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Chapter 1
Strategic Management
Chapter Summary
corporate-, business-, and functional-level planners, and support personnel. At each progressively
lower level, strategic activities are more specific, narrow, short-term, and action-oriented, with lower
risks but fewer opportunities for dramatic impact.
belief that a firm’s mission can be best achieved through a systematic and comprehensive assessment
of both its internal capabilities and its external environment.
Learning Objectives
1. Explain the concept of strategic management.
2. Describe how strategic decisions differ from other decisions that managers make.
3. Name the benefits and risks of a participative approach to strategic decision making.
company are responsible.
5. Describe a comprehensive model of strategic decision making.
6. Appreciate the importance of strategic management as a process.
7. Give examples of strategic decisions that companies have recently made.
Lecture Outline
I. The Nature and Value of Strategic Management
A. Exhibit 1.1, Strategy in Action gives an example of how a poor decision affected
Xerox to the tune of $107 billion. Strategic management is defined as the set of
1. Strategic management comprises nine critical tasks:
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whole or part.
a) Formulate the company’s mission, including broad statements about its purpose,
philosophy, and goals.
c) Assess the company’s external environment, including both the competitive and
the general contextual factors.
e) Identify the most desirable options by evaluating each option in light of the
selected set of long-term objectives and grand strategies.
systems is emphasized.
i) Evaluate the success of the strategic process as an input for future decision
making.
2. As these tasks indicate, strategic management involves the planning, directing,
organizing, and controlling of a company’s strategy-related decisions and actions.
c) A strategy reflects a company’s awareness of how, when, and where it should
compete; against whom it should compete; and for what purposes it should
compete.
B. Dimensions of Strategic Decisions
1. Typically, strategic issues have the following dimensions:
a) Strategic issues require top-management decisions.
b) Strategic issues require large amounts of the firm’s resources.
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whole or part.
(1) Strategic decisions involve substantial allocations of people, physical
(2) Strategic decisions commit the firm to actions over an extended period.
c) Strategic issues often affect the firm’s long-term prosperity.
(1) Strategic decisions ostensibly commit the firm for a long time, typically
(2) Once a firm has committed itself to a particular strategy, its image and
different strategy.
d) Strategic issues are future oriented.
(1) Strategic decisions are based on what managers forecast, rather than on
what they know.
options.
e) Strategic issues usually have multifunctional or multi-business consequences.
(1) Strategic decisions have complex implications for most areas of the firm.
f) Strategic issues require considering the firm’s external environment.
(1) All business firms exist in an open system. They affect and are affected by
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whole or part.
2. Three Levels of Strategy
a) The decision-making hierarchy of a firm typically contains three levels.
(1) Corporate level: composed principally of a board of directors and the chief
executive and administrative officers.
(a) They are responsible for the firm’s financial performance and for the
achievement of nonfinancial goals, such as enhancing the firm’s
image and fulfilling its social responsibilities.
(2) The business level is in the middle of the decision-making hierarchy. It is
composed principally of business and corporate managers.
(a) These managers must translate the statements of direction and intent
(c) They strive to identify and secure the most promising market
segment within that arena.
(3) The functional level is at the bottom of the decision-making hierarchy. It is
composed principally of managers of product, geographic, and functional
areas.
(a) These managers develop annual objectives and short-term strategies
execute the firm’s strategic plans.
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whole or part.
the right things”).
(d) These managers address such issues as the efficiency and
b) Exhibit 1.4, Alternative Strategic Management Structures, depicts the three
levels of strategic management as structured in practice.
(1) Alternative 1
(a) Here, the firm is engaged in only one business and the corporate- and
(2) Alternative 2
(a) This depicts the classical corporate structure, comprising three fully
alternative.
3. Characteristics of Strategic Management Decisions
a) The characteristics of strategic management decisions vary with the level of
strategic activity considered.
c) Corporate-level decisions
(1) Corporate-level decisions are often characterized by greater risk, cost, and
d) Functional-level decisions
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whole or part.
(1) Functional-level decisions implement the overall strategy formulated at the
(2) Functional-level decisions incur only modest costs, because they depend
comparative profit potential is low.
(4) Common functional-level decisions include decisions on generic versus
e) Business-level decisions
(2) Such decisions are less costly, risky, and potentially profitable than
(3) Common business-level decisions include decisions on plant location,
C. Formality in Strategic Management
1. The formality of strategic management systems varies widely among companies.
2. A number of forces determine how much formality is needed in strategic
management.
a) The size of the organization, its predominant management styles, the
degree of formality.
(1) Some firms, especially smaller ones, follow an entrepreneurial mode.
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whole or part.
(a) They are basically under the control of a single individual, and they
(3) Medium-sized firms in relatively stable environments follow the adaptive
mode.
related to existing strategy.
c) It is not unusual to find different modes within the same organization.
3. The Strategy Makers
a) The ideal strategic management team includes decision makers from all three
company levels.
approval for strategic action.
c) Exhibit 1.5, Hierarchy of Objectives and Strategies, aligns levels of strategic
vice president for planning.
(1) Top management shoulders broad responsibility for all the major elements
by staff groups.
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whole or part.
e) A firm’s president or CEO characteristically plays a dominant role in the
the firm.
of its strategy.
f) When the dominance of the CEO approaches autocracy, the effectiveness of the
firm’s strategic planning and management processes is likely to be diminished.
g) In implementing a company’s strategy, the CEO must have an appreciation for
strategy.
(2) Empowerment of non-managerial employees has been a recent trend
across major management teams.