Management A Practical Introduction Third Edition Angelo Kinicki

Management A Practical Introduction Third Edition Angelo Kinicki & Brian K. Williams Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin

Chapter 6: Strategic Management How Star Managers Realize a Grand Design v. The Dynamics of Strategic Planning v. The Strategic Management Process v. Establishing the Grand Strategy v. Formulating Strategy v. Execution Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 2

Manager’s Toolbox v Lesson #1: in an era of management fads, strategic planning is still tops v Lesson #2: a manager’s most valuable character trait: be willing to make large, painful decisions to suddenly alter strategy Mc. Graw-Hill/Irwin Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 3

6. 1 The Dynamics Of Strategic Planning WHY IS IT IMPORTANT TO HAVE A STRATEGY? v. Organizations need to know where they are going and how they will get there v. A large scale action plan that sets the direction for an organization is a strategy - it is an educated guess about what the organization has to do to survive v. The process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals is strategic management v. Strategic planning determines the organization’s long term goals and how the organization should achieve them Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 4

Strategy, Strategic Management, Strategic Planning v Strategy: is a large scale action plan that sets the direction for the organization. v Strategic Management: is a process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals. (Middle managers) v Strategic Planning: determines not only the organization’s long-term goals for the next 1 -5 year regarding growth and profits, but also the ways the organization should achieve them Mc. Graw-Hill/Irwin Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 5

6. 1 The Dynamics Of Strategic Planning There are three reasons to adopt strategic management and strategic planning: Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 6

Why Strategic Management and Strategic Planning are Important 1) Providing direction & momentum 1) 2) 2) Focuses on most critical problems, choices, & opportunities Creates teamwork, promotes learning, & builds commitment Encouraging new ideas 1) 3) Stresses importance of innovation Developing a sustainable competitive advantage 1) Ability to produce goods and services more effectively than competitors 2) Sustainable competitive advantage is staying ahead in: 1) 2) Innovating 3) Quality 4) Mc. Graw-Hill/Irwin Being responsive to customers Effectiveness Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 7

6. 1 The Dynamics Of Strategic Planning WHAT IS AN EFFECTIVE STRATEGY? v. Michael Porter argues strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 8

6. 1 The Dynamics Of Strategic Planning There are three key principles of strategic positioning: 1. An organization’s strategic position comes from serving few needs to many customers like Jiffy Lube, serving broad needs of a few customers like Bessemer Trust, or serving broad needs of many customers 2. Companies have to choose what strategy to follow and also what strategy not to follow – they have to make trade-offs 3. Creating a “fit” among activities is important - a company’s activities should interact and reinforce one another Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 9

Does Strategic Management Work for Small as Well as Large? 1) Also appropriate for companies with fewer than 100 employees 2) Improvement in financial performance for these companies was small and may not be worth the effort Mc. Graw-Hill/Irwin Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 10

The Five Steps of the Strategic Management Process WHAT IS THE STRATEGIC MANAGEMENT PROCESS? The strategic management process has five steps plus a feedback loop 1. Establish 2. the mission 3. and vision 2. Establish the grand strategy (using SWOT and forecasting) 3. Formulate the strategic plans (using e. g. Porter) 4. Carry out the strategic plan 5. Maintain strategic control Feedback: Revise actions, if necessary, based on feedback Mc. Graw-Hill/Irwin Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 11

6. 2 The Strategic-Management Process Step 1: Establish The Mission & The Vision v. A good mission statement expresses the organization’s purpose or reason for being v. A good vision statement describes the longterm goal of what the organization wants to become Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 13

Mission Statements v Does your company’s mission statement answer the following questions? v v v v v Mc. Graw-Hill/Irwin Who are our customers? What are our major products and services? In what geographical areas do we compete? What is our basic technology? What is our commitment to economic objectives? What are our basic beliefs, values, aspirations, and philosophical priorities? What are our major strengths and competitive advantages? What are our public responsibilities? What is our attitude toward our employees? Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 14

Vision Statements v Does your company’s vision statement answer “yes” to the following questions? v v v v Mc. Graw-Hill/Irwin Is it appropriate for the organization and for the times? Does it set standards of excellence that reflect high ideals? Does it clarify purpose and direction? Does it inspire enthusiasm and encourage commitment? Is it well articulated and easily understood? Does it reflect the uniqueness of the organization, its distinctive competence, what it stands for, what it’s able to achieve? It is ambitious? Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 15

6. 2 The Strategic-Management Process Step 2: Establish The Grand Strategy v. The grand strategy explains how the organization’s mission is to be accomplished v. Three common grand strategies are growth (involves expansion of sales revenue, market share, number of employees, or number of customers served), stability (involves little or no significant change), and defensive (involves reduction in the organization’s efforts) Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 16

How Companies Can Implement Grand Strategies v Growth Strategy v v v Mc. Graw-Hill/Irwin It can improve an existing product or service to attract more buyers It can increase its promotion and marketing efforts to try to expand its market share It can expand its operations, as in taking over distribution or manufacturing previously handled by someone else It can expand into new products or services It can acquire similar or complementary businesses It can merge with another company to form a larger company Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 17

How Companies Can Implement Grand Strategies (Cont. ) v Stability Strategy v v v It can go for a no-change strategy It can go for a little-change strategy Defensive Strategy v It can reduce costs v It can sell off assets v It can gradually phase out product lines or services v It can divest part of its business v It can declare bankruptcy v It can attempt a turnaround Mc. Graw-Hill/Irwin Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 18

6. 2 The Strategic-Management Process Step 3: Formulate Strategic Plans v. The process of choosing among different strategies and altering them to best fit the organization’s needs is strategy formulation v. The strategy formulation process can be completed using techniques like Porter’s competitive forces and strategies, and product life cycles Step 4: Carry Out The Strategic Plan v. Strategy implementation involves putting strategic plans into effect v. Managers need to ensure that the right people and control systems are in place to execute the plans Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 20

6. 2 The Strategic-Management Process Step 5: Maintain Strategic Control: The Feedback Loop v. Monitoring the execution of strategy and making necessary adjustments is strategic control v. To keep strategic plans on track, managers need to encourage people, keep planning simple, stay focused, and keep moving Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 21

6. 3 Establishing The Grand Strategy HOW CAN A SWOT ANALYSIS HELP WITH STRATEGY? v. The starting point for a grand analysis is the SWOT analysis (a search for the Strengths, Weaknesses, Opportunities, and Threats affecting an organization) v. A SWOT analysis provides managers with a realistic understanding of where the organization is relative to its internal and external environments Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 23

6. 3 Establishing The Grand Strategy v. Organizational strengths include the skills and capabilities that give the organization special competencies and competitive advantages in executing strategies in pursuit of its mission v. Organizational weaknesses include the drawbacks that hinder an organization in executing strategies in pursuit of its mission v. Organizational opportunities include environmental factors that the organization may exploit for competitive advantage v. Organizational threats include environmental factors that hinder an organization’s achieving a competitive advantage Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 24

6. 3 Establishing The Grand Strategy Figure 6. 2: SWOT Analysis Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 25

6. 3 Establishing The Grand Strategy v. After completing the SWOT analysis, managers need to make forecasts (visions or projections of the future) There are two types of forecasts: v. A hypothetical extension of a past series of events into the future is a trend analysis v. The creation of alternative hypothetical but equally likely future conditions is contingency planning or scenario planning Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 27

6. 4 Formulating Strategy HOW IS STRATEGY FORMULATED? v. Organizations can use many techniques to formulate strategy including Porter’s five competitive forces, Porter’s four competitive strategies, the product life cycle, diversification and synergy, and competitive intelligence Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 28

6. 4 Formulating Strategy Porter’s Five Competitive Forces include: 1. The threat of new entrants • New competitors can shake-up an industry virtually overnight 2. The bargaining power of suppliers • Companies that rely on a single supplier are vulnerable Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 29

6. 4 Formulating Strategy 3. The bargaining power of buyers • Major customers, and customers that shop around can negotiate better prices 4. The threat of substitute products or services • When there are substitute products or services available, firms have less power 5. Rivalry among competitors • Intense rivalry is a threat to companies Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 30

6. 4 Formulating Strategy Porter’s four competitive strategies or generic strategies include: 1. The cost leadership strategy - involves trying to keep costs and prices below those of competitors and targeting a wide market v. Examples of companies with this strategy include Bic, Home Depot, and Dell 2. The differentiation strategy - offer products or services that are of unique and superior value compared to those of competitors, and sell to a wide market v. Examples of companies using a differentiation strategy include Ritz-Carlton Hotels Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 31

6. 4 Formulating Strategy 3. The cost-focus strategy - keep costs and prices below those of competitors and target a narrow market v. Examples of companies with a cost-focus strategy include regional gas stations 4. The focused-differentiation strategy - offer products or services that are of unique and superior value compared to those of competitors, and sell to a narrow market v. Examples of companies with this strategy include Ferrari and Lamborghini Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 32

The Product Life Cycle Stage 1 Introduction Stage 2 Growth Stage 3 Maturity 3. Formulate the strategic plans (using e. g. Porter) Mc. Graw-Hill/Irwin Stage 4 Decline 4. Carry out the strategic plan Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 34

6. 4 Formulating Strategy The four stages a product or service goes through over its life are known as the product life cycle v. In the introduction stage, the product is introduced to the marketplace v. In the growth stage, customer demand increases, sales grow, and competitors may enter the market v. In the maturity stage, the product starts to fall out of favor and sales and profits drop v. In the decline stage, the product falls out of favor and is withdrawn from the marketplace Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 35

6. 4 Formulating Strategy v. A company that makes and sells only one product in its market follows a single-product strategy v. This strategy has both benefits (the firm can focus on just one product) and risks (the firm is vulnerable to competitors) v. The diversification strategy involves operating several businesses in order to spread the risk v. There are two kinds of diversification: unrelated (operating several businesses that are not related to each other) and related (operating several businesses that are related) Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 36

6. 4 Formulating Strategy There are three advantages to related diversification: 1. reduced risk because the firm sells more than one product 2. management efficiencies because administration is spread over several businesses 3. synergy because the economic value of separate, related companies operating under one roof is greater than the companies are worth separately Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 37

6. 4 Formulating Strategy v. When companies gain information about their competitors so that they can anticipate their moves and react appropriately, the companies are practicing competitive intelligence Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 38

Competitive Intelligence v Gaining Competitive Intelligence: v Public and print advertising v Investor information v Informal sources Mc. Graw-Hill/Irwin Kinicki/Williams, Management: A Practical Introduction 3 e 2006 The Mc. Graw-Hill Companies, Inc. All rights reserved. © © 2008, Mc. Graw-Hill/Irwin 39

6. 5 Implementing & Controlling Strategy: Execution WHY IS EFFECTIVE EXECUTION IMPORTANT? v. The execution stage of strategy involves getting things done v. Execution is a central part of strategy that consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve promised results Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 41

6. 5 Implementing & Controlling Strategy: Execution There are three building blocks underlying effective execution: 1. Develop seven essential behaviors 1. 2. 3. 4. 5. 6. 7. Effective leaders: know their people and their business insist on realism set clear goals and priorities follow through reward the doers expand people’s capabilities know themselves Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 42

6. 5 Implementing & Controlling Strategy: Execution The three building blocks are the foundation for the three core processes of execution The First Core Process: People v. Effective leaders evaluate talent using specific milestones, develop future leaders, and deal with non-performers—they get the people part right The Second Core Process: Strategy v. A good strategic plan considers the “how” of execution Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 44

6. 5 Implementing & Controlling Strategy: Execution The Third Core Process: Operations v. Strategy defines where the organization wants to go, the people process assigns responsibility for getting there, and the operating plan shows how to get there v. The success of strategy execution depends on how well leaders manage three processes of strategy, people, and operations Kinicki/Williams, Management: A Practical Introduction 3 e © 2008, Mc. Graw-Hill/Irwin 45