING

Holdup – it refers to the risk that a company will become too dependent upon
the specialist provider of an outsourced activity.

Loss of Information – a company that is not careful can lose important

competitive information when it outsources an activity.