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Strategic Management

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Strategic Management ­ MGT603
VU
Lesson 3
INTERNAL FACTORS & LONG TERM GOALS
Objectives:
After reading this lecture you will be able to know that:
What are Internal Factors?
1. Financial ratios
2. Performance levels
3. Industry averages
4. Survey results
What is the importance of strategies in achieving Long term objectives?
What are the Financial and Non financial benefits of Strategic Management?
Long-Term Objectives
Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission.
Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the
actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should
be consistent, usually from two to five years.
Objectives are essential for organizational success because they state direction; aid in evaluation; create
synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing,
motivating and controlling activities. Objectives should be challenging, measurable, consistent, reasonable,
and clear. In a multidimensional firm, objectives should be established for the overall company and for each
division.
The Nature of Long-Term Objectives
Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical,
obtainable, and congruent among organizational units. Each objective should also be associated with a time
line. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market
share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and
social responsibility. Clearly established objectives offer many benefits. They provide direction, allow
synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and
aid in both the allocation of resources and the design of jobs.
Long-term objectives are needed at the corporate, divisional, and functional levels in an organization. They
are an important measure of managerial performance.
Clearly stated and communicated objectives are vital to success for many reasons. First, objectives help
stakeholders understand their role in an organization's future. They also provide a basis for consistent
decision making by managers whose values and attitudes differ. By reaching a consensus on objectives
during strategy-formulation activities, an organization can minimize potential conflicts later during
implementation. Objectives set forth organizational priorities and stimulate exertion and accomplishment.
They serve as standards by which individuals, groups, departments, divisions, and entire organizations can
be evaluated. Objectives provide the basis for designing jobs and organizing activities to be performed in an
organization. They also provide direction and allow for organizational synergy.
Without long-term objectives, an organization would drift aimlessly toward some unknown end! It is hard
to imagine an organization or individual being successful without clear objectives. Success only rarely occurs
by accident; rather, it is the result of hard work directed toward achieving certain objectives.
Strategies
Strategies are the means by which long-term objectives will be achieved. Business strategies may include
geographic expansion, diversification, acquisition, product development, market penetration, retrenchment,
divestiture, liquidation, and joint venture.
Strategies are potential actions that require top management decisions and large amounts of the firm's
resources. In addition, strategies affect an organization's long-term prosperity, typically for at least five
years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and
require consideration of both external and internal factors facing the firm.
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Strategic Management ­ MGT603
VU
Annual Objectives
Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives.
Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic,
consistent, and prioritized. They should be established at the corporate, divisional, and functional levels in a
large organization.
Annual objectives should be stated in terms of management, marketing, finance/accounting,
production/operations, research and development, and information systems accomplishments. A set of
annual objectives is needed for each long-term objective.
Annual objectives are especially important in strategy implementation, whereas long-term objectives are
particularly important in strategy formulation. Annual objectives represent the basis for allocating resources.
Policies
Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and
procedures established to support efforts to achieve stated objectives. Policies are guides to decision making
and address repetitive or recurring situations.
Policies are most often stated in terms of management, marketing, finance/ accounting,
production/operations, research and development, and computer information systems activities. Policies
can be established at the corporate level and apply to an entire organization, at the divisional level and apply
to a single division or at the functional level and apply to particular operational activities or departments.
Policies, like annual objectives, are especially important in strategy implementation because they outline an
organization's expectations of its employees and managers. Policies allow consistency and coordination
within and between organizational departments.
The Strategic-Management Model
The strategic-management process best can be studied and applied using a model. Every model represents
some kind of process. The framework illustrated in Figure 1-1 is a widely accepted, comprehensive model
of the strategic-management process. This model does not guarantee success, but it does represent a clear
and practical approach for formulating, implementing, and evaluating strategies. Relationships among major
components of the strategic-management process are shown in the model.
A Comprehensive Strategic-Management Model
Source: Fred R. David, "How Companies Define Their Mission," Long Range Planning 22, no.
3 (June 1988): 40.
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Strategic Management ­ MGT603
VU
Identifying an organization's existing vision, mission, objectives, and strategies is the logical starting point
for strategic management because a firm's present situation and condition may preclude certain strategies
and may even dictate a particular course of action. Every organization has a vision, mission, objectives, and
strategy, even if these elements are not consciously designed, written, or communicated. The answer to
where an organization is going can be determined largely by where the organization has been.
The strategic-management process is dynamic and continuous. A change in any one of the major
components in the model can necessitate a change in any or all of the other components. For instance, a
shift in the economy could represent a major opportunity and require a change in long-term objectives and
strategies; a failure to accomplish annual objectives could require a change in policy; or a major competitor's
change in strategy could require a change in the firm's mission. Therefore, strategy formulation,
implementation, and evaluation activities should be performed on a continual basis, not just at the end of
the year or semiannually. The strategic-management process never really ends.
Application of the strategic-management process is typically more formal in larger and well-established
organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and
approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly
changing environments such as technology companies tend to be more formal in strategic planning. Firms
that have many divisions, products, markets, and technologies also tend to be more formal in applying
strategic-management concepts. Greater formality in applying the strategic-management process is usually
positively associated with the cost, comprehensiveness, accuracy, and success of planning across all types
and sizes of organizations.
Benefits of Strategic management
Following are the major benefits of Strategic management:
Proactive in shaping firm's future
Initiate and influence actions
Formulate better strategies (Systematic, logical, rational approach)
Financial benefits:
Improved productivity
Improved sales
Improved profitability
Non-Financial benefits:
Increased employee productivity
Improved understanding of competitors' strategies
Greater awareness of external threats
Understanding of performance reward  relationships
Better problem-avoidance
Lesser resistance to change
Financial Benefits
Research indicates that organizations using strategic-management concepts are more profitable and
successful than those that do not. 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. Firms with planning systems more closely resembling strategic-
management theory generally exhibit superior long-term financial performance relative to their industry.
High-performing firms seem to make more informed decisions with good anticipation of both short- and
long-term consequences. On the other hand, firms that perform poorly often engage in activities that are
shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing
organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. They
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Strategic Management ­ MGT603
VU
typically underestimate their competitors' strengths and overestimate their own firm's strengths. They often
attribute weak performance to uncontrollable factors such as poor economy, technological change, or
foreign competition.
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Table of Contents:
  1. NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation
  2. KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements
  3. INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives
  4. BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition
  5. COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission:
  6. CHARACTERISTICS OF A MISSION STATEMENT:A Declaration of Attitude
  7. EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces
  8. KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000ís USA
  9. EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces
  10. TECHNOLOGICAL FORCES:Technology-based issues
  11. INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)
  12. IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit
  13. FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing
  14. FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing
  15. INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios
  16. ANALYTICAL TOOLS:Research and Development, The functional support role
  17. THE INTERNAL FACTOR EVALUATION (IFE) MATRIX:Explanation
  18. TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies
  19. TYPES OF STRATEGIES:Horizontal Integration, Michael Porterís Generic Strategies
  20. TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development
  21. TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification
  22. TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation
  23. STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework
  24. THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX:WT Strategies
  25. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  26. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  27. BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks
  28. BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix
  29. GRAND STRATEGY MATRIX:RAPID MARKET GROWTH, SLOW MARKET GROWTH
  30. GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors
  31. THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria
  32. RESOURCE ALLOCATION
  33. ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure
  34. RESTRUCTURING:Characteristics, Results, Reengineering
  35. PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING STRATEGIES:Philosophy
  36. MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation
  37. MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning
  38. FINANCE/ACCOUNTING ISSUES:DEBIT, USES OF PRO FORMA STATEMENTS
  39. RESEARCH AND DEVELOPMENT ISSUES
  40. STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants
  41. PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities
  42. STRATEGY EVALUATION:Consistency, The process of evaluating Strategies
  43. REVIEWING BASES OF STRATEGY:Measuring Organizational Performance
  44. MEASURING ORGANIZATIONAL PERFORMANCE
  45. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning