Chapter 1 STRATEGIC MANAGEMENT

Techniques for Improving Decision Making

1. Devil's Advocacy 2. Dialectic Inquiry 3.Outside View

Scenario planning Involves:

1. Formulating plans that are based on "what-if" scenarios about the future 2. Encourages managers to: Think outside the box and be more flexible 3. Anticipate probable scenarios 4. Ivory tower planning

Strategic management Involves:

1. General Managers 2. Functional Manager 3. Multidivisional Company

Corporate-level managers

1. Oversee the development of strategies for the entire organization 2. Provide a link between people concerned with the firm's strategic development and the shareholders 3. Ensure that business strategies pursued by the company are consistent with maximizing profitability and profit growth

Functional- level managers

1. Responsible for specific business functions 2. Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers 3. Provide information that helps formulate realistic and attainable strategies

Dialectic inquiry

Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action- Promotes strategic thinking

Establishing major goals

Goal - Precise and measurable desired future state that a company attempts to realize

Outside View

Identification of past successful or failed strategic initiatives to determine if they will work for the current project

Strategy

Set of related actions that managers take to increase their company's performance

Steps in a formal strategic planning process

1. Select the corporate mission and goals 2. Analyze the organization's external competitive environment and internal operating environment 3. Select strategies that: Build on the organization's strengths and correct it's weaknesses 4. Are consistent with the organization's mission and goals 5. Are congruent and constitute a viable business model 6. Implement the strategies

Strategy implementation

1. Taking action at the functional, business, and corporate levels to execute a strategic plan 2. Designing the best organization structure, culture, and control systems to put a chosen strategy into action

Characteristics of Good Strategic Leaders

1. Vision, eloquence, and consistency 2. Articulation of a business model Commitment 3. Being well informed 4. Willingness to delegate and empower 5. Astute use of power 6. Emotional intelligence 7. Self-awareness, self-regulation, and motivation 8. Empathy and social skills

Business-level managers

1.Heads of business units 2. Translate statements of intents into concrete strategies for individual businesses 3. Are concerned with strategies specific to a particular business

Profit Growth is achieved by:

1.Selling products in rapidly growing markets 2.Gaining market share from rivals 3.Selling more to existing customers 4.Expanding overseas 5. diversifying into new businesses

To boost profitability and profit growth, managers must:

1.Use strategies to give their company a competitive advantage over rivals 2.Deliver high profitability and sustainable profit growth

Sustained competitive advantage

A company's strategies enable it to maintain above-average profitability for a number of years

Devil's Advocacy

A member of a decision-making team identifies all the considerations that might make a proposal unacceptable- Possible perils of recommended courses of action are brought into light

Global strategies

Address how to expand operations outside the home country- Since competitive advantage is determined at a global level

Goal of SWOT

Affirm a company-specific business model: To align, fit, or match a company's resources and capabilities to the demands of its environment

Availability Error

Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine it

Vision

Articulation of a company's desired achievements or future state

General Managers

Bear responsibility for a company's overall performance or for one of its major self-contained subunits or divisions

Types of Bias in Strategic decision making:

Cognitive Bias Prior Hypothesis Bias Escalating Commitment Representativeness Illusion of control Availability Error Reasoning by analogy

SWOT analysis

Comparison of strengths, weaknesses, opportunities, and threats

Multidivisional company

Competes in several different businesses and has a separate self-contained division to manage each

Strategic Leadership

Creating competitive advantage through effective management of the strategy-making process

Purpose of SWOT

Identify the strategies to: 1. Exploit external opportunities 2. Build on and protect company strengths 3. Eradicate weaknesses and counter threats

Escalating Commitment

Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing

Prior Hypothesis Bias

Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong

Corporate-level strategies

Determine: 1. The businesses a company should be in to maximize profitability and profit growth 2. How to gain a competitive edge

Functional-level strategies

Directed at improving the effectiveness of operations within a company

Business-level strategies

Encompass the business's overall competitive theme: 1. How it positions itself in the marketplace to gain a competitive advantage 2. Different position strategies that can be used in different industry settings

Risk Capital

Equity capital for which there is no guarantee that stockholder will: recoup their investment Earn a decent return

Firm Obtain competitive Advantage by :

Formulating and implementing strategies that enable their company to outperform rivals.

Profit growth

Increase in net profit over time

Components of a Mission statement:

Mission Vision Values Establishing major goals

Return on invested capital (ROIC)

Net profit over the capital invested in a firm

Competitive advantage

Occurs when a company's profitability is greater than the average profitability and profit growth of firms in its industry

Determinants of Shareholder Value

Profitabilty Effectiveness of strategies Profit Growth Shareholder Value

Feedback loop

Provide information to the corporate level on the: 1. Strategic goals that are being achieved 2. Degree of competitive advantage being created and sustained

Mission

Purpose of the company, or a statement of what the company strives to do

Strategy implementation

Putting strategies into action

Ivory Tower Planning

Recognizes that successful strategic planning encompasses managers at all levels of the corporation

Functional Managers

Responsible for supervising a particular function, task, activity, or operation

Profitability is the result of :

Result of how efficiently the capital is used to satisfy customer needs

Profitability

Return a company makes on the capital invested in the enterprise

Shareholder value

Returns that shareholders earn from purchasing shares in a company: Sources: Capital appreciation in the value of a company's shares Dividend payments

Strategy Formulation

Selecting strategies based on analysis of an organization's external and internal environment

Business unit

Self-contained division that provides a product or service for a particular market

Values

Statement of how employees should conduct themselves and their business to help achieve the company mission

Cognitive Biases

Systematic errors in human decision making Arise from the way people process information

Representativeness

Tendency to generalize from a small sample or a single vivid anecdote Violates the statistical law of large numbers

Illusion of Control

Tendency to overestimates one's ability to control events General or top managers are more prone to this

Many successful strategies are a result of serendipity rather than strategic planning

True

Unforeseen circumstances can adversely affect strategic plans

True

Reasoning Analogy

Use of simple analogies to make sense out of a complex problem