Introduction to Strategic Management
By the end of this lesson, you are expected to:
• learn the basics of strategic management.
• understand the strategic planning process.
• discover the hierarchical levels of strategy.
What is Strategy?
The word “strategy” is probably the most overused and misunderstood word in business. According to Johnson and Scholes, authors of Exploring Corporate Strategy:
“Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations”
In essence, strategy is about answering the following questions:
• What is the direction of the business? (in the long-term)
• Which are the markets that a business should compete in and what is involved in doing so?
• How can a business perform better than its competitors within each of its markets?
• What are the resources required in order to be able to compete?
• What are the external (or environmental) factors that impact the business’s ability to compete?
• What are the expectations of stakeholders and how can we add value for them?
Strategic Management is the set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organization and its environment so as to achieve organizational goals.
A company’s strategy should answer the following questions:
• Who are our customers?
• What changes are occurring in the competitive environment?
• What products or services should we offer?
• How can we offer those products or services most efficiently?
Superior performance is not a matter of luck. It is determined by the choices that managers make.
The general plan of major actions by which a firm intends to achieve its long-term goals.Grand Strategies can be defined using four general categories:
4) Global Operations
Can be promoted internally by investing in expansion or externally by acquiring additional business divisions.
• Internal: Development of new or changed products, expansion of current products into new markets.
• External: Typically involves diversification (the acquisition of businesses that are related to current product lines or that take the corporation into new areas).
• A strategy adopted when a firm wants to remain the same size or grow slowly and in a controlled fashion.
• Used to integrate strategic business units and to ensure that the organization is working efficiently.
• The organization goes through a period of forced decline by either shrinking current business units or liquidating* entire businesses.
• Also known as Downsizing.
Some Key Terms:
* Liquidation: selling off a business unit for the cash value of the assets.
Divestiture: selling off of businesses that no longer seem central to the corporation.
4) Global Operations
• In order to provide synergy among worldwide operations for the purpose of fulfilling common goals.
• Companies face a dilemma between global integration and national responsiveness: need to decide whether they want each global affiliate to act autonomously or whether activities should be standardized across countries.
This process involves five steps:
1) The overall strategic management process begins when executives evaluate their current position with respect to mission, goals and strategies.
2) They then scan the organization’s internal and external environments and identify strategic factors that might require change.
3) There might be a need to redefine the mission or goals or to formulate a new strategy.
4) The next step in the strategic management process is implementation – how strategy is put into action.
5) Lastly, a formal control system can detect and correct problems, in order to help keep strategic plans on track.
#1 Mission & ObjectivesMissionEvery organization needs a Mission Statement that reflects what they’re trying to accomplish. It should be a long-term vision of what the organization is trying to become.A mission statement should be realistic, achievable and should not lead the organization into unrealistic ventures far beyond its competencies. It must be specific to provide direction to management when choosing between alternative courses of action.
An organization’s mission is converted into specific, measurable, and action-oriented commitments and objectives.
These objectives in turn provide direction, establish priorities and facilitate management control.
After evaluating their mission and goals, there is a need to scan the organization’s internal and external environment and identify factors that might require change.Internal or external events might indicate a need to redefine the mission/objectives or to formulate a new strategy at either the corporate, business unit or functional level.Managers may use persuasion, new equipment, changes in organization structure, or a reward system to ensure that employees and resources are used to make formulated strategy a reality.
This includes the planning and decision making that lead to the establishment of the firm’s goals and the development of a specific strategic plan.Strategy formulation may include assessing the external environment and internal problems and integrating the results into goals and strategy.
#4 Strategy Implementation
This is how strategy is put into action. It is the use of managerial and organizational tools to direct resources toward accomplishing strategic results.
Strategy implementation is the administration and execution of the strategic plan – some people argue that it is the most difficult and important part of strategic management.
The difficulty of implementing strategy is greater when a company goes global. In the international arena, structural design must merge with foreign culture as well as link foreign operators to the home country.
A formal control system can help keep strategic plans on track. A control system (e.g. reward systems, pay incentives, budgets, IT systems, policies) should be proactive instead of reactive.Control should not stifle creativity and innovation since there is no tradeoff between control and creativity. The goal of a control system is to detect and correct problems in order to keep plans on target.Some examples of corrective actions are:
– updating assumptions
– reformulating plans
– modifying budget allocations
• Corporate Level
• Business Unit Level
• Functional or Operational Level Though strategy may be about competing and surviving as a firm, one can argue that products, not corporations, compete – which are developed by business units.While a corporation must manage its portfolio of businesses to grow and survive, the success of a diversified firm depends upon its ability to manage each of its product lines.
Strategy Safari: A Guided Tour Through The Wilds of Strategic Management
This strategy involves:
• the selection of businesses in which the company should compete.
• the development and coordination of that portfolio of businesses.Main concerns are:
• Reach: defining the issues that are corporate responsibilities.
• Competitive Contact: defining where in the corporation competition is to be localized.
• Managing Activities and Business Relationships: seeks to develop synergies by sharing resources across business units and using business units to complement other corporate business activities.
• Management Practices: corporations decide how business units are to be governed.
A strategic business unit may be a division or product line that can be planned independently from the other business units of the firm.At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced.Michael Porter identified three generic strategies that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of the Five Forces*.
3) Functional Level Strategy
This is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the Value Chain*.
Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy.