Strategic Management

1. Strategic Management “...process of decisions and actions to aid management in developing and implementing plans to achieve company objectives...”

2. Evolution of Strategic Management • Basic financial planning • Forecast-based planning • Externally oriented planning • Strategic management for competitive advantage

3. Why Bother? What are the Benefits? • Prevent problems • Better quality of group decisions • Employee motivation through participation • Lower resistance to change

4. Triggering Events • New CEO • Intervention by external institution • Takeover attempt or threat of a change of ownership • Performance gap

5. What Makes a Decision Strategic? • Top-management approval • Substantial company resources • Long-term effects • Future oriented • Multifunctional consequences • Firm’s external environment

6. Strategic Management and Corporate Social Responsibility “ Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” Milton Friedman - Capitalism and Freedom (1962)

7. Corporate Social Responsibility and Business Ethics • Why ethical problems arise • Personal gain • Competitive pressures • Business vs. personal goals • Cross-cultural issues

8. Advantages of Socially Responsible Corporate Behavior • Fulfill public expectations / avoid sanctions • Prevent harm to public and stakeholders • Improve company performance • Protect employees • Promote personal morality

9. Strategic Management Process Environmental Scanning Strategy Formulation Strategy Implementation Evaluation and Control

10. Environmental Scanning: SWOT • Company Profile • strengths • weaknesses • Environmental Assessment • opportunities • threats

11. What Should We Examine in the Company Profile? • Financial position • Leadership • Org. structure • Culture • Strategic issues by functional area • Stage of industry evolution

12. Meaningful Financial Analysis:Ratio Analysis and Equity valuation • Perform financial ratio analysis • Liquidity • Solvency • Funds management • Profitability • Assess capital structure • Understand differences between ‘expense’ and ‘investment’

13. current assets current liabilities quick assets current liabilities Liquidity Ratios The ability of a company to meet its short-term obligations. Current Ratio: Quick Ratio:

14. operating profit Interest on long-term debt Long-term debt capitalization Total liabilities Stockholder’s equity Long-term debt Stockholder’s equity Solvency Ratios (Leverage) Ability to meet long term debt payment Times interest earned Debt to equity

15. Leverage Example

16. Accounts receivable net sales Accounts receivable Net sales Funds Management Ratios How the company’s investment in productive assets is managed Receivables to sales Average collection period (days in A.R.) X 365 days

17. Sales Average inventory Sales Average assets Funds Management Ratios, cont’d. Inventory turnover Asset turnover

18. sales - cost of goods sold sales net income sales net income total assets Profitability Ratios Gross profit margin Net profit margin Return on assets

19. Net income Average total capital Profitability Ratios, cont’d. Return on total capital Return on equity Net income Average equity

20. Net income – preferred stock dividends Average number of shares outstanding Stock price per share Earnings per share Cash dividends Stock price per share Common Stock Ratios Earnings per share Price-earnings ratio Dividend yield

21. Making Meaningful Comparisons • Comparison with past performance • Stage of industry evolution • Benchmarking with competitors • US and industry averages • Industry success factors

22. Points to Consider • Important component of SWOT analysis • Results used by managers, investors, creditors, prospective employees, govt. agencies • Based on past data • Comparisons are key • Accounting practices may vary between firms • Variety of financial ratios

23. Company Profile - cont’d. • Leadership • Experience, succession, payment • Organizational structure • various types • pros and cons w/ each type • Corporate culture • advantages of a strong culture

24. Company Profile - cont’d. Strategic Issues by Functional Area • Marketing • Finance • R & D • Operations • Human Resources

25. Environmental Scanning:Environmental Assessment • Opportunities New geographic markets, new product lines, forward or backward integration, acquisition of rival, exploit new technology • Threats Potential entry of new competitor, improvement in substitute product, limited market growth, recession, adverse demographic trend

26. Environmental ScanningStage of Industry Evolution Determinants of success may differ across the stages of industry evolution. Emerging Newly formed – innovations, changes in demand, needs Rapid increases in capacity and unit sales, dominant technology emerges Growth Maturity Slowing growth rate, increased competition, experienced customer base. Decline Consistent decline in unit sales, overcapacity

27. Strategies and Stage of Industry Evolution: Emerging What does it take to succeed in the Introduction / Emerging stage? • Technological leadership • Experience curve • Dominant technology • Preempt strategically valuable assets • Create customer switching costs / loyalty

28. Strategies and Stage of Industry Evolution: Growth Stage What does it take to succeed in the growth stage? • Marketing and promotion aimed at brand recognition • Expanding the product line • Financial strength to accommodate growth • Strong marketing channels

29. Strategies and Stage of Industry Evolution: Mature What does it take to succeed in the mature stage? • Product refinement – extensions, packaging • Emphasis on process innovation • Lower costs • Higher quality • Differentiation / emphasis on service • Horizontal integration • International expansion

30. Strategies and Stage of Industry Evolution: Decline What does it take to succeed in the declining stage? • Market leadership • Focus on growth segments – niche strategy • Emphasize production and distribution efficiency • Gradually harvest the business • Prune the product line • Preferred customer selection • Defer equipment maintenance and repair • Divestment

31. Market size Market growth rate Number and size of rivals Scope of rivalry Number and size of buyers Distribution channels Economies of scale Learning curve Capacity utilization Ease of entry Average industry profitability Pace of technological change Environmental Scanning:Dominant Economic Characteristics

32. Environmental Scanning:Stakeholder Analysis “… people or groups who have an interest, claim, or stake in how well the firm performs…” shareholders managers employees customers suppliers government unions community general public

33. Environmental Scanning:Porter’s Five Forces Model What determines the degree of industry competition? Potential new entrants Rivalry among existing firms Suppliers Buyers Substitute products

34. Barriers to Entry • Economies of scale • Product differentiation • Capital requirements • Cost disadvantages independent of size • Access to distribution channels • Government policy

35. Intensity of Rivalry • Many competitors, similar in size • Slow rate of industry growth • Product lacks differentiation • High level of fixed costs • Capacity added in large increments • Exit barriers are high • Reputation or past history

36. Substitute Products • Products that appear to be different but satisfy the same need • good examples butter vs. margarine coffee vs. tea tape b/u vs. CD burner • bad examples Coke vs. Pepsi Honda vs. Toyota • Customer switching costs are low

37. Bargaining Power of Buyers/Customers • Purchases in large volume • Purchases products that are standard or undifferentiated • Firm’s product represents a large share of buyer’s total cost • Unimportant to final quality of product • Product does not save the buyer money • Buyer may integrate backward

38. Bargaining Power of Suppliers • Supplier has few competitors • Supplier offers a unique product • Substitutes not readily available • Supplier can integrate forward • Firm or industry purchases represent small share of supplier’s total sales

39. Environmental Scanning:Mapping Strategic Groups • Definition: firms with similar resources pursuing similar strategies • “How to” mapping • identify relevant dimensions • choose two (not highly correlated) • plot in two-dimensional space • group nearby firms • repeat with another pair of dimensions

40. Strategic Management Process Environmental Scanning Strategy Formulation Strategy Implementation Evaluation and Control

41. Strategy Formulation • Mission statement • Objectives • Strategies • Policies

42. Company Mission Statements • Definition: “...fundamental, yet enduring statement of purpose that differentiates a company from its competitors...” • What are the benefits? • unanimity of purpose • employee motivation • allocating resources • culture / focal identity

43. How to Build a Mission Statement • Basic product or service • Primary market or technology • Goals: survival, growth and profit • Basic beliefs, company philosophy • Public image • Company self-concept • Customers • Quality

44. Geisinger’s Mission Statement Enhancing quality of life through an integrated health service organization based on a balanced program of patient care, education, research and community service.

45. National Weather Service Mission Statement " The National Weather Service (NWS) provides weather, hydrologic, and climate forecasts and warnings for the United States, its territories, adjacent waters and ocean areas, for the protection of life and property and the enhancement of the national economy. NWS data and products form a national information database and infrastructure which can be used by other governmental agencies, the private sector, the public, and the global community.

46. Dell’s Mission Statement Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of: • Highest quality • Leading technology • Competitive pricing • Individual and company accountability • Best-in-class service and support • Flexible customization capability • Superior corporate citizenship • Financial stability

47. UNLV Mission Statement The University of Nevada, Las Vegas, located in the vibrant and dynamic city of Las Vegas and surrounded by the Mojave Desert, is emerging as a premier urban university. UNLV’s development embraces the traditional values of higher education adapted for the global community of the 21st century. The university increasingly will concentrate its resources on programs that are student centered, demonstrably excellent, and responsive to the needs of the local and regional community. UNLV promotes an environment that encourages the full personal and professional development of those it serves and of those who serve the university. UNLV assists students in meeting the intellectual and ethical challenges of responsible citizenship and a full and productive life through opportunities to acquire the knowledge and common experiences that enhance critical thinking, leadership skills, aesthetic sensitivity, and social integrity. The university provides traditional and professional academic programs for a diverse student body and encourages innovative and interdisciplinary approaches to teaching, learning, and scholarship. Recognizing the individuality of each student, UNLV simultaneously engenders collegial relationships and a sense of community among its members. UNLV embraces the interdependence of quality instruction, scholarly pursuits, and substantive involvements in campus and community life. The university offers artistic, cultural, and technical resources and opportunities to the broadest possible community. It promotes research programs and creative activities by students and faculty that respond to the needs of an urban community in a desert environment. UNLV is committed to developing a synergy between professional and liberal studies, between undergraduate education and graduate programs, and between superior teaching and meaningful research. UNLV increasingly is a dynamic resource for, and partner with, the community that it serves.

48. Setting Objectives • Purpose of setting Objectives is to: • convert mission into performance targets • create yardsticks to track performance • establish goals that require stretch • push firm to be inventive, focused

49. Setting Objectives • Set challenging but achievable objectives, but guard against: • Complacency • Drift • Internal confusion • Status quo performance • Financial and strategic objectives

50. Financial Objectives • Objectives that relate to improving firm’s financial performance • Examples • increase ROI from 15% to 20% • maintain AA bond rating • increase earnings growth from 10% to 15%