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Ch 1 -1

Copyright 2011 Pearson Education

Strategic Management: Concepts


and Cases
Arab World Edition
Fred R. David
Abbas J. Ali
Abdulrahman Y. Al-Aali

Chapter 1:
The Nature of Strategic
Management

Ch 1 -2

Copyright 2011 Pearson Education

Chapter Outline

What is Strategic Management?


Key Terms in Strategic Management
The Strategic-Management Model
Benefits of Strategic Management
Why Some Firms Do No Strategic Planning
Pitfalls in Strategic Planning
Guidelines for Effective Strategic Management

Ch 1 -3

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Chapter Outline (contd)

Business Ethics and Strategic Management


Comparing Business and Military Strategy
The Nature of Global Competition

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Themes in the Text

Global Considerations impact virtually all strategic


decisions
E-commerce vital strategic management tool
Natural Environment important strategic issue

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Ch 1 -5

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Strategic Management Defined

Art & science of formulating, implementing, and evaluating, cross-functional


decisions that enable an organization to achieve its objectives
In essence, the strategic plan is a companys game plan.

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Ch 1 -6

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Strategic Management
Strategic management achieves a firms success through
integration:

Management

Marketing

Finance/Accounting

Production/Operations

Research & Development

MIS

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Ch 1 -7

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Strategic Management
Strategy Formulation
Vision & Mission
External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection
Ch 1 -8
Ch 1 -8

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Strategy Formulation
Issues in Strategy Formulation

New business opportunities

Businesses to abandon

Allocation of resources

Expansion or diversification

International markets

Mergers or joint ventures

Avoidance of hostile takeover

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Ch 1 -9

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Strategy Implementation

Strategy Implementation

Annual Objectives
Policies
Employee Motivation
Resource Allocation
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Ch 1 -10

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Strategy Implementation
The Action Stage of Strategic Management

Is the most difficult stage


Involves mobilization of employees & managers
Interpersonal skills are critical
There must be consensus on goal pursuits

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Ch 1 -11

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Strategy Evaluation

Strategy Evaluation

Internal Review
External Review
Performance Metrics
Corrective Actions
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Ch 1 -12

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Strategy Evaluation
Final Stage of Strategic Management
Subject to future modification
Todays success is no guarantee of future success
New and different problems
Complacency leads to demise

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Ch 1 -13

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Prime Task of Strategic Management

Think through the overall mission of a business. Ask


the key question: What is our Business?
Peter Drucker

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Ch 1 -14

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Integrating Intuition & Analysis

The strategic management process attempts to organize


quantitative and qualitative information under conditions of
uncertainty.

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Ch 1 -15

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Integrating Intuition & Analysis


Intuition is based on:
Past experiences
Judgment
Feelings

Intuition is useful for decision making in:


Conditions of great uncertainty
Conditions with little precedent
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Ch 1 -16

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Integrating Intuition & Analysis

Intuition & Judgment

Involve management at all levels

Influence all analyses

Ch 1 -17
Ch 1 -17

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Integrating Intuition & Analysis

Analytical Thinking

Intuitive Thinking

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Ch 1 -18

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Integrating Intuition & Analysis

In the Arab world, there is a cultural tendency to emphasize


the role of intuition and imagination in decision making.
There are companies which, because of luck and ample
opportunities, have experienced tremendous growth.

Ch 1 -19
Ch 1 -19

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Adapting to Change

Organizations must monitor events


Ongoing process
Internal and external events
Timely changes

Ch 1 -20
Ch 1 -20

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Strategic Management is Gaining and Maintaining


Competitive Advantage

Competitive Advantage:
Anything that a firm does especially well compared to rival
firms

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Ch 1 -21

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Achieving Sustained Competitive Advantage

1. Adapting to change in external trends, internal capabilities,


and resources
2. Effectively formulating, implementing, and evaluating
strategies

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Ch 1 -22

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Adapting to Change
Rate & magnitude of change is increasing dramatically

E-commerce
Demographics
Technology

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Adapting to Change

Effective Adaptation to change requires long-term


focus

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Ch 1 -24

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Adapting to Change
Key Strategic Management Questions
What kind of business should we become?
Are we in the right fields?
Are there new competitors?
What strategies should we pursue?
How are our customers changing?

Ch 1 -25

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Key Terms

The Strategists Those that affect a firms success or


failure:

Chief Executive Officer (CEO)


Chief Strategy Officer (CSO)
President
Owner
Board Chair
Executive Director

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Ch 1 -26

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Key Terms

Vision Statement:
What do we want to become?
Mission Statement:
What is our business?

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Opportunities and Threats (External)

External opportunities and threats are largely beyond


the control of a single organization.

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Oportunities and Threats (External) Contd


Analysis of Trends:

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Economic

Social

Cultural

Demographic/Environmental

Political, Legal, Governmental

Technological

Competitors

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Key Terms

Environmental Scanning (Industry Analysis):


The process of conducting research and gathering and assimilating
external information

Ch 1 -30

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Key Terms Opportunities & Threats


The basic tenet of strategic management:

Take
Take advantage
advantage of
of
External
External Opportunities
Opportunities
Strategy Formulation
Avoid/minimize
Avoid/minimize impact
impact
of
of External
External Threats
Threats

Ch 1 -31

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Strengths and Weaknesses (Internal)

Strengths & Weaknesses (Internal):


Controllable activities performed especially well or poorly

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Strengths and Weaknesses (Internal) Contd

Strengths and weaknesses are typically located in the


functional areas of the firm, such as:

Ch 1 -33

Management

Marketing

Finance/Accounting

Production/Operations

Research & Development

Computer Information Systems

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Assessing the Internal Environment

Financial Ratios
Performance Metrics

Internal Factors
Industry Averages
Survey Data

Ch 1 -34

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Long Term Objectives

Long-term Objectives:
Mission-driven pursuit of specified results more than one year
out

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Long Term Objectives (Contd)

Long term objectives are essential for ensuring a firms


success. They:

Provide direction

Help with evaluation

Create synergy

Focus coordination

Basis for planning, motivating, and


controlling

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Strategies
Strategies:
The means by which long-term objectives are achieved

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Strategies (Contd)
Some examples of different strategies are:

Geographic expansion

Diversification

Acquisition

Market penetration

Retrenchment

Liquidation

Joint venture

Key Terms

Annual Objectives:
Short-term milestones that firms must achieve to attain long-term
objectives

Ch 1 -39

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Key Terms

Policies:
Means by which annual objectives will be achieved

Ch 1 -40

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Example Strategies in Action in 2009


Mohammed Abdulmohsin Al-Kharafi & Sons Company
(MAK Group)
The MAK Group is one of the largest family-owned organizations in
the Arab world. In 2008 it was listed among the top 100 companies
in the Muslim world by Dinar Standard. In 2009 its annual turnover
was over US$5 billion; it operates in more than 25 countries around
the world and has more than 120,000 employees. The company was
established as a trading company more than 100 years ago and it
has since developed into a large multi-national corporation.
Faced with limited local market and enriched with a large amount of
cash, the company has embarked on an ambitious diversification
strategy. Since 1956 the company has participated in a number of
important projects in Kuwait, the Gulf States, Africa, the Caribbean,
Asia, and Eastern Europe. It has various branches and subsidiaries
in area related Construction, trade, and manufacturing in various
parts of the world.
Ch 1 -41
Ch 1 -41

Copyright 2011 Pearson Education

Example Strategies in Action in 2009 (Contd)


SKAB Group
The SKAB Group is one of the largest private-sector business groups in
Saudi Arabia with a variety of diversified but interconnected business
enterprises, spanning such disciplines as environment protection and
recycling, mineral-water bottling, contracting, the hospitality industry,
real estate, shopping malls, travel and tourism, food products, and
construction and maintenance.
SKAB embarks on three major strategies to realize growth and market
vitality: market expansion at home and abroad, partnership, and
acquisition. Although the group is family-owned, it is managed by
professional management team.
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Ch 1 -42

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Source: Adapted from Fred R. David, How Companies Define Their Mission, Long Range Planning 22, no 3 (June 1988):40
Ch 1 -43

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Strategic Management Model


Strategic Management Process
Dynamic & continuous
More formal in larger organizations

Ch 1 -44

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Strategic Management Model (Contd)

1.

Identify Existing:
Vision
Mission
Objectives
Strategies

2.

Audit external environment

3.

Audit internal environment

4.

Competing in the global market-place

Ch 1 -45

Copyright 2011 Pearson Education

Strategic Management Model (Contd)

5.

Establish long-term objectives

6.

Generate, evaluate, and select strategies

7.

Implement selected strategies

8.

Leadership and culture

9.

Measure & evaluate performance

Ch 1 -46

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Benefits of Strategic Management

Strategic Management:
Is proactive in shaping firms future
Initiates and influences firms activities
Helps to formulate better strategies that are systematic, logical,
and rational

Ch 1 -47

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Benefits of Strategic Management


Financial Benefits

Improvement in sales

Improvement in profitability

Productivity improvement

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Ch 1 -48

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Benefits of Strategic Management


Nonfinancial Benefits

Improved understanding of competitors strategies


Enhanced awareness of threats
Increased employee productivity
Reduced resistance to change
Enhanced problem-prevention capabilities

Ch 1 -49
Ch 1 -49

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Benefits of Strategic Management


Greenley
1. Identification of opportunities
2. Objective view of management problems
3. Improved coordination & control
4. Minimizes adverse conditions & changes
5. Decisions that better support objectives
6. Effective allocation of resources
7. Reduces resources and time spent correcting erroneous
decisions

Ch 1 -50

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Benefits of Strategic Management


Greenley (Contd)
8. Internal communication among personnel
9. Integration of individual behaviors
10. Clarify individual responsibilities
11. Encourages forward thinking
12. Cooperative approach to tackling problems and opportunities
13. Encourages favorable attitude toward change
14. Gives discipline to business management

Ch 1 -51

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Why Some Firms Do No Strategic Planning


Reasons why some firms are resistant to strategic planning
include:
Poor reward structures
Fire-fighting
Chief executives orientation
Lack of access to needed resources
Waste of time
Too expensive
Laziness
Content with success

Ch 1 -52

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Why Some Firms Do No Strategic Planning


(Contd)
Fear of failure
Overconfidence
Prior bad experience
Self-interest
Fear of the unknown
Honest difference of opinion
Suspicion

Ch 1 -53

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Pitfalls in Strategic Planning

Being aware of potential pitfalls of strategic planning and being


prepared to address them is essential to success.

Ch 1 -54

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Pitfalls in Strategic Planning


Some pitfalls to watch out for and avoid in
strategic planning
Using it to gain control over decisions and resources
Doing it only to satisfy accreditation and regulatory requirements
Too hastily moving from mission development to strategy
formulation
Failing to communicate the plan to employees
Top managers making many intuitive decisions that
conflict with the formal plan

Ch 1 -55

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Pitfalls in Strategic Planning


Some pitfalls to watch out for and avoid in strategic
planning (Contd)
Top managers not actively supporting the strategic planning
process
Failing to use plans as a standard for measuring performance
Delegating planning to a planner rather than involving all
managers
Failing to involve key employees in all phases of planning
Failing to create a collaborative climate supportive of change

Ch 1 -56

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Pitfalls in Strategic Planning


Some pitfalls to watch out for and avoid in
strategic planning (Contd)
Viewing planning as unnecessary or unimportant
Becoming so engrossed in current problems that insufficient or no
planning is done
Being so formal in planning that flexibility and creativity are stifled

Ch 1 -57

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Guidelines for Effective Strategic Management

Strategic Management must:


Not become a self-perpetuating bureaucratic mechanism
Not become ritualistic, stifled, orchestrated, too formal,
predictable, and rigid
Be a self-reflective learning process
Words supported by numbers, rather than numbers supported by
words
Represent the medium for explaining strategic issues and
organizational responses

Ch 1 -58

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Business Ethics & Strategic Management

Business Ethics:
Principles of conduct within organizations that guide decision
making and behavior
Code of Business Ethics:
Provides basis on which policies can be devised to guide daily
behavior and decisions in the workplace

Ch 1 -59

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Business Ethics & Strategic Management (Contd)

Good business ethics are prerequisite for good strategic


management

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Business Ethics & Strategic Management


Unethical Business Practices
Business practices that are always considered unethical include:
Misleading advertising
Misleading labeling
Harm to the environment
Insider trading
Dumping flawed products on foreign markets

Ch 1 -61

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Business Ethics & Strategic Management


Unethical Business Practices (Contd)
Poor product or service safety
Padding expense accounts
Lack of equal opportunities for foreign workers
Overpricing
Sweatshops
Hiring child labor

Ch 1 -62

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Natural Environment Perspective


Using ISO 14000 Certification to Gain Strategic
Advantage

What are ISO 14000 & 14001?


Requirements for ISO 14001
Environmental Management Systems (EMS)

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Ch 1 -63

The Nature of Global Competition

International/multinational corporations:
Parent company
Host country

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The Nature of Global Competition

Strategy implementation may be difficult


Cultural differences:
Norms
Values
Work ethic

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Advantages of International Operations

1. Absorb excess capacity/reduce unit costs


2. Extend the product life cycle
3. Low-cost production facilities
4. Less intense competition
5. Spread risk over wider markets

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Ch 1 -66

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Advantages of International Operations (contd)

6. Potential lower taxes


7. Joint ventures to build networks and knowledge
8. Foreign government incentives
9. Economies of scale

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Ch 1 -67

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Disadvantages of International Operations


1. Difficult communications
2. Underestimate foreign competition
3. Cultural barriers to effective management
4. Require understanding of regional trade organizations
5. Complications arising from currency differences
6. Availability of market information

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Ch 1 -68

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Ch 1 -69

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