Strategic Management What is Strategy and the Strategic Management Process? Mohammad Najjar, PhD...

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Strategic Management

What is Strategy and the Strategic Management Process?

Mohammad Najjar, PhD Management Science

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Learning Outcome

At the end of this chapter you will be able to:

1. Understand what is strategy.

2. Describe the strategic management process

3. Explain each dimension of the strategic management process

4. Gain, through case studies, a practical experience of the importance of strategic management

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Chess Game: What We Actually Do?

The game of chess is all about positioning your own pieces to gain advantage. The most advantageous positioning depends on: 1) the current positioning of your own

pieces, 2) the current positioning of your

opponent’s pieces, 3) the expected future positioning of

your opponent’s pieces, 4) and the desired future positioning of

your own pieces.

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Chess Game: What We Actually Do?

Therefore, one needs to understand the implications of current positioning and have an idea of what positioning the opponent is likely to adopt in the future.

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Case Study:Walt Disney Company

1984 Profits: $242 Million

Theme Park Operations: 77 percent of profits

Consumer Products: 22 percent of profits

Filmed Entertainment: 1 percent of profits

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Case Study:Walt Disney Company

Hired Michael Eisner - 1984

1. Increased admission prices at theme parks (used existing resources)1984 - $186 m 1989 - $787 m

2. Focused on movie studios and character development (used existing resources)1984 - $2.42 m 1994 - $845 m

3. Diversified into television (ABC), hotels, retail stores,sport team, cruise line, publishing, consumerproducts, licensing, etc. (acquired new resources)

Market Cap: 1984 = $2 billion 1994 = $28 billion

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Strategy Definition

Strategy: A firm’s theory about how to gain competitive advantages, may need a plan and a set of coordinated actions

Eisner’s theory may have been:

People will pay a premium price for extraordinaryentertainment. We have the necessary resources tocreate extraordinary entertainment. Therefore, let’sredeploy our resources in a different way and offersomething extraordinary to people.

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Strategic Management as a Process:

Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

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StrategicManagement as a Process:

Eisner went through a process—it may not have been exactly this process. For example, Eisner did not instantly decide to upgrade the theme parks. He went through a process of analysis before he came to the conclusion that updating the theme parks and increasing the admission price would likely lead to higher profits.

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Strategic Management: Mission

A firm’s mission is its reason for existenceMy mission is to give students a remarkable and superior experience to succeed in their jobs, and therefore their life.

Example: After short, but very successful careers in investment banking, two sisters started a shoe company. Their father had been a steel worker whose feet were badly injured in an industrial accident. These sisters were anxious to start a firm that had significant meaning to them. The mission of their new firm was “to provide the safest, highest quality shoes to the steel construction industry.” As you might imagine, they were passionate about the mission of their new firm: Steelcon Shoes.

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Strategic Management Process and the Mission:

Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice



Mission

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Strategic Management: MissionThe mission of the firm should inform all other parts of the strategic management process. Objectives should flow from the mission. External and internal analysis should be done with an appreciation for the firm’s mission. Strategic choices should reflect the mission. strategic implementation should be done with the mission of the firm in mind. Finally, the competitive advantage a firm possesses should be a reflection of the firm’s mission.

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Strategic Management: Mission

Think of one example (a leading company).What is the mission of the company?Do you think this firm could change what they do and how they do it given their respective mission?

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Strategic Management: Objectives

Objectives are specific and measureable targets.

My objectives is to improve students’ managerial skills and knowledge.

My mission is to give students a remarkable and superior experience to succeed in their jobs, and therefore their life. (In order to do this, I need specific and measureable objectives to direct my work)

The things a firm needs to ‘do’ to achieve its mission

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Objectives are specific and measureable targets.

My objectives is to improve students’ managerial skills and knowledge.

Specific: the focus is on students’ skills and knowledge

Measureable: for example through exams (can measure students’ knowledge) and through succeeding in work (skills can be measured later when they finish collage)

Objectives should influence/direct other elements in the strategic management process

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Answer:-Objectives should flow from the mission of the firm-Objectives are specific and measureable targets that a firm needs to reach in order to carry out its mission-To reach the targets, the firm needs to accomplish a set of tasks or activities – “do”

Again, Objectives “The things a firm needs to “do” to achieve its mission”

So, objectives are the things a firm should “do” or is it the “targets” a firm needs to achieve?

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Strategic Management: Mission and Objectives

1. The mission and objectives of a firm should serve as the basis or background for the strategic management process

2. A firm’s mission and objectives should inform the analysis done in every other segment of the model

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Strategic Management as a Process:

Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice



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Strategic Management: Internal and External Analysis

External analysis – a systematic examination of the environment in which the firm operates (phenomena external to the firm)

Internal analysis – a systematic examination of a firm’s resources and capabilities

External Analysis Internal Analysis

• Laws and Reg.

• Demographics

• Social trends

• Technology

• Human resources(knowledge)

• Manufacturingabilities

• Technology

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-External and internal analysis enable a firm to make appropriate strategic choices.

-For example, External and internal analysis are intended to enable managers to recognize sources of possible competitive advantage by identifying unmet needs in the external environment (external analysis) and the firm’s abilities to meet those needs (internal analysis).

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Example: Steelcon Shoes goes through an analysis of the external environment and its internal environment (resources) whenever it considers introducing a new line of shoes.

This analysis helps them identify opportunities (e.g. unmet needs) and threats (e.g. regulations or environmental concerns that affect their operations) in the external environment to which they should pay attention. It also helps them to recognize what strengths (e.g. have skilled workforce) and weaknesses (e.g. low design abilities) they have as a firm.

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External and internal analysis are critical steps in helping a firm determine what its theory will be regarding how to achieve competitive advantage.

Eisner’s theory may have been:

After visits to the parks and intensive analysis of the external and Internal environment, “Eisner thought that people will pay a premium price for extraordinary entertainment [opportunity]. We have the necessary resources [strength] to create extraordinary entertainment. Therefore, let’s redeploy our resources in a different way and offer something extraordinary to people.”

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Strategic Management: Strategic Choice

Strategic choice is the point in the process where managers choose how to organize and position the resources of the firm.

-Meaningful strategic choices can be made only when managers understand the external and internal environments they face

- Strategic choices are made at two levels: the business level and the corporate level

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Eisner thought that people will pay a premium price for extraordinary entertainment [opportunity]. We have the necessary resources [strength] to create extraordinary entertainment. Therefore, let’s redeploy our resources in a different way [Strategic Choice to organize and position the resources]… update the theme parks and offer something extraordinary to people [focusing on providing extraordinary services with higher price, business level]… Buying ABC, hotels, etc [new businesses, corporate level]

Strategic Choice can be:-Business level strategic choices deal with the positioning of a given business,

- A business may be positioned at the top of the market—high quality, high price, it may be positioned at the lower end of the market—low quality, low price, or it may be positioned somewhere in between these extremes

- Corporate level strategic choices determine in which businesses a firm will operate or decisions that will affect the entire group

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Notes:

-Many firms operate in more than one business (several business units).

- Firms may choose to manage each business differently (have different business level strategic choice for each business unit).

- Firms may make corporate level strategic choice any time it considers expanding into a new business. Thus, even small firms make corporate level strategic choices as they decide which business they will enter and which they will not.

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Strategic Management: Strategy Implementation

Strategy Implementation:

- How managers carry out the strategic choices they make

Who will do what (responsibility)

Implementation issues: Organizational structure (hierarchy) and control

• Who reports to whom

• How does the firm hire, promote, pay, etc.

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Strategy Implementation:

- -Implementation issues are important.

-For example, implementation issues affect how ‘happy’ people are working for a company [e.g. compensation may impact employees happiness, low pay means low happiness] . If your strategy is to offer customers an extraordinary entertainment , unhappy employees can be a serious liability [a problem ].

- So it is not only important to formulate strategy, but also intensive attention should be given to strategy implementation and related implementation issues.

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Summary of Strategy Implementation:

- A successful formulated strategy, may turn to a big failure when it comes to implementation

- Every strategic choice has implicit implementation issues associated with it.

- Different strategic choices may call for different implementation responses.

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Strategic Management: Competitive Advantage

Competitive Advantage: the ability to create more economic value than competitors, and it is the desired end state of the strategic management process

-All other elements of the strategic management process are aimed at and undertaken to achieve competitive advantage

-Competitive advantage is the result of doing something different and/or better than competitors

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Competitive Advantage, there is something about a firm’s offering to the market that allows the firm to realize greater economic value than competitors

-Question: why you choose to join An-Najah National University over others?

- What are the desirable characteristics of An-Najah National University that encouraged or made you prefer it over others?

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Competitive Advantage, there is something about a firm’s offering to the market that allows the firm to realize greater economic value than competitors

The difference in economic value come about in several different ways:

-Preferences/Differentiation: It could be that the product offered or the way it is offered causes people to prefer it to the point that they are willing to pay a higher price for the product and/or choose it over others (doing something different)

-Cost Advantage: It could be that the firm has figured out a way to produce and distribute the product at a lower cost than competitors (Wal-Mart, doing something similar but better than competitors)

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Temporary and Sustainable

- Competition limits the duration of competitive advantage in most cases

- Profits attract competition

- Competitive advantage typically results in high profits

Therefore,

- Most competitive advantage is temporary

- Competitors imitate the advantage or offer something better

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Some competitive advantages are sustainable if:

- Competitors are unable to imitate the source of advantage- No one conceives of a better offering

Of course,

- In time, even sustainable competitive advantage may be lost

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Competitive Advantage depends on consumers’ taste and what they want at a given point in time.

-Thus, - A competitive advantage can fade away due to changes in consumer preferences even if competitors do not

compete away the advantage

For example, SUVs /4-Wheel cars in the US (GM, Ford, etc)?

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Competitive Parity: Competitive parity means that a firm and/or its output are viewed as being about the same as other firms, or in other words, about average in the marketplace.

- firm’s offerings are ‘average’

- people do not have a preference for the firm’s offering

-the firm does not have a cost advantage over others

-Example, Jeans Clothes? Discuss.

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Competitive Disadvantage, causes might be:

-potential customers may have an aversion (preference not to buy) to a firm’s market offering, Why?

-the firm may have a cost disadvantage

-a firm may have outdated technology/equipment

-a firm may have a negative reputation

-Example, WalMart? Discuss Advantages and Disadvantages.

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Measuring Competitive Advantage:

-Superior Economic Performance is viewed as evidence of competitive advantage

- It is rather easy to see the evidence of competitive advantage (i.e. superior economic performance)

- Measuring the source of the advantage per se is typically impossible

-If there are several potential sources of competitive advantage within a firm, then the measurement issue becomes even more inexact

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Measuring Competitive Advantage:

Two Classes of Measures:

1) Accounting Measures

2) Economic Measures

• ROA, ROS, ROE, etc. that exceed industry averages

• earning a return in excess of the cost of capital

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Competitive Advantage

Disadvantage

Parity

Advantage

Below Normal

Normal

Above Normal

Economic Returns

• exceeding expectations

• meeting expectations

• failing expectations

Strategic Management:

Emergent vs. Intended Strategies

-The strategic management process leads managers to intended strategies

However,-Conditions often change or new information becomes available

Therefore,-Managers respond and adopt emergent strategies

Strategic Management:Summary

This course is not about mere survival, it is about thriving—achieving Competitive Advantage

• The strategic management process helps managers achieve competitive advantage

• Competitive advantage depends on differences

• Strategy is about discovering and exploiting these differences

Strategic Management:Summary

-You can use the process to identify and exploit difference between you and others

-You can use the process to determine if you want to stay with a company

-Strategy is often the difference between stumbling through life and moving ahead with purpose

Strategic Management What is Strategy and the Strategic Management Process? Mohammad Najjar, PhD...

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