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RSM219H1 (136)
Chapter 6

Chapter 6 Notes

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University of Toronto St. George
Rotman Commerce
Chris Bovaird

CHAPTER 6 – Managing the Business Enterprise WHO ARE MANAGERS?  Although our focus is on managers in business settings, remember that the principles of management apply to all kinds of organizations SETTING GOALS AND FORUMLATING STRATEGY  Goals – Objectives that a business hopes and plans to achieve  The basic aspects of organizational goal setting 1. Deciding what it intends to do is only step one for an organization 2. A company’s managers must also make decisions about actions that will and will not achieve its goals 3. Strategy is the broad program that underlies those decisions Setting Goals  The Purposes of Goal Setting o We can identify for main purposes in organizational goal setting: 1. Goal setting provides direction, guidance, and motivation for all managers. If managers know precisely where the company is headed, there is less potential for error in the different units of the company 2. Goal setting helps firms allocate resources. Areas that are expected to grow will get first priority. The company allocates more resources to new projects with large sales potential than it allocates to mature products with established but stagnant sales potential 3. Goal setting helps to define corporate culture. General Electric’s goal, for instance, is to push each of its divisions to number one or number two in its industry. The result is competitive, often stressful, environment and a culture that rewards success and has little tolerance for failure 4. Goal setting helps managers assess performance. If a company sets a goal to increase sales by 10 percent in a given year, managers in unites who attain or exceed the goal can be rewarded. Units failing to reach the goal will also be compensated accordingly  Kinds of Goals o Every enterprise has a purpose – a reason for being o Mission statement – an organization’s statement of how it will achieve its purpose in the environment in which it conducts its business o Regardless of a company’s purpose and mission, every firm needs long-term, intermediate, and short-term goals: 1. Long-term goals – goals set for extended periods of time, typically five years or more into the future 2. Intermediate goals – goals set for a period of one to five years 3. Short-term goals – goals set for the very near future, typically less than one year Formulating strategy  Strategy formulation – creation of a broad program for defining and meeting an organization’s goals 1. Set strategic goals   Strategic goals – long-term goals derived directly from a firm’s mission statement  SWOT analysis – identification and analysis of organization strengths and weaknesses and environmental opportunities and threats as part of strategy formulation  Strengths (internal)  Weaknesses (internal)  Opportunities (external)  Threats (external) 2. Analyze the environment (external)   Environment analysis – the process of scanning the environment for threats and opportunities  Changing consumer tastes and hostile takeover offers are threats, as are new government regulations. Even more important threats come from new products and new competitors  Opportunities are areas in which the firm can potentially expand, grow, or take advantage of existing strengths Analyze the organization (internal)   Organizational analysis – the process of analyzing a firm’s strengths and weaknesses 3. Match organization and its environment   The final step in strategy formulation is matching environmental threats and opportunities with corporate strengths and weaknesses 4. Formulate strategy  A Hierarchy of Plans  Plans can be viewed on three levels: o Strategic plans – plans that reflect decisions about resource allocations, company priorities, and steps needed to meet strategic goals  They are usually set by the board of directors and top management o Tactical plans – generally, short-range plans concerned with implanting specific aspects of a company’s strategic plans  They typically involve upper and middle management o Operational plans – plans setting short-term targets for daily, weekly, or monthly performance  They are developed by middle- and lower-level managers Levels of Strategies  There are three levels of strategy in a business firm o Corporate-level strategy – identifies the various businesses that a company will be in, and how these businesses will relate to each other  Concentration  Concentration strategy – involves focussing the company on one produce or product line  Growth (Internal)  Market penetration – boosting sales of present products by more aggressive selling in the firm’s current marks  Product development – developing improved products for current markets  Geographic expansion – expanding operations in new geographic areas or countries  Integration (External)  Horizontal integration – acquiring control of competitors in the same or similar markets with the same or similar products  Vertical integration – owning or controlling the inputs to the firm’s processes and/or the channels through which the products or services are distributed  Diversification  Diversification – expanding into related or unrelated products or market segments  Related diversification means adding new, but related, products or services to an existing business  Conglomerate diversification means diversifying into products or markets that are not related to the firm’s present businesses  Investment Reduction  Investment reduction – reducing the company’s investment in one or more of its lines of business  One investment-reduction strategy is retrenchment, which means the reduction of activity or operations  Divestment is another investment-reduction strategy; it involves selling or liquidating one or more of a firm’s businesses o Business-level (competitive) strategy – indentifies the ways a business will compete in its chosen line of products or services  Michael Porter identifies three competitive strategies:  Cost leadership – becoming the low cost leader in an industry  Differentiation strategy – a firm seeks to be unique in its industry along some dimension that is valued by buyers  Focus strategy – selecting a market segment and serving the customers in that market niche better than competitors o Functional strategies – identify the basic courses of action that each department in the
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