In this article we will discuss about:-
1. Definition of Strategic Management 2. Phases of Strategic Management 3. Strategic Management Model 4. Components 5. Need 6. Strategic Management Process 7. Value 8. Importance 9. Challenges 10. Guidelines.
Strategic Management: Definition, Phases, Components, Process, Importance and Challenges
Strategic Management – Definition:
One can generalise and say that the strategic management is the process of management of strategic decision-making, implementation and control. It is not a complete meaning of strategic management though as it fails to cover many important aspects of strategic management.
One should know that the nature of strategic management is different from that of management.
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Managers in most cases deal with day to day issues and problems of operational control. These issues and problems include procuring raw materials, scheduling production process, inventory control, producing goods, procuring finances, investing, capital budgeting, working capital management, procuring human resources, settling their problems, selling the products, creating demand, advertising, sales promotion, marketing research and the like.
All these tasks are important, but the managers perform these tasks based on general guidelines provided to them. Therefore, these tasks are vital for efficient implementation of strategy but it is not the entire scope of strategic management.
Strategic management is defined as “a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives.” – William F. Glueck
Strategic management is defined as “determination of the basic long-term goals and objectives of an enterprise and adoption of course of action and allocation of resources necessary to carry out these goals.” – Alfred D. Chandler
Strategic management is defined as the set of decisions and actions resulting in formulation and implementation of strategies designed to achieve the objectives of organization. Strategic management focuses on the major long-term issues that affect an organization. Strategic management involves planning, implementation and control of an organization’s strategy.
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It is concerned with making decisions about the long-term goals and objectives of an organization, an analysis of the environment within which it operates and an assessment of the current status which will assure its continued success and make it secured from surprise. It is a non-routine and forward looking. It covers the entire cycle of planning and control at strategic level.
Strategic management is a process by which an organization tries to:
(a) Assess its position within its environment (strategic analysis)
(b) Generate as well as choose a set of options (strategic choice)
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(c) Implementation of strategies
(d) Review and control
(e) Match organizational activities to its capabilities
(f) Making major decisions regarding allocation of resources
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(g) Long-term direction that an organization is expected to take.
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. Strategy is a means to achieve these objectives. 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 process is the means by which the management establishes purpose and pursues the purpose through co-alignment of organizational resources with environment, opportunities and constraints. Strategic management is defined as the set of decisions and actions resulting in formulation and implementation of strategies designed to achieve the objectives of an organization.
Strategies designed to achieve the objectives of an organization. Strategic management is a stream of decisions and actions, which leads to the development of an effective strategy or strategies to help achieve corporative objectives. It is a systematic approach to a major and increasingly important responsibility of general management to position and relate the firm to its environment in a way which will assure its continued success and make it secure from surprises.
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Strategic management is the process of formulating strategies and strategic plans and managing the organization to achieve them. Organizations and managers who think and act strategically are looking ahead and defining the direction in which they want to go in the middle and longer term.
Although they are aware of the fact that businesses, like managers, must perform well in the present to succeed in the future, they are concerned with the broader issues which they are facing and the general direction in which they must go to deal with these issues.
Strategic management takes place within the context of the mission of the organization, and a fundamental task of strategic management will be to ensure that the mission is defined and relevant to the basic purpose of the organization within its changing environment. Strategic management is concerned with both ends and means.
As an end, it describes a vision of what the organization will look like in a few years’ time; as a means, it shows how it is expected that the vision will be realized. Strategic management is therefore visionary management, concerned with creating and conceptualizing ideas of where the organization is going. But it must be translatable into empirical management, which decides how, in practice, it is going to get there.
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Strategic management creates a perspective which people can share and which guides their decisions and actions. The focus will be on identifying the organization’s mission and goals, but attention is also concentrated on the resource base required to make it succeed. It is always necessary to remember that strategy is the means to create value.
Managers who think strategically will have a broad and long-term view of where they are going. But they will also be aware that they are responsible first for planning how to allocate resources to opportunities which contribute to the implementation of strategy and, second, managing these opportunities in ways which will significantly add value to the results achieved by the organization.
Strategic management is a decision making process at the top level. It involves analysis of various strategic options both within and outside the enterprise. It aims at efficient and effective use of resources for attaining the organizational objectives. It tries to reduce the performance gap. It ensures a good management information system.
Strategic management is a company-wide long-term approach, effort and exercise, plan to integrate competence of the organization to the challenges of the environment designed to achieve the long-term objectives of the organization (whether it be private, public or governmental).
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In strategic management, the term ‘strategic is used to mean ‘pertaining to the relation between the firm and its environment’. This indicates the role of SWOT analysis in strategic management. The strengths and weaknesses of the firm and opportunities and threats in the environment will indicate the portfolio strategy and other strategies it should pursue.
In simple terms the purpose of strategic management is to achieve sustained strategic-competitiveness of the firm and above average returns of the organization. This would be done by developing and implementing a value creating strategy. By implementing a value creating strategy that competitors present and potential are not simultaneously implementing and that the competitors are unable to duplicate benefits of such strategy, the organization thus achieves a sustained or sustainable competitive advantage.
Strategic Management – Phases:
Glueck traces the evolution of strategic management as arising from the use of planning technique by managers. In most businesses in earlier times, and in many smaller firms today, the focus of the manager’s job was on day-to-day planning.
However, as businesses expanded the managers found it difficult to coordinate operations due to increased complexity and the changes taking place in the business environment. Hence long- range planning appeared that focused on forecasting the future by using economic and technological tools. Primarily corporate staff whose reports were forwarded to top management performed long range planning.
Since the corporate planners were not the decision- makers, long- range planning had some impact, but not as much as would be expected if top management were involved. This produced first generation plans.
Today’s approach is called ‘strategic management’ where the board of directors and corporate planners perform their roles. But the significant roles are for the general managers of the corporation and its major operating divisions.
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Strategic management focuses on analysis of the business and the preparation of likely future scenarios. Contingency strategies are then prepared for each of these likely future scenarios. Strategic planning helps to formulate strategy. It is a part of the wider process of strategic management that deals with aspects of formulation, implementation and control of a strategy.
Hofer refers to evolution of strategic management in terms of four-paradigm shift.
These include:
1. The early entrepreneurs dealing in a single product, limited customers and narrow markets, resorted to ‘Ad-hoc policy making’ in the mid 1930s.
2. ‘Planned policy formulation’ replaced ad-hoc planning as businesses began to expand. A need was felt to integrate functional areas in a rapidly changing environment.
3. ‘Strategy’ paradigm emerged in the early 1960s in response to rapid environmental changes that triggered the need to examine the basic relationship between businesses which had become increasingly complex and their environments.
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4. The ‘strategic management’ paradigm came about in the 1980s. It focused on two broad areas, namely, the strategic approaches and methods of business firms and the responsibility of general management. It generated revolutionary thinking in the field of general management.
Few companies relatively have developed a full strategic management perspective in which the whole corporation thinks strategically and has a clear vision of where it wants to go and knows well how to get there. Rather companies evolve toward this position in gradual manner in certain stages.
It is believed that companies proceed through four stages of development beginning with simple financial planning through forecast-based planning, then externally oriented or strategic planning and finally arrive at strategic management.
Phase # 1. Basic Financial Planning:
Managers initiate serious planning when they are required to propose next year’s budget. Projects are proposed on the basis of very little analysis, with most information coming from within the firm. The sales force usually provides the small amount of environmental information.
Such simplistic operational planning only pretends to be strategic management, yet it is quite time consuming. Normal company activities are often suspended for weeks while managers try to cram ideas into the proposed budget. The time horizon is usually one year.
Phase # 2. Forecast-Based Planning:
As annual budgets become less useful at stimulating long-term planning, managers attempt to propose five-year plans. They now consider projects that may take more than one year. In addition to internal information, managers gather any available environmental data- usually on an ad hoc basis and extrapolate current trends five years into the future.
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This phase is also time consuming, often involving a full month of managerial activity to make sure all the proposed budgets fit together. The process gets very political as managers compete for larger shares of funds. Endless meetings take place to evaluate proposals and justify assumptions. The time horizon is usually three to five years.
Phase # 3. Externally Oriented Planning (Strategic Planning):
Frustrated with highly political, yet ineffectual five year plan, top management begins to involve and takes control of the planning process by initiating strategic planning. The company seeks to increase its responsiveness to changing markets and competition by thinking strategically.
Planning is taken out of the hands of lower level managers and concentrated in a planning staff whose task is to develop strategic plans for the corporation. Consultants often provide the sophisticated and innovative techniques that the planning staff uses to collect information and predict future trends.
High- level managers meet once a year led by key members of the planning staff to evaluate and update the current strategic plans. Such top-down planning emphasizes formal strategy formulation and leaves the implementation issues to lower managerial levels. Top management typically develops five-year plans with help from consultants but minimal input from lower levels.
Phase # 4. Strategic Management:
Realizing that even the best plans are useless without the contribution and commitment of lower level managers, top management forms planning groups of managers and key employees at many levels from various departments and work groups. They develop and integrate a series of strategic plans aimed at achieving the company’s primary objectives.
Strategic plans now detail the implementation, evaluation, and control issues. Rather than attempting to perfectly forecast the future, plans emphasize probable scenarios and contingency strategies. The sophisticated annual five year strategic plan is replaced with strategic thinking at all levels of the organization throughout the year.
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Strategic information, previously available only centrally to top management, is available via local area networks and intranets to people throughout the organization. Instead of staff, internal and external planning consultants are available to help guide group strategy discussion.
Although top management may still initiate the strategic planning process, the resulting strategies may flow from anywhere in the organization. Planning in fact is an outcome of interaction across level and is no longer top down. People at all levels are involved.
Strategic Management – Model:
The strategic management model is briefly explained. The purpose here is simply to provide an introduction to the major concepts.
1. Environmental Scanning:
Environmental scanning is the monitoring, evaluating, and disseminating of information from the external and internal environment to key people within the organization in order to identify strategic factors that will determine the future of the corporation. The external environment of a business is scanned through SWOT analysis.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. The external environment consists of variables in terms of Opportunities and Threats that are outside the organization and typically beyond the short-run control of the top management.
These variables provide the context within which the organizations operate. The key environment variables may be general forces and trends within the overall societal environment or specific factors that operate within an organization’s specific task environment often called its industry.
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The internal environment of firm consists of variables in terms of Strengths and Weaknesses that are within the organization itself and are usually within the short- run control of the top management.
These variables form the context in which work is done and include the corporation’s structure, culture, and resources. Key strengths form a set of core competencies a firm uses to gain competitive advantage.
2. Strategy Formulation:
Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue.
Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversity, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover.
Strategy formulation decisions commit an organization to specific products, markets, resources, and technologies over a period of time. Strategists determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization.
The mission of a business is the fundamental, unique purpose that sets it apart from other firms of its type and identifies the scope of its operations in product and market terms. It is a general, enduring statement of company intent embodying the business philosophy of strategic decision makers.
It implies the image the company seeks to project, reflects the firm’s self-concept, and indicates the principal product or service areas and primary customer needs the company will attempt to satisfy.
The mission statement promotes a sense of shared expectations in employees and communicates a public image to important stakeholder groups in the company’s task environment. It tells who we are and what we do as well as what we’d like to become.
Maytag Corporation’s mission statement is:
To improve the quality of home life by designing, building, marketing, and servicing the best appliances in the world.
Mission statements need to be communicated throughout the organization. Top management must also demonstrate their importance by living them as an example. A clear mission statement can become an important inspiration to employees and lead to commitment and loyalty to the corporation.
Once established, missions are difficult to change, as they become critical ingredients of the corporate culture. Good mission statements tend to be simple and easy to understand at all levels of the organization. They stimulate enthusiasm and commitment among employees.
Objectives are the end results of planned activity that state what is to be accomplished by when and should be quantified if possible and their achievement should result in the fulfillment of a corporation’s mission.
To achieve long-term prosperity, strategic planners commonly establish long- term objectives in the areas of profitability, productivity, competitive position, employee development, employee relations, technological leadership, and public responsibility. To be of greatest value, each objective must be acceptable, flexible, measurable, motivating, suitable, understandable and achievable and consistent with other objectives of the firm.
The identification and communication of annual objectives relate logically to the strategy’s long- term objectives. Accomplishment of the annual objectives adds up to the successful execution of the business’s overall long-term plan. A comprehensive set of annual objectives provides a specific basis for monitoring and controlling organizational performance.
Such objectives can assist in the development of starting points that alert top management to variations in key performance areas that might have serious ramifications for the ultimate success of a strategy. To maximize their contribution, annual objectives must be consistent, integrated, coordinated and linked to long-term objectives.
A strategy of a corporation forms a comprehensive plan of action stating how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage.
A typical business firm usually considers three types of strategy: corporate, business and functional.
Corporate strategy provides a company overall directions in terms of its general attitude toward growth and the management of its various businesses and product lines.
Corporate strategy is concerned with two main questions:
(1) What business areas should a company participate in so as to maximize its long-term profitability?
(2) What strategies should it use to enter into and exit from business areas?
In other words, corporate- level strategies are basically about decisions related to allocating resources among the different businesses of a firm, transferring resources from one set of businesses to others, and managing a portfolio of businesses in such a way that the overall corporate objectives are achieved. An analysis based on business definition provides a set of strategic alternatives that an organization can consider.
Corporate strategies typically fit within the four main categories of stability, growth, retrenchment and combination. For example Maytag Corporation followed a corporate growth strategy by acquiring other appliance companies in order to have a full line of major home appliances.
The business level strategies are the alternative courses of action that a firm can adopt for each of its businesses separately to serve identified customer groups and give value to the customers in order to satisfy their needs. In the process the firm uses its competencies to acquire, sustain and increase its competitive advantage.
The competitive advantage of any business in an industry arises from the wise use of its core competencies. Business strategies take place at the business unit or product level. They emphasize improvement of the competitive position of a corporation’s products or services in the specific industry or market segment served by that business unit.
Business strategies may fit within the two overall categories of competitive or cooperative strategies. For example, Apple Computer uses a differentiation competitive strategy that emphasizes innovative products with creative design. In contrast, British Airways pursued a cooperative strategy by making an alliance with American Airlines in order to provide global service.
Within the general framework of the grand strategy, each distinctive business function needs a specific and integrative plan of action. A functional strategy is the short- term game plan for a key functional area within a company. Such strategies provide more specific details about how key functional areas are to be managed in the near future.
Functional strategies relating to the key functional areas must be consistent with long-term objectives and grand strategy. Functional strategies assist the implementation of grand strategy by organizing and activating specific subunits of the company to pursue the business strategy in daily activities.
Functional strategies are concerned with developing and nurturing a distinctive competency to provide a company or business unit with a competitive advantage. For example, R and D functional strategies are technological follower-ship and technological leadership.
For years, Magic Chef had been a successful appliance maker by spending little on R and D but by quickly imitating the innovations of other competitors that helped the company to reduce and sustain its costs lower than its competitors and consequently to compete with lower prices. Proctor and Gamble spends huge amounts on advertising in order to create customer demand by differentiating its products from its competitors.
Thus business firms apply all three types of strategy either singly or simultaneously.
Policies are directives that guide the thinking, decisions, and actions of managers and their subordinates in implementing the organization’s strategy. Policies provide guidelines for establishing and controlling the ongoing operating processes of the firm consistent with the firm’s strategic objectives.
Policies are often referred to as standard operating procedures and serve to increase managerial effectiveness by standardizing many routine decisions and to limit the discretion of managers and subordinates in implementing operation strategies.
Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives, and strategies.
The following are examples of the nature and diversity of company policies:
1. Maytag will not approve any cost reduction proposal if it reduces product quality in any way.
2. In 3M researchers should spend 15% of their time working on something other than their primary project.
3. General Electric must be number 1 or 2 wherever it competes.
4. The minimum equity position required for all new McDonald’s franchises.
Policies like these provide clear guidance to managers through the organization.
3. Strategy Implementation:
Strategy implementation is the process of putting strategies and policies into action through the development of programs, budgets, and procedures that might involve changes within the overall culture, structure, and/or management system of the entire organization.
Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, developing an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensation to organizational performance.
Strategy implementation is the action stage of strategic management. Implementing strategy denotes mobilizing employees and managers to put formulated strategies into action and require personal discipline, commitment, and sacrifice. Successful strategy implementation depends upon managers’ ability to motivate employees. Strategies formulated but not implemented serve no useful purpose.
Programs are a complex of goals, policies, procedures, rules, task assignments, steps to be taken, resources to be employed, and other elements necessary to carry out a given course of action; they are ordinarily supported by budgets. It may involve restructuring the corporation, changing the company’s internal culture, or beginning a new research effort.
For example, the management of Intel Corporation, realizing that it would not be able to continue its corporate growth strategy without the regular development of new generations of microprocessors, decided to implement a series of programs-
1. They formed an alliance with Hewlett-Packard to develop the successor to the Pentium Pro-chip.
2. Assembled an elite team of engineers and scientists to do long-term original research into computer chip design.
A budget is a statement of expected results expressed in numerical terms. A budget may be expressed either in financial terms or in terms of labor-hours, units of product, machine-hours, or any other numerically measurable term. It may deal with operations, as the expense budget does; it may reflect capital outlays, as the capital expenditure budget does; or it may show cash flow, as the cash budget does.
For example, General Motors budgeted $ 4.3 billion during 2000 through 2004 to update and expand its Cadillac line of automobiles to increase the number of models from 5 to 9, and offering more powerful engines, sportier handling, and edgier styling. The company hopes to reverse its declining market share by appealing to a younger market.
Procedures are plans that establish a required method of handling future activities. They are guides to action, rather than to thinking, and they detail the exact manner in which certain activities must be accomplished. They are chronological sequences of required actions. For example, Delta Airlines used various procedures to cut costs.
To reduce the number of employees, Delta asked technical experts in hydraulics, metal-working, avionics, and other trades to design cross- functional work teams. To cut marketing expenses, the company instituted a cap on travel agent commissions and emphasized sales to bigger accounts. Delta also changed its purchasing and food service procedures.
4. Strategy Evaluation:
Strategy evaluation is the final stage in strategic management. Managers need to know when and why particular strategies are not working well; strategy evaluation is the primary means for obtaining this information.
Evaluation is the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. All strategists are subject to future modification because external and internal factors are constantly changing.
Three fundamental strategy evaluation activities are:
(1) Reviewing external and internal factors that are the bases for current strategies,
(2) Measuring performance, and
(3) Taking corrective actions.
Strategy evaluation is needed because success today is no guarantee of success tomorrow. Managers at all levels use the resulting information to take corrective action and resolve problems. Although evaluation is the final major element of strategic management, it also can pinpoint weaknesses in previously implemented strategic plans and thus stimulate the entire process to begin again.
Strategic Management Process – Components:
The five components of strategic management process are:
1. Selection of the corporate mission and major corporate goals,
2. Analysis of the organization’s external competitive environment to identify opportunities and threats,
3. Analysis of the organization’s internal operating environment to identify the organization’s strengths and weaknesses,
4. Selection of strategies that build on the organization’s strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats.
5. Strategy implementation.
Each component constitutes a sequential step in the strategic management process. Each cycle of the management process begins with a statement of the corporate mission and major corporate goals followed by external and internal analysis, strategic choice. The strategy formulation ends with the design of the organizational structure and control systems necessary to implement the organization’s chosen strategy.
Now each of the components will be discussed one by one:
Component # 1. Mission and Major Goals:
Most organizations define the basic reason for their existence in terms of a mission statement that provides the basic philosophy of the firm. A mission statement usually emanates from the entrepreneur or from major strategists in the firm’s development overtime. The mission of a company is an important element in establishing the strategy of the organization.
“The mission can be seen as a link between performing some social function and more specific targets or objectives of the organization”. Thus the mission legitimizes the existence of a firm. A carefully defined mission of a business provides an explicit statement to insiders and outsiders ‘of what the company stands for—its purpose, image and character.’
Mission definitions can be as broad as to loose meaning, or so abstract that they appear only public pronouncements of ideals that are difficult to achieve. A good mission statement should be brief, specific and clear enough to lead to action and must focus around customer needs and utilities.
Mission statements need to be communicated throughout the organization. Top management must also demonstrate their importance by “living” them as an example. A clear mission statement can become an important inspiration to employees and can lead to commitment and loyalty to the corporation.
Once established, missions are difficult to change, as they become critical component of the corporate culture. For instance, IBM has attempted to change its mission several times, but the critical elements established by the company’s founder Thomas Watson, still encourage the IBM sales function to attempt to achieve “quota” by the year end, rather than seeking to provide customers with “solutions”, or to promote non- mainframe sales.
Good mission tend to be simple and easy to understand at all levels of the organization. They stimulate enthusiasm and commitment amongst employees; they are challenging; they are short and easily absorbed and accepted; and they are frequently repeated.
For instance, in the US General Electric, the mission for each business is to “be number one or two in the world or sell it, close it or fix it”. Such a statement is readily understood and memorable.
A well-developed mission statement helps top management in a number of ways:
1. It crystallizes top management’s own view of the long- term strategic position of the firm.
2. It helps to insure that the behavior of lower-order personnel is directed toward achievement of the corporate mission.
3. It conveys a message to external stakeholders, such as financial institutions that may influence their investment strategies.
4. It insures organizational confidence, in that top management knows where it wishes to drive the corporation.
5. It provides a pathway for establishing long-term strategy.
The mission of an organization provides the context within which strategies are formulated. The mission sets out why the organization exists and what it should be doing. For example, the mission of a national airline might be defined as satisfying the needs of individual and business travelers for high-speed transportation at a reasonable price to all the major population center of a country.
“Major goals specify what the organization hopes to fulfill in the medium to long term. Most profit-seeking organizations operate with a hierarchy of goals, in which attaining superior performance is placed at or near the top. Secondary goals are objectives judged necessary by the company if it is to attain superior performance. For example, under the leadership of Jack Welch, General Electric has operated with a secondary goal of being first or second in every major market in which it competes. This secondary goal reflects Welch’s belief that building market share is the best way to achieve superior performance”
Component # 2. External Analysis:
A firm’s external environment consists of all the conditions and forces that affect its strategic options but are typically beyond the firm’s control.
The analysis of the organization’s external environment aims at identifying strategic opportunities and threats in the organization’s operating environment. Three interrelated environments should be analyzed at this stage- the industry environment, the national environment and the wider macro-environment.
The industry environment consists of the forces and conditions within a specific industry and a specific competitive operating situation, external to the firm, that influence the selection and attainment of alternative objective/strategy combinations. Analysis of the industry environment assesses the competitive structure of the industry to which an organization belongs.
It examines the major competitors, the stage of industry development as well assessing the impact of globalization upon competition within an industry. Changes in the operating environment often result from strategic actions taken by the firm or its competitors, customers, suppliers and creditors.
For instance, easy credit facilities, growing price consciousness among the consumers, the entry of a new competitor into the market; the development of a substitute product may cause direct and intentional positive or negative effects on a firm.
Analyzing the national environment does an assessment whether the national context within which a company operates facilitates the attainment of a competitive advantage in the global marketplace. For instance, spiraling inflation, import restrictions, demographic swings of population in the served geographical areas, or revolutionary technological innovations may make firms’ production systems suddenly obsolete.
Analysis of macro-environment consists of examining macroeconomic, social, government, legal, international, and technological factors that may affect the organization.
Component # 3. Internal Environment:
‘An organization’s internal environment analysis determines its performance capabilities based on existing or accessible resources.’ It identifies the strengths and weaknesses of the organization and considers such issues as determining the quantity and quality of resources available to the organization in which the sources of competitive advantage lie.
Building and maintaining a competitive advantage requires a company to achieve superior efficiency, quality, innovation, and customer responsiveness. A company’s strengths lead to superiority in these areas, whereas a company’s weaknesses translate into inferior performance.
Component # 4. SWOT and Strategic Choice:
Given a company’s internal strengths and weaknesses and its external opportunities and threats, a company needs to generate a series of strategic alternatives. The comparison of strengths, weaknesses, opportunities and threats is normally referred to as a SWOT analysis.
The main purpose of SWOT analysis is to identify strategies that align, fit, or match a company’s resources and capabilities to the demands of the environment in which the company operates. In other words, the purpose of generating strategic alternatives by a SWOT analysis should be to build on a company’s strengths in order to exploit opportunities, counter threats, and correct weaknesses.
SWOT analysis provides a simple but powerful tool for evaluating the strategic position of the firm. It is especially useful for senior executives undertaking a fundamental reappraisal of a business, in that it permits a free-thinking environment unencumbered by the constraints often imposed by a finance-driven budgetary planning system.
It also allows a test of perceived common purpose within an organization when carried out at various levels within the firm. The requirements for undertaking such an analysis are relatively simple and, at the end of the exercise, key information needs can usually be identified.
A list (not comprehensive) of common strengths, weaknesses, opportunities, and threats. Other critical factors may be identified. In terms of usage, executives may be divided into groups to initially identify—first as individuals and second as groups—their views as to the firm’s strengths and weaknesses, opportunities and threats. It may well be useful to focus on only a prioritized list of these and also to assess the cross-impacts of strengths and weaknesses on threats and opportunities.
For strategy formulation, the firm attempts to build upon its strengths and eliminate its weaknesses. When the firm does not possess the skills required to take advantage of opportunities or avoid threats, the necessary resources may be identified from the SWOT analysis and steps taken to procure the strengths or to reduce any weakness.
Strategic Choice:
Strategic choice is a process of choosing from among the alternatives generated by a SWOT analysis. The strategic alternatives are evaluated against each other with regard to their ability to achieve major goals.
The generated strategic alternatives can encompass corporate level, business level and functional level strategies that would enable an organization to survive and prosper in the rapidly changing and globally competitive environment that characterize most modern industries. In the following paragraphs we will discuss the corporate, business, functional and global strategies.
Corporate-Level Strategy:
An organization’s corporate strategy identifies the businesses that maximize its long- term profitability. For many organizations competing successfully often means vertical integration, diversification, strategic alliance or acquisition.
For an organization vertical integration means integrating its operation either backward into the production of inputs for the company’s main operation or forward into the disposal of outputs from the operation.
Some companies may be successful in establishing a sustainable competitive advantage and may be able to generate resources in excess of their investment requirements within their business. For such organizations, long-term profitability maximization may mean diversification in new businesses.
Business Level Strategies:
Business level strategy is concerned with shaping the future of the business unit concerned. It is essentially competitive strategy that signifies the interface between the market and the business unit. Business level strategy is concerned with meeting competition, protecting market shares and achieving profits at the business unit level.
At the business level managers translate the general direction and thrust of the organization into specific strategies relevant to particular businesses and consistent with overall investment strategy of the corporation as a whole.
At this level multifunctional strategies are formulated and implemented for the specific product- market area in which the business operates. Business strategies might differ in terms of their commitment to growth. While some businesses strive for growth, others release resources by adopting harvesting or divestment strategies.
A number of portfolio models to position businesses, including the advantage matrix, competitive position-market attractiveness matrix, directional policy matrix, growth share matrix, life cycle strategy and value based planning etc., have been designed to assist the corporate center in identifying the appropriate position of each business within the corporate portfolio.
Functional Strategies:
From the business strategies, managers develop operational strategies and tactics to implement selected business level strategy. Functional level strategies may be defined as strategies ‘directed at improving the effectiveness of functional operations within a company’. The functional operations include manufacturing, marketing, research and development, materials management and human resources management.
Global Strategies:
Today markets have become global and firms have to be competitive globally. Attaining competitive advantage and maximizing a company’s performance needs a company needs to expand its business activities beyond its home country. Therefore, a company must ponder over various global strategies to adopt to compete in the global market-place.
Component # 5. Strategy Implementation:
After the strategic choice has been made, the chosen strategy has to be put into action.
The strategy implementation is divided into four main components:
1. Design Organizational Structure:
Strategy implementation is effected through the people in the organization, and the way in which they are organized. The allocation of various roles and responsibilities relating to different aspects of the strategy to different managers and subunits is necessary for the implementation of the selected strategy.
A company’s organizational structure, therefore, delineates roles and responsibilities as well as their reporting relationships. If the existing structure of an organization is not appropriate for the company’s strategy, it may have to design a new structure. We describe the different types of organizational structures that can be used to implement strategy.
2. Designing Control Systems:
In addition to choosing an appropriate organizational structure, a company must also establish suitable organizational control systems. Control systems enable strategists monitor the progress and performance of a strategy. The control systems may range from market and output controls to bureaucratic controls and controls through organizational structure. An organization also requires an appropriate sort of reward and incentive systems to encourage performance.
3. Matching, Strategy, Structure and Controls:
For a successful strategy implementation, a company’s strategy must match with its structure and controls. The strategic managers can create a structure and control systems to encourage the development of various distinctive functional competencies or skills.
Building competitive advantage through organizational design starts at the functional level. However, the successful strategy implementation requires a structure that links and combines the skills and competencies of a company’s value creation functions, allowing it to follow a business-level strategy successfully.
Therefore, companies pursuing a business level strategy must adopt the appropriate form of structure and control if they are to use their resources effectively to develop superior efficiency, quality, innovation and responsiveness to customers. Companies can bear the costs of operating organizational structure and control systems if these systems increase their ability to add value.
Hence, over time, companies must manage and change their structures to allow them to create value. However, several companies do not use the appropriate form of structure overtime and fail to manage their strategies. These companies survive as long as they match their strategy, structure and control systems.
Many large companies have an international component in their organizational structures. The issue for international companies is to adopt the structure and control system that best fits their strategy. The need to implement international strategy successfully requires corporate managers to design the company’s structure and controls so that the firm is able to respond to the changes of the global market.
4. Managing Strategic Change:
In today’s world the only constant is change. Because the change is so pervasive, the companies that are able to adapt their strategy and structure to a changing world achieve long run success.
The Feedback Loop:
Feedback can be defined as post-implementation results collected as inputs for the enhancement of future decision-making. Once a strategy is implemented, its execution must be monitored to know to what extent the strategic objectives are actually being achieved.
The information received though feedback is fed into the next round of strategy formulation and implementation. The feedback serves either to reaffirm existing corporate goals and strategies or to suggest changes. Feedback may also reveal that strategic objectives were attainable but implementation was poor.
Strategic Management – Need:
Some managers argue that why should firms engage themselves in strategic management? They argue that firms can exist, develop and continue in business without strategic management. Some other managers argue that strategic management is essential in this competitive era.
The following factors help us to know the need for strategic management:
i. Due to Change:
Everything, except change is not permanent. It does mean that only change is permanent. Change makes planning difficult. But, firms may pro-act to the change rather than just react to it. Strategic management encourages the top executives to forecast change and provides direction and control.
It will also allow the firm to take advantage of the opportunities provided by the changes in the environment and avoid the threats or reduce the risk as the future is anticipated. Thus, strategic management allows an enterprise to base its decisions on long-range forecasts.
ii. To Provide Guidelines:
Strategic management provides guidelines to the employer about the organisation’s expectations from them. This would minimise conflict between job performance and job demands. Thus, it provides incentive for employer and helps the organisation in achieving its objectives.
iii. Developed Field of Study by Research:
Strategic management was just based on case studies or anecdotal evidence 30 years ago. But recently, there are methodological problem researches in this field of study. More systematic knowledge in this area is available at present. Therefore, today it is worthwhile to study strategic management.
iv. Probability for Better Performance:
There is no clear research evidence that strategic management leads to higher performance. But the majority of studies suggest that there is a relationship between better performance and formal planning. It is also stated that businesses which plan strategically have a higher probability of success than those which do not have.
v. Systematize Business Decisions:
Strategic management provides data and information about different business transactions to managers and helps them to make decisions systematically.
vi. Improves Communication:
Strategic management provides effective communication of information from lower level managers to middle level managers and to top level managers.
vii. Improves Coordination:
Strategic management improves coordination not only among the functional areas of management, but also among individual projects.
viii. Improves Allocation of Resources:
Strategic planning helps in deciding upon most feasible and viable projects and thereby improves the allocation of resources to the viable projects.
ix. Helps the Managers to have a Holistic Approach:
Strategic management helps the managers to have complete understanding of the company and to have a holistic approach towards business problems and proportions.
Strategic Management – Process:
Strategic management is a process of series of steps.
The basic steps in strategic management process are:
i. Identify corporate vision, mission, objectives and goals.
ii. Analyse the corporate external environment to identify opportunities and threats.
iii. Scan the corporate internal environment to identify strengths and weaknesses of the company.
iv. Revise the corporate mission, if there is any drastic deviation in the external environment.
v. Craft the strategic alternatives based mostly on the corporate opportunities and strengths. Also consider strategies for correcting company’s weaknesses, when the opportunities are significant and distinct. Similarly consider crafting strategies by correcting the threats, as and when possible, and when the company has distinctive strengths or competencies.
vi. Select the best corporate strategy. Craft business unit level and functional level strategies based on corporate strategy.
vii. Implement the strategy.
viii. Evaluate and control the strategic implementation process in order to achieve the best performance.
A process is an identifiable flow of information through interrelated stages of analysis directed toward the achievement of an aim. In the strategic management process, the flow of information involves historical, current, and forecast data on the businesses, its operations, and environment that are evaluated in light of the values and priorities of influential individuals and groups-often called stakeholders- who are vitally interested in the actions of the business.
The aim of the strategic management process is the formulation and implementation of strategies that result in long-term achievement of the company’s mission and near-term achievement of objectives.
Viewing strategic management as a process involves several important implications:
1. A change in any component will affect several or all other components.
2. Strategy formulation and implementation are sequential. The process begins with development or reevaluation of the company mission associated with, but essentially followed by, development of a company profile and assessment of the external environment.
Then follow, in order, strategic choice, definition of long-term objectives, design of grand strategy, definition of short-term objectives, design of operating strategies, institutionalization of the strategy, and review and evaluation. However, the apparent rigidity of the process must be qualified.
(a) The strategic posture of a firm may have to be reevaluated in terms of any of the principal factors that determine or affect company performance. Entry by a major new competitor, death of a prominent board member, replacement of the chief executive officer, or a downturn in market responsiveness are among the changes that can prompt reassessment of a company’s strategic plan. However, no matter where the need for a reassessment originates, the strategic management process begins with the mission statement.
(b) Every component of the strategic management process does not deserve equal attention each time a planning activity takes place. Firms in an extremely stable environment do not require an in-depth assessment every five years. Often companies are satisfied with their original mission statements even after decades of operations and thus need to spend only a minimal amount of time in addressing the subject. In addition, while formal strategic planning may be undertaken only every five years, objectives and strategies are usually updated each year, and rigorous reassessment of the initial stages of strategic planning is rarely undertaken at these points.
3. The third implication relates to the necessity of feedback from institutionalization, review, and evaluation to the early stages of the process. Feedback can be defined as post-implementation results collected as inputs for the enhancement of future decision making. Therefore, strategic managers should attempt to assess the impact of implemented strategies on external environment.
Thus, future planning can reflect any changes precipitated by strategic actions. Strategic managers should also carefully measure and analyze the impact of strategies on the need for possible alterations in the company mission.
The final implication of strategic management as a process is the need to view it as a dynamic system. Dynamic describes the constantly changing conditions that influence interrelated and interdependent strategic activities.
Managers should recognize that components of the strategic process are constantly evolving, while formal planning artificially freezes the changing conditions and forces in a company’s internal and external environments, much as an action photograph freezes the movement of a swimmer.
In actuality, change is continuous, and thus the dynamic strategic planning process must be constantly monitored for significant changes in any components as a precaution against implementing an obsolete strategy.
Strategic Management – Value:
The study of strategic management is valuable for the following reasons:
The study and expertise in strategic management enable managers to face challenges in making decisions and translating them into action.
Managers face four major challenges in managing the resources on a day-to-day basis:
(a) As strategic management is concerned with complexity arising out of ambiguous and non-routine situation with organization-wide rather than functional specific implications, this can be a particular problem due to the background of managers trained for many years to undertake operational tasks and responsibility.
Therefore, the managers who aspire to management, or influence strategy needs to develop a capability to take an overview, to conceive of the whole rather than just the parts of the situation facing an organization.
(b) To develop ability as a strategist requires that the manager is able to conceptualize key strategic issues like analysis and planning, action to undertake tasks and conceptualization of problems and choices. Because strategic management is characterized by its complexity, it is necessary to make decisions and judgments based on the conceptualization of difficult issues.
Managers, therefore, are required to train themselves not only in skills of detailed planning or analysis, analytical approaches to strategy and actions related to the management of strategy but also develop concepts of relevance to the complexity of strategy.
(c) A major challenge for the strategic manager is to build an organization that, simultaneously, is able to match stakeholder expectations and resource capability and efficiency with a responsiveness to changes in the environment. This cannot be done by the intellectual understanding or the sheer energy of the strategist alone. The need is to build organizational capability in strategic response and action.
(d) Managing strategic change is of particular importance for managers.
The study of strategic management can also be useful for a manager in an enterprise in the following ways:
(i) A manager is likely to perform better if he knows the direction in which the enterprise is going. He would like to know how he does fits into the broader framework. If he knows how his function contributes, he should be able to do better to achieve organizational objectives.
If his unit is successful and higher-level managers realize his contribution, this will positively reflect on him. Furthermore employees at lower level interpret strategies and policies imposed from above. If they well understand why they were established, they can implement them more effectively.
(ii) The study of strategic management process will help identify factors that may lead to significant changes in the organization. Some of these strategic changes might reflect positively or negatively on an individual. For example, a major divestiture could eliminate a unit or a new market thrust or product development could make a unit more critical for organizational performance.
The understanding of the factors may lead the organization in certain direction, assists in taking the timely decision to keep or change the job. Foresight about critical organizational changes may prove an asset in one’s career.
(iii) The awareness of the strategies, values and objectives of higher-level managers makes one better assess the likelihood of acceptance of one’s proposals. Thus an understanding of the strategic decisions may be helpful in securing beneficial resources, improving job performance and enhancing career development.
(iv) The study of strategic management process is also helpful to first-line and middle level managers. It prepares them to become successful and more effective top managers and also increases the possibility of reaching the top.
(v) The study of strategic management serves to integrate the functional tools, such as analytical tools of production, operations management, accounting, physical distribution and logistics, personnel and labor relations that help in analyzing business problems. It also provides with an opportunity to learn when to use which tools and how to deal with trade-offs when the results or preferences of all the functional areas are not maximized.
Strategic Management – Importance:
The strategic management of business will enable an organization in the following ways:
1. It helps integrate the behaviour of individuals into a total effort.
2. It gives a sense of long-term direction and provides a framework for guidance in medium-term and short-term planning.
3. It allows for identification, prioritization, and exploitation of opportunities.
4. It minimizes the effects of adverse conditions and changes.
5. It is a conscious and a rational management exercise, which involves defining and achieving an organization’s objective and implementing its mission.
6. It provides a basis for clarifying individual responsibilities.
7. It is the only means by which the future opportunities and problems can be anticipated by the management.
8. It focuses on long-term issues, which affect the organization.
9. It allows major decisions to better support established objectives.
10. It helps the organization in managing risks and reducing risks.
11. It allows more effective allocation of time and resources to identified opportunities.
12. It gives a sense of purpose leading to better quality of management overall.
13. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.
14. It encourages creativity and initiative.
15. It leads to better analysis and diagnosis of the current and likely future environment, identifying opportunities and threats.
16. It encourages a favourable attitude toward change.
17. It will have positive impact on the long-term prosperity of the firm.
18. It provides an objective view of management problems.
19. It involves planning, implementation and control of an organization’s strategy.
20. It gives a degree of discipline and formality to the management of a business.
21. It creates a framework for internal communication among personnel.
22. It enables the organization to be more aware of its external environment and enables it to adapt to achieve a better fit with its environment.
23. It encourages forward thinking.
24. It is concerned with implementation of policies that are considered to be appropriate.
25. It represents a framework for improved coordination and control of activities.
26. It is the adoption of a course of action so as to achieve a given objective with the specified reasons.
27. It is conducive to greater harmony and goal congruence.
28. It provides a cooperative, integrated and enthusiastic approach to tackling problems and opportunities.
29. It improves quality of strategic decisions through group interaction.
30. It reduces gaps and overlaps in activities.
Strategic Management – Challenges:
Strategic management faces different kinds of challenges viz., technological advancement and obsolescence, product or service innovations and development, etc. The recent additions to the challenges are- global issues consequent upon economic liberalization, quality issues consequent upon the total quality management concept of the Japanese firms and social issues.
We shall discuss these challenges for strategic management:
Challenge # 1. Technological Advancements and Strategic Management:
As necessity is the mother of invention, competition and a host of other reasons are responsible for the rapid technological advancements and innovations. These advancements and innovations of one firm poses challenges for the strategic decision-making of the competing firms.
Further, the continuous technological advancements led to the obsolescence of the existing technologies. It creates a challenge for the strategic management of those firms using obsolete technologies. The strategic managers should be fully aware of technological advances and innovations while formulating strategies.
Challenge # 2. Product/Service Innovation and Development and Strategic Management:
Technological advancements and innovations together with changes in consumer tastes and preferences, needs and conveniences led to the continuous product/services development and innovation of new products.
The firms with new products/services widely accepted by the customers enjoy distinctive strategic advantage whereas other firms in the same industry suffer from strategic disadvantage. This leads to further competition and creates new challenges for strategic management. Strategic managers are expected to be aware of these developments and innovations in the industry while formulating their strategies.
Challenge # 3. Global Issues and Strategic Management:
With the announcement of economic liberalisation in India and consequently opening up of the economy to the rest of the world in 1991, business activities have tended to cross national boundaries more intensely and frequently. Due to the increase in scale and variety of operations of multinational and transnational corporations in the country, even firms with no international operations are experiencing the impact of globalisation on their markets and operations.
Since this trend is expected to continue, almost all the organisations, irrespective of their size, nature of operations and markets will have to consider global issues in their strategic management process.
The strategic managers must be fully aware of critical international variables that might considerably affect their strategic operations, before they determine how their strategic management process can most effectively accommodate global environmental factors.
Challenge # 4. Quality Issues and Strategic Management:
The quality movement, spearheaded by W. Edwards Dening has had a significant impact on the method of strategic management process of organisations in the 1990s. Sea changes took place in the concept of quality. The concept of post- production quality control changed into Total Quality Management (TQM). It further changed to feed forward and zero-defect of the product.
Further, quality today does mean an organisation — wide commitment to enhance the value of goods or services to the customer at each and every stage — from the stage of product design, raw material, every stage of production process, to the place of marketing (or selling) to post sale service.
Japanese firms once produced cheap products, presently they are producing not only low cost but most qualitative products. In fact, today’s customers feel happy to buy a Japanese-made product in view of its quality. Hence, Japanese firms enjoy strategic advantage position in this regard.
Managers involved in the strategic management process at all levels are expected to understand the history of this movement and its day-to-day developments in order to appreciate the crucial role it plays in modern organisational strategy.
Challenge # 5. Economic Boom and Recession:
Both economic booms as well as economic recession affect the strategic management process. Economic boom provides the opportunities for the increase in demand as well as business operations and economic recession in general create threats. Companies should foresee the trends that result in recession and formulate strategies accordingly. In fact most of the companies failed to foresee the economic recession of 2008 and beyond.
Challenge # 6. Social Issues and Strategic Management:
Since the organisation is part and parcel of the society, most of the organisations are of the view that, social responsibility is the managerial obligation to act, protect and promote both organisational interests and welfare of the society. Strategic management process of an organisation will be affected by recognising this obligation.
The strategic managers should have a clear idea about –
(a) The societal constituencies that the organisation will serve us the obligation,
(b) The areas of the business to be affected by this obligation,
(c) Method of conducting social audit to facilitate the strategic management process, and
(d) The areas of strategic advantages that the organisation will be enjoying.
Effective Strategic Management – Guidelines:
For an effective formulation and implementation of strategies, the managers must keep in mind certain guidelines otherwise it may create problems for the organization. An integral part of the strategy evaluation must be to evaluate the effectiveness of the strategic management process. It should be determined that strategic management in the organization is a people process or a paper process.
Even the most technically sound strategic plan will serve little purpose if it is not implemented. Many organizations spend a large amount of time, money, and effort on developing the strategic plan, treating the means and circumstances under which it will be implemented as afterthought.
Change comes as a result of implementation and evaluation, not through the plan. While a technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is prepared.
Strategic management must be a self-reflective learning process rather than a self- perpetuating bureaucratic mechanism. It must familiarize managers and employees in the organization with key strategic issues and feasible alternatives for resolving those issues.
Strategic management must not become ritualistic, stilted, orchestrated, or too formal, predictable, and rigid. Strategists should play the role of facilitating continuous organizational learning and change.
Lenz offered some important guidelines for effective strategic management:
1. Keep the strategic management process as simple and non-routine as possible
2. Eliminate jargon and archaic planning language
3. Remember, strategic management is a process for fostering learning and action, not merely a formal system for control.
4. To avoid routine behavior, vary assignment, team membership, meeting formats, and the planning calendar.
5. The process should not be totally predictable, and setting must be changed to stimulate creativity.
6. Emphasize well-oriented plans with numbers as back-up material.
7. Stimulate thinking and action that challenge the assumptions underlying current corporate strategy.
8. If strategy is not working, managers desperately need to know it.
9. No pertinent information should be classified as inadmissible merely because it cannot be quantified.
10. Build a corporate culture in which the role of strategic management and its essential purposes are understood.
11. Attend to psychological, social, and political dimensions, as well as the information infrastructure and administrative procedures supporting it.
Another important guideline for effective strategic management is open- mindedness. A willingness and eagerness to consider new information, new viewpoints, new ideas, and new possibility is essential; all organizational members must share a spirit of inquiry and learning.
Strategists must commit themselves to listen to and understand managers’ positions well enough to be able to restate those positions to the managers’ satisfaction. On the other hand, managers and employees throughout the firm should be able to describe the strategists’ positions to the satisfaction of the strategists. This degree of discipline will promote understanding and learning.
Most organizations can afford to pursue only a few corporate-level strategies at any given time in the wake of limited resources. It is a critical mistake for managers to pursue too many strategies at the same time, thereby spreading the firm’s resources so thin that all strategies are jeopardized.
Joseph Charyk, CEO of the Communication Satellite Corporation said, “We have to face the cold fact that Comsat may not be able to do all it wants. We must make hard choices on which ventures to keep and which to fold”.