Strategic Management Concepts:

A Competitive Advantage Approach

Sixteenth Edition

Chapter 1
The Nature of Strategic
Management

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Learning Objectives (1 of 2)
1.1 Describe the strategic-management process.
1.2 Discuss the three stages of strategy formulation,
implementation, and evaluation activities.
1.3 Explain the need for integrating analysis and intuition in
strategic management.
1.4 Define and give examples of key terms in strategic
management.

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Learning Objectives (2 of 2)
1.5 Illustrate the comprehensive strategic-management
model.
1.6 Describe the benefits of engaging in strategic
management.
1.7 Explain why some firms do no strategic planning.
1.8 Describe the pitfalls in actually doing strategic planning.
1.9 Discuss the connection between business and military
strategy.

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Defining Strategic Management (1 of 3)
Strategic Management
• The art and science of formulating, implementing, and
evaluating cross-functional decisions that enable an
organization to achieve its objectives

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Defining Strategic Management (2 of 3)
• Strategic management is used synonymously with the
term strategic planning in this course.
• Sometimes the term strategic management is used to refer
to strategy formulation, implementation, and evaluation,
with strategic planning referring only to strategy
formulation.

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Defining Strategic Management (3 of 3)
• A strategic plan is a company’s game plan.
• A strategic plan results from tough managerial choices
among numerous good alternatives, and it signals
commitment to specific markets, policies, procedures, and
operations.

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Stages of Strategic Management (1 of 4)
• Strategy formulation
• Strategy implementation
• Strategy evaluation

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Stages of Strategic Management (2 of 4)
• Strategy Formulation
– developing a vision and mission
– identifying an organization’s external opportunities and
threats
– determining internal strengths and weaknesses
– establishing long-term objectives
– generating alternative strategies
– choosing particular strategies to pursue

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Strategy Formulation Decisions
• What new businesses to enter
• What businesses to abandon
• Whether to expand operations or diversify
• Whether to enter international markets
• Whether to merge or form a joint venture
• How to avoid a hostile takeover

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Stages of Strategic Management (3 of 4)
• Strategy Implementation
– requires a firm to establish annual objectives, devise
policies, motivate employees, and allocate resources
so that formulated strategies can be executed
– often called the action stage

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Stages of Strategic Management (4 of 4)
• Strategy Evaluation
– Determining which strategies are not working well
– Three fundamental activities:
▪ reviewing external and internal factors that are the
bases for current strategies
▪ measuring performance
▪ taking corrective actions

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Key Terms in Strategic Management (1 of 6)
Competitive Advantage
– any activity a firm does especially well compared to
activities done by rival firms, or
– any resource a firm possesses that rival firms desire.
• A firm must strive to achieve sustained competitive
advantage

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Key Terms in Strategic Management (2 of 6)
• Strategists
– Individuals most responsible for the success or failure
of an organization
– Help an organization gather, analyze, and organize
information
• Vision and Mission Statements
– A vision statement answers the question “What do we
want to become?”
– A mission statement answers the question “What is our
business?”

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Key Terms in Strategic Management (3 of 6)
• External Opportunities and Threats
– economic, social, cultural, demographic,
environmental, political, legal, governmental,
technological, and competitive trends and events that
could significantly benefit or harm an organization
• Internal Strengths and Internal Weaknesses
– an organization’s controllable activities that are
performed especially well or poorly
– determined relative to competitors

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Some Opportunities and Threats
• Availability of capital can no longer be taken for granted.
• Consumers expect green operations and products.
• Marketing is moving rapidly to the Internet.
• Commodity food prices are increasing.
• An oversupply of oil is driving oil and gas prices down.

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Key Terms in Strategic Management (4 of 6)
• Long-Term Objectives
– specific results that an organization seeks to achieve in
pursuing its basic mission
– long-term means more than one year
– should be challenging, measurable, consistent,
reasonable, and clear

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Key Terms in Strategic Management (5 of 6)
• Strategies
– the means by which long-term objectives will be
achieved
– may include geographic expansion, diversification,
acquisition, product development, market penetration,
retrenchment, divestiture, liquidation, and joint ventures

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Key Terms in Strategic Management (6 of 6)
• Annual objectives
– short-term milestones that organizations must achieve
to reach long-term objectives
– should be measurable, quantitative, challenging,
realistic, consistent, and prioritized
– should be established at the corporate, divisional, and
functional levels in a large organization
• Policies
– the means by which annual objectives will be achieved

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The Strategic-Management Model
• Where are we now?
• Where do we want to go?
• How are we going to get there?

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Figure 1-1 Comprehensive Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4 (October 2010): 20.
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Benefits of Strategic Management
• Strategic management allows an organization to be more
proactive than reactive in shaping its own future;
• It allows an organization to initiate and influence (rather
than just respond to) activities—and thus to exert control
over its own destiny.

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Figure 1-2 Benefits to a Firm That Does
Strategic Planning

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Financial Benefits
• Businesses using strategic-management concepts show
significant improvement in sales, profitability, and
productivity compared to firms without systematic planning
activities
• High-performing firms tend to do systematic planning to
prepare for future fluctuations in their external and internal
environments

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Nonfinancial Benefits
• Enhanced awareness of external threats
• Improved understanding of competitors’ strategies
• Increased employee productivity
• Reduced resistance to change
• Clearer understanding of performance–reward
relationships

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Why Some Firms Do No Strategic
Planning (1 of 2)
• No formal training in strategic management
• No understanding of or appreciation for the benefits of
planning
• No monetary rewards for doing planning
• No punishment for not planning
• Too busy “firefighting” (resolving internal crises) to plan
ahead
• View planning as a waste of time, since no product/service
is made

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Why Some Firms Do No Strategic
Planning (2 of 2)
• Laziness; effective planning takes time and effort; time is
money
• Content with current success; failure to realize that
success today is no guarantee for success tomorrow; even
Apple Inc. is an example
• Overconfident
• Prior bad experience with strategic planning done
sometime/somewhere

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Pitfalls in Strategic Planning (1 of 2)
• Using strategic planning to gain control over decisions and resources
• Doing strategic planning only to satisfy accreditation or regulatory
requirements
• Too hastily moving from mission development to strategy formulation
• Failing to communicate the plan to employees, who continue working
in the dark
• Top managers making many intuitive decisions that conflict with the
formal plan
• Top managers not actively supporting the strategic-planning process
• Failing to use plans as a standard for measuring performance

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Pitfalls in Strategic Planning (2 of 2)
• Delegating planning to a “planner” rather than involving all
managers
• Failing to involve key employees in all phases of planning
• Failing to create a collaborative climate supportive of
change
• Viewing planning as unnecessary or unimportant
• Becoming so engrossed in current problems that
insufficient or no planning is done
• Being so formal in planning that flexibility and creativity are
stifled
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Figure 1-3 How to Gain and Sustain
Competitive Advantage

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Comparing Business and Military Strategy
• A fundamental difference between military and business
strategy is that business strategy is formulated,
implemented, and evaluated with an assumption of
competition, whereas military strategy is based on an
assumption of conflict
• Both business and military organizations must adapt to
change and constantly improve to be successful

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Excerpts from Sun Tzu’s The Art of War
Writings
• War is a matter of vital importance to the state: a matter of
life or death, the road either to survival or ruin. Hence, it is
imperative that it be studied thoroughly
• Know your enemy and know yourself, and in a hundred
battles you will never be defeated
• Skillful leaders do not let a strategy inhibit creative counter-
movement

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Copyright

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Strategic Management Concepts:
A Competitive Advantage Approach
Sixteenth Edition

Chapter 2
The Business Vision and
Mission

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Learning Objectives
2.1 Describe the nature and role of vision statements in strategic
management.
2.2 Describe the nature and role of mission statements in strategic
management.
2.3 Discuss the process of developing a vision and mission
statement.
2.4 Discuss how clear vision and mission statements can benefit
other strategic-management activities.
2.5 Describe the characteristics of a good mission statement.
2.6 Identify the components of mission statements.
2.7 Evaluate mission statements of different organizations and
write effective vision and mission statements.

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Vision Statement
A vision statement should answer the basic question:
“What do we want to become?”

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What Do We Want to Become?
• The vision statement should be short, preferably one
sentence, and as many managers as possible should have
input into developing the statement.
• The vision statement should reveal the type of business
the firm engages.

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Vision Statement Examples
• General Motors’ vision is to be the world leader in
transportation products and related services. (Author
comment: Good statement)
• PepsiCo’s responsibility is to continually improve all
aspects of the world in which we operate—environment,
social, economic—creating a better tomorrow than today.
(Author comment: Statement is too vague; it should
reveal how the firm’s food and beverage business
benefits people)

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Mission Statement (1 of 2)
• A declaration of an organization’s “reason for being.”
• It answers the pivotal question “What is our business?”
• It is essential for effectively establishing objectives and
formulating strategies.

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Mission Statement (2 of 2)
• It reveals what an organization wants to be and whom it
wants to serve
• It is also called a creed statement, a statement of purpose,
a statement of philosophy, a statement of beliefs, and a
statement of business principles

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Figure 2-1 A Comprehensive Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4 (October 2010): 20.
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Developing Vision and Mission Statements
A widely used approach includes:
• Select several articles about these statements and ask all
managers to read these as background information.
• Ask managers themselves to prepare a vision and mission
statement for the organization.
• A facilitator or committee of top managers should then
merge these statements into a single document and
distribute the draft statements to all managers.
• A request for modifications, additions, and deletions is
needed next, along with a meeting to revise the document.

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Importance of Vision and Mission
Statements
• To make sure all employees/managers understand the
firm’s purpose or reason for being.
• To provide a basis for prioritization of key internal and
external factors utilized to formulate feasible strategies.
• To provide a basis for the allocation of resources.
• To provide a basis for organizing work, departments,
activities, and segments around a common purpose.

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Table 2-2 Ten Benefits of Having a Clear
Mission and Vision
1. Achieve clarity of purpose among all managers and employees.
2. Provide a basis for all other strategic planning activities, including internal and
external assessment, establishing objectives, developing strategies, choosing
among alternative strategies, devising policies, establishing organizational
structure, allocating resources, and evaluating
performance.
3. Provide direction.
4. Provide a focal point for all stakeholders of the firm.
5. Resolve divergent views among managers.
6. Promote a sense of shared expectations among all managers and employees.
7. Project a sense of worth and intent to all stakeholders.
8. Project an organized, motivated organization worthy of support.
9. Achieve higher organizational performance.
10. Achieve synergy among all managers and employees.

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Characteristics of a Mission Statement (1 of 3)
• A good mission statement allows for the generation and
consideration of a range of feasible alternative objectives
and strategies without unduly stifling management
creativity.
• A mission statement needs to be broad to reconcile
differences effectively among, and appeal to, an
organization's diverse stakeholders

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Characteristics of a Mission Statement (2 of 3)
• Stakeholders
– include employees, managers, stockholders, boards of
directors, customers, suppliers, distributors, creditors,
governments (local, state, federal, and foreign), unions,
competitors, environmental groups, and the general
public.

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Characteristics of a Mission Statement (3 of 3)
1. Broad in scope; does not include monetary amounts, numbers,
percentages, ratios, or objectives
2. Fewer than 150 words in length
3. Inspiring
4. Identifies the utility of a firm’s products
5. Reveals that the firm is socially responsible
6. Reveals that the firm is environmentally responsible
7. Includes nine components: customers, products or services, markets,
technology, concern for survival/growth/profits, philosophy, self-
concept, concern for public image, concern for employees
8. Reconciliatory
9. Enduring

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A Customer Orientation (1 of 3)
A mission statement should:
• Define what the organization is and what the organization
aspires to be
• Be limited enough to exclude some ventures and broad
enough to allow for creative growth
• Distinguish a given organization from all others

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A Customer Orientation (2 of 3)
A mission statement should also:
• Serve as a framework for evaluating both current and
prospective activities
• Be stated in terms sufficiently clear to be widely
understood throughout the organization

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A Customer Orientation (3 of 3)
• A good mission statement reflects the anticipations of
customers.
• The operating philosophy of organizations should be to
identify customers' needs and then provide a product or
service to fulfill those needs.

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Considerations (1 of 2)
• Do not offer me things.
• Do not offer me clothes. Offer me attractive looks.
• Do not offer me shoes. Offer me comfort for my feet and
the pleasure of walking.
• Do not offer me a house. Offer me security, comfort, and a
place that is clean and happy.
• Do not offer me books. Offer me hours of pleasure and the
benefit of knowledge.
• Do not offer me CDs. Offer me leisure and the sound of
music.
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Considerations (2 of 2)
• Do not offer me tools. Offer me the benefits and the
pleasure that come from making beautiful things.
• Do not offer me furniture. Offer me comfort and the
quietness of a cozy place.
• Do not offer me things. Offer me ideas, emotions,
ambience, feelings, and benefits.
• Please, do not offer me things.

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Mission Statement Components (1 of 2)
1. Customers—Who are the firm’s customers?
2. Products or services—What are the firm’s major
products or services?
3. Markets—Geographically, where does the firm compete?
4. Technology—Is the firm technologically current?
5. Survival, growth, and profitability—Is the firm
committed to growth and financial soundness?

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Mission Statement Components (2 of 2)
6. Philosophy—What are the basic beliefs, values,
aspirations, and ethical priorities of the firm?
7. Self-concept (distinctive competence)—What is the
firm’s major competitive advantage?
8. Public image—Is the firm responsive to social,
community, and environmental concerns?
9. Employees—Are employees a valuable asset of the
firm?

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Example Mission Statements (1 of 2)
PepsiCo
• We aspire to make PepsiCo the world’s (3) premier
consumer products company, focused on convenient foods
and beverages (2). We seek to produce healthy financial
rewards for investors (5) as we provide opportunities for
growth and enrichment to our employees (9), our business
partners and the communities (8) in which we operate. And
in everything we do, we strive to act with honesty,
openness, fairness and integrity (6).
• Author comment: Statement lacks three components:
Customers (1), Technology (4), and Distinctive
Competence (7); 62 words
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Example Mission Statements (2 of 2)
Royal Caribbean
• We are loyal to Royal Caribbean and Celebrity and strive for
continuous improvement in everything we do. We always provide
service with a friendly greeting and a smile (7). We anticipate the
needs of our customers and make all efforts to exceed our
customers’ expectations. We take ownership of any problem that is
brought to our attention. We engage in conduct that enhances our
corporate reputation and employee morale (9). We are committed
to act in the highest ethical manner and respect the rights and
dignity of others (6).
• Author comment: Statement lacks six components:
Customers (1), Products/Services (2), Markets (3), Technology
(4), Survival/Growth/Profits (5), and Public Image (8); 86 words
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Exemplary Proposed Mission Statement (1 of 2)
Avon
• Our mission is to provide women (1) quality fragrances,
cosmetics, and jewelry (2) at reasonable prices backed by
outstanding customer service provided by our thousands
of door-to-door sales representatives (7, 9) operating
globally (3). We use the latest technology (4) to profitably
develop and market products desired by women all over
the world (5). Avon representatives put integrity first (6) in
setting a good example in every community (8) they
operate—as they sell beauty. (58 words)

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Exemplary Proposed Mission Statement (2 of 2)
L’Oreal
• Our mission is to design, produce, and distribute the
world’s best fragrances, perfumes, and personal care
products (2) to women, men, and children (1) by utilizing
the latest technological improvements (4). We empower
our highly creative team of researchers to develop safe,
eco-friendly (7) products that will enable our firm to
profitably grow (5) through thousands of retail outlets. We
strive to be one of the most socially responsible (8) firms
on the planet (3) and appreciate our employees (9) making
that happen, while following the “golden rule” in all that we
do (6). (85 words)
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Copyright

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Strategic Management Concepts:
A Competitive Advantage Approach
Sixteenth Edition

Chapter 3
The External Assessment

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Learning Objectives (1 of 2)
3.1 Describe the nature and purpose of an external
assessment in formulating strategies.
3.2 Identify and discuss 10 external forces that must be
examined in formulating strategies: economic, social,
cultural, demographic, environmental, political,
governmental, legal, technological, and competitive.
3.3 Explain Porter’s Five Forces Model and its relevance in
formulating strategies.

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Learning Objectives (2 of 2)
3.4 Describe key sources of information used for locating
vital external information.
3.5 Discuss forecasting tools and techniques.
3.6 Explain how to develop and use an External Factor
Evaluation (EFE) Matrix.
3.7 Explain how to develop and use a Competitive Profile
Matrix.

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External Audit
• External audit
– focuses on identifying and evaluating trends and
events beyond the control of a single firm
– reveals key opportunities and threats confronting an
organization so that managers can formulate strategies
to take advantage of the opportunities and avoid or
reduce the impact of threats

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The Nature of an External Audit
• The external audit is aimed at identifying key variables
that offer actionable responses
• Firms should be able to respond either offensively or
defensively to the factors by formulating strategies that
take advantage of external opportunities or that minimize
the impact of potential threats.

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Figure 3-1 A Comprehensive Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4 (October 2010): 20.

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Key External Forces
External forces can be divided into five broad categories:
1. economic forces
2. social, cultural, demographic, and natural environment
forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces

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Figure 3-2 Relationships Between Key
External Forces and an Organization

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The Process of Performing an External
Audit (1 of 2)
• First, gather competitive intelligence and information
about economic, social, cultural, demographic,
environmental, political, governmental, legal, and
technological trends.

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The Process of Performing an External
Audit (2 of 2)
• Information should be assimilated and evaluated
• A final list of the most important key external factors should
be communicated

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The Industrial Organization (I/O) View
• The Industrial Organization (I/O) approach to competitive
advantage advocates that external (industry) factors are
more important than internal factors in a firm for gaining
and sustaining competitive advantage.

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Economic Forces
• Shift to service economy • Income differences by region and
• Availability of credit consumer group

• Level of disposable income • Price fluctuations

• Propensity of people to spend • Foreign countries’ economic

conditions
• Interest rates
• Monetary and Fiscal policy
• Inflation rates
• Stock market trends
• GDP trends
• Tax rate variation by country and
• Consumption patterns state
• Unemployment trends • European Economic Community
• Value of the dollar (EEC) policies
• Import/Export factors • Organization of Petroleum Exporting
Countries (OPEC) policies
• Demand shifts for different goods and
services
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Advantages of a Strong Dollar
1. Leads to lower exports
2. Leads to higher imports
3. Makes U.S. goods expensive for foreign consumers
4. Helps keep inflation low
5. Allows U.S. firms to purchase raw materials cheaply from other countries
6. Allows U.S. to service its debt better
7. Spurs foreign investment
8. Encourages Americans to travel abroad
9. Leads to lower oil prices because oil globally is priced in U.S. dollars
10. Encourages Americans to spend money because they can buy more for their
money

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Social, Cultural, Demographic, and Natural
Environmental Forces
• U.S. Facts
– Aging population
– Less white
– 2050 = 20% population > 65 years
– 2075 = no ethnic or racial majority

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Key Social, Cultural, Demographic, and
Natural Environmental Variables
• Population changes by race, age, and • Attitudes toward retirement
geographic area
• Energy conservation
• Regional changes in tastes and
• Attitudes toward product quality
preferences
• Number of marriages • Attitudes toward customer service

• Number of divorces • Pollution control

• Number of births • Attitudes toward foreign peoples
• Number of deaths • Energy conservation
• Immigration and emigration rates • Social programs
• Social Security programs • Number of churches
• Life expectancy rates • Number of church members
• Per capita income • Social responsibility issues
• Social media pervasiveness

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Political, Governmental, and Legal Forces
• The increasing global interdependence among
economies, markets, governments, and organizations
makes it imperative that firms consider the possible impact
of political variables on the formulation and
implementation of competitive strategies.

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Political, Government, and Legal Variables
• Environmental • USA vs. other country
regulations relationships
• Number of patents • Political conditions in foreign
• Changes in patent laws countries

• Equal employment laws • Global price of oil changes

• Level of defense • Local, state, and federal laws

expenditures • Import–export regulations
• Unionization trends • Tariffs
• Antitrust legislation • Local, state, and national
elections

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Technological Forces (1 of 2)
New technologies such as:
• the Internet of Things
• 3D printing
• the cloud
• mobile devices
• biotech
• analytics
• autotech
• robotics and
• artificial intelligence

are fueling innovation in many industries, and impacting strategic-planning

decisions.
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Technological Forces (2 of 2)
• Many firms now have a Chief Information Officer (CIO)
and a Chief Technology Officer (CTO) who work
together to ensure that information needed to formulate,
implement, and evaluate strategies is available where and
when it is needed

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Results of Technological Advances
1. Major opportunities and threats that must be considered in formulating
strategies.
2. Can affect organizations’ products, services, markets, suppliers,
distributors, competitors, customers, manufacturing processes,
marketing practices, and competitive position.
3. Can create new markets, result in new and improved products,
change the relative competitive cost positions, and render existing
products and services obsolete.
4. Can reduce or eliminate cost barriers between businesses, create
shorter production runs, create shortages in technical skills, and result
in changing values and expectations of employees, managers, and
customers.
5. Can create new competitive advantages that are more powerful than
existing advantages.
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Competitive Forces (1 of 2)
• An important part of an external audit is identifying rival
firms and determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives, and
strategies

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Competitive Forces (2 of 2)
Characteristics of the most competitive companies:
1. Strive to continually increase market share
2. Use the vision/mission as a guide for all decisions
3. Whether it's broke or not, fix it–make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. Hire and retain the best employees and managers
possible
7. Strive to stay cost-competitive on a global basis

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Key Questions About Competitors
1. What are the strengths of our major competitors?
2. What are the weaknesses of our major competitors?
3. What are the objectives and strategies of our major competitors?
4. How will our major competitors most likely respond to current economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and competitive trends
affecting our industry?
5. How vulnerable are the major competitors to our alternative company strategies?
6. How vulnerable are our alternative strategies to successful counterattack by our major competitors?
7. How are our products or services positioned relative to major competitors?
8. To what extent are new firms entering and old firms leaving this industry?
9. What key factors have resulted in our present competitive position in this industry?
10. How have the sales and profit rankings of our major competitors in the industry changed over recent
years? Why have these rankings changed that way?
11. What is the nature of supplier and distributor relationships in this industry?
12. To what extent could substitute products or services be a threat to our competitors?

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Competitive Intelligence Programs (1 of 2)
Competitive intelligence (CI)
• a systematic and ethical process for gathering and
analyzing information about the competition's activities and
general business trends to further a business's own goals

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Competitive Intelligence Programs (2 of 2)
The three basic objectives of a CI program are:
1. To provide a general understanding of an industry and its
competitors
2. To identify areas in which competitors are vulnerable and
to assess the impact strategic actions would have on
competitors
3. To identify potential moves that a competitor might make
that would endanger a firm's position in the market

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Figure 3-3 The Five-Forces Model of
Competition (1 of 2)

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The Five-Forces Model of Competition (2 of 2)
1. Identify key aspects or elements of each competitive force
that impact the firm.
2. Evaluate how strong and important each element is for
the firm.
3. Decide whether the collective strength of the elements is
worth the firm entering or staying in the industry.

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The Five-Forces Model (1 of 6)
• Rivalry among competing firms
– Most powerful of the five forces
– Focus on competitive advantage of strategies over
other firms

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The Five-Forces Model (2 of 6)
Table 3-7 Conditions That Cause High Rivalry Among Competing Firms
1. When the number of competing firms is high
2. When competing firms are of similar size
3. When competing firms have similar capabilities
4. When the demand for an industry’s products is falling
5. When the product or service prices in the industry are falling
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
9. When fixed costs are high among competing firms
10. When the product is perishable
11. When rivals have excess capacity
12. When consumer demand is falling
13. When rivals have excess inventory
14. When rivals sell similar products/services
15. When mergers are common in the industry
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The Five-Forces Model (3 of 6)
• Potential Entry of New Competitors
– Barriers to entry are important
– Quality, pricing, and marketing can overcome barriers

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Barriers to Entry (1 of 2)
• Need to gain economies of scale quickly
• Need to gain technology and specialized know-how
• Lack of experience
• Strong customer loyalty
• Strong brand preferences
• Large capital requirements
• Lack of adequate distribution channels

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Barriers to Entry (2 of 2)
• Government regulatory policies
• Tariffs
• Lack of access to raw materials
• Possession of patents
• Undesirable locations
• Counterattack by entrenched firms
• Potential saturation of the market

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The Five-Forces Model (4 of 6)
• Potential development of substitute products
– Pressure increases when:
▪ Prices of substitutes decrease
▪ Consumers' switching costs decrease

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The Five-Forces Model (5 of 6)
• Bargaining Power of Suppliers is increased when (there
are):
– Few suppliers
– Few substitutes
– Costs of switching raw materials is high
• Backward integration is gaining control or ownership of
suppliers

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The Five-Forces Model (6 of 6)
• Bargaining power of consumers
– Customers being concentrated or buying in volume
affects intensity of competition
– Consumer power is higher where products are
standard or undifferentiated

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Conditions Where Consumers Gain
Bargaining Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling consumer
demand
4. If buyers are informed about sellers' products, prices, and
costs
5. If buyers have discretion in whether and when they
purchase the product

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Sources of External Information (1 of 2)
• Unpublished sources include customer surveys, market
research, speeches at professional and shareholders'
meetings, television programs, interviews, and
conversations with stakeholders.
• Published sources of strategic information include
periodicals, journals, reports, government documents,
abstracts, books, directories, newspapers, and manuals.

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Sources of External Information (2 of 2)
• finance.yahoo.com
• hoovers.com
• globaledge.msu.edu/industries/

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Forecasting Tools and Techniques
• Forecasts
– educated assumptions about future trends and events
– no forecast is perfect

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Making Assumptions
• Assumptions
– Best present estimates of the impact of major external
factors, over which the manager has little if any control,
but which may exert a significant impact on
performance or the ability to achieve desired results.

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Business Analytics
• Using software to mine huge volumes of data
• Helps executives make decisions

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Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize and evaluate these factors:
• Social • Political
• Cultural • Governmental
• Demographic • Legal
• Economic • Technological
• Environmental • Competitive

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EFE Matrix Steps
1. List 20 key external factors
2. Weight from 0.0 to 1.0
3. Rate the effectiveness of current strategies from 1-4
4. Multiply weight * rating
5. Sum weighted scores

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Table 3-9 EFE Matrix for a Local 10-Theater
Cinema Complex (1 of 2)
Weighted
Key External Factors Weight Rating Score
Opportunities Blank Blank Blank
1. Two new neighborhoods developing within 3 miles 0.09 1 0.09
2. TDB University is expanding 6% annually 0.08 4 0.32
3. Major competitor across town recently closed 0.08 3 0.24
4. Demand for going to cinemas growing 10% 0.07 2 0.14
5. Disposable income among citizens up 5% in prior year 0.06 3 0.18
6. Rowan County is growing 8% annually in population 0.05 3 0.15
7. Unemployment rate in county declined to 3.1% 0.03 2 0.06

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Table 3-9 EFE Matrix for a Local 10-Theater
Cinema Complex (2 of 2)
Weighted
Key External Factors Weight Rating Score
Threats Blank Blank Blank
8. Trend toward healthy eating eroding concession sales 0.12 4 0.48
9. Demand for online movies and DVDs growing 10% 0.06 2 0.12
10. Commercial property adjacent to cinemas for sale 0.06 3 0.18
11. TDB University installing an on-campus movie theater 0.04 3 0.12
12. County and city property taxes increasing 25% 0.08 2 0.16
13. Local religious groups object to R-rated movies 0.04 3 0.12
14. Movies rented at local Red Box’s up 12% 0.08 2 0.16
15. Movies rented last quarter from Time Warner up 15% 0.06 1 0.06
Total 1.00 Blank 2.58

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Industry Analysis: Competitive Profile
Matrix (CPM)
• Identifies firm's major competitors and their strengths &
weaknesses in relation to a sample firm's strategic
positions
• Critical success factors include internal and external
issues

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Table 3-12 An Example Competitive Profile
Matrix
Company 1 Company 2 Company 3
Blank Blank Company 1 Company 2 Company 3
Critical Success Weight Rating Score Rating Score Rating Score
Factors
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10
Management 0.10 4 0.40 3 0.20 1 0.10
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 blank 3.15 blank 2.50 blank 2.20

Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength,
4 = major strength. As indicated by the total weighted score of 2.50, Competitor 2 is weakest. Only
eight critical success factors are included for simplicity; this is too few in actuality.

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Copyright

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Strategic Management Concepts:
A Competitive Advantage Approach
Sixteenth Edition

Chapter 4
The Internal Assessment

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Learning Objectives (1 of 2)
4.1 Describe the nature and role of an internal assessment
in formulating strategies.
4.2 Discuss why organizational culture is so important in
formulating strategies.
4.3 Identify the basic functions (activities) that make up
management and their relevance in formulating
strategies.
4.4 Identify the basic functions of marketing and their
relevance in formulating strategies.
4.5 Discuss the nature and role of finance and accounting
in formulating strategies.
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Learning Objectives (2 of 2)
4.6 Discuss the nature and role of production/operations in
formulating strategies.
4.7 Discuss the nature and role of research and
development (R&D) in formulating strategies.
4.8 Discuss the nature and role of management information
systems (MIS) in formulating strategies.
4.9 Explain value chain analysis and its relevance in
formulating strategies.
4.10 Develop and use an Internal Factor Evaluation (IFE)
Matrix.

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Figure 4-1 A Comprehensive Strategic-
Management Model

Source: Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988):
40. Also, Ratnaningsih, Anik, and Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of
David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of
Mathematics and Technology, no. 4, (October 2010): 20.
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Key Internal Forces
• Distinctive competencies
– A firm’s strengths that cannot be easily matched
or imitated by competitors
– Building competitive advantages involves taking
advantage of distinctive competencies.
Figure 4-2 The Process of Gaining Competitive Advantage
in a Firm
Weaknesses → Strenghts → Distinctive Competencies →
Competitive Advantage

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The Process of Performing an Internal Audit
• The internal audit
– Requires gathering, assimilating, and prioritizing
information about the firm's management, marketing,
finance, accounting, production/operations, research
and development (R and D), and management
information systems operations
– Provides more opportunity for participants to
understand how their jobs, departments, and divisions
fit into the whole firm

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The Resource-Based View (RBV) (1 of 3)
• The Resource-Based View (RBV) Approach
– contends that internal resources are more important for
a firm than external factors in achieving and sustaining
competitive advantage

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The Resource-Based View (RBV) (2 of 3)
• Proponents of the RBV contend that organizational
performance will primarily be determined by internal
resources that can be grouped into three all-encompassing
categories:
– physical resources
– human resources
– organizational resources

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The Resource-Based View (RBV) (3 of 3)
• For a resource to be valuable, it must be either (1) rare,
(2) hard to imitate, or (3) not easily substitutable.
• These three characteristics of resources are called
Empirical Indicators
• These enable a firm to implement strategies that improve
its efficiency and effectiveness and lead to a sustainable
competitive advantage.

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Integrating Strategy and Culture
• Organizational culture significantly affects planning
activities.
• If strategies can capitalize on cultural strengths, such as a
strong work ethic or highly ethical beliefs, then
management often can swiftly and easily implement
changes.

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Organizational Culture
• Organizational culture is “a pattern of behavior that has
been developed by an organization as it learns to cope
with its problem of external adaptation and internal
integration and that has worked well enough to be
considered valid and to be taught to new members as
the correct way to perceive, think, and feel.”

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Cultural Products
• Values • Sagas
• Beliefs • Language
• Rites • Metaphors
• Rituals • Symbols
• Ceremonies • Folktales
• Myths • Heroes and heroines
• Stories
• Legends

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Aspects of Organizational Culture
Table 4-2 Fifteen Example (Possible) Aspects of an Organization’s Culture
Dimension Low Degree Degree Degree High
1. Strong work ethic; arrive early and leave late 1 2 3 4 5
2. High ethical beliefs; clear code of business ethics followed 1 2 3 4 5
3. Formal dress; shirt and tie expected 1 2 3 4 5
4. Informal dress; many casual dress days 1 2 3 4 5
5. Socialize together outside of work 1 2 3 4 5
6. Do not question supervisor’s decision 1 2 3 4 5
7. Encourage whistle-blowing 1 2 3 4 5
8. Be health conscious; have a wellness program 1 2 3 4 5
9. Allow substantial “working from home” 1 2 3 4 5
10. Encourage creativity, innovation, and open-mindedness 1 2 3 4 5
11. Support women and minorities; no glass ceiling 1 2 3 4 5
12. Be highly socially responsible; be philanthropic 1 2 3 4 5
13. Have numerous meetings 1 2 3 4 5
14. Have a participative management style 1 2 3 4 5
15. Preserve the natural environment; have a sustainability program 1 2 3 4 5
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Management
The functions of management consist of five basic
activities:
• planning
• organizing
• motivating
• staffing
• controlling

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The Basic Functions of Management (1 of 2)
• Planning: forecasting, establishing objectives, devising
strategies, and developing policies
• Organizing: organizational design, job specialization, job
descriptions, span of control, coordination, job design, and
job analysis
• Motivating: leadership, communication, work groups,
behavior modification, delegation of authority, job
enrichment, job satisfaction, needs fulfillment,
organizational change, employee morale, and managerial
morale

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The Basic Functions of Management (2 of 2)
• Staffing: wage and salary administration, employee
benefits, interviewing, hiring, firing, training, management
development, employee safety, equal employment
opportunity, and union relations
• Controlling: quality control, financial control, sales control,
inventory control, expense control, analysis of variances,
rewards, and sanctions

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Management Audit Checklist of
Questions (1 of 2)
1. Does the firm use strategic-management concepts?
2. Are company objectives and goals measurable and well
communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization's structure appropriate?

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Management Audit Checklist of
Questions (2 of 2)
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms
effective?

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Marketing
Marketing
• the process of defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and services

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Functions of Marketing
• Customer analysis
• Selling products and services
• Product and service planning
• Pricing
• Distribution
• Marketing research
• Cost/ benefit analysis

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Customer Analysis
• Customer Analysis
– the examination and evaluation of consumer needs,
desires, and wants
– involves administering customer surveys, analyzing
consumer information, evaluating market positioning
strategies, developing customer profiles, and
determining optimal market segmentation strategies

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Selling Products and Services
• Selling
– includes many marketing activities, such as
advertising, sales promotion, publicity, personal selling,
sales force management, customer relations, and
dealer relations

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Product and Service Planning
• Product and Service Planning
– includes activities such as test marketing; product and
brand positioning; devising warranties; packaging;
determining product options, features, style, and
quality; deleting old products; and providing for
customer service
– important when a company is pursuing product
development or diversification

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Pricing
• Pricing
– Five major stakeholders affect pricing decisions:
consumers, governments, suppliers, distributors, and
competitors
– Sometimes an organization will pursue a forward
integration strategy primarily to gain better control over
prices charged to consumers.

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Distribution
• Distribution
– includes warehousing, distribution channels,
distribution coverage, retail site locations, sales
territories, inventory levels and location, transportation
carriers, wholesaling, and retailing
– especially important when a firm is striving to
implement a market development or forward integration
strategy

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Marketing Research
• Marketing Research
– the systematic gathering, recording, and analyzing of
data about problems relating to the marketing of goods
and services
– can uncover critical strengths and weaknesses

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Cost/Benefit Analysis
• Cost/Benefit Analysis
– Three steps are required:
1.compute the total costs associated with a decision
2.estimate the total benefits from the decision
3.compare the total costs with the total benefits

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Marketing Audit Checklist of Questions (1 of 2)
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and cost
effective?
5. Does the firm have an effective sales organization?
6. Does the firm conduct market research?

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Marketing Audit Checklist of Questions (2 of 2)
7. Are product quality and customer service good?
8. Are the firm's products and services priced appropriately?
9. Does the firm have an effective promotion, advertising,
and publicity strategy?
10. Are marketing, planning, and budgeting effective?
11. Do the firm's marketing managers have adequate
experience and training?
12. Is the firm's Internet presence excellent as compared to
rivals?

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Finance/Accounting Functions (1 of 4)
The functions of finance/accounting comprise three
decisions:
1. The investment decision
2. The financing decision
3. The dividend decision

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Finance/Accounting Functions (2 of 4)
• Investment Decision (Capital Budgeting)
– the allocation and reallocation of capital and resources
to projects, products, assets, and divisions of an
organization
• Financing Decision
– determines the best capital structure for the firm and
includes examining various methods by which the firm
can raise capital

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Finance/Accounting Functions (3 of 4)
• Dividend Decisions
– concern issues such as the percentage of earnings
paid to stockholders, the stability of dividends paid over
time, and the repurchase or issuance of stock
– determine the amount of funds that are retained in a
firm compared to the amount paid out to stockholders

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Finance/Accounting Functions (4 of 4)
1. How has each ratio changed over time?
2. How does each ratio compare to industry norms?
3. How does each ratio compare with key competitors?

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Table 4-4 A Summary of Key Financial
Ratios (1 of 4)
Ratio How Calculated What it measures
Liquidity Ratios BLANK BLANK
Current assets over Current liabilities
Current Ratio Current assets The extent to which a firm can meet its short-term
Current liabilities obligations
Current assets minus inventory over Current liabilities
The extent to which a firm can meet its short-term
Current assets minus inventory
Quick Ratio obligations without relying on the sale of its inventories
Current liabilities
Leverage Ratios Blank Blank

Debt-to-Total-Assets Ratio Total debt

Total debt over Total assets
The percentage of total funds provided by creditors
Total assets
Total debt over Total stockholders’ equity
Debt-to-Equity Ratio Total debt The percentage of total funds provided by creditors
Total stockholders' equity versus by owners

Long-term debt over Total stockholders’ equity

Long-Term Debt-to-Equity Ratio Long-term debt The balance between debt and equity in a firm’s long-
Total stockholders' equity term capital structure

Profits before interest and taxes over Total interest charges

Times-Interest-Earned Ratio Profits before interest and taxes the extent to which earnings can decline without the
Total interest charges firm becoming unable to meet its annual interest costs

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A Summary of Key Financial Ratios (2 of 4)
Ratio How Calculated What it measures
Activity Ratios Blank Blank
Sales over Inventory of finished goods
Sales Whether a firm holds excessive stocks of
Inventory turnover Inventory of finished goods inventories and whether a firm is slowly selling
its inventories compared to the industry average
Fixed Assets Sales
Sales over Fixed assets Sales productivity and plant and equipment
turnover Fixed assets utilization
Sales Whether a firm is generating a sufficient volume
Sales over Total assets
Total Assets turnover Total assets of business for the size of its asset investment

Accounts Receivable Annual credit sales over The average length of time it takes a firm to
Annual
Accounts credit sales
receivable
turnover Accounts receivable collect credit sales (in percentage terms)

Accounts receivable over total credit sales per

Average Collection 365 days Accounts receivable The average length of time it takes a firm to
Period Total credit sales/365 days collect on credit sales (in days)

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A Summary of Key Financial Ratios (3 of 4)
Ratio How Calculated What it measures
Profitability Ratios Blank Blank
Gross Profit Margin Sales minus cost of goods sold over Sales the total margin available to cover
Sales minus cost of goods sold
operating expenses and yield a profit
Sales

Operating Profit Earnings before interest and taxes EBIT over Sales Profitability without concern for taxes and
Earnings before interest and taxes EBIT
Margin Sales interest

Net Profit Margin Net income over sales After-tax profits per dollar of sales
Net income
Sales
Return on total Assets Net income over Total assets After-tax profits per dollar of assets; this
Net income
(ROA) ratio is also called return on investment
Total assets (ROI)
Return on Net Income over Total stockholders’ equity After-tax profits per dollar of
Net income
Stockholders’ Equity stockholders’ investment in the firm
(ROE) Total stockholders' equity

Earnings Per Share Net income over Number of shares of common stock outstanding
Earnings available to the owners of
Net income
(EPS) Number of shares of common stock outstanding common Stock

Price-Earnings Ratio Market price per share over Earnings per share Attractiveness of firm on equity markets
Market price per share
Earnings per share

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A Summary of Key Financial Ratios (4 of 4)
Ratio How Calculated What it measures
Growth Ratios Blank Blank

Sales Annual percentage growth in total sales Firm’s growth rate in sales

Net Income Annual percentage growth in profits Firm’s growth rate in profits

Earnings Per Share Annual percentage growth in EPS Firm’s growth rate in EPS

Dividends Per Share Annual percentage growth in dividends Firm’s growth rate in dividends
per share per share

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Finance/Accounting Audit Checklist (1 of 2)
1. Where is the firm financially strong and weak as indicated
by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt
and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?

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Finance/Accounting Audit Checklist (2 of 2)
6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its investors and
stockholders?
8. Are the firm's financial managers experienced and well
trained?
9. Is the firm's debt situation excellent?

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Production/Operations
• Production/operations function
– consists of all those activities that transform inputs into
goods and services
• Production/operations management deals with inputs,
transformations, and outputs that vary across industries
and markets.

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Table 4-6 The Basic Functions (Decisions)
Within Production/Operations
Decision Areas Example Decisions

1. Process these decisions include choice of technology, facility layout, process flow
analysis, facility location, line balancing, process control, and transportation
analysis. Distances from raw materials to production sites to customers are
a major consideration.
2. Capacity these decisions include forecasting, facilities planning, aggregate planning,
scheduling, capacity planning, and queuing analysis. Capacity utilization is
a major consideration.
3. Inventory these decisions involve managing the level of raw materials, work-in-
process, and finished goods, especially considering what to order, when to
order, how much to order, and materials handling.
4. Workforce these decisions involve managing the skilled, unskilled, clerical, and
managerial employees by caring for job design, work measurement, job
enrichment, work standards, and motivation techniques.
5. Quality these decisions are aimed at ensuring that high-quality goods and ser-
vices are produced by caring for quality control, sampling, testing, quality
assurance, and cost control.

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Table 4-7 Implications of Various Strategies
on Production/Operations
Various Strategies Implications
1. Become a low-cost provider Creates high barriers to entry
Creates larger market
Requires longer production runs and fewer product changes
2. Become a high-quality provider Requires more quality-assurance efforts
Requires more expensive equipment
Requires highly skilled workers and higher wages
3. Provide great customer service Requires more service people, service parts, and equipment
Requires rapid response to customer needs or changes in
customer tastes
Requires a higher inventory investment
4. Be the first to introduce new Has higher research and development costs
products Has high retraining and tooling costs
5. Become highly automated Requires high capital investment
Reduces flexibility
May affect labor relations
Makes maintenance more crucial
6. Minimize layoffs Serves the security needs of employees and may develop
employee loyalty
Helps attract and retain highly skilled employees
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Production/Operations Audit Checklist
1. Are supplies of raw materials, parts, and subassemblies
reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in good
condition?
3. Are inventory-control policies and procedures effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically
located?
6. Does the firm have technological competencies?

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Research and Development Audit
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization's R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems
adequate?
6. Is communication between R&D and other organizational
units effective?
7. Are present products technologically competitive?

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Management Information Systems
• Management Information System
– Receives raw material from both external and internal
evaluation of an organization
– Improves the performance of an enterprise by
improving the quality of managerial decisions
– Collects, codes, stores, synthesizes, and presents
information in such a manner that it answers important
operating and strategic questions

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Management Information Systems Audit (1 of 2)
1. Do all managers in the firm use the information system to
make decisions?
2. Is there a chief information officer or director of
information systems position in the firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm
contribute input to the information system?
5. Are there effective passwords for entry into the firm's
information system?

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Management Information Systems Audit (2 of 2)
6. Are strategists of the firm familiar with the information
systems of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand the
competitive advantages that information can provide
firms?
9. Are computer training workshops provided for users of
the information system?
10. Is the firm’s information system continually being
improved in content- and user-friendliness?

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Value Chain Analysis (VCA)
• Value Chain Analysis (VCA)
– refers to the process whereby a firm determines the
costs associated with organizational activities from
purchasing raw materials to manufacturing product(s)
to marketing those products
– aims to identify where low-cost advantages or
disadvantages exist anywhere along the value chain
from raw material to customer service activities

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Figure 4-8 Transforming Value Chain Activities
into Sustained Competitive Advantage

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Benchmarking
• Benchmarking
– an analytical tool used to determine whether a firm's
value chain activities are competitive compared to
rivals and thus conducive to winning in the marketplace
– entails measuring costs of value chain activities across
an industry to determine “best practices”

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The Internal Factor Evaluation (IFE) Matrix
1. List key internal factors as identified in the internal-audit
process.
2. Assign a weight that ranges from 0.0 (not important) to
1.0 (all-important) to each factor.
3. Assign a 1-to-4 rating to each factor to indicate whether
that factor represents a strength or weakness.
4. Multiply each factor's weight by its rating to determine a
weighted score for each variable.
5. Sum the weighted scores for each variable to determine
the total weighted score for the organization.

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Table 4-8 A Sample Internal Factor Evaluation
Matrix for a Retail Computer Store (1 of 2)
Weighted
Key internal Factors Weight Rating Score
Strengths Blank Blank Blank
1. Inventory turnover increased from 5.8 to 6.7. 0.05 3 0.15
2. Average customer purchase increased from $97 to $128. 0.07 4 0.28

3. Employee morale is excellent. 0.10 3 0.30

4. In-store promotions resulted in 20% increase in sales. 0.05 3 0.15
5. Newspaper advertising expenditures increased 10%. 0.02 3 0.06
6. Revenues from repair/service in the store up 16%. 0.15 3 0.45
7. In-store technical support personnel have MIS college 0.05 4 0.20
degrees.
8. Store’s debt-to-total assets ratio declined to 34%. 0.03 3 0.09
9. Revenues per employee up 19%. 0.02 3 0.06

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Table 4-8 A Sample Internal Factor Evaluation
Matrix for a Retail Computer Store (2 of 2)
Weighted
Key internal Factors Weight Rating Score
Weaknesses Blank Blank Blank
1. Revenues from software segment of store down 12%. 0.10 2 0.20

2. Location of store negatively impacted by new Highway 34. 0.15 2 0.30

3. Carpet and paint in store somewhat in disrepair. 0.02 1 0.02

4. Bathroom in store needs refurbishing. 0.02 1 0.02

5. Revenues from businesses down 8%. 0.04 1 0.04

6. Store has no website. 0.05 2 0.10

7. Supplier on-time delivery increased to 2.4 days. 0.03 1 0.03

8. Often customers have to wait to check out 0.05 1 0.05

Total 1.00 BLANK 2.50

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Copyright

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Strategic Management Concepts:
A Competitive Advantage Approach
Sixteenth Edition

Chapter 5
Strategies in Action

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Learning Objectives (1 of 2)
5.1 Identify and discuss eight characteristics of objectives and
ten benefits of having clear objectives.
5.2 Define and give an example of eleven types of strategies.
5.3 Identify and discuss the three types of “Integration
Strategies.”
5.4 Give specific guidelines when market penetration, market
development, and product development are especially
effective strategies.
5.6 Explain when diversification is an effective business
strategy.

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Learning Objectives (2 of 2)
5.6 List guidelines for when retrenchment, divestiture, and
liquidation are especially effective strategies.
5.7 Identify and discuss Porter’s five generic strategies.
5.8 Compare (a) cooperation among competitors, (b) joint
venture and partnering, and (c) merger/acquisition as
key means for achieving strategies.
5.9 Discuss tactics to facilitate strategies, such as (a) being
a first mover, (b) outsourcing, and (c) reshoring.
5.10 Explain how strategic planning differs in for-profit, not-
for-profit, and small firms.

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Long-Term Objectives
• The results expected from pursuing certain strategies
• 2-to-5 year timeframe

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Table 5-1 Varying Performance Measures by
Organizational Level

Organizational Level Basis for Annual Bonus or Merit Pay

Corporate 75% based on long-term objectives
25% based on annual objectives
Division 50% based on long-term objectives
50% based on annual objectives
Function 25% based on long-term objectives
75% based on annual objectives

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Table 5-2 The Desired Characteristics of
Objectives
1. Quantitative
2. Measurable
3. Realistic
4. Understandable
5. Challenging
6. Hierarchical
7. Obtainable
8. Congruent across departments

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The Nature of Long-Term Objectives
• Objectives
– provide direction
– allow synergy
– assist in evaluation
– establish priorities
– reduce uncertainty
– minimize conflicts
– stimulate exertion
– aid in both the allocation of resources and the design of
jobs

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Financial Versus Strategic Objectives
• Financial objectives include growth in revenues, growth
in earnings, higher dividends, larger profit margins, greater
return on investment, higher earnings per share, a rising
stock price, improved cash flow, and so on.
• Strategic objectives include a larger market share,
quicker on-time delivery than rivals, shorter design-to-
market times than rivals, lower costs than rivals, higher
product quality than rivals, wider geographic coverage than
rivals, achieving technological leadership, consistently
getting new or improved products to market ahead of
rivals, and so on.

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Not Managing by Objectives
• Managing by Extrapolation
• Managing by Crisis
• Managing by Subjectives
• Managing by Hope

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Figure 5-1 A Comprehensive Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4 (October 2010): 20.
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Types of Strategies
• Most organizations simultaneously pursue a combination
of two or more strategies, but a combination strategy can
be exceptionally risky if carried too far.
• No organization can afford to pursue all the strategies that
might benefit the firm.
• Difficult decisions must be made and priorities must be
established.

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Alternative Strategies Defined and
Exemplified (1 of 2)
Table 5-4 Alternative Strategies Defined and Recent Examples Given
Strategy Definition Example
Forward Integration Gaining ownership or increased control Amazon began rapid delivery
over distributors or retailers services in some U.S. cities.
Backward Integration Seeking ownership or increased Starbucks purchased a coffee
control of a firm’s suppliers farm.
Horizontal Integration Seeking ownership or increased BB&T acquired Susquehanna
control over competitors Bancshares.
Market Penetration Seeking increased market share for Under Armour signed tennis
present products or services in present champion Andy Murray to a 4-
markets through greater marketing year, $23 million marketing deal.
efforts
Market Development Introducing present products or Gap opened its first five stores
services into new geographic area in China.
Product Development Seeking increased sales by improving Amazon just began offering its
present products or own line of baby diapers and
services or developing new ones wipes.

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Alternative Strategies Defined and
Exemplified (2 of 2)
[Table 5-4 continued]
Strategy Definition Example
Related Diversification Adding new but related products Facebook acquired the text-
or services messaging firm WhatsApp for
$19 billion.
Unrelated Diversification Adding new, unrelated products Kroger and Whole Foods
or services Market are cooking meals,
becoming restaurants.
Retrenchment Regrouping through cost and Staples closed 250 stores and
asset reduction to reverse reduced by 50% the size of
declining sales and profit other stores.
Divestiture Selling a division or part of an Sears Holdings divested its
organization Land’s End division to Sears’
shareholders.
Liquidation Selling all of a company’s The Trump Taj Mahal in Atlantic
assets, in parts, for their City, New Jersey, faces
tangible worth liquidation.

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Figure 5-2 Levels of Strategies with Persons
Most Responsible

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Integration Strategies
• Forward Integration
– involves gaining ownership or increased control over
distributors or retailers
• Backward Integration
– strategy of seeking ownership or increased control of a
firm's suppliers
• Horizontal Integration
– a strategy of seeking ownership of or increased control
over a firm's competitors

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Forward Integration Guidelines
• When an organization’s present distributors are especially
expensive
• When the availability of quality distributors is so limited as to
offer a competitive advantage
• When an organization competes in an industry that is growing
• When an organization has both capital and human resources to
manage distributing their own products
• When the advantages of stable production are particularly high
• When present distributors or retailers have high profit margins

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Backward Integration Guidelines
• When an organization’s present suppliers are especially
expensive or unreliable
• When the number of suppliers is small and the number of
competitors is large
• When the organization competes in a growing industry
• When an organization has both capital and human resources
• When the advantages of stable prices are particularly important
• When present suppliers have high profit margins
• When an organization needs to quickly acquire a needed
resource

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Horizontal Integration Guidelines
• When an organization can gain monopolistic
characteristics in a particular area or region without being
challenged by the federal government
• When an organization competes in a growing industry
• When increased economies of scale provide major
competitive advantages
• When an organization has both the capital and human
talent needed
• When competitors are faltering due to a lack of managerial
expertise

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Intensive Strategies
• Market Penetration Strategy
– seeks to increase market share for present products or
services in present markets through greater marketing
efforts
• Market Development
– involves introducing present products or services into
new geographic areas
• Product Development Strategy
– seeks increased sales by improving or modifying
present products or services

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Market Penetration Guidelines
• When current markets are not saturated with a particular
product or service
• When the usage rate of present customers could be
increased significantly
• When the market shares of major competitors have been
declining while total industry sales have been increasing
• When the correlation between dollar sales and dollar
marketing expenditures historically has been high
• When increased economies of scale provide major
competitive advantages

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Market Development Guidelines
• When new channels of distribution are available that are
reliable, inexpensive, and of good quality
• When an organization is very successful at what it does
• When new untapped or unsaturated markets exist
• When an organization has the needed capital and human
resources to manage expanded operations
• When an organization has excess production capacity
• When an organization’s basic industry is rapidly becoming
global in scope

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Product Development Guidelines
• When an organization has successful products that are in
the maturity stage of the product life cycle
• When an organization competes in an industry
characterized by rapid technological developments
• When major competitors offer better-quality products at
comparable prices
• When an organization competes in a high-growth industry
• When an organization has strong research and
development capabilities

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Diversification Strategies
• Related Diversification
– value chains possess competitively valuable cross-
business strategic fits
• Unrelated Diversification
– value chains are so dissimilar that no competitively
valuable cross-business relationships exist

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Synergies of Related Diversification
• Transferring competitively valuable expertise,
technological know-how, or other capabilities from one
business to another
• Combining the related activities of separate businesses
into a single operation to achieve lower costs
• Exploiting common use of a known brand name
• Using cross-business collaboration to create strengths

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Related Diversification Guidelines
• When an organization competes in a no-growth or a slow-
growth industry
• When adding new, but related, products would significantly
enhance the sales of current products
• When new, but related, products could be offered at highly
competitive prices
• When new, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys
• When an organization’s products are currently in the declining
stage of the product’s life cycle
• When an organization has a strong management team

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Unrelated Diversification Guidelines (1 of 2)
• When revenues derived from an organization’s current products
would increase significantly by adding the new, unrelated
products
• When an organization competes in a highly competitive or a no-
growth industry, as indicated by low industry profit margins and
returns
• When an organization’s present channels of distribution can be
used to market the new products to current customers
• When the new products have countercyclical sales patterns
compared to present products
• When an organization’s basic industry is experiencing declining
annual sales and profits
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Unrelated Diversification Guidelines (2 of 2)
• When an organization has the capital and managerial
talent needed to compete successfully in a new industry
• When an organization has the opportunity to purchase an
unrelated business that is an attractive investment
opportunity
• When there exists financial synergy
• When existing markets for an organization’s present
products are saturated
• When antitrust action could be charged against an
organization that historically has concentrated on a single
industry
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Defensive Strategies (1 of 3)
• Retrenchment
– Regroups through cost and asset reduction to reverse
declining sales and profits
• Divestiture
– Selling a division or part of an organization
– Often used to raise capital for further strategic
acquisitions or investments
• Liquidation
– Selling all of a company’s assets, in parts, for their
tangible worth

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Defensive Strategies (2 of 3)
• Retrenchment
– occurs when an organization regroups through cost
and asset reduction to reverse declining sales and
profits
– also called a turnaround or reorganizational strategy
– designed to fortify an organization’s basic distinctive
competence

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Retrenchment Guidelines
• When an organization has a distinctive competence but
has failed consistently to meet its goals
• When an organization is one of the weaker competitors in
a given industry
• When an organization is plagued by inefficiency, low
profitability, and poor employee morale
• When an organization fails to capitalize on external
opportunities and minimize external threats
• When an organization has grown so large so quickly that
major internal reorganization is needed

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Divestiture Guidelines
• When an organization has pursued a retrenchment
strategy and failed to accomplish improvements
• When a division needs more resources to be competitive
than the company can provide
• When a division is responsible for an organization's overall
poor performance
• When a division is a misfit with the rest of an organization
• When a large amount of cash is needed quickly
• When government antitrust action threatens a firm

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Defensive Strategies (3 of 3)
• Liquidation
– selling all of a company’s assets, in parts, for their
tangible worth
– can be an emotionally difficult strategy

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Liquidation Guidelines
• When an organization has pursued both a retrenchment
strategy and a divestiture strategy, and neither has been
successful
• When an organization’s only alternative is bankruptcy
• When the stockholders of a firm can minimize their losses
by selling the organization’s assets

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Figure 5-3 Porter’s Five Generic Strategies

Source: Based on Michael E. Porter, Competitive Strategy: Techniques for

Analyzing Industries and Competitors (New York: Free Press, 1980), 35–40.
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Michael Porter's Five Generic Strategies (1 of 3)
Cost Leadership emphasizes producing standardized
products at a very low per-unit cost for consumers who are
price-sensitive
• Type 1
– low-cost strategy that offers products or services to a
wide range of customers at the lowest price available
on the market
• Type 2
– best-value strategy that offers products or services to
a wide range of customers at the best price-value
available on the market
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Michael Porter's Five Generic Strategies (2 of 3)
• Type 3
– Differentiation is a strategy aimed at producing
products and services considered unique industry-wide
and directed at consumers who are relatively price-
insensitive

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Michael Porter's Five Generic Strategies (3 of 3)
• Type 4
– low-cost focus strategy that offers products or
services to a niche group of customers at the lowest
price available on the market
• Type 5
– best-value focus strategy that offers products or
services to a small range of customers at the best
price-value available on the market

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Means for Achieving Strategies
• Cooperation Among Competitors
• Joint Venture/Partnering
• Merger/Acquisition
• Private-Equity Acquisitions
• First Mover Advantages
• Outsourcing/Reshoring

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Table 5-5 Nine Reasons Why Many Mergers
and Acquisitions Fail
1. Integration difficulties
2. Inadequate evaluation of target
3. Large or extraordinary debt
4. Inability to achieve synergy
5. Too much diversification
6. Managers overly focused on acquisitions
7. Too large an acquisition
8. Difficult to integrate different organizational cultures
9. Reduced employee morale due to layoffs and
relocations

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Table 5-6 Eleven Potential Benefits of
Merging With or Acquiring Another Firm
1. To provide improved capacity utilization
2. To make better use of the existing sales force
3. To reduce managerial staff
4. To gain economies of scale
5. To smooth out seasonal trends in sales
6. To gain access to new suppliers, distributors, customers, products,
and creditors
7. To gain new technology
8. To gain market share
9. To enter global markets
10. To gain pricing power
11. To reduce tax obligations

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Table 5-7 Five Benefits of a Firm Being the
First Mover
1. Secure access and commitments to rare resources.
2. Gain new knowledge of critical success factors and issues.
3. Gain market share and position in the best locations.
4. Establish and secure long-term relationships with customers,
suppliers, distributors, and investors.
5. Gain customer loyalty and commitments.

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Copyright

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Strategic Management Concepts:
A Competitive Advantage Approach
Sixteenth Edition

Chapter 6
Strategy Analysis and Choice

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Learning Objectives (1 of 2)
6.1 Describe the strategy analysis and choice process.
6.2 Diagram and explain the three-stage strategy-formulation
analytical framework.
6.3 Diagram and explain the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix.
6.4 Diagram and explain the Strategic Position and Action
Evaluation (SPACE) Matrix.
6.5 Diagram and explain the Boston Consulting Group
(BCG) Matrix.

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Learning Objectives (2 of 2)
6.6 Diagram and explain the Internal-External (IE) Matrix.
6.7 Diagram and explain the Grand Matrix.
6.8 Diagram and explain the Quantitative Strategic
Planning Matrix (QSPM).
6.9 Discuss the role of organizational culture in strategic
analysis and choice.
6.10 Identify and discuss important political considerations in
strategy analysis and choice.
6.11 Discuss the role of a board of directors (governance) in
strategic planning.

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Figure 6-1 A Comprehensive Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4 (October 2010): 20.
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
The Process of Generating and Selecting
Strategies (1 of 3)
• A manageable set of the most attractive alternative
strategies must be developed.
• The advantages, disadvantages, trade-offs, costs, and
benefits of these strategies should be determined.

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The Process of Generating and Selecting
Strategies (2 of 3)
• Identifying and evaluating alternative strategies should
involve many of the managers and employees who earlier
assembled the organizational vision and mission
statements, performed the external audit, and conducted
the internal audit.

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The Process of Generating and Selecting
Strategies (3 of 3)
• Alternative strategies proposed by participants should be
considered and discussed in a series of meetings.
• Proposed strategies should be listed in writing.
• When all feasible strategies identified by participants are
given and understood, the strategies should be ranked in
order of attractiveness.

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Figure 6-2 The Strategy-Formulation
Analytical Framework

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A Comprehensive Strategy-Formulation
Framework (1 of 3)
• Stage 1 - Input Stage
– summarizes the basic input information needed to
formulate strategies
– consists of the EFE Matrix, the IFE Matrix, and the
Competitive Profile Matrix (CPM)

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A Comprehensive Strategy-Formulation
Framework (2 of 3)
• Stage 2 - Matching Stage
– focuses on generating feasible alternative strategies
by aligning key external and internal factors
– techniques include the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix, the Strategic
Position and Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the Internal-
External (IE) Matrix, and the Grand Strategy Matrix

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A Comprehensive Strategy-Formulation
Framework (3 of 3)
• Stage 3 - Decision Stage
– involves the Quantitative Strategic Planning Matrix
(QSPM)
– reveals the relative attractiveness of alternative
strategies and thus provides objective basis for
selecting specific strategies

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Table 6-1 Matching Key External and Internal
Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

Excess working capital + Annual growth of 20 percent in = Acquire Cellfone, Inc.
(an internal strength) the cell phone industry (an external
opportunity)
Insufficient capacity + Exit of two major foreign = Pursue horizontal
(an internal weakness) competitors from The industry (an integration by buying
external opportunity) competitors’ facilities
Strong research and + Decreasing numbers of younger = Develop new products
development expertise adults (an external threat) for older adults
(an internal strength)
Poor employee morale + Rising health-care costs (an = Develop a new wellness
(an internal weakness) external threat) program

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The Matching Stage (1 of 3)
• The Strengths-Weaknesses-Opportunities-Threats
(SWOT) Matrix helps managers develop four types of
strategies:
– SO (strengths-opportunities) Strategies
– WO (weaknesses-opportunities) Strategies
– ST (strengths-threats) Strategies
– WT (weaknesses-threats) Strategies

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The Matching Stage (2 of 3)
• SO Strategies
– use a firm’s internal strengths to take advantage
of external opportunities
• WO Strategies
– aim at improving internal weaknesses by taking
advantage of external opportunities

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The Matching Stage (3 of 3)
• ST Strategies
– use a firm's strengths to avoid or reduce the impact
of external threats
• WT Strategies
– defensive tactics directed at reducing internal
weakness and avoiding external threats

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SWOT Matrix (1 of 2)
1. List the firm’s key external opportunities.
2. List the firm’s key external threats.
3. List the firm’s key internal strengths.
4. List the firm’s key internal weaknesses.
5. Match internal strengths with external opportunities,
and record the resultant SO strategies.

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SWOT Matrix (2 of 2)
6. Match internal weaknesses with external opportunities,
and record the resultant WO strategies.
7. Match internal strengths with external threats, and record
the resultant ST strategies.
8. Match internal weaknesses with external threats, and
record the resultant WT strategies.

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Figure 6-4 The SPACE Matrix (1 of 3)

Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological
Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155
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Figure 6-4 The SPACE Matrix (2 of 3)
• Strategic Position and Action Evaluation (SPACE)
Matrix
– four-quadrant framework indicates whether aggressive,
conservative, defensive, or competitive strategies are
most appropriate for a given organization

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Figure 6-4 The SPACE Matrix (3 of 3)
• Two internal dimensions (financial position [FP] and
competitive position [CP])
• Two external dimensions (stability position [SP] and
industry position [IP])
• Most important determinants of an organization’s overall
strategic position

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SPACE Matrix Axes (1 of 2)
Table 6-2 Example Factors That Make Up the SPACE Matrix Axes

Internal Strategic Position External Strategic Position

Financial Position (FP) Stability Position (SP)
Return on investment Technological changes
Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry into market
Inventory turnover Competitive pressure
Earnings per share Ease of exit from market
Price earnings ratio Price elasticity of demand
Blank Risk involved in business

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SPACE Matrix Axes (2 of 2)
[Table 6-2 continued]

Internal Strategic Position External Strategic Position

Competitive Position (CP) Industry Position (IP)
Market share Growth potential
Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Extent leveraged
Capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers and distributors Productivity, capacity utilization

Source: Based on H. Rowe, R. Mason, & K. Dickel, Strategic Management and Business Policy: A
Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155–156.

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Steps to Develop a SPACE Matrix (1 of 4)
1. Select a set of variables to define financial position (FP),
competitive position (CP), stability position (SP), and
industry position (IP).

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Steps to Develop a SPACE Matrix (2 of 4)
2. Assign a numerical value ranging from +1 (worst) to +7
(best) to each of the variables that make up the FP and
IP dimensions.
Assign a numerical value ranging from −1 (best) to −7
(worst) to each of the variables that make up the SP and
CP dimensions.

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Steps to Develop a SPACE Matrix (3 of 4)
3. Compute an average score for FP, CP, IP, and SP.
4. Plot the average scores for FP, IP, SP, and CP on the
appropriate axis.
5. Add the two scores on the x-axis and plot the resultant
point on X. Add the two scores on the y-axis and plot the
resultant point on Y. Plot the intersection of the new xy
point.

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Steps to Develop a SPACE Matrix (4 of 4)
6. Draw a directional vector from the origin of the SPACE
Matrix through the new intersection point.
– This vector reveals the type of strategies
recommended for the organization: aggressive,
competitive, defensive, or conservative

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Figure 6-5 Example Strategy Profiles (1 of 2)

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Figure 6-5 Example Strategy Profiles (2 of 2)

Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological
Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.
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The Boston Consulting Group (BCG)
Matrix
• BCG Matrix
– graphically portrays differences among divisions in
terms of relative market share position and industry
growth rate
– allows a multidivisional organization to manage its
portfolio of businesses by examining the relative
market share position and the industry growth rate
of each division relative to all other divisions in the
organization

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Figure 6-7 The BCG Matrix (1 of 4)

Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group
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Figure 6-7 The BCG Matrix (2 of 4)
• Question Marks - Quadrant I
– Organization must decide whether to strengthen them
by pursuing an intensive strategy (market penetration,
market development, or product development) or to sell
them
• Stars - Quadrant II
– represent the organization’s best long-run opportunities
for growth and profitability

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Figure 6-7 The BCG Matrix (3 of 4)
• Cash Cows - Quadrant III
– generate cash in excess of their needs
– should be managed to maintain their strong position
for as long as possible
• Dogs - Quadrant IV
– compete in a slow- or no-market-growth industry
– businesses are often liquidated, divested, or trimmed
down through retrenchment

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Figure 6-7 The BCG Matrix (4 of 4)
• The major benefit of the BCG Matrix is that it draws
attention to the cash flow, investment characteristics,
and needs of an organization's various divisions.

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Figure 6-10 The Internal-External (IE)
Matrix (1 of 2)

Source: Based on: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a
description of the GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M.
Pennington, eds., Corporate Planning: Techniques and Applications l par; New York: AMACOM, 1979.
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Figure 6-10 The Internal-External (IE)
Matrix (2 of 2)
• The IE Matrix is based on two key dimensions: the IFE
total weighted scores on the x-axis and the EFE total
weighted scores on the y-axis
• Three Major Regions
– Grow and build
– Hold and maintain
– Harvest or divest

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Figure 6-11 An Example IE Matrix

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The Grand Strategy Matrix (1 of 3)
• Grand Strategy Matrix
– based on two evaluative dimensions: competitive
position and market (industry) growth

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Figure 6-13 The Grand Strategy Matrix

Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy
Formulation and Administration (Homewood, IL: Richard D. Irwin, 1976), 16–18.
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The Grand Strategy Matrix (2 of 3)
• Quadrant I
– continued concentration on current markets (market
penetration and market development) and products
(product development) is an appropriate strategy
• Quadrant II
– unable to compete effectively
– need to determine why the firm's current approach is
ineffective and how the company can best change to
improve its competitiveness

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The Grand Strategy Matrix (3 of 3)
• Quadrant III
– must make some drastic changes quickly to avoid
further decline and possible liquidation
– Extensive cost and asset reduction (retrenchment)
should be pursued first
• Quadrant IV
– have characteristically high cash-flow levels and limited
internal growth needs and often can pursue related or
unrelated diversification successfully

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The Quantitative Strategic Planning Matrix
(QSPM)
• Quantitative Strategic Planning Matrix (QSPM)
– objectively indicates which alternative strategies are
best
– uses input from Stage 1 analyses and matching results
from Stage 2 analyses to decide objectively among
alternative strategies

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Table 6-5 The Quantitative Strategic
Planning Matrix (QSPM)
Strategic Alternatives
Key Factors Weight Strategy 1 Strategy 2 Strategy 3

Key External Factors Blank Blank Blank Blank

Economy Blank Blank Blank Blank
Political/Legal/Governmental Blank Blank Blank Blank
Social/Cultural/Demographic/ Environmental Blank Blank Blank Blank
Technological Blank Blank Blank Blank
Competitive Blank Blank Blank Blank
Key Internal Factors Blank Blank Blank Blank
Management Blank Blank Blank Blank
Marketing Blank Blank Blank Blank
Finance/Accounting Blank Blank Blank Blank
Production/Operations Blank Blank Blank Blank
Research and Development Blank Blank Blank Blank
Management Information Systems Blank Blank Blank Blank

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Steps in a QSPM (1 of 2)
1. Make a list of the firm’s key external opportunities and
threats and internal strengths and weaknesses in the left
column.
2. Assign weights to each key external and internal factor.
3. Examine the Stage 2 (matching) matrices, and identify
alternative strategies that the organization should
consider implementing.

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Steps in a QSPM (2 of 2)
4. Determine the Attractiveness Scores (AS).
5. Compute the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.

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Positive Features of the QSPM
• Sets of strategies can be examined sequentially or
simultaneously
• Requires strategists to integrate pertinent external and
internal factors into the decision process
• Can be adapted for use by small and large for-profit and
nonprofit organizations

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Limitations of the QSPM
• Always requires informed judgments
• It is only as good as the prerequisite information and
matching analyses on which it is based

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Table 6-6 A QSPM for a Retail Computer
Store (1 of 3)

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Table 6-6 A QSPM for a Retail Computer
Store (2 of 3)

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Table 6-6 A QSPM for a Retail Computer
Store (3 of 3)

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The Culture and Politics of Strategy Choice
• Strategies that require fewer cultural changes may be
more attractive because extensive changes can take
considerable time and effort
• Political maneuvering consumes valuable time, subverts
organizational objectives, diverts human energy, and
results in the loss of some valuable employees
• Political biases and personal preferences get unduly
embedded in strategy choice decisions

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Tactics to Aid Strategists
• Choose Methods That Afford Employee Commitment
• Achieve Satisfactory Results with a Popular Strategy
• Shift from Specific to General Issues
• Focus on Long-Term Issues and Concerns
• Involve Middle Level Managers in Decisions

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Governance Issues
• Board of Directors
– a group of individuals who are elected by the
ownership of a corporation to have oversight and
guidance over management and who look out for
shareholders’ interests

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Board of Director Duties and Responsibilities
1. Control and oversight over management
2. Adherence to legal prescriptions
3. Consideration of stakeholders/ interests
4. Advancement of stockholders’ rights

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Principles of Good Governance (1 of 2)
1. No more than two directors are current or former
company executives.
2. The audit, compensation, and nominating committees are
made up solely of outside directors.
3. Each director owns a large equity stake in the company,
excluding stock options.

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Principles of Good Governance (2 of 2)
4. Each director attends at least 75 percent of all meetings.
5. The board meets regularly without management present
and evaluates its own performance annually.
6. The CEO is not also the chairperson of the board.
7. There are no interlocking directorships (where a director
or CEO sits on another director's board).

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Copyright

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Strategic Management Concepts:
A Competitive Advantage Approach
Sixteenth Edition

Chapter 7
Implementing Strategies:
Management, Operations,
and Human Resource
Issues

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Learning Objectives (1 of 2)
7.1 Describe the transition from formulating to implementing
strategies.
7.2 Discuss five reasons why annual objectives are
essential for effective strategy implementation.
7.3 Identify and discuss six reasons why policies are
essential for effective strategy implementation.
7.4 Explain the role of resource allocation and managing
conflict in strategy implementation.
7.5 Discuss the need to match a firm’s structure with its
strategy.

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Learning Objectives (2 of 2)
7.6 Identify, diagram, and discuss seven different types of
organizational structure.
7.7 Identify and discuss fifteen dos and don’ts in constructing
organizational charts.
7.8 Discuss four strategic production/operations issues vital
for successful strategy implementation.
7.9 Discuss seven strategic human resource issues vital for
successful strategy implementation.

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Figure 7-1 Comprehensive Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4, (October 2010): 20.
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The Nature of Strategy Implementation
Strategy Formulation Strategy Implementation
• Strategy formulation is • Strategy implementation is
positioning forces before the managing forces during the
action. action.
• Strategy formulation focuses • Strategy implementation
on effectiveness. focuses on efficiency.
• Strategy formulation is • Strategy implementation is
primarily an intellectual primarily an operational
process. process.
• Strategy formulation requires • Strategy implementation
good intuitive and analytical requires special motivation and
skills. leadership skills.
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Annual Objectives
Annual Objectives:
1. Represent the basis for allocating resources
2. Are a primary mechanism for evaluating managers
3. Are the major instrument for monitoring progress toward
achieving long-term objectives
4. Establish organizational, divisional, and departmental
priorities
5. Are essential for keeping a strategic plan on track

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Figure 7-3 The Stamus Company’s
Hierarchy of Aims

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Policies (1 of 3)
• Policy
– specific guidelines, methods, procedures, rules, forms,
and administrative practices established to support and
encourage work toward stated goals
– instruments for strategy implementation

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Policies (2 of 3)
• Policies
– set boundaries, constraints, and limits on the kinds of
administrative actions that can be taken to reward and
sanction behavior
– let both employees and managers know what is
expected of them, thereby increasing the likelihood that
strategies will be implemented successfully
– provide a basis for management control and allow
coordination across organizational units

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Policies (3 of 3)
• Policies
– reduce the amount of time managers spend making
decisions. Policies also clarify what work is to be done
and by whom.
– promote delegation of decision making to appropriate
managerial levels where various problems usually
arise.
– clarify what can and cannot be done in pursuit of an
organization’s objectives.

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Types of Resources
• Financial
• Physical
• Human
• Technological

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Resource Allocation
• Resource Allocation
– central management activity that allows for strategy
execution
– Strategic management enables resources to be
allocated according to priorities established by annual
objectives

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Managing Conflict
• Conflict
– Disagreement between two or more parties on one or
more issues
– Establishing annual objectives can lead to conflict
because individuals have different expectations and
perceptions, schedules create pressure, personalities
are incompatible, and misunderstandings occur
between line managers and staff managers

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Managing Conflict (1 of 2)
• Avoidance
– Includes such actions as ignoring the problem in hopes
that the conflict will resolve itself or physically
separating the conflicting individuals
• Defusion
– Includes playing down differences between conflicting
parties while accentuating similarities and common
interests

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Managing Conflict (2 of 2)
• Confrontation
– exemplified by exchanging members of conflicting
parties so that each can gain an appreciation of the
other’s point of view or holding a meeting at which
conflicting parties present their views and work through
their differences

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Table 7-5 Some Management Trade-Off
Decisions Required in Strategy Implementation
To emphasize short-term profits or long-term growth
To emphasize profit margin or market share
To emphasize market development or market penetration
To lay off or furlough
To seek growth or stability
To take high risk or low risk
To be more socially responsible or more profitable
To outsource jobs or pay more to keep jobs at home
To acquire externally or to build internally
To restructure or reengineer
To use leverage or equity to raise funds
To use part-time or full-time employees

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Matching Structure With Strategy
• Structure largely dictates how objectives and policies will
be established
• Structure dictates how resources will be allocated

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Table 7-6 Symptoms of an Ineffective
Organizational Structure
1. Too many levels of management
2. Too many meetings attended by too many people
3. Too much attention being directed toward solving interdepartmental conflicts
4. Too large a span of control
5. Too many unachieved objectives
6. Declining corporate or business performance
7. Losing ground to rival firms
8. Revenue or earnings divided by number of employees or number of
managers is low compared to rival firms

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The Functional Structure
• Functional Structure
– groups tasks and activities by business function, such
as production/operations, marketing,
finance/accounting, research and development, and
management information systems

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Table 7-7 Advantages and Disadvantages of
a Functional Organizational Structure
Advantages Disadvantages
1. Simple and inexpensive 1. Accountability forced to the top
2. Capitalizes on specialization of 2. Delegation of authority and
business activities such as marketing responsibility not encouraged
and finance
3. Minimizes need for elaborate control 3. Minimizes career development
system
4. Allows for rapid decision making 4. Low employee and manager morale
Blank 5. Inadequate planning for products and
markets
Blank 6. Leads to short-term, narrow thinking

Blank 7. Leads to communication problems

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Divisional Structure
• Functional activities are performed both centrally and in
each separate division
• Organized by geographic area, product or service,
customer, or process

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Table 7-8 Advantages and Disadvantages of
a Divisional Organizational Structure
Advantages Disadvantages
1. Clear accountability 1. Can be costly
2. Allows local control of local situations 2. Duplication of functional activities
3. Creates career development chances 3. Requires a skilled management force
4. Promotes delegation of authority 4. Requires an elaborate control system
5. Leads to competitive climate internally 5. Competition among divisions can become so
intense as to be dysfunctional
6. Allows easy adding of new products or 6. Can lead to limited sharing of ideas and
regions Resources
7. Allows strict control and attention to 7. Some regions, products, or customers may
products, customers, or regions receive special treatment

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The Strategic Business Unit (SBU) Structure
• SBU Structure
– groups similar divisions into strategic business units
and delegates authority and responsibility for each unit
to a senior executive who reports directly to the chief
executive officer
– can facilitate strategy implementation by improving
coordination between similar divisions and channeling
accountability to distinct business units

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The Matrix Structure (1 of 2)
• Matrix Structure
– most complex of all designs because it depends upon
both vertical and horizontal flows of authority and
communication

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The Matrix Structure (2 of 2)
• For a matrix structure to be effective, organizations need
participative planning, training, clear mutual understanding
of roles and responsibilities, excellent internal
communication, and mutual trust and confidence

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Table 7-9 Advantages and Disadvantages of
a Matrix Structure
Advantages Disadvantages
1. Clear project objectives 1. Requires excellent vertical and horizontal
flows of communication
2. Results of their work clearly seen by 2. Costly because creates more manager
employees positions
3. Easy to shut down a project 3. Violates unity of command principle
4. Facilitates uses of special equipment, 4. Creates dual lines of budget authority
personnel, and facilities
5. Shared functional resources instead of 5. Creates dual sources of reward and
duplicated resources, as in a divisional punishment
structure
Blank 6. Creates shared authority and reporting
Blank 7. Requires mutual trust and understanding

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Figure 7-6 Typical Top Managers of a Large
Firm

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Restructuring
• Restructuring
– involves reducing the size of the firm in terms of
number of employees, number of divisions or units,
and number of hierarchical levels in the firm's
organizational structure
– primary benefit sought from restructuring is cost
reduction

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Reengineering
• Reengineering
– involves reconfiguring or redesigning work, jobs, and
processes for the purpose of improving cost, quality,
service, and speed
– does not usually affect the organizational structure or
chart, nor does it imply job loss or employee layoffs

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Managing Resistance to Change
• Force Change Strategy
– involves giving orders and enforcing those orders
• Educative Change Strategy
– presents information to convince people of the need for
change
• Self-interest Change Strategy
– attempts to convince individuals that the change is to
their personal advantage

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Strategic Human Resource Issues
Seven human resource issues:
1. Linking performance and pay to strategy
2. Balancing work life with home life
3. Developing a diverse work force
4. Using caution in hiring a rival’s employees
5. Creating a strategy-supportive culture
6. Using caution in monitoring employees’ social media
7. Developing a corporate wellness program

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Linking Performance and Pay to Strategies
• Decisions on salary increases, promotions, merit pay, and
bonuses need to support the long-term and annual
objectives of the firm
• Gain sharing and bonus systems can be used

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Balance Work and Home Life
• Work and family strategies now represent a competitive
advantage for those firms that offer such benefits as:
– elder care assistance
– flexible scheduling
– job sharing
– adoption benefits
– onsite summer camp
– employee help line
– pet care
– lawn service referrals

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Develop a Diverse Workforce
Six benefits of having a diverse workforce are:
1. Women and minorities have different insights, opinions, and
perspectives that should be considered.
2. A diverse workforce portrays a firm committed to nondiscrimination.
3. A workforce that mirrors a customer base can help attract customers,
build customer loyalty, and design/offer products/services that meet
customer needs/wants.
4. A diverse workforce helps protect the firm against discrimination
lawsuits.
5. Women and minorities represent a huge additional pool of qualified
applicants.
6. A diverse workforce strengthens a firm’s social responsibility and
ethical position
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Creating a Strategy-Supportive Culture (1 of 2)
1. Formal statements of organizational philosophy, charters,
creeds, materials used for recruitment and selection, and
socialization
2. Designing of physical spaces, facades, buildings
3. Deliberate role modeling, teaching, and coaching by
leaders
4. Explicit reward and status system, promotion criteria
5. Stories, legends, myths, and parables about key people
and events

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Creating a Strategy-Supportive Culture (2 of 2)
6. What leaders pay attention to, measure, and control
7. Leader reactions to critical incidents and organizational
crises
8. How the organization is designed and structured
9. Organizational systems and procedures
10. Criteria used for recruitment, selection, promotion, leveling
off, retirement, and “excommunication” of people

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Monitoring Social Media
• Proponents of companies monitoring employees’ social-
media activities emphasize that
– a company’s reputation in the marketplace can easily
be damaged by disgruntled employees venting on
social media sites
– social-media records can be subpoenaed, like email,
and used as evidence against the company.

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Corporate Wellness Program
• The Affordable Care Act increased the maximum
incentives and penalties employers may use to encourage
employee well-being
• Most companies have both
– “carrots,” such as giving employee discounts on
insurance premiums or even extra cash,
– “sticks,” such as imposing surcharges on premiums for
those who do not make progress toward getting
healthy.

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Copyright

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