StrategyManagement ESLSCA July15

Strategic Management
MBA course - ESLSCA
Dr. Ashraf Elsafty

ashraf@ashrafelsafty.com
0100 146 3 111
1st Reference Book:

Strategic Management & Business Policy: 13th Edition, Thomas L. Wheelen,
J.David Hunger.
2nd Reference Book:

Exploring Corporate Strategy: Text &Cases, 8th Edition, Gerry Johnson, Kevan
Scholes, Richard Whittington.
1 1
STRATEGIC MANAGEMENT & BUSINESS POLICY
13TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER
Strategic Management: a set of managerial decisions
and actions that determines the long-run performance
of a corporation.
Includes:
• Internal and external environment scanning
• Strategy formulation
• Strategy implementation
• Evaluation and control
1-3
Phases of Strategic Management:
• Phase 1: Basic financial planning

• Phase 2: Forecast-based planning
• Phase 3: Externally oriented strategic planning
• Phase 4: Strategic management
1-4
Benefits of Strategic Management:
• Clearer sense of strategic vision for the

firm
• Sharper focus on what is strategically
important
• Improved understanding of a rapidly
changing environment
1-5
Additional Benefits of Strategic Management:
• Improved organizational • Strategic thinking

performance • Organizational learning
• Achieves a match
between the
organization’s
environment and its
strategy, structure and
processes
• Important in unstable
environments
1-6
Impact of Globalization:
Globalization: the integration and internationalization of

markets and corporations
1-7
Impact of Environmental Sustainability:
Environmental Sustainability: the use of business

practices to reduce a company’s impact on the natural,
physical environment
1-8
Impact of Environmental Sustainability
Risks of Climate Change include:
• Regulatory risk • Litigation risk

• Supply chain risk • Reputational risk
• Product and technology • Physical risk
risk
1-9
Population ecology: established organizations are
unable to adapt to change
Institution theory: organizations adapt by imitating

successful organizations
1-10
Strategic choice perspective: organizations adapt to
change and have the ability to reshape their
environment
Organizational learning theory: organizations adapt

defensively and use knowledge to improve their
relationship with the environment
1-11
Strategic flexibility: the ability to shift from one
dominant strategy to another and requires:
• Long-term commitment to the development and

nurturing of critical resources
• Learning organization
1-12
Learning organization: an organization skilled at
creating, acquiring, and transferring knowledge and at
modifying its behavior to reflect new knowledge and
insights
1-13
Main activities of a learning organization include:
• Solving problems • Learning from past

systematically experience, history and
experiences of others
• Experimenting with new
approaches • Transferring knowledge
quickly and easily
throughout the
organization
1-14
Basic Elements of Strategic Management
1. Environmental scanning
2. Strategy formulation
3. Strategy implementation
4. Evaluation and control
1-15
1-16
1-17
Environmental Scanning is the monitoring, evaluating

and disseminating of information from the external
and internal environments to key people within the
organization
1-18
1-19
Strategy Formulation: the development of long-range

plans for the effective management of environmental
opportunities and threats in light of organizational
strengths and weaknesses (SWOT)
1-20
Mission- the purpose or reason for the organization’s

existence
Vision- describes what the organization would like to

become
Objectives- the end results of planned activity
1-21
Strategies- form a comprehensive master plan that

states how the corporation will achieve its mission
and objectives
– Corporate
– Business
– Functional
Policies- the broad guidelines for decision making
that links the formulation of a strategy with its
implementation
1-22
1-23
Strategy implementation: the process by which

strategies and policies are put into action through the
development of:
• Programs
• Budgets
• Procedures
1-24
Evaluation and control: the process in which

corporate activities and performance results are
monitored so that actual performance can be
compared to desired performance
1-25
Performance: the end result of organizational activities
Feedback/Learning Process: revise or correct

decisions based on performance
1-26
Triggering event: something that acts as a stimulus for
a change in strategy and can include:
• New CEO
• External intervention
• Threat of change of ownership
• Performance gap
• Strategic inflection point
1-27
What Makes a Strategic Decision?
Strategic decision making focuses on the long-run

future of the organization
Characteristics of strategic decision making include:

• Rare
• Consequential
• Directive
1-28
Mintzberg’s Modes of Strategic Decision Making
• Entrepreneurial
• Adaptive
• Planning
• Logical incrementalism (Quinn)
1-29
Strategic Decision Making Process:
1. Evaluate current 5. Analyze strategic

performance results (SWOT) factors
2. Review corporate 6. Generate, evaluate and
governance select the best
3. Scan and assess the alternative strategy
external environment 7. Implement selected
4. Scan and assess the strategies
internal corporate 8. Evaluate implemented
environment strategies
1-30
1-31
1-32
Strategic audit provides a checklist of questions, by
area or issue, that enables a systematic analysis to be
made of various corporate functions and activities
1-33
1-34
1. Why has strategic management become so important
to today’s corporations?
2. How does strategic management typically evolve
in a corporation?
3. What is a learning organization? Is this approach to
strategic management better than the more traditional
top-down approach in which strategic planning is primarily
done by top management?
4. Why are strategic decisions different from other kinds
of decisions?
5. When is the planning mode of strategic decision making
superior to the entrepreneurial and adaptive modes?
1-35
13TH EDITION
Corporation: a mechanism established to allow different
parties to contribute capital, expertise and labor for
their mutual benefit
Corporation is governed by the board of directors

that oversees top management with the
concurrence of the shareholders.
Corporate governance: the relationship among the
board of directors, top management and shareholders in
determining the direction and performance of the
corporation
Due care: Board of directors are responsible that the
corporation is not harmed by members of the board.
Directors can be held liable
Responsibilities of the Board of Directors
• Sets corporate strategy, overall direction, mission, or

vision
• Hires and fires the CEO and top management
• Controls, monitors, or supervises top management
• Reviews and approves the use of resources
• Cares for shareholders’ interests
• Assures that the corporation is managed in accordance
with state laws, security regulations and conflict of
interest situations
Role of the Board in Strategic Management
• Monitor developments inside and outside the

corporation
• Evaluate and Influence management proposals,
decisions and actions
• Initiate and Determine the corporation’s mission and
strategies
Members of a Board of Directors
Inside Directors are officers or executives employed by

the board’s corporation
Outside Directors are executives of other firms but are

not employees of the board’s corporation
Affiliated directors- not employed by the corporation,

handle legal or insurance work
Retired executive directors- used to work for the

corporation, partly responsible for past decisions
affecting current strategy
Family directors- descendents of the founder and own

significant blocks of stock
Agency theory problems arise in corporations because

top management is not willing to accept responsibility
for their decisions unless they own a substantial amount
of stock in the corporation
Stewardship theory as the result of long tenure with

the corporation, insiders (top management) tend to
identify with the corporation and its success. Act in the
best interest of the corporation more than self-interest
Interlocking Directorates- useful for gaining both
inside information about an uncertain environment and
objective expertise about potential strategies and tactics
Direct interlocking directorate- when two firms share

a director or when an executive of one firm sits on the
board of a second
Indirect interlocking directorate- when two

corporations have directors who serve on the board of a
third firm
Nomination and Election of Board Members
97% of U.S. boards use nominating committees to

identify potential board members
Staggered boards- only a portion of board members

stand for re-election when directors serve more than
one year terms
Nomination and Election of Board Members
Criteria for a good director include:

– Willingness to challenge management when necessary
– Special expertise that is important to the company
– Available for outside meetings to advise management
– Expertise on global issues
– Understands the firm’s key technologies and processes
– Brings external contacts that are potentially valuable to the firm
– Has detailed knowledge of the firm’s industry
– Has high visibility in their field
– Is accomplished at representing the firm to stakeholders
Approximately 70% of the top executives of U.S.
publicly held companies hold the dual
designation of Chairman and CEO
Lead Director- is consulted by the Chair/CEO regarding
board affairs and coordinates the annual evaluation of
the CEO
• 96% of U.S. companies that combine the Chairman and

CEO positions had a lead director
Impact of the Sarbanes-Oxley Act on U.S.
Corporate Governance
Sarbanes Oxley Act 2002- designed to protect

shareholders from excesses and failed oversight of
boards of directors
– Whistleblower procedures
– Improved corporate
Impact of the Sarbanes-Oxley Act on U.S.
Corporate Governance
• Evaluating Governance
– Rating agencies
– S&P Corporate Governance Scoring System
• Avoiding Governance Improvements
– Multiple classes of stock
– Public to private ownership
– Controlled companies
Trends in Corporate Governance
• Boards shaping company strategy

• Institutional investors active on boards
• Shareholder demands that directors and top management own
significant stock
• More involvement of non-affiliated outside directors
• Increased representation of women and minorities
• Boards evaluating individual directors
• Smaller boards
• Splitting the Chairman and CEO positions
• Shareholders may begin to nominate board members
• Society expects boards to balance profitability with social needs of
society
Responsibilities of Top Management
Executive leadership is the directing of activities toward

the accomplishment of corporate objectives. Sets the
tone for the entire corporation
Strategic vision- description of what the company is

capable of becoming
Responsibilities of Top Management
Transformational Leaders provide change and

movement in an organization by providing a vision for that
change.
Characteristics include:
• CEO articulates a strategic vision for the corporation

• CEO presents a role for others to identify with and to
follow
• CEO communicates high performance standards and also
show confidence in the followers’ abilities to meet these
standards
Managing the Strategic Planning Process
Strategic planning staff- supports both top management
and the business units in the strategic planning process
Major responsibilities include:
• Identifying and analyzing company-wide strategic issues,

and suggesting corporate strategic alternatives to top
management
• Work as facilitators with business units to guide them
through the strategic planning process
1. When does a corporation need a board of directors?
2. Who should and should not serve on a board of directors?
3. Should a CEO be allowed to serve on another company’s
board of directors?
4. What would be the result if the only insider on a corporation’s
board were the CEO?
5. Should all CEOs be transformational leaders? Would you like
to work for a transformational leader?
13TH EDITION
13TH EDITION
Responsibilities of a Business Firm
Social Responsibility: proposes that a private

corporation has responsibilities to society that extend
beyond making a profit
3-60
Friedman’s traditional view of a business firm:

• Argues against the concept of social
responsibility
– Primary goal of business is profit maximization not
spending shareholder money for the general social
interest
3-61
Carroll’s four responsibilities of business: (in order

of priority)
• Economic
• Legal
• Ethical
• Discretionary
3-62
Carroll’s four responsibilities of business:
3-63
Social capital refers to the goodwill of key stakeholders

and provides a company with:
• The ability to enter local and • The ability to charge premium

international markets prices
• Enhanced reputation • Improved relationships with
suppliers and distributors
• Competitive advantage
• The ability to attract better
• Cost savings
talent
• Goodwill in the eyes of public
officials
• Access to capital
3-64
Characteristics of Sustainability
•Environmental
•Economic
•Social
3-65
Corporate Stakeholders
Stakeholders have an interest in the business and affect

or are affected by the achievement of the firm’s
objectives
Enterprise strategy- articulates the firm’s ethical

relationship with its stakeholders
3-66
Stakeholder Analysis- the identification of corporate
stakeholders in 3 steps:
1. Primary stakeholders have a direct connection with

the corporation and have sufficient bargaining power
to directly affect corporate activities
2. Secondary stakeholders have an indirect stake in
the corporation but are also affected by corporate
activities
3. Estimate the effect on each stakeholder from a
particular strategic decision
3-67
Reasons for Unethical Behavior
• Unaware that behavior is questionable

• Lack of standards of conduct
• Different cultural norms and values
• Behavior-based or relationship-based governance
systems
• Different values between business people and
stakeholders
3-68
Moral Relativism claims that morality is relative to some
personal, social, or cultural standard and that there is
not a method for deciding whether one decision is
better than another
3-69
Types of Moral Relativism include:
• Naïve relativism
• Role relativism
• Social group relativism
• Cultural relativism
3-70
Kohlberg’s Levels of Moral Development
• Preconventional level: concern for one’s self

• Conventional level: considerations for society’s laws
and norms
• Principled level: guided by an internal code of ethics
3-71
Encouraging Ethical Behavior
• Code of Ethics- specifies how an organization

expects its employees to behave while on the job
• Whistleblowers- employees who report illegal or

unethical behavior on the part of others
3-72
Key Terms in Ethical Behavior
Ethics- the consensually accepted standards of behavior

for an occupation, trade, or profession
Morality- the precepts of personal behavior based on
religious or philosophical grounds
Law is the formal codes that permit or forbid certain
behaviors and may or may not enforce ethics or
morality
3-73
Approaches to Ethical Behavior
Utilitarian- actions are judged by consequences

Individual rights- fundamental rights should be
respected
Justice- decisions must be equitable, fair and impartial in
the distribution of costs and benefits to individuals or
groups
3-74
Cavanagh’s questions to solve ethical problems:
1. Utility- does it optimize the satisfactions of the

stakeholders?
2. Rights- Does it respect the rights of the individuals
involved
3. Justice- Is it consistent with the canons of justice?
3-75
Kant’s categorical imperatives:
1. Actions are ethical only if the person is willing for the

same action to be taken by everyone who is in a
similar situation
2. Never treat another person simply as a means but
always as an end
3-76
1. What is the relationship between corporate
governance and social responsibility?
2. What is your opinion of GAP International’s having

a code of conduct for its suppliers? What would
Milton Friedman say? Contrast his view with Archie
Carroll’s view.
3-77
3. Does a company have to act selflessly to be considered
socially responsible? For example, when building a new
plant, a corporation voluntarily invested in additional
equipment that enabled it to reduce its pollution emissions
beyond any current laws. Knowing that it would be very
expensive for its competitors to do the same, the firm
lobbied the government to make pollution regulations
more restrictive on the entire industry.
Is this company socially responsible? Were its managers
acting ethically?
3-78
4. Are the people living in a relationship-based governance
system likely to be unethical in business dealings?
5. Given that people rarely use a company’s code of ethics

to guide their decision making, what good are the codes?
3-79
13TH EDITION
Environmental scanning- the monitoring, evaluation
and dissemination of information from the external
and internal environments to key people within the
corporation
4-81
Identifying External Environmental Variables
• Natural environment
• Societal environment
• Task environment
4-82
Natural environment
• Physical resources
• Wildlife
• Climate
4-83
Societal environment- social systems that influence

long-term decisions
• Economic forces
• Technological forces
• Political-legal forces
• Sociocultural forces
4-84
Task environment- groups that directly affect a

corporation and are affected by the corporation
• Government
• Local communities
• Suppliers
• Competitors
• Customers
• Creditors
• Unions
• Special interest groups/trade associations
4-85
Industry analysis- an in-depth examination of

key factors within a corporation’s task
environment
4-86
STEEP Analysis- monitoring trends in the

societal and natural environments
– Sociocultural-
– Technological-
– Economic-
– Ecological-
– Political-legal forces
4-87
Trends in Economic Forces:
• Interest rates
• Home sales
• Oil prices
• Emerging markets
• BRIC countries
• Eastern Europe
4-88
4-89
Trends in Technological Forces:
– Portable information devices and electronic

networking
– Alternative energy sources
– Precision farming
– Virtual personal assistants
– Genetically altered organisms
– Smart, mobile robots
4-90
Trends in Political-Legal Forces:
– Enforcement of U.S. antitrust laws

– Taxation and labor laws
– Government bureaucracy
– World Trade Organization
4-91
Trends in Sociocultural Forces:
– Demographics
– Increasing environmental awareness
– Growing health consciousness
– Expanding seniors market
– Impact of Gen Y
– Declining mass market
– Changing pace and location of life
– Changing household composition
– Increasing diversity of workforce and markets
4-92
4-93
4-94
4-95
Identifying External Strategic Factors:
Issues priority matrix- used to identify and analyze

developments in the external environment
External strategic factors- key environmental trends

that are judged to have both a medium to high
probability of occurrence and a medium to high
probability of impact on the corporation
4-96
4-97
Industry- a group of firms that produces a
similar product or service
Porter’s 5 forces:
– Threat of new entrants
– Rivalry among existing firms
– Threat of substitute products
– Bargaining power of buyers
– Bargaining power of suppliers
– Relative power of other stakeholders (added)
4-98
4-99
Threat of new entrants- new entrants to an
industry bring new capacity, a desire to gain
market share and substantial resources
4-100
Entry barrier- an obstruction that makes it difficult for
a company to enter an industry
• Economies of scale •Access to distribution

• Product differentiation channels
• Capital requirements •Cost disadvantages due to
size
• Switching costs
•Government policies
4-101
Rivalry Among Existing Firms- new entrants to an
industry bring new capacity, a desire to gain
market share and substantial resources
• Number of competitors
• Rate of industry growth
• Product or service characteristics
• Amount of fixed costs
• Capacity
• Height of exit barriers
• Diversity of rivals
4-102
Threat of Substitute Products or Services-
products that appear different but can satisfy the
same need as another product
4-103
Bargaining Power of Buyers- ability of buyers to
force prices down, bargain for higher quality, play
competitors against each other
• Large purchases
• Backward integration
• Alternative suppliers
• Low cost to change suppliers
• Product represents a high percentage of buyer’s
cost
• Buyer earns low profits
• Product is unimportant to buyer
4-104
Bargaining Power of Suppliers- ability of suppliers
to raise prices or reduce quality
• Industry is dominated by a few companies

• Unique product or service
• Substitutes are not readily available
• Ability to forward integrate
• Unimportance of product or service to the industry
4-105
Relative Power of Other Stakeholders
• Government
• Local communities
• Creditors
• Trade associations
• Special interest groups
• Unions
• Shareholders
• Complementors- products that work well with a
firm’s product
4-106
Industry Evolution
• Fragmented industry- no firm has a large

market share and each firm only serves a small
piece of the total market in competition with other
firms
• Consolidated industry- domination by a few
large firms, each struggles to differentiate products
from its competition
4-107
Categorizing International Industries
• Multi-domestic Industries- specific to each

country or group of countries
• Global Industries- operate worldwide with

multinational companies making only small
adjustments for country-specific circumstances
• Regional industries- multinational companies

primarily coordinate their activities within regions
4-108
4-109
Strategic group- a set of business units or firms that
pursue similar strategies with similar resources
4-110
4-111
Strategic Types
• Defenders- focus on improving efficiency

• Prospectors- focus on product innovation and
market opportunities
• Analyzers- focus on at least two different product
market areas
• Reactors- lack a consistent strategy-structure-
culture relationship
4-112
Hypercompetition
Creates a condition of disequilibrium and

change
• Competitive advantage comes from:

– knowledge of environment
– willingness to take risks
– Cannibalization of own products
4-113
Key success factors- variables that can significantly
affect the overall competitive positions of
companies within an industry
Industry matrix- summarizes the key success factors

within a particular industry
4-114
4-115
Using Key Success Factors to Create an
Industry Matrix
Competitive intelligence (business intelligence)- a

formal program of gathering information on a
company’s competitors
Sources of competitive intelligence:

• Information brokers
• Internet
• Industrial espionage
• Investigatory services
4-116
Monitoring Competitors for Strategic Planning
Primary activity of competitive intelligence is to

monitor competitors
Competitors organizations that offer same, similar, or

substitute products or services in the business
areas in which a particular company operates
4-117
• Forecasting is based on a set of assumptions
• Faulty underlying assumptions are the most

frequent cause of forecasting errors
Useful forecasting techniques
• Extrapolation •Delphi technique

• Brainstorming •Statistical modeling
• Expert opinion •Prediction markets
• Industry Scenario •Cross impact analysis
4-118
4-119
4-120
1. Discuss how a development in a corporation’s natural and
societal environments can affect the corporation through
its task environment
2. According to Porter, what determines the level of
competitive intensity in an industry?
3. According to Porter’s discussion of industry analysis, is
Pepsi Cola a substitute of Coca Cola?
4. How can a decision maker identify strategic factors in a
corporation’s external international environment?
5. Compare and contrast trend extrapolation with the writing
of scenarios as forecasting techniques
4-121
13TH EDITION
Organizational analysis- concerned with identifying
and developing an organization’s resources and
competencies
5-123
Core and Distinctive Competencies
Resources- an organization’s assets

• Tangible
• Intangible
Capabilities- a corporation’s ability to exploit its
resources
5-124
Competency- a cross-functional integration and

coordination of capabilities
Core competency- a collection of competencies that
cross divisional boundaries, is wide-spread
throughout the corporation and is something the
corporation does exceedingly well
Distinctive competency- core competencies that are
superior to those of the competition
5-125
VRIO framework (Barney)

• Value
• Rare
• Imitability
• Organization
5-126
Using Resources to Gain Competitive Advantage
1. Identify and classify resources in terms of strengths and

weaknesses
2. Combine the firm’s strengths into specific capabilities and
core competencies
3. Appraise profit potential- Are there any distinctive
competencies?
4. Select the strategy that best exploits the firm’s capabilities
and competencies relative to external opportunities
5. Identify resource gaps and invest in upgrading weaknesses
5-127
Access to a Distinctive Competency
1. Asset endowment
2. Acquired from someone else
3. Shared with another business
4. Built and accumulated within the company
5-128
Access to a Distinctive Competency
Clusters- geographic concentrations of

interconnected companies and industries
Access to:
• Employees
• Suppliers
• Information
• Complementary products
5-129
Imitability an Advantage
Durability- the rate at which a firm’s underlying

resources, capabilities, or core competencies
depreciate or become obsolete
Imitability- the rate at which a firm’s underlying

resources, capabilities, or core competencies can
be duplicated by others
5-130
Determining the Sustainability of an Advantage
Transparency- the speed at which other firms under

the relationship of resources and capabilities
support a successful strategy
Transferability- the ability of competitors to gather
the resources and capabilities necessary to support
a competitive challenge
Replicability- the ability of competitors to use
duplicated resources and capabilities to imitate the
other firm’s success
5-131
Determining the Sustainability of an Advantage
Explicit knowledge- knowledge that can be easily

articulated and communicated
Tacit knowledge- knowledge that is not easily

communicated because it is deeply rooted in
employee experience or in the company’s culture
5-132
5-133
Business models- a company’s method for making
money in the current business environment
Includes
• Who the company serves
• What the company provides
• How the company makes money
• How the company differentiates and sustains
competitive advantage
• How the company provides its product/service
5-134
Business models
• Customer solutions model

• Profit pyramid model
• Multi-component system/installed model
• Advertising model
• Switchboard model
5-135
Business models (cont’d)
• Efficiency model
• Blockbuster model
• Profit multiplier model
• Entrepreneurial model
• De Facto industry standard model
5-136
Value chain- a linked set of value creating activities that
begin with basic raw materials coming from suppliers,
moving on to a series of value-added activities
involved in producing and marking a product or
service, and ending with distributors getting the final
goods into the hands of the ultimate consumer
5-137
Industry Value Chain Analysis
Value chain segments include:

• Upstream
• Downstream
Center of gravity- the part of the chain that is most

important to the company and the point where its
core competencies lie
– Vertical integration
5-138
Corporate Value Chain Analysis
Primary activities Support activities

• Inbound logistics • Procurement
• Operations • Technology development
• Outbound logistics • Human resource
management
• Firm infrastructure
5-139
5-140
Corporate Value Chain Analysis
1. Examine each product line’s value chain in terms of

the various activities involved in producing the product
or service
2. Examine the linkages within each product line’s value
chain
3. Examine the potential synergies among the value
chains of different product lines or business units
5-141
Basic Organizational Structures
• Simple
• Functional
• Divisional
• Strategic Business Units
• Conglomerate
5-142
5-143
Corporate Culture: The Company Way
Corporate culture- the collection of beliefs, expectations

and values learned and shared by a corporation’s
members and transmitted from one generation of
employees to another.
5-144
Functions of Corporate Culture
• Conveys a sense of identity for employees

• Generates employee commitment
• Adds to the stability of the organization as a
social system
• Serves as a frame of reference for
employees to understand organizational
activities and as a guide for behavior
5-145
Corporate Culture: The Company Way
Cultural intensity- the degree of which members of a unit

accept the norms, values and other cultural content
associated with the unit
Shows the depth of the culture
Cultural integration- the extent of which units
throughout the organization share a common culture
Shows the breadth of the culture
5-146
Strategic Marketing Issues
Market position- Who are our customers?
Marketing Mix- the particular combination of key

variables under a corporation’s control that can be used
to affect demand and to gain competitive advantage
5-147
5-148
Product life cycle- product monetary sales over time
from introduction through growth and maturity to
decline
5-149
Brand- a name given to a company’s product which
identifies that item in the mind of the consumer
Corporate brand- a type of brand in which the company’s

name serves as the brand
5-150
Corporate reputation- a widely held perception of a
company by the general public
• Stakeholders’ perceptions of quality

• Corporation’s prominence in the minds of stakeholders
5-151
Strategic Financial Issues
Financial leverage- ratio of total debt to total assets

• Used to describe how debt is used to increase earnings
available to common shareholders
Capital budgeting- the analyzing and ranking of possible
investments in fixed assets in terms of additional
outlays and receipts that will result from each
investment
• Hurdle point
5-152
Strategic Research and Development Issues
R & D intensity- pending no R & D as a percentage of

sales revenue
Technology competence- the development and use of
innovative technology
Technology transfer- the process of taking new
technology from the laboratory to the marketplace
5-153
R & D Mix- the mix of:

Basic R & D- focuses on theoretical problems
Product R & D- concentrates on marketing and is
concerned with product or product packaging
improvements
Engineering R & D is concerned with engineering,
concentrating on quality control, and the development
of design specifications and improved production
equipment
5-154
Technology discontinuity- when a new technology

cannot be used to enhance current technology, but
substitutes for the technology to yield better
performance
• Moore’s Law
5-155
5-156
Strategic Operations Issues
Intermittent Systems- item is normally processed

sequentially, but the work and sequence of the process
vary
Continuous systems- work is laid out in lines on which

products can be continuously assembled or processed
Operating leverage- impact of a specific change in sales

volume on net operation income
5-157
Experience curve- unit production costs decline by some

fixed percentage each time the total accumulated
volume of production units doubles
5-158
Flexible Manufacturing for Mass Customization

• Computer Assisted Design
• Computer Assisted Manufacturing
• Economies of Scale
5-159
Strategic Human Resource Issues
Teams
Autonomous (self-managed)- a group of people
working together without a supervisor to plan,
coordinate and evaluate their work
Cross-functional work teams- various disciplines are
involved in a project from the beginning
Concurrent engineering- specialists work side-by-side
and compare notes constantly to design cost-effective
products with features customers want
5-160
Virtual Teams- groups of geographically or

organizationally dispersed coworkers that are
assembled using a combination of telecommunications
and information technologies to accomplish
organizational tasks- driven by 5 trends
5-161
• Flatter organizational structures

• Turbulent environments
• Increased employee autonomy
• Higher knowledge requirements
• Increased globalization
• Increased employee decision making
5-162
Quality of work life- includes improvements in:

• Introducing participative problem solving
• Restructuring work
• Introducing innovative reward systems
• Improving the work environment
5-163
Human diversity- the mix in the workplace of people

from different races, cultures and backgrounds
• Provides a sustainable competitive advantage
5-164
Strategic Information Systems/Technology Issues
Information systems/technology contributions to

performance:
• Automation of back office processes
• Automation of individual tasks
• Enhancement of key business functions
• Development of a competitive advantage
5-165
Current trends in Information systems/technology

Internet include:
• Intranet
• Extranet
• Web 2.0
5-166
Supply chain management- networks for sourcing raw

materials, manufacturing products or creating services,
storing, and distributing goods, and delivering them to
customers and consumers
5-167
5-168
1. What is the relevance of the resource-based view of the
firm to strategic management in a global environment?
2. How can value chain analysis help indentify a company’s
strengths and weaknesses?
3. In what ways can a corporation’s structure and culture
be internal strengths and weaknesses?
4. What are the pros and cons of management using the
experience curve to determine strategy?
5. How might a firm’s management decide whether it should
continue to invest in current known technology or
in new, but untested technology? What factors might
encourage or discourage such a shift?
5-169
13TH EDITION
Strategy formulation- concerns developing a
corporation’s mission, objectives, strategies and
policies
Situation Analysis- the process of finding a strategic

fit between external opportunities and internal
strengths while working around external and
internal weaknesses
6-171
SWOT- Strengths-Weaknesses-Opportunities-Threats
Strategy= opportunity/capacity
Opportunity has no real value unless a company has the
capacity to take advantage of that opportunity
6-172
Criticisms of SWOT analysis
• Generates lengthy lists

• Uses no weights to reflect priorities
• Uses ambiguous words and phrases
• Same factor can be in 2 categories
• No obligation to verify opinion with data or analysis
• Requires only a single level of analysis
• No logical link to strategy implementation
6-173
Generating a Strategic Factors Analysis
Summary (SFAS) Matrix
SFAS summarizes an organization’s strategic factors by

combining the external factors from the EFAS Table
with the internal factors from the IFAS Table
6-174
6-175
Finding a Propitious Niche
Propitious niche- where an organization can use its

core competencies to take advantage of a
particular market opportunity and the niche is just
large enough for one firm to satisfy its demand
Strategic sweet spot- a company is able to satisfy

customers’ needs in a way that rivals cannot
Strategic window- a unique market opportunity that

is available for a particular time
6-176
6-177
Review of Mission and Objectives
A re-examination of an organization’s current

mission and objectives must be made
before alternative strategies can be
generated and evaluated
Performance problems can derive from

inappropriate (narrow or too broad) mission
statements and objectives
6-178
TOWS Matrix- illustrates how the external opportunities
and threats can be matched with internal strengths and
weaknesses to result in 4 possible strategic alternatives
• Provides a means to brainstorm alternative strategies

• Forces managers to create various kinds of growth and
retrenchment strategies
• Used to generate corporate as well as business
strategies
6-179
6-180
Business strategy focuses on improving the competitive
position of a company’s or business unit’s products or
services within the specific industry or market
segment it serves
6-181
Business strategy is comprised of:
• Competitive strategy
• Cooperative strategy
6-182
Porter’s competitive strategies
Lower cost strategy- the ability of a company or a business

unit to design, produce and market a comparable product
more efficiently than its competitors
Differentiation strategy- the ability of a company or a

business unit to provide a unique or superior value to the
buyer in terms of product quality, special features, or
after sale service
6-183
Cost leadership- a lower-cost competitive strategy that

aims at the broad mass market and requires efficient
scale facilities, cost reductions, cost and overhead
control; avoids marginal customers, cost minimization
in R&D, service, sales force and advertising
• Provides a defense against competitors

• Provides a barrier to entry
• Generates increased market share
6-184
Differentiation- involves the creation of a product or

service that is perceived throughout the industry as
unique. Can be associated with design, brand image,
technology, features, dealer network, or customer
service
• Lowers customers sensitivity to price

• Increases buyer loyalty
• Barrier to entry
• Can generate higher profits
6-185
Cost Focus- low-cost competitive strategy that focuses

on a particular buyer group or geographic market and
attempts to serve only this niche to the exclusion of
others
Differentiation Focus- concentrates on a particular

buyer group, product line segment, or geographic
market to serve the needs of a narrow strategic
market more effectively than its competitors
6-186
6-187
Risks in Competitive Strategies
6-188
Issues in Competitive Strategies
Stuck in the middle- when a company has no

competitive advantage and is doomed to below-
average performance
6-189
Issues in Competitive Strategies
Entrepreneurial firms follow focus strategies

where they focus their product or service on
customer needs in a market segment and
differentiate based on quality and service
6-190
6-191
Industry Structure and Competitive Strategy
Fragmented industry- many small- and medium-sized

companies compete for relatively small shares of the
total market
• Products are typically in early stages of product life
cycle
• Focus strategies are used
6-192
Industry Structure and Competitive Strategy
Consolidated industry- domination by a few large

companies
• Emphasis on cost and service

• Economies of scale
• Regional and national brands
• Slower growth over capacity
• Knowledgeable buyers
6-193
Hyper-competition and Competitive Advantage
Sustainability
Competitive advantage in a hyper-competitive market is

characterized by a continuous series of multiple short-
term initiatives that replace current products with new
products before competitors can do so.
• Leads to an over emphasis on short-term tactics
6-194
Competitive Tactics
Tactic- a specific operating plan that details how a

strategy is going to be implemented in terms of when
and where it is to be put into action
• Narrower in scope and shorter in time horizon than
strategies
6-195
6-196
Timing Tactics: When to Compete
Timing Tactics- when a company implements a strategy
• First movers
• Late movers
6-197
Market Location: Where to Compete
Market location tactics- where a company implements a strategy
Offensive tactics Defensive tactics

• Frontal assault • Raise structural barriers
• Flanking maneuver • Increase expected
retaliation
• Bypass attack
• Lower the inducement for
• Encirclement
attack
• Guerrilla warfare
6-198
Cooperative Strategies- used to gain a competitive
advantage within an industry by working with other
firms
6-199
Collusion- the active cooperation of firms within an
industry to reduce output and raise prices to avoid
economic law of supply and demand
6-200
Strategic Alliances- a long-term cooperative
arrangement between two or more independent firms
or business units that engage in business activities for
mutual economic gain
Used to:
• Obtain or learn new capabilities
• Obtain access to specific markets
• Reduce financial risk
• Reduce political risk
6-201
Types of Cooperative Agreements
• Mutual Service Consortia

• Joint Venture
• Licensing Arrangements
• Value-Chain Partnerships
6-202
1. What industry forces might cause a propitious niche
to disappear?
2. Is it possible for a company or business unit to follow
a cost leadership and a differentiation strategy
simultaneously? Why or why not?
3. Is it possible for a company to have a sustainable competitive
advantage when its industry becomes hyper-competitive?
4. What are the advantages and disadvantages of being a
first mover in an industry? Give some examples
of first movers and late mover firms.
5. Why are strategic alliances temporary?
6-203
13TH EDITION
Corporate strategy- the choice of direction of the
firm as a whole and the management of its
business or product portfolio and concerns:
• Directional strategy
• Portfolio analysis
• Parenting strategy
7-205
Directional strategy- the firm’s overall orientation
toward growth, stability, or retrenchment
7-206
Portfolio analysis- industries or markets in which the
firm competes through its products and business
unites
7-207
Parenting strategy- the manner in which
management coordinates activities and transfers
resources and cultivates capabilities among product
lines and business units
7-208
7-209
Growth Strategy:
Concentration and Diversification
• Merger- a transaction involving two or more

corporations in which stock is exchanged but in which
only one corporation survives
• Acquisition- the purchase of a company that is

completely absorbed by the subsidiary or division of
the acquiring corporation
7-210
Growth Strategy
Concentration
• Vertical
• Horizontal
Diversification
• Concentric
• Conglomerate
7-211
Concentration strategies
Vertical growth- taking over the function previously

provided by a supplier or by a distributor
• Vertical integration- the degree to which a firm
operates vertically in multiple locations on an
industry’s value chain from extracting raw materials
to manufacturing to retailing
– Backward integration- assuming a function previously
provided by a supplier
– Forward integration- assuming a function previously
provided by a distributor
7-212
Concentration strategies
Transaction cost economies- vertical integration is

more efficient than contracting for goods and
services in the marketplace when the transaction
costs of buying on the open market become too
great
7-213
• Full integration- a firm internally makes 100% of its
key suppliers and completely controls its distributors
• Taper integration- a firm internally produces less

than half of its own requirements and buys the rest
from outside suppliers
7-214
• Quasi-integration- a company does not make any of
its key supplies but purchases most of its
requirements from outside suppliers that are under
its partial control
• Long-term contracts- agreements between 2 firms

to provide agreed-upon goods and services to each
other for a specific period of time
7-215
7-216
Horizontal growth- expansion of operations into other
geographic locations and/or increasing the range of
products and services offered to current markets
• Horizontal growth is achieved through:
– Internal development
– Acquisitions
– Strategic alliances
Horizontal integration- the degree to which a firm

operates in multiple geographic locations at the
same point on an industry’s value chain
7-217
International Entry Options for Horizontal Growth
• Exporting • Green-Field Development

• Licensing • Production Sharing
• Franchising  Turn-key Operations
• Joint Venture  BOT Concept
• Acquisitions  Management Contracts
7-218
Diversification Strategies
Concentric (Related) Diversification- growth into a

related industry when a firm has a strong competitive
position but attractiveness is low
7-219
Synergy- when two businesses will generate more profits

together than they could separately
7-220
Conglomerate (Unrelated) Diversification- growth

into an unrelated industry
• Management realizes that the current industry is
unattractive
• Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in other
industries
7-221
Controversies in Directional Strategies
• Is vertical growth better than horizontal

growth?
• Is concentration better than diversification?
• Is concentric diversification better than
conglomerate diversification?
7-222
Stability Strategies- continuing activities without any
significant change in direction
• Pause/Proceed with caution strategy- an opportunity

to rest before continuing a growth or retrenchment
strategy
• No change strategy- continuance of current operations

and policies
• Profit Strategies- to do nothing new in a worsening

situation but instead to act as though the company’s
problems are only temporary
7-223
Retrenchment Strategies- used when the firm has a
weak competitive position in some or all of its product
lines from poor performance
7-224
Retrenchment Strategies
Turnaround strategy- emphasizes the improvement of

operational efficiency when the corporation’s
problems are pervasive but not critical
• Contraction- effort to quickly “stop the bleeding”

across the board but in size and costs
• Consolidation- stabilization of the new leaner

corporation
7-225
Captive Company Strategy- company gives up
independence in exchange for security
Sell-out strategymanagement can still obtain a good

price for its shareholders and the employees can keep
their jobs by selling the company to another firm
Divestment- sale of a division with low growth potential
7-226
Bankruptcy- company gives up management of the firm to
the courts in return for some settlement of the
corporation’s obligations
Liquidation- management terminates the firm
7-227
Portfolio analysis- management views its product lines
and business units as a series of investments from
which it expects a profitable return
Popular portfolio analysis techniques include:

• BCG Matrix
• GE Business Screen
7-228
BCG Matrix
Question marks- new products with the potential for

success but require a lot of cash for development
Stars- market leaders at the peak of their product cycle

and are able to generate enough cash to maintain
their high market share and usually contribute to the
company’s profits
7-229
BCG Matrix
Cash cows- products that bring in far more money than is

needed to maintain their market share
Dogs- products with low market share and do not have

the potential to bring in much cash
7-230
7-231
BCG Matrix- Limitations
• Use of highs and lows to form categories is too

simplistic
• Link between market share and profitability is
questionable
• Growth rate is only one aspect of industry
attractiveness
• Product lines or business units are considered only in
relation to one competitor
• Market share is only one aspect of overall competitive
position
7-232
7-233
GE Business Screen- Limitations
• Complex and cumbersome

• Numerical estimates of industry attractiveness and
business strength/competitive position give the
appearance of objective, but are actually subjective
judgments that can vary from person to person
• Cannot effectively depict the positions of new products
and business units in developing industries
7-234
Advantages and Limitations of Portfolio Analysis
Advantages:
• Encourages top management to evaluate each of the
corporation’s businesses individually and to set
objectives and allocate resources for each
• Stimulates the use of externally oriented data to
supplement management’s judgment
• Raises the issue of cash flow availability to use in
expansion and growth
7-235
Advantages and Limitations of Portfolio Analysis
Limitations:
• Defining product/market segments is difficult
• Suggest the use of standard strategies that can miss
opportunities or be impractical
• Provides an illusion of scientific rigor when in reality
positions are based on objective judgments
• Value-laden terms such as cash cow and dog can lead
to self-fulfilling prophecies
• Lack of clarity on what makes an industry attractive or
where a product is in its life cycle
7-236
Managing a Strategic Alliance Portfolio
1. Developing and implementing a portfolio strategy for

each business unit and a corporate policy for
managing all the alliances of the entire company
2. Monitoring the alliance portfolio in terms of
implementing business units’ strategies and corporate
strategy and policies
3. Coordinating the portfolio to obtain synergies and
avoid conflicts among alliances
4. Establishing an alliance management system to
support other tasks of multi-alliance management
7-237
Corporate parenting- views a corporation in terms of
resources and capabilities that can be used to build
business unit value as well as generate synergies
across business units
• Generates corporate strategy by focusing on the core

competencies of the parent corporation and the value
created from the relationship between the parent and
its businesses
7-238
Developing a Corporate Parenting Strategy
1. Examine each business unit in terms of its strategic

factors
2. Examine each business unit in terms of areas in which
performance can be improved
3. Analyze how well the parent corporation fits with the
business unit
7-239
Horizontal Strategy and Multipoint Competition
Horizontal strategy- cuts across business unit

boundaries to build synergy across business units and
to improve competitive position in one of more
business units
Multipoint competition- large multi-business

corporations compete against other large multi-
business firms in a number of markets
7-240
1. How does horizontal growth differ from vertical growth
as a corporate strategy? From concentric diversification?
2. What are the tradeoffs between an internal and an external
growth strategy? Which approach is best as an international
entry strategy?
3. Is stability really a strategy or just a term for no strategy?
4. Compare and contrast SWOT analysis with portfolio
analysis.
5. How is corporate parenting different from portfolio analysis?
How is it alike? Is it a useful concept in a global industry?
7-241
13TH EDITION
Functional strategy- the approach a functional area
takes to achieve corporate and business unit
objectives and strategies by maximizing resource
productivity
8-243
Marketing strategy deals with pricing, selling and
distributing a product
8-244
Market development strategy- provides the ability
to:
• Capture a larger market share
– Market saturation
– Market penetration
• Develop new uses and/or markets for current
products
8-245
Product development strategy- provides the ability
to:
• Develop new products for existing markets
• Develop new products for new markets
8-246
• Line extension- using a successful brand name to
market other products
• Push strategy- promotions to gain or hold shelf space

in retail outlets
• Pull strategy- advertising to “pull” products through the

distribution channels
8-247
• Skim pricing- offers the opportunity to “skim the
cream” from the top of the demand curve with a high
price while the product is novel and competitors are
few
• Penetration pricing- attempts to hasten market

development and offers the pioneer the opportunity to
use the experience curve to gain market share with low
price and then dominate the industry
8-248
Financial Strategy- examines the financial implications of
corporate and business-level strategic options and
identifies the best financial course of action
Financial strategy includes the management of:

• Dividends
• Stock price
• Sales of company patents
8-249
Leveraged buyout- company is acquired in a transaction
financed largely by debt usually obtained from a third
party
Reverse stock split- investor’s shares are split in half for

the same total amount of money
8-250
Research and Development Strategy- deals with
product and process innovation and improvement
• Technological leader- pioneers innovation

• Technological follower- imitates the products of
competitors
• Open innovation- use of alliances and connections with
corporate, government, academic labs and consumers
to develop new products and processes
8-251
8-252
Operations Strategy- determines how and where a
product or service is to be manufactured, the level of
vertical integration in the production process, the
deployment of physical resources and relationships
with suppliers
Manufacturing Types include
• Job shops •Mass production systems

•Continuous improvement
• Connected line batch flow
•Modular manufacturing
• Flexible manufacturing systems
•Mass customization
• Dedicated transfer lines
8-253
Purchasing Strategy- deals with obtaining raw materials,
parts and supplies needed to perform the operations
function
Options include:
• Sole suppliers (Deming)

• Just-in-time
• Parallel sourcing
8-254
Logistics Strategy- deals with the flow of products into
and out of the manufacturing process
Trends include:
• Centralization
• Outsourcing
• Internet
8-255
Human Resource Strategy
Trends include:
• Self-managed teams
• 360-degree appraisal
• Diverse workforce
8-256
Information Technology Strategy
Trends include:
• Follow the sun management

• Internet
• Extranet
• Intranet
8-257
Outsourcing- purchasing from someone else a product or
service that had been previously provided internally
• Avoid outsourcing distinctive competencies
Offshoring- the outsourcing of an activity or a function to

a wholly-owned company or an independent provider in
another country
8-258
Disadvantages of outsourcing and offshoring
• Customer complaints
• Long-term contracts
• Ability to learn new skills and develop new core
competencies
• Lack of cost savings
• Poor product quality
• Increased transportation costs
8-259
Errors in Outsourcing Efforts
• Outsourcing the wrong activities

• Selecting the wrong vendor
• Poor contracts
• Personnel issues
• Lack of control
• Hidden costs
• Lack of an exit strategy
8-260
8-261
• Follow the leader
• Hit another home run
• Arms race
• Do everything
• Losing hand
8-262
Constructing Corporate Scenarios- pro forma balance
sheets and income statements that forecast the effect of
each alternative strategy/its various programs will have
on division and corporate return on investment
8-263
Steps include
1. Use industry scenarios to develop assumptions
about the task environment
2. Develop common size financial statements for
prior years
3. Construct detailed pro forma financial
statements for each strategic alternative
8-264
8-265
Management’s Attitude Toward Risk
Risk- composed not only of the probability that the strategy

will be effective but also of the amount of assets the
corporation must allocate to the strategy and the length
of time the assets will be unavailable for other uses
• Real options approach- a broad range of options used in

environments of high uncertainty
• Net present value- calculates the value of a project by

predicting its payouts, adjusting them for risk and subtracting the
amount invested
8-266
8-267
How to Access the importance of stakeholder
concerns
1. How will this decision affect each stakeholder?

2. How much of what stakeholders want are they likely to
get under the alternative?
3. What are the stakeholders likely to do if they don’t get
what they want?
4. What is the probability that they will do it?
8-268
Corporate Culture Options
1. Take a chance on ignoring the culture

2. Manage around the culture and change the
implementation plan
3. Try to change the culture to fit the strategy
4. Change the strategy to fit the culture
8-269
Needs and Desires of Key Managers
• Personnel characteristics and experience

• Industry and cultural backgrounds
• Tendency to maintain the status quo
8-270
Process of Strategic Choice
Strategic choice- the evaluation of alternative strategies and

selection of the best alternative
• Consensus
• Devil’s advocate
• Dialectical inquiry
8-271
Process of Strategic Choice
Criteria for evaluating alternatives includes:

• Mutual exclusivity
• Success
• Completeness
• Internal Consistency
8-272
Effective Policies Accomplish
1. Forces trade-offs between competing resource demands

2. Tests the strategic soundness of a particular action
3. Sets clear boundaries within which employees must
operate while granting them freedom to experiment
within those constraints
8-273
1. Are the functional strategies interdependent, or can they
be formulated independently of other functions?
2. Why is penetration pricing more likely than skim pricing
to raise a company’s or a business unit’s operating
profit in the long run?
3. How does mass customization support a business unit’s
competitive strategy?
4. When should a corporation or business unit outsource a
function or an activity?
5. What is the relationship of policies to strategies?
8-274
13TH EDITION
Strategy implementation- the sum total of all
activities and choices required for the execution of
a strategic plan
• Who are the people to carry out the strategic plan?

• What must be done to align company operations in
the intended direction?
• How is everyone going to work together to do what
is needed?
9-276
Common Strategy Implementation Problems
1. Took more time than planned

2. Unanticipated major problems
3. Poor coordination
4. Competing activities and crises created distractions
5. Employees with insufficient capabilities
6. Poor subordinate training
7. Uncontrollable external environmental factors
8. Poor departmental leadership and direction
9. Inadequately defined implementation tasks and activities
10. Inefficient information system to monitor activities
9-277
Developing Programs, Budgets and Procedures
Programs make strategies action-oriented
9-278
Developing Programs, Budgets and Procedures
Matrix of Change- provides guidance on where,

when and how fast to implement change
Budget- provides the last real check on the feasibility

of the strategy
Procedures (organizational routines)- detail the

various activities that must be carried out to
complete a corporation’s programs
9-279
9-280
Achieving Synergy
Synergy– exists for a divisional corporation if the

return on investment is greater than what the
return would be if each division were an
independent business
Forms of Synergy include

• Shared know-how •Economies of scale or scope
• Coordinated strategies •Pooled negotiating power
• Shared tangible resources •New business creation
9-281
Structure Follows Strategy- changes in corporate
strategy lead to changes in organizational structure
1. New strategy is created

2. New administrative problems emerge
3. Economic performance declines
4. New appropriate structure is invented
5. Profit returns to its previous level
9-282
Stages of Corporate Development
I. Simple Structure
• Flexible and dynamic
II. Functional Structure
• Entrepreneur is replaced by a team of managers
9-283
Stages of Corporate Development
III. Divisional Structure

• Management of diverse product lines in numerous industries
• Decentralized decision making
IV. Beyond SBU’s
• Matrix
• Network
9-284
9-285
9-286
Blocks to Changing Stages
• Internal
– Lack of resources
– Lack of ability
– Refusal of top management to delegate
• External
– Economy
– Labor shortages
– Lack of market growth
9-287
Blocks to Changing Stages
(Entrepreneurs)
• Loyalty
• Task orientation
• Single-mindedness
• Working in isolation
9-288
Organizational Life Cycle- describes how organizations
grow, develop and decline
Stages include:
• Birth
• Growth
• Maturity
• Decline
• Death
9-289
9-290
Advanced Types of Organizational Structures
Matrix structures- functional and product forms are

combined simultaneously at the same level of the
organization
9-291
Conditions for Matrix structures include:

• Ideas need to be cross-fertilized across projects or
products
• Scarcity of resources
• Abilities to process information and to make decisions
needs to be improved
9-292
9-293
9-294
Market development strategy- provides the ability
to:
• Capture a larger market share
– Market saturation
– Market penetration
• Develop new uses and/or markets for current
products
9-295
Phases of Matrix Structure Development

(Davis and Lawrence)
1. Temporary cross-functional task forces

2. Product/brand management
3. Mature matrix
9-296
Network Structure- eliminates in-house business

functions
Cellular/Modular Structure- composed of a series of

project groups or collaborations linked by constantly
changing non-hierarchical electronic networks
• Useful in unstable environments that require
innovation and quick response
9-297
9-298
Network Structure
Advantages:
• Increased flexibility and adaptability
• Ability to concentrate on distinctive competencies
Disadvantages:
• Transitional structure
• Availability of numerous partners
• Overspecialization
9-299
Reengineering and Strategy Implementation
Reengineering- the radical redesign of business

processes to achieve major gains in cost, service, or
time
• Program to implement a turnaround strategy
9-300
Principles for Reengineering (Hammer)
• Organize around outcomes, not tasks
• Have those who use the output of the process perform the
process
• Subsume information-processing work into real work that
produces information
• Treat geographically-dispersed resources as though they were
centralized
• Link parallel activities instead of integrating their results
• Put the decision point where the work is performed and build
control into the process
• Capture information once and at the source
9-301
Six Sigma- an analytical method for achieving near
perfect results on a production line
1. Define a process where results are below average

2. Measure the process to determine current performance
3. Analyze the information to determine problems
4. Improve the process and eliminate the error
5. Establish preventive controls
9-302
Lean Six Sigma- incorporates Six Sigma with lean
manufacturing- removes unnecessary production steps
and fixes the remaining steps
9-303
Designing Jobs to Implement Strategy
Job Design- the study of individual tasks in an attempt to

make them more relevant to the company and to the
employees
• Job enlargement
• Job rotation
• Job enrichment model
9-304
International Issues in Strategy Implementation
Multinational Corporation- a highly developed

international company with a deep involvement
throughout the world with a worldwide perspective in
its management and decision making
9-305
Forces for Standardization
• Convergence of customer preferences and incomes

• Competition from other global products
• Growing customer awareness of international brands
• Economies of scale
• Falling trading costs across countries
• Cultural exchange and business interactions among
countries
9-306
Forces for Customization
• Differences in customer preferences

• Differences in customer incomes
• Need to build local brand reputation
• Competition from domestic companies
• Variations in trading costs
• Local regulatory requirements
9-307
International Strategic Alliances
Drivers for strategic fit among alliance partners

• Partners must agree on values and vision
• Alliance must be derived from business, corporate and functional
strategy
• Alliance must be important to partners, especially top
management
• Partners must be mutually dependent for achieving objectives
• Activities must add value
• Alliance must be accepted by stakeholders
• Partners contribute strengths while protecting core competencies
9-308
Stages of International Development
Stage 1: Domestic company

Stage 2: Domestic company with export division
Stage 3: Primarily domestic company with international
division
Stage 4: Multinational corporation with multidomestic
emphasis
Stage 5: Multinational corporation with global emphasis
9-309
Centralization versus Decentralization
Product group structure- enables the company to

introduce and manage a similar line of products
around the world
Geographic area structure- allows the company to

tailor products to regional differences and to achieve
regional coordination
Multinational corporations are moving from geographic

area to product group structures
9-310
9-311
1. How should a corporation attempt to achieve synergy
among functions and business units?
2. How should an owner-manager prepare a company for
its movement from Stage I to Stage II?
3. How can a corporation keep from sliding into the Decline
stage of the organizational life cycle?
4. Is reengineering just another fad, or does it offer
something of lasting value?
5. How is the cellular/modular structure different from the
network structure?
9-312
13TH EDITION
Integration Managers
• Prepare a competitive profile of the company in

terms of its strengths and weaknesses
• Draft a profile of what the ideal combined company
should look like
• Develop action plans to close the gap between
actual and ideal
• Establish training programs to unit the combined
company and make it more competitive
10-314
Successful Integration Managers
• Deep knowledge of the acquiring company

• Flexible management style
• Ability to work in cross-functional teams
• Willingness to work independently
• Sufficient emotional and cultural intelligence to
work in a diverse environment
10-315
Staffing Follows Strategy
• Training and development

• Executive types
– Dynamic industry expert
– Analytical portfolio manager
– Cautious profit planner
– Turnaround specialist
– Professional liquidator
10-316
Selection and Management Development
Executive succession- replacing a key top manager
Succession planning
• Identifying candidates below the top layer of
management
• Measuring internal candidates against external
candidates
• Providing financial incentives
10-317
Identifying Abilities and Potential
Performance appraisal system identifies good

performers with promotion potential
Assessment centers evaluates a person’s suitability
for an advanced position
Job rotation- ensures employees are gaining a mix of
experience to prepare them for future
responsibilities
10-318
Problems in Retrenchment
Downsizing the planned eliminated of positions or

jobs
• Can damage the learning capacity of an
organization
10-319
Successful Downsizing
• Eliminate unnecessary work instead of making

across the board cuts
• Contract out work that others can do cheaper
• Plan for long-run efficiencies
• Communicate the reasons for actions
• Invest in the remaining employees
• Develop value added jobs to balance out job
elimination
10-320
International Issues in Staffing
• Culture differences
• Management styles
• Human resource practices
• Suboptimization
• Communication and coordination
• Lack of international management with experience
10-321
Implementation involves leading and coaching
people to use their abilities and skills most
effectively and efficiently to achieve
organizational objectives
10-322
Managing Corporate Culture
• Strong cultures are resistant to change

• Optimal culture supports mission and
strategies
• Change in strategy should be followed by
change in culture
10-323
Accessing Strategy-Culture Compatibility
1. Is the proposed strategy compatible with the

company’s current culture
2. Can the culture be easily modified to make it more
compatible with the new strategy
3. Is management willing and able to make major
organizational changes and accept probable delays
and a likely increase in costs
4. Is management still committed to implementing the
strategy
10-324
10-325
Managing Cultural Change Through
Communication
• CEO and top management communicated the

strategic vision throughout the organization
• Current performance was compared to competition
and constantly updated
• Vision was translated into key elements needed to
accomplish the vision
10-326
Managing Diverse Cultures Following an
Acquisition
Methods of managing two different cultures

• Integration- balanced give and take of cultures
• Assimilation- domination of one culture over the
other
• Separation of the two cultures
• Assimilation- disintegration of one culture resulting
from pressure form the other to impose its culture
and practices
10-327
10-328
Action plan- what actions are going to be taken, by
whom, during what time frame, and with what
expected results
1. Specific actions to be taken to make the program operational

2. Dates to begin and end each action
3. Person responsible for carrying out each action
4. Person responsible for monitoring the timeliness and
effectiveness of each action
5. Expected financial and physical consequences of each action
6. Contingency plans
10-329
Importance of Action plans
• Serve as a link between strategy formulation and

evaluation and control
• Specifies what needs to be done differently from
current operations
• Evaluation and control processes appraise
performance and identify remedial actions
10-330
10-331
10-332
Management by Objectives (MBO)- encourages
participative decision making through shared goal
setting and performance assessment based on
achieving stated objectives
• Establishing and communicating organizational

objectives
• Setting individual objectives
• Developing an action plan to achieve objectives
• Performance review (periodic and annual)
10-333
Total Quality Management (TQM)- philosophy that
is committed to customer satisfaction and
continuous improvement
Objectives
1. Better, less variable quality of the product and service
2. Quicker less variable response in processes to customer
needs
3. Greater flexibility in adjusting to customers’ shifting
requirements
4. Lower cost through quality improvement and elimination of
non-value added work
10-334
Essential Ingredients
1. Intense focus on customer satisfaction

2. Internal as well as external customers
3. Accurate measurement of every critical variable in
a company’s operations
4. Continuous improvement of products and services
5. New work relationships based on trust and
teamwork
10-335
Dimensions of National Culture
1. Power distance
2. Uncertainty avoidance
3. Individualism-collectivism
4. Masculinity-femininity
5. Long-term orientation
10-336
1. What skills should a person have for managing a business
unit following a differentiation strategy? Why? What should
a company do if no one is available internally and the
company has a policy of promotion from within?
2. When should someone form outside the company be
hired to manage the company or one of its business units?
3. What are some ways to implement a retrenchment
strategy without creating a lot of resentment and conflict
with labor unions?
4. How can corporate culture be changes?
5. Why is an understanding of national cultures important
in strategic management?
10-337
13TH EDITION
Evaluation and Control ensures that a company is
achieving what it set out to accomplish by
comparing performance with desired results and
taking corrective action as needed
11-339
1. Determine what to measure
2. Establish standards of performance
3. Measure actual performance
4. Compare actual performance with the
standard
5. Take corrective action
11-340
11-341
11-342
Appropriate Measures
Performance is the end result of activity
Steering controls measure variables that influence

future profitability
• Cost per passenger mile (airlines)
• Inventory turnover ratio (retail)
• Customer satisfaction
11-343
Types of Controls
• Output controls- specify what is to be accomplished

by focusing on the end result
• Behavior controls specify how something is done

through policies, rules, standard operating
procedures and orders from supervisors
• Input controls emphasize resources
11-344
Activity Based Costing
• Activity based costing- allocates indirect and direct

costs to individual product lines based on value-
added activities going into that product
– Allows accountants to charge costs more accurately since
it allocates overhead more precisely
11-345
Enterprise Risk Management a corporate-wide,
integrated process for managing uncertainties that
could negatively or positively influence the
achievement of objectives
1. Identify the risks using scenario analysis,

brainstorming, or performing risk assessments
2. Rank the risks, using some scale of impact and
likelihood
3. Measure the risks using some agreed-upon
standard
11-346
Primary Measures of Corporate Performance
• Return on Investment (ROI)

• Earnings per share (EPS)
• Return on equity (ROE)
• Operating cash flow
– Free cash flow
11-347
Popular Measures of Internet Companies
Non-Financial Measures
• Stickiness
• Eyeballs
• Mindshare
• Monthly unique viewers
11-348
11-349
11-350
Shareholder Value- the present value of the
anticipated future streams of cash flows from the
business plus the value of the company if liquidated
Economic Value Added (EVA)- measures the

difference between the pre-strategy and post-
strategy values for the business
EVA=After tax income-total annual cost of capital
11-351
Market Value Added (MVA)- measures the
difference between the market value of a
corporation and the capital contributed by
shareholders and lenders
• Measures the stock market’s estimate of the net

present value of a firm’s past and expected capital
investment projects
11-352
Balanced score card– combines financial measures
that tell results of actions already taken with
operational measures on customer satisfaction,
internal processes and the corporation’s innovation
and improvement activities
• Financial
• Customer
• Internal business perspective
• Innovation and learning
11-353
Evaluating Top Management and the Board of
Directors
• Chairman-CEO Feedback Instrument

• Management Audit
• Strategic Audit
11-354
Primary Measures of Divisional and Functional
Performance
Responsibility centers- used to isolate a unit so it

can be evaluated separately from the rest of the
corporation
• Standard cost centers
• Revenue centers
• Expense centers
• Profit centers
• Investment centers
11-355
Benchmarking- the continual process of measuring
products, services and practices against the
toughest competitors or those companies
recognized as industry leaders
11-356
1. Indentify the area or process to be examined
2. Find behavioral and output measures
3. Select an accessible set of competitors of best
practices
4. Calculate the differences among the company’s
performance measurements and those of the
competitors and determine why the differences
exist
5. Develop tactical programs for closing performance
gaps
6. Implement the programs and compare the results
11-357
International Measurement Issues
Most widely used measurement techniques
• Return on investment
• Budget analysis
• Historical comparison
• International transfer pricing
11-358
International Measurement Issues
Barriers to international trade
• Different standards for products and services

– Safety/environmental
– Energy efficiency
– Testing procedures
• Counterfeiting/piracy
• Control and Reward systems
– Multidomestic – loose
– Multinational- tight control
11-359
Enterprise Resource Planning (ERP)- unites all of
a company’s major business activities within a
single family of software modules providing instant
access throughout the organization
Radio Frequency Identification (RFID)- an

electronic tagging technology used to improve
supply chain efficiency
Divisional and Functional IS Support- used to

support, reinforce, or enlarge business level
strategy throughout the decision support system
11-360
• Lack of quantifiable objectives or performance
standards
• Inability to use information systems to provide

timely and valid information
11-361
Short term orientation- managers only consider
current tactical or operational issues and ignore
long-term strategic issues
• Lack of time
• Do not recognize importance of long-term issues
• Are not evaluated on a long-term basis
11-362
Goal Displacement- confusion of the means with ends
• Behavior substitution- when people substitute
activities that do not lead to goal
accomplishment for activities that do lead to
goal accomplishment because the wrong
activities are rewarded
• Suboptimization- when a unit optimizing its goal
accomplishment is to the detriment of the
organization as a whole
11-363
1. Controls should involve only the minimum amount
of information needed to give a reliable picture of
events (80/20 Rule)
2. Controls should monitor only meaningful activities
and results, regardless of measurement difficulty
3. Controls should be timely so that corrective action
can be taken before it is too late
4. Long-term and short-term goals should be used
5. Controls should aim at pinpointing exceptions
6. Emphasize the reward of meeting or exceeding
standards rather than punishment for failing to
meet standards
11-364
Approaches to Strategic Incentive Management
• Weighted-factor method
• Long-term evaluation method
• Strategic funds method
11-365
Effective means to achieve results is through a
reward system that combines all 3
approaches
• Segregate strategic funds from short-term funds

• Develop a weighted factor chart for each SBU
• Measure performance based on:
– Pre-tax profit (Strategic funds approach)
– Weighted factors
– Long-term evaluation of the SBU’s performance
11-366
11-367
1. Is Figure 11-1 a realistic model of the evaluation and
control process?
2. What are some examples of behavior controls? Output
controls? Input controls?
3. Is EVA an improvement over ROI, ROE, or EPS?
4. How much faith can a manager place in transfer price
as a substitute for market price in measuring a profit
center’s performance?
5. Is the evaluation and control process appropriate for a
corporation that emphasizes creativity? Are control and
creativity compatible?
11-368
13TH EDITION
Case method- provides the opportunity to move from
a narrow, specialized view that emphasizes
functional techniques to a broader, less precise
analysis of the overall corporation
12-370
Researching the Case Situation
Don’t go beyond the decision date of the case in your

research unless instructed to do so
Sources of information:
• Hoover’s
• Company annual and 10-K reports
12-371
Researching the Case Situation
Ratio analysis- the calculation of ratios from data on

financial statements
• Liquidity ratios
• Profitability ratios
• Activity ratios
• Leverage ratios
12-372
12-373
12-374
12-375
12-376
12-377
Analyzing Financial Statements
• Review historical income statements and balance

sheets
• Compare historical statements over time
• Calculate changes that occur in individual
categories form year to year
• Determine the change as a percentage
• Adjust for inflation
12-378
Common size statements- financial statements in
which the dollar figures have been converted into
percentages
12-379
Altman’s Z Value bankruptcy formula- calculate
the likelihood of going bankrupt. Compare historical
statements over time
Index of sustainable growth- used to determine
whether a company embarking on a growth
strategy will need to take on debt to fund the
growth
12-380
Useful Economic Measures
Constant dollars- dollars adjusted for inflation
Prime interest rate- the rate of interest banks charge

on their lowest risk loans
Gross domestic product- measures total output of

goods and services within a country’s borders
12-381
12-382
12-383
12-384
1. Why should you begin a case analysis with a financial
analysis? When are other approaches appropriate?
2. What are common-size financial statements? What is
their value to case analysis? How are they calculated?
3. When should you gather information outside a case by
going to the library or using the Internet? What should
you look for?
4. When is inflation an important issue in conducting case
analysis? Why bother?
5. How can you learn what date a case took place?
12-385
Final Exam cases to select from:
• Case 7 Apple
• Case 10 Rosetta
• Case 12 Google
• Case 13 Yahoo
• Case 16 Carnival
• Case 21 Tomtom
• Case 22 Volcom
• Case 26 Rocky chocolate
3-386

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Strategic Management

MBA course - ESLSCA

Dr. Ashraf Elsafty

1st Reference Book:

2nd Reference Book:

• Phase 1: Basic financial planning

• Clearer sense of strategic vision for the

• Improved organizational • Strategic thinking

Globalization: the integration and internationalization of

Environmental Sustainability: the use of business

• Regulatory risk • Litigation risk

Institution theory: organizations adapt by imitating

Organizational learning theory: organizations adapt

• Long-term commitment to the development and

• Solving problems • Learning from past

Environmental Scanning is the monitoring, evaluating

Strategy Formulation: the development of long-range

Mission- the purpose or reason for the organization’s

Vision- describes what the organization would like to

Objectives- the end results of planned activity

Strategies- form a comprehensive master plan that

Strategy implementation: the process by which

Evaluation and control: the process in which

Performance: the end result of organizational activities

Feedback/Learning Process: revise or correct

Strategic decision making focuses on the long-run

Characteristics of strategic decision making include:

1. Evaluate current 5. Analyze strategic

Corporation is governed by the board of directors

• Sets corporate strategy, overall direction, mission, or

• Monitor developments inside and outside the

Inside Directors are officers or executives employed by

Outside Directors are executives of other firms but are

Affiliated directors- not employed by the corporation,

Retired executive directors- used to work for the

Family directors- descendents of the founder and own

Agency theory problems arise in corporations because

Stewardship theory as the result of long tenure with

Direct interlocking directorate- when two firms share

Indirect interlocking directorate- when two

97% of U.S. boards use nominating committees to

Staggered boards- only a portion of board members

Criteria for a good director include:

• 96% of U.S. companies that combine the Chairman and

Sarbanes Oxley Act 2002- designed to protect

• Boards shaping company strategy

Executive leadership is the directing of activities toward

Strategic vision- description of what the company is

Transformational Leaders provide change and

• CEO articulates a strategic vision for the corporation

Major responsibilities include:

• Identifying and analyzing company-wide strategic issues,

Social Responsibility: proposes that a private

Friedman’s traditional view of a business firm:

Carroll’s four responsibilities of business: (in order

Social capital refers to the goodwill of key stakeholders

• The ability to enter local and • The ability to charge premium

Stakeholders have an interest in the business and affect

Enterprise strategy- articulates the firm’s ethical

1. Primary stakeholders have a direct connection with

• Unaware that behavior is questionable

• Preconventional level: concern for one’s self