THE NATURE OF STRATEGIC MANAGEMENT

THE NATURE OF STRATEGIC MANAGEMENT

BY

SMART LEARNING WAY

·         Contents :-

      The strategic management process

·         The need for integrating analysis and intuition in strategic management

·         Definition and examples of key terms in strategic management

·         The nature of strategy formulation, implementation and evaluation activities

·         The benefits of good business in strategic management

·         The advantages and Disadvantages of entering global markets

What is Strategic Management?

Once there were two company presidents who competed in the same industry.  These two presidents decided to go on a camping trip to discuss a possible merger.  They hiked deep into the woods.  

 Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled.  Instantly, the first president took off his knapsack and got out a pair of jogging shoes.   

The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!”  This story captures the notion of strategic management, which is to achieve and maintain competitive advantage.

Defining Strategic Management

Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable and organisation to achieve its objectives.  

As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting, production/operations, research and development, and computer information systems to achieve organizational success.   

Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation.  The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was very popular between the mid 1960s and the mid 1970s.  During these years, strategic planning was widely believed to be the answer for all problems.  At the time, much of corporate America was ‘obsessed’ with strategic planning. Following that “boom,” however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns.  The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world.

A strategic plan is, in essence, a organisations 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.  Profit margins among firms in most industries have been so reduced that there is little room for error in the overall strategic plan.  

 A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, ‘less desirable’ courses of action.

Stages of Strategic Management

The strategic management process consists of three stages: formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organisations 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 diversify, whether to enter international markets, to merge or form a joint venture, and how to avoid a hostile takeover.

Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most.  Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time.  Strategies determine long-term competitive advantages.  

 For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization.  Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.

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, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management.  Implementing strategy means mobilizing employees and managers to put formulated strategies into action.  Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice.  Successful strategy implementation hinges upon managers’ ability to motivate employees, which is more an art than a science.  Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation.  Strategy implementation activities affect all employees and managers in an organization.  Every division and department must decide on answers to questions, such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?”  The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management.  Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies 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.

3.      Taking corrective actions. 

Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization:  corporate, divisional or strategic business unit, and functional.  By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team.  

 Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels.  Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities.

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.”  When a firm can do something that rival firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage.  Getting and keeping   competitive advantage is essential for long-term success in an organization.  

 The Industrial/Organisation (I/O) and the Resource-Based View (RBV) theories of organisation present different perspectives on how best to capture and keep competitive advantage—that is, how best to manage strategically.  Pursuit of competitive advantage leads to organizational success or failure.  Strategic management researchers and practitioners alike desire to better understand the nature and role of competitive advantage in various industries.

Normally, a firm can sustain a competitive advantage for only a certain period due to rival firms imitating and undermining that advantage.  Thus it is not adequate to simply obtain competitive advantage.  A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and by (2) effectively formulating, implementing, and evaluating strategies that capitalize upon those factors. 

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, chancellor, dean, or entrepreneur.  Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers.  We are in an extended period of change.  If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.”

Strategists help an organization gather, analyze, and organize information.  They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans.  Strategic planners usually serve in a support or staff role.  Usually found in higher levels of management, they typically have considerable authority for decision making in the firm.  The CEO is the most visible and critical strategic manager.  Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist).  In the last five years, the position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of many organizations.

Strategists differ as much as organizations themselves, and these differences must be considered in the formulation, implementation, and evaluation of strategies.  Some strategists will not consider some types of strategies because of their personal philosophies.  Strategists differ in their attitudes, values, ethics willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style. 

Vision and Mission Statements

Many organizations today develop a vision statement that answers the question “What do we want to become?”  Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement.  Many vision statements are a single sentence.  For example, the vision statement of Stokes Eye Clinic in Florence, South Carolina, is “Our vision is to take care of your vision.”  The vision of the Institute of management Accountants is “Global leadership in education, certification, and practice of management accounting and financial management.”

Mission statements are “enduring statements of purpose that distinguish one business from other similar firms.  A mission statement identifies the scope of a firm’s operations in product and market terms.”  It addresses the basic question that faces all strategists:  “What is our business?”  A clear mission statement describes the values and priorities of an organization.  Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities.  A mission statement broadly charts the future direction of an organization.  An example of a mission statement is provided as follows for Microsoft.

           

External Opportunities and Threats

External opportunities and external 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—thus the word external. 

 The wireless revolution, biotechnology, population shifts, very high gas prices, changing work values and attitudes, illegal immigration issues, and increased competition from foreign companies are examples of opportunities or threats for companies.  These types of changes are creating a different type of consumer and consequently a need for different types of products, services, and strategies.  Many companies in many industries face the severe external threat of online sales capturing increasing market share in their industry.

Other opportunities and threats may include the passage of a law, the introduction of a new product by a competitor, a national catastrophe, or the declining value of the dollar.  A competitor’s strength could be a threat.  Unrest in the Middle East, rising energy costs, or the war against terrorism could represent an opportunity or a threat.

A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats.  For this reason, identifying, monitoring , and evaluating external opportunities and threats are essential for success.  

This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis.  Lobbying is one activity that some organizations utilize to influence external opportunities and threats.

Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and development, and management information systems activities of a business.  Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity.  Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.

Strengths and weaknesses are determined relative to competitors.  Relative deficiency or superiority is important information.  Also, strengths and weaknesses can be determined by elements of being rather than performance.  For example, a strength may involve ownership of natural resources or a historic reputation for quality.  Strengths and weaknesses may be determined relative to a firm’s own objectives.  For example, high levels of inventory turnover may not be a strength to a firm that seeks never to stock-out.

Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages.  Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives

Objectives can be defined as specific results that an organisation seeks to achieve in pursuing its basic mission.  Long-term means more than one year.  Objectives are essential for organizational success because they state directions; 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.

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 ventures.

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 multi functional or multi divisional consequences and require consideration of both the external and internal factors facing the firm.

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 management information systems (MIS) 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.

Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies.  The National Center for Health Promotion estimates that more than 80 percent of all U.S. corporations have no smoking policies.  No smoking policies are usually derived from annual objectives that seek to reduce corporate medical costs associated with absenteeism and to provide a healthy workplace.  Ireland recently banned smoking in all pubs and restaurants.  Norway, Holland, and Greece are passing similar laws.  

 The Netherlands and Italy banned smoking in bars, cafes, and restaurants in January 2005.  One European country that still allows smoking almost everywhere is Germany, where 34 percent of all people smoke compared to 22 percent in the United States.  There is growing support in New Jersey and Colorado to require casinos to be nonsmoking.  Currently the only nonsmoking casinos in the nation is the Taos Mountain Casino in Taos, New Mexico.  Casinos are fighting the nonsmoking initiative, contending that it would have a detrimental impact on revenues.   

When Delaware recently, enacted an indoor smoking ban at the state’s racetracks revenues fell by 11 percent.  An estimated one-third of casino customers are smokers but, of course, that means two-thirds are nonsmokers.

The Strategic-Management Model

The strategic-management process can best be studied and applied using a model.  Every model represents some kind of process. 

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, 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.

The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests.  Strategists do not go through the process in lockstep fashion.  Generally, there is give-and- take among hierarchical levels of an organization.  Many organizations semiannually conduct formal meetings to discuss and update the firm’s vision/mission, opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and performance.  These meetings are commonly held off-premises and called retreats.  The rationale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants.  Good communication and feedback are needed throughout the strategic-management process.

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

Strategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activities---and thus to exert control over its own destiny.  Small business owners, chief executive officers, presidents, and managers of many for-profit and non-profit organizations have recognized and realized the benefits of strategic management.

Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice.  This certainly continues to be a major benefit of strategic management, but research studies now indicate that process, rather than the decision or document, is the more important contribution of strategic management.  Communication is a key to successful strategic management.  Through involvement in the process, managers and employees become committed to supporting the organization.  Dialogue and participation are essential ingredients.

The manner in which strategic management is carried out is thus exceptionally important.  A major aim of the process is to achieve the understanding of and commitment from all managers and employees.  Understanding may be the most important benefit of strategic management, followed by commitment.  When managers and employees understand what the organization is doing and why they often feel that they are a part of the firm and become committed to assisting it.  This is especially true when employees also understand linkages between their own compensation and organizational performance.   

Managers and employees become surprisingly creative and innovative when they understand and support the firm’s mission, objectives, and strategies.  A great benefit of strategic management, then, is the opportunity that the process provides to empower individuals.  Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination, and rewarding them for doing so.

More and more organizations are decentralizing the strategic-management process, recognizing that planning must involve lower-level managers and employees.  The notion of centralized staff planning is being replaced in organizations by decentralized line-manager planning.   The process is a learning, helping, educating, and supporting activity, not merely a paper-shuffling activity among top executives.  

 Strategic-management dialogue is more important than a nicely bound strategic-management document.  The worst thing strategists can do is develop strategic plans themselves and then present them to operating managers to execute.  Through involvement in the process, line managers become ‘owners’ of the strategy.  Ownership of strategies by the people who have to execute them is a key to success!

Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer, both managers and employees must also be involved in strategy formulation, implementation, and evaluation activities.  Participation is a key to gaining commitment for needed changes.

An increasing number of corporations and institutions are using strategic management to make effective decisions.  But strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.

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 typically underestimate their competitors’ strengths and overestimate their own firm’s strengths.  They often attribute weak performance to uncontrollable factors such as a poor economy, technological change, or foreign competition.

Non Financial Benefits

Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as an enhanced awareness of external threats, an improved understanding of competitors, strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships.  Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels.  Firms that have nurtured their managers and employees, shared organizational objectives with them, empowered them to help improve the product or service, and recognized their contributions can turn to them for help in a pinch because of this interaction.

In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm.  It can be the beginning of an efficient and effective managerial system.  Strategic management may renew confidence in the current business strategy or point to the need for corrective actions.  The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than as a threat.

Greenley stated that strategic management offers the following benefits:

1.      It allows for identification, prioritization, and exploitation of opportunities.

2.      It provides an objective view of management problems.

3.      It represents a framework for improved coordination and control of activities.

4.      It minimizes the effects of adverse conditions and changes.

5.      It allows major decisions to better support established objectives.

6.      It allows more effective allocation of time and resources to identified opportunities.

7.      It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.

8.      It creates a framework for internal communication among personnel.

9.      It helps integrate the behavior of individuals into a total effort.

10.  It provides a basis for clarifying individual responsibilities.

11.  It encourages forward thinking.

12.  It provides a cooperative, integrated, and enthusiastic approach to tackling problems and opportunities.

13.  It encourages a favorable attitude toward change.

14.  It gives a degree of discipline and formality to the management of a business.

Why Some Firms Do No Strategic Planning

Some firms do not engage in strategic planning, and some firms do strategic planning but receive no support from managers and employees.  Some reasons for poor or no strategic planning are as follows:

·       Poor Reward Structures - When an organization assumes success, it often fails to reward success.  When failure occurs, then the firm may punish.  In this situation, it is better for an individual to do nothing (and not draw attention) than to risk trying to achieve something, fail and be punished.

·        Fire Fighting - An organization can be so deeply embroiled in crisis management and fire fighting that it does not have time to plan.

·     Waste of Time - Some firms see planning as a waste of time no marketable product is produced.  Time spent on planning is an investment.

·         Too Expensive - Some organizations are culturally opposed to spending resources.

·         Laziness - People may not want to put forth the effort needed to formulate a plan.

·         Content with Success - Particularly if a firm is successful, individuals may feel there is no need to plan because things are fine as they stand.  But success today does not guarantee success tomorrow.

·         Fear of Failure - By not taking action, there is little risk of failure unless a problem is urgent and pressing.  Whenever something worthwhile is attempted, there is some risk of failure.

·        Overconfidence - As individuals amass experience, they may rely less on formalized planning.  Rarely, however, is this appropriate.  Being overconfident or overestimating experience can bring demise.  Forethought is rarely wasted and is often the mark of professionalism.

·        Prior Bad Experience - People may have had a previous bad experience with planning, that is, cases in which plans have been long, cumbersome, impractical, or inflexible.  Planning, like anything else, can be done badly.

·        Self-Interest - When someone has achieved status, privilege, or self-esteem through effectively using an old system, he or she often sees a new plan as a threat.

·     Fear of the Unknown - People may be uncertain of their abilities to learn new skills, of their aptitude with new systems, or of their ability to take on new roles.

·      Honest Difference of Opinion - People may sincerely believe the plan is wrong.  They may view the situation from a different viewpoint, or they may have aspirations for themselves or the organization that are different from the plan.   Different people in different jobs have different perceptions of a situation.

·         Suspicion - Employees may not trust management.

Pitfalls in Strategic Planning

Strategic planning is an involved, intricate, and complex process that takes an organization into uncharted territory.  It does not provide a ready-to-use prescription for success; instead, takes the organization through a journey and offers a framework for addressing questions and solving problems.  Being aware of potential pitfalls and being prepared to address them is essential to success.

Some pitfalls to watch for and avoid in strategic planning are these:

·         Using strategic planning to gain control over decisions and resources

·         Doing strategic planning only to satisfy accreditation or regulatory requirements

·         Too hastily moving from mission development to strategy formulation

·         Failing to communicate the plan to employees, who continue working in the dark

·         Top managers making many intuitive decisions that conflict with the formal plan

·         Top managers not actively supporting the strategic-planning process

·         Failing to use plans as a standard for measuring performance

·         Delegating planning to a “planner” rather than involving all managers

·         Failing to involve key employees in all phases of planning

·         Failing to create a collaborative climate supportive of change

BIBLIOGRAPHY

David, F 2007, Strategic Management: Cases and Concepts, Pearson Education, New Jersey