Chapter One

The Nature of Business Policy & Strategic Management

Discussion Questions
Why do some firms succeed while others fail?
Some say businesses fail, because managers fail.
Do you agree?

Dr. Tizazu K. 1
Defining Business Policy and strategic management

 Policy is the means by which annual objectives will be achieved.

 Policies guide how the firm does business.
 Policies include:-
• Guidelines
• Rules and
• procedures established to support efforts to achieve stated
objectives.
 Strategies suggest how the firm will reach its goals.
 Strategy is large-scale, future-oriented plan for interacting with
the competitive environment to achieve objectives.
 It is a company’s “game plan”
 It is also a framework for managerial decisions
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 Cont….
The term strategic management is used synonymously with
the term strategic planning.

• Strategic management is often used in academia, whereas

strategic planning used in the business world.

Sometimes the term strategic management is used to refer

to strategy formulation, implementation, and evaluation.

A strategic plan is in essence a company’s game plan.

-Just as a football team needs a good game plan to have a chance
for success, a company must have a good strategic plan to
compete successfully.
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 Cont….

Strategic management can be defined as the art and

science of formulating, implementing, and evaluating
cross-functional decisions that enable an organization to
achieve its objectives.

Strategic management refer to making decisions

about an organization’s future direction for growth,
renewal and transformation and implementing those
policies.

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 Cont….
 Strategic management consists of the analyses, decisions, and
actions an organization undertakes in order to create and
sustain competitive advantages
 Analysis
• Strategic goals
• Internal and external environment of the firm
 Strategic decisions
• What industries should we compete in?
• How should we compete in those industries?
 Actions
• Allocate necessary resources
• Design the organization to bring intended strategies to reality
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 The Importance of Policy for Strategic Management

Policies can be established at the:-

• Corporate level and apply to an entire organization.
• Divisional level and apply to a single division.
• Functional level and apply to particular operational activities.

 Policies, like annual objectives, are especially important in

strategy implementation because they outline an organization’
expectations of its employees and managers.

 Policies allow consistency and coordination within and

between organizational departments.

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 Stages of strategic Management
-The strategic management process consists of 3 stages.
1. Strategy formulation
2. Strategy implementation
3. Strategy evaluation
1. Strategy formulation includes:-
• developing a vision and mission.
• identifying an organization’s opportunities & threats.
• determining strengths & weaknesses.
• establishing long-term objectives.
• generating alternative strategies, & choosing particular
strategies to pursue.
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 Cont….

- Strategy formulation issues deciding on:-

what new businesses to enter
what businesses to abandon
how to allocate resources
whether to expand operations or diversify
whether to merge or form a joint venture etc.

2. Strategy implementation requires a firm to establish annual

objectives, devise policies, motivate employees, and allocate
resources so that formulated strategies can be executed.

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 Cont…..
 Strategy implementation/action stage incorporates:-
• developing a strategy-supportive culture
• creating an effective organizational structure
• preparing budgets
• utilizing information systems, and
• linking employee compensation to organizational performance.

 Implementing strategy means mobilizing employees and

managers to put formulated strategies into action.

 Strategy implementation is the most difficult stage in strategic

management and it requires
- personal discipline
- commitment, and sacrifice. 9
 Cont…..
3. Strategy evaluation is an assessment of strategy implementation in the
light of specified objectives.

Three fundamental strategy evaluation activities are:-

1. reviewing external and internal factors that are the bases for
current strategies.
2. measuring performance
3. taking corrective actions

 Strategy evaluation is needed because success today is no guarantee of

success tomorrow.

 Strategy formulation, implementation, and evaluation activities occur at 3

levels in a large organization:-
corporate
divisional/strategic business unit/ and
 functional 10
 Key Terms in Strategic Management
1. Competitive Advantage
Strategic management is all about gaining and maintaining
competitive advantage.
This term can be defined as “anything that a firm does
especially well compared to rival firms.”
• For example, in a global economic recession, simply having
ample cash on the firm’s balance sheet can provide a major
competitive advantage.

- Some cash-rich firms are buying distressed rivals.

• For example, BHP Billiton, the world’s largest miner, is
seeking to buy rival firms in Australia and South America.

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 2. Strategists
 Strategists are the individuals who are most responsible for
the success or failure of an organization.

-Strategists have various job titles, such as chief executive officer,

president, owner, chair of the board, executive director.
-Strategists help an organization gather, analyze, and organize
information.
3. Vision and Mission Statements
 Vision is a position that a company would like to achieve in the
distant future.
• It answers the question: Where we are going?
For example the vision of Assosa University is: To be one of the
top ten university in the country by 2025 G.C
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 Cont….
Mission sets out why the organization exists and what it should be
doing.
• It describes the role an organization plays in a society.

• It typically focuses on the company’s present business scope-”who we

are and what we do”; and broadly describes an organization’s present
capabilities, customer focus, activities, and business makeup.
4. Long-Term Objectives
• Objectives can be defined as specific results that an organization
seeks to achieve in pursuing its basic mission.
- Objectives should be SMART
S- Specific
M- Measurable
A- Attainable
R- Realistic
T- Time 13
 5. External Opportunities and Threats

External opportunities and threats refer to economic, social,

cultural, demographic, environmental, political, legal,
governmental, technological, and competitive trends and events
that could significantly benefit or harm an organization in the
future.

Opportunities and threats are largely beyond the control of

a single organization.

- Opportunities are external conditions that are helpful to the

achievement of the objective.

- Threats are external conditions that are harmful to the

achievement of the objective.
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 Opportunities and Threats

Potential Opportunities Potential Threats

• Serving additional “customer” • Entry of potent new

groups competitors
• Expanding to new geographic •Substitute products or
areas services
• Expanding product line • Slowing market growth
• Transferring skills to new • Adverse shifts in political or
products or services economic conditions
• Vertical integration • Costly new regulations
• Take market share from rivals • Growing leverage of
• Alliances or acquisitions customers or suppliers
• Openings to exploit new • Reduced buyer needs for
product or services
technologies
• Openings to extend brand • Demographic changes
name/image
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 6. Internal Strengths and Weaknesses

• A strength is something a firm does well or a characteristic that

enhances its competitiveness.
• A weakness is something a firm lacks, does poorly, or a condition
placing it at a disadvantage.
Potential Resource Strengths Potential Resource Weaknesses

• Powerful strategy • No clear strategic direction

• Strong financial condition • Obsolete facilities
• Strong brand name/image • Excess debt
• Proprietary technology • Higher overall costs than rivals
• Cost advantages • Missing some key
• Strong communications skills/competencies
• Product innovation • Internal operating problems
• Good customer service • Weak marketing and
• Better product quality communications skills
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 7. Policies
 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.

The strategic management model

1. Develop Vision & Mission Statements
2. Perform External & Internal Audit
3. Establish Long Term Objectives
4. Generate, Evaluate, and Select Strategies
5. Implement Strategies.
6. Measure and Evaluate Performance

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 Cont….
 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.

-Strategy formulation, implementation, and evaluation

activities should be performed on a continual basis, not
just at the end of the year or semiannually.

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 Strategic Management Model

Perform
External
Audit

Implement Measure
Develop Generate,
Establish Implement Strategies: And
Vision Evaluate,
Long-Term Strategies: Marketing, Evaluate
& And
Objectives Management Fin /Acct, Performance
Mission Select Issues R&D, MIS
Statements Strategies
issues

Perform
Internal
Audit

St. Formulation St. Implementation St. Evaluation 19

 Benefits of Strategic Management
 Proactive in shaping firm’s future
 Initiate and influence firm’s activities
 Formulate better strategies
 Financial Benefits
• Improvement in sales
• Improvement in profitability
• Productivity improvement
 Non-Financial Benefits
•Improved understanding of competitors strategies
• Enhanced awareness of threats
• Reduced resistance to change
• Enhanced problem-prevention capabilities 20
 Other benefits of Strategic Management
Identification of Opportunities
Improved coordination & control
Minimizes adverse conditions & changes
Decisions that better support objectives
Effective allocation of time & resources
Internal communication among personnel
Integration of individual behaviors
Clarify individual responsibilities
Encourage forward thinking
Encourages favorable attitude toward change

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 Business Ethics and Strategic Management
 Business Ethics
• Good ethics is good business. Bad ethics can spoil even the best
strategic plans.
• Business ethics can be defined as principles of conduct within
organizations that guide decision making and behavior.

• All strategy formulation, implementation, and evaluation

decisions have ethical ramifications.
• Business actions considered to be unethical include misleading
advertising or labeling, causing environmental harm, poor
product or service safety etc.

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 Reasons for Unethical Behavior
Why are many business people perceived to be acting
unethically?
It may be that the involved people are not even aware
that they are doing something questionable.
There is no worldwide standard of conduct for business
people. This is especially important given the global nature
of business activities.
Cultural norms and values vary between countries and
even between different geographic regions and ethnic
groups within a country.
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- For example, what is considered in one country to be a bribe
to accelerate service is sometimes considered in another
country to be normal business practice.
• Some of these differences may derive from whether a
country’s governance system is rule-based or relationship-
based.

• Relationship-based countries tend to be less transparent and

have a higher degree of corruption than do rule-based
countries affect business practices.
Code of Business Ethics
A code of business ethics is a document that provides behavioral
guidelines that cover daily activities and decisions within an
organization. 24
A new wave of ethics issues related to
• product safety,
• employee health,
• sexual harassment,
• smoking,
• Internet fraud,
• waste disposal,
• inappropriate gifts, and
• security of company records has accentuated the need for
strategists to develop a clear code of business ethics.

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 A code of ethics is to consider the three basic approaches to
ethical behavior:
1. Utilitarian approach proposes that actions and plans should be
judged by their consequences. People should therefore behave
in a way that will produce the greatest benefit to society and
produce the least harm or the lowest cost.

2. Individual rights approach suggests that human beings have

certain fundamental rights that should be respected in all
decisions.

3. Justice approach proposes that decision makers be reasonable,

fair, and impartial in the distribution of costs and benefits to
individuals and groups.

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