Strategic Imperative

Strategic Introduction to
Management Strategic
Management

Dr Md Moazzam Husain
STRATEGIC MANAGEMENT
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
 Strategic Management
• Strategic management is the study of why some firms
outperform others.
• How to create a competitive advantage in the market place that
is unique, valuable, and difficult to copy
• “Total organization” perspective, integrating across
functional areas.
• Two perspectives of leadership: romantic view and
external control perspective.
• Strategies put together an understanding of the
external environment with an understanding of internal
strengths and weaknesses.

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 Definition of Strategic Management

Strategic management consists of the analysis,

decisions, and actions an organization
undertakes in order to create and sustain
competitive advantages (Dess, Lumpkin, &
Eisner, Strategic Management: Creating
Competitive Advantage, 3rd Ed., p. 9).

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 Definition of Strategic Management

• Analysis
• Strategic goals (vision, mission, strategic objectives)
• Internal and external environment of the firm
• Decisions
• What industries should we compete in?
• How should we compete in those industries?
• Actions
• Allocate necessary resources
• Design the organization to bring intended strategies
to reality
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 Attributes of Strategic Management

• Directs the organization toward overall goals

and objectives.
• Includes multiple stakeholders in decision
making.
• Needs to incorporate short-term and long-term
perspectives.
• Recognizes trade-offs between efficiency and
effectiveness.

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 Mintzberg’s Views of Strategy

• Plan - consciously intended course of action

• Ploy - maneuver to outwit opponent
• Pattern - consistency in behavior
• Position - location in environment
• Perspective - way of perceiving the world

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 Forms of Strategy

• Formal versus informal - associated with size of

firm and stage of development. Mintzberg’s
distinction between entrepreneurial and
planning mode.
• Intended versus realized - intended strategies
are the plans managers develop; realized
strategies are the actions that actually take
place over time.

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 Forms of Strategy

Source:H. Mintzberg and J. A. Waters, “Of Strategies, Deliberate and

Emergent,” Strategic Management Journal 6 (1985), pp. 257-72.

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 Strategic Vision

Management’s views and conclusions about what the

organization’s long-term direction should be, the technology-
product-customer focus it intends to pursue, and its future
business scope constitute a strategic vision for the company. A
strategic vision thus reflects management’s aspirations for the
organization and its business, providing a panoramic view of
“where we are going” and giving specifics about its future business
plans. A strategic vision points an organization in a particular
direction and charts a strategic path for it to follow.

Example: In 1999 Microsoft’s vision was “empower people

through great software anytime, anyplace, and on any device.”

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 Coherence in Strategic Direction

Company vision
• Massively inspiring
Company vision
• Overarching
• Long-term
• Driven by and evokes passion
• Fundamental statement of the
organization’s
• Values
Hierarchy of Goals
• Aspiration
• Goals

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 Mission Statement

A company’s mission statement is typically focused on

its present business scope – “who we are and what we
do”; mission statements broadly describe an
organization’s present capabilities, customer focus,
activities, and business makeup.

Example: “The mission of the American Red Cross is

to improve the quality of human life; to enhance self-
reliance and concern for others; and to help people
avoid, prepare for, and cope with emergencies.”

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 Coherence in Strategic Direction

Mission statements
• Purpose of the company Company vision
• Basis of competition and
Mission statements
competitive advantages
• More specific than vision
• Focused on the means Hierarchy of Goals
by which the firm will
compete

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 Stakeholders and Corporate Mission

A company’s stakeholders can be divided into internal

stakeholders and external stakeholders. Internal stakeholders are
stockholders and employees, including executive officers, other
managers, and board members. External stakeholders are all
other individuals and groups that have some claims on the
company. Typically, this group comprises customers, suppliers,
governments, unions, local communities, and the general public.

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 Stakeholders and Corporate Mission

All stakeholders are in an exchange relationship with

the company. Each of the stakeholder groups supplies
the organization with important resources or
contributions), and in exchange each expects its
interests to be satisfied (by inducements). Stockholders
provide the enterprise with capital and in exchange
expect an appropriate return on their investment;
employees provide labor and skills and in exchange
expect commensurate income, job satisfaction, job
security, and good working conditions.

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 Stakeholders and Corporate Mission

External Stakeholders
Customers
Suppliers
Governments
Unions
Local Communities
General Public

Internal Stakeholders
Stockholders
Employees
Managers
Board Members

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 Stakeholder Impact Analysis

A company must take into account the claims of

stakeholders when formulating its strategies or
stakeholders may withdraw their support. For example,
stockholders may sell their shares, employees leave
their jobs. But a company cannot always satisfy the
claims of all stakeholders. The goals of different may
conflict, and in practice few organizations have the
resources to manage all stakeholders. For example,
union claim for higher wages can conflict with
consumer demands for reasonable prices and
stockholder demands for acceptable returns.

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 Stakeholder Impact Analysis

Often the company must make choices. To do so, it must identify

the most important stakeholders and give highest priority to
pursuing strategies that satisfy their needs. Stakeholder impact
analysis can provide such identification. Typically, stakeholder
impact analysis follows these steps:
• Identifying stakeholders
• Identifying stakeholders’ interests and concerns
• As a result, identifying what claims stakeholders are likely to
make on the organization
• Identifying the stakeholders who are most important from the
organization’s perspective
• Identifying the resulting strategic challenges.

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 Stakeholder Impact Analysis

Such an analysis enables a company to identify the

stakeholders most critical to its survival and to make
sure that the satisfaction of their needs is paramount.
Most companies that go through this process quickly
reach the conclusion that there are three stakeholder
groups the company must satisfy if it is to survive and
prosper: customers, employees, and stockholders.

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 Coherence in Strategic Direction

Strategic objectives
• Operationalize the Company vision
mission statement
Mission statements
• Measurable, specific,
appropriate, realistic, Strategic objectives
timely, challenging,
resolve conflicts that Hierarchy of Goals
arise, and yardstick for
rewards and incentives

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 Strategic Management Process

• Analysis
• Hierarchy of goals
• Analysis of external and internal environments
• Formulation
• What business(es) should we be in?
• For each, what is the basis for competitive
advantage (low cost, differentiation, focus)?
• Implementation
• Functional tactics
• Culture and organization structure

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 Levels of Strategy

CEO Corporate-level
DIsney Corporation

Studio Entertainment Parks & Resorts Consumer Products Media Networks

Business-level
Walt DIsney Pictures Touchstone Pictures... Disneyland... Disney Stores... ABC Network...

Manager
Functional-level
Operations Marketing Finance...

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 Does Strategic Planning Pay Off?

• Original research showed mixed results. Planning

might not pay off for firms in static or turbulent
environments or for small firms.
• Miller and Cardinal’s (1994) meta-analysis found that
strategic planning affects firm growth and profitability.
In particular, they found that:
• Planning  performance link true for formal and informal
planning.
• Planning  performance link even stronger in turbulent
environments.
• Firm size unrelated to effectiveness of planning.

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 Role of Corporate Governance
• Corporate governance
• Relationship among
 The shareholders
 The management (led by the Chief Executive Officer)
 The board of directors
• Issue is
• How corporations can succeed (or fail) in aligning
managerial motives with
 The interests of the shareholders
 The interests of the board of directors

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 Example

• Stock-option stashes grew 47% from the previous year

for CEO’s according to compensation consulting firm
Watson Wyatt.
• Soaring stock-option growth indicates that CEOs pay is
directly related to their good performance.
• Watson Wyatt believes the compensation package
offered to CEO’s is in accordance with the job market.
• If the board of a company could hire someone to do the
job for less, they would hire that individual.

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 Separation of Owners (Shareholders)
and Management

• Shareholders (investors)
• Limited liability
• Participate in the profits of the enterprise
• Limited involvement in the company’s affairs
• Management
• Run the company
• Does not personally have to provide the funds
• Board of directors
• Elected by shareholders
• Fiduciary obligation to protect shareholder interests
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 Agency Theory

• Deals with the relationship between

• Principals – who are owners of the firm
(stockholders), and the
• Agents – who are the people paid by principals to
perform a job on their behalf (management)

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 Agency Theory: Two Problems

• Goals of principals and agents may conflict

• Difficult or expensive for the principal to verify what
the agent is actually doing
 Hard for board of directors to confirm that managers
are actually acting in shareholders’ interests
 Managers may opportunistically pursue their own
interests

• Principal and agent may have different attitudes

and preferences toward risk

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 Governance Mechanisms: Aligning
the Interests of Owners and Managers
• Two primary means of monitoring behavior of managers
• Committed and involved board of directors
 Active, critical participants in setting strategies

 Evaluate managers against high performance standards

 Take control of succession process

 Director independence

• Shareholder activism
 Right to sell stock

 Right to vote the proxy

 Right to sue for damages if directors or managers fail to meet

their obligations
 Right to information from the company

 Residual rights following company’s liquidation

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 Governance Mechanisms: Aligning the
Interests of Owners and Managers
• Managerial incentives (contract-based outcomes)
• Reward and compensation agreements:
 Align rewards of all employees (including rank and
file as well as executives) to the long-term
performance of the corporation
 Allow creation of executive wealth that is reasonable
in view of the creation of shareholder wealth
 Measurable and predictable outcomes that are
directly linked to the company’s performance
 Market oriented

 Easy to understand by investors and employees

 Fully disclosed to investing public and approved by

shareholders

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 External Governance Control Mechanisms

• Market for corporate control

• Auditors
• Banks and analysts
• Regulatory bodies
• Media and public activists

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