By Rajat
Arora
Strategic management is a field that deals with the major intended and emergent
initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance
the performance of firms in their external environments.[1] It entails specifying theorganization's mission, vision and objectives, developing policies and plans,
often in terms of projects and programs, which are designed to achieve these
objectives, and then allocating resources to implement the policies and plans,
projects and programs. Strategic management is a level of managerial activity
under setting goals and over Tactics. Strategic management provides overall direction to the
enterprise and is closely related to the field of Organization Studies.
In the field of business administration it is useful to talk about
"strategic alignment" between the organization and its environment or
"strategic consistency." According to Arieu (2007), "there is
strategic consistency when the actions of an organization are consistent with
the expectations of management, and these in turn are with the market and the
context." Strategic management includes not only the management team but
can also include the Board of Directors and other stakeholders of the
organization. It depends on the organizational structure.
“Strategic management is an ongoing process that evaluates
and controls the business and the industries in which the company is involved;
assesses its competitors and sets goals and strategies to meet all existing and
potential competitors; and then reassesses each strategy annually or quarterly
[i.e. regularly] to determine how it has been implemented and whether it has succeeded
or needs replacement by a new strategy to meet changed circumstances, new
technology, new competitors, a new economic environment., or a new social,
financial, or political environment.” (Lamb, 1984:ix) [2] Strategic Management can also be defined as "the
identification of the purpose of the organisation and the plans and actions to
achieve the purpose. It is that set of managerial decisions and actions that
determine the long term performance of a business enterprise. It involves
formulating and implementing strategies that will help in aligning the
organisation and its environmental to achieve organisational goals."
Concepts/approaches of strategic management
Strategic management can depend upon the size of
an organization, and the proclivity to change of its business environment.
These points are highlighted below:
§ A global/transnational organization may employ a
more structured strategic management model, due to its size, scope of
operations, and need to encompass stakeholder views and requirements.
§ An SME (Small and Medium Enterprise) may employ
an entrepreneurial approach. This is due to its comparatively smaller size and
scope of operations, as well as possessing fewer resources. An SME's CEO (or
general top management) may simply outline a mission, and pursue all activities
under that mission.
§ Whittington (2001) highlighted four approaches
to strategic management, utilising different factors that organisations may
face. These are the Classical, Processual, Evolutionary and Systemic
approaches. Each paradigm is suited to specific environmental factors, of which
global firms have faced over the past 4/5 decades.
§ Mintzberg has stated there are prescriptive
(what should be) and descriptive (what is) schools, in the sense that the
prescriptive schools are "one size fits all" approaches designed to
work as best practice methods, and the descriptive schools merely describe how
corporate strategy is devised in given contexts.
It can be said that there is no overriding
strategic managerial method, and that a number of differing variables must be
taken into account, relative to how a corporate strategic plan is outlined. It
can also be said to be a subjective and highly contextual process.
Strategy formation (Classical school)
The Classical School of strategic management is
the most taught and deployed approach, of which most textbooks on the subject
convey. The essential points of the approach are "where are we now?",
"where do we want to be?" and "how do we get there?". It
thus comprises an environmental analysis, a choice of available options, and
determining a path for action and implementation.
The initial task in strategic management is
typically the compilation and dissemination of a mission statement. This
document outlines, in essence, the raison d'etre of an organization.
Additionally, it specifies the scope of activities an organization wishes to
undertake, coupled with the markets a firm wishes to serve.
Following the devising of a mission statement, a
firm would then undertake an environmental scanning within the purview of the
statement.
Strategic formation is a combination of three
main processes which are as follows:
§ Performing a situation analysis, self-evaluation
and competitor analysis: both internal and external; both micro-environmental
and macro-environmental.
§ Concurrent with this assessment, objectives are
set. These objectives should be parallel to a time-line; some are in the
short-term and others on the long-term. This involves crafting vision
statements (long term view of a possible future), mission statements (the role
that the organization gives itself in society), overall corporate objectives (both
financial and strategic), strategic business unit objectives (both financial
and strategic), and tactical objectives.
Strategy evaluation and choice
An environmental scan will highlight all
pertinent aspects that affect an organization, whether external or
sector/industry-based. Such an occurrence will also uncover areas to capitalise
on, in addition to areas in which expansion may be unwise.
These options, once identified, have to be
vetted and screened by an organization. In addition to ascertaining the
suitability, feasibility and acceptability of an option, the actual modes of
progress have to be determined. These pertain to:
The basis of competition
The basis of competition is the competitive
advantage used or established by the strategy. This advantage may derive from
how an organization produces its products, how it acts within a market relative
to its competitors, or other aspects of the business. Specific approaches may
include:
§ Differentiation, in which a multitude of market
segments are served on a mass scale. An example will include the array of
products produced by Unilever, or Procter and Gamble, as both forge many of the
world's noted consumer brands serving a variety of market segments.
§ Cost-based, which often concerns economy
pricing. An example would be dollar stores in the United States.
§ Market segmentation (or niche), in which
products are tailored for the unique needs of a niche market, as opposed to a
mass market. An example is Aston Martin cars.
Mode of action
§ Measuring the effectiveness of the
organizational strategy, it's extremely important to conduct a SWOT analysis to figure out the internal strengths and
weaknesses, and external opportunities and threats of the entity in business.
This may require taking certain precautionary measures or even changing the
entire strategy.
In corporate strategy, Johnson, Scholes and
Whittington present a model in which strategic options are evaluated against
three key success criteria:[3]
§ Suitability; would it work?
§ Feasibility; can it be made to work?
§ Acceptability; will they work it?
Suitability
Suitability deals with the overall rationale of
the strategy. The key point to consider is whether the strategy would address
the key strategic issues underlined by the organisation's strategic position.
§ Does it make economic sense?
§ Would it be suitable in terms of environment and
capabilities?
Tools that can be used to evaluate suitability
include:
§ Ranking strategic options
Feasibility
Feasibility is concerned with whether the
resources required to implement the strategy are available, can be developed or
obtained. Resources include funding, people, time, and information.
or cash flow in the market
Tools that can be used to evaluate feasibility
include:
§ resource deployment analysis
Acceptability
Acceptability is concerned with the expectations
of the identified stakeholders (mainly shareholders, employees and customers)
with the expected performance outcomes, which can be return, risk and stakeholder/stakeholders
reactions.
§ Return deals with the benefits expected by the
stakeholders (financial and non-financial). For example, shareholders would
expect the increase of their wealth, employees would expect improvement in
their careers and customers would expect better value for money.
§ Risk deals with the probability and
consequences of failure of a strategy (financial and non-financial).
§ Stakeholder reactions deals with anticipating the likely
reaction of stakeholders. Shareholders could oppose the issuing of new shares,
employees and unions could oppose outsourcing for fear of losing their jobs,
customers could have concerns over a merger with regards to quality and
support.
Tools that can be used to evaluate acceptability
include:
The direction of action
Strategic options may span a number of options,
including:
§ Growth-based (inspired by Igor Ansoff's matrix –
market development, product development, market penetration, diversification)
§ Consolidation
§ Divestment
§ Harvesting
The exact option depends on the given resources
of the firm, in addition to the nature of products' performance in given
industries. A generally well-performing organisation may seek to harvest (,i.e.
let a product die a natural death in the market) a product, if via portfolio
analysis it was performing poorly comparative to others in the market.
Additionally, the exact means of implementing a
strategy needs to be considered. These points range from:
§ Strategic alliances
§ Capital Expenditures (CAPEX)
§ Internal development (,i.e. utilising one's own
strategic capability in a given course of action)
§ M&A (Mergers and Acquisitions)
The chosen option in this context is dependent
on the strategic capabilities of a firm. A company may opt for an acquisition
(actually buying and absorbing a smaller firm), if it meant speedy entry into a
market or lack of time in internal development. A strategic alliance (such as a
network, consortium or joint venture) can leverage on mutual skills between
companies. Some countries, such as India and China, specifically state that FDI
in their countries should be executed via a strategic alliance arrangement.
Strategic implementation and control
Once a strategy has been identified, it must
then be put into practice. The implementation of strategy is of great
importance. Conducting a corporate strategy is worthless as long as it is not
implemented correctly by each department of the organization This may involve
organising, resourcing and utilising change management procedures:
Organizing
Organizing relates to how an organizational
design of a company can fit or align with a chosen strategy. This concerns the
nature of reporting relationships, spans of control, and any strategic business
units (SBUs) that require to be formed. Typically, an SBU will be createdif it
exists in a market with unique conditions, or has/requires unique strategic
capabilities
Resourcing
Resourcing is literally the resources required
to put the strategy into practice, ranging from human resources, to capital
equipment, and to ICT-based implements.
Change management
In the process of implementing strategic plans,
an organization must be wary of forces that may legitimately seek to obstruct
such changes. It is important then that effectual change management practices
are instituted. These encompass:
§ The appointment of a change agent, as an
individual who would champion the changes and seek to reassure and allay any
fears arising.
§ Ascertaining the causes of the resistance to
organizational change (whether from employees, perceived loss of job security,
etc.)
§ Via change agency, slowly limiting the negative
effects that a change may uncover.
Testing the Strategic Alignment of the
organization
The optimal performance of organizations is
highly dependent on the level of Strategic Alignment. Until 2010 Change
management was used to implement a strategy. In 2010 the Rotterdam School of Management together with the Erasmus School
of Economicsconducted research on
the measurement possibilities of Strategic Alignment. This cooperation led to
the introduction of the S-ray Alignment Scan. The S-ray Alignment Scan is a
visual of the Corporate Strategy measured against the level of understanding
and implementation of the organozational departments. In 2011 Erasmus University of Rotterdam introduced S-ray Diagnostics, which is a
spin-off of this cooperation, solely focused on measuring strategic alignment
of organizations.
Whittington's perspectives
Apart from the Classical approach, Whittington
outlined three other schools with reference to strategic management thinking.
Processual
The Classical school was the prominent paradigm
in the 1960s. However, with the advent of stagflation in the 1970s, rising
trade union actions in some countries, wide-scale regional conflicts, rising
oil prices, etc. it became apparent that firms needed to balance numerous
stakeholder standpoints. A rational planning model could not be exercised, if
internal (and sometimes external) powers needed to be heeded, consulted and
even accommodated to.
Processual strategic management thus emphasises
politics, in terms of resolving/managing internal conflicts and reaching
compromises in strategic decision-making. Internal politics may be required for
the following purposes. Some SBUs/functional areas may require more resources,
or be competing for the same items from top management. An SBU/functional area
could be headed by a powerful manager, who by virtue of his or her influence
can impede general strategic actions.
In these cases, satisfying differing viewpoints
is key, in an effort to resolve conflict and provide a common path for the
organisation.
Evolutionary
In the 1980s, business environments became more
dynamic. It thus became key to "sink or swim", and adapt to the
needs,challenges and rigours of one's business landscape. In this sense,
evolutionary strategic management is essentially Darwinist, and follows a
classical Darwinian path. Organisations must develop or nurture traits that
will help them survive and prosper within their given markets. If they do not,
they will perish. A major facet of evolutionary strategic management is a
population ecology model, in which firms in an industry are seen akin to a
population of animals.
Evolutionary strategy stems from an inability to
track properly complex environments. If an industry has continuously changing
factors, rational planning (as per the Classical school) is futile. An
organisation holds no choice but to "adapt or die".
Systemic
In recent years, there has been greater emphasis
on consumer rights and the general social responsibility of companies.
Consumers are now expecting firms to act responsibly in their business
operations, and to take heed of numerous needs in this process. It can be said,
consequent from this eventuality, that firms operate in a connected fashion
with their communities and societies, and necessarily impact and "give and
take" from such bodies.
Systemic strategy views the organisation as an
open system, in that it takes inputs from society and imparts outputs into it.
It thus is an integral and interconnected facet of the wider society, and not
an entity distinct from it. A rational planning model is not seen as optimal,
as it detracts from attuning to the needs of the community and the wider
society a firm engages in.
Drivers
The end goal of Classical planning is a
deliberate need for profit maximisation. Deliberate in this instance means that
it is consciously designed by top management as such. Conversely, evolutionary
strategy is emergent, and not consciously planned or executed.
Processual strategy is typically seen as
deliberate and pluralistic, as a firm in the model cannot always seek to
maximise profits. Systemic strategy is emergent and pluralistic, due to the
continuous determining of social needs.
General approaches
In general terms, there are two main approaches,
which are opposite but complement each other in some ways, to strategic
management:
§ The Industrial Organizational
Approach
§ based on economic theory — deals with issues like competitive
rivalry, resource allocation, economies of scale
§ assumptions — rationality, self discipline
behaviour, profit maximization
§ The Sociological
Approach
§ deals primarily with human interactions
§ assumptions — bounded rationality, satisficing
behaviour, profit sub-optimality. An example of a company that currently
operates this way is Google. The stakeholder focused approach is an example
of this modern approach to strategy.
Strategic management techniques can be viewed as
bottom-up, top-down, or collaborative processes. In the bottom-up approach,
employees submit proposals to their managers who, in turn, funnel the best
ideas further up the organization. This is often accomplished by a capital
budgeting process. Proposals are assessed using financial criteria such as return on investment or cost-benefit analysis. Cost underestimation and benefit overestimation are major
sources of error. The proposals that are approved form the substance of a new
strategy, all of which is done without a grand strategic design or a strategic
architect. The top-down approach is the most common by far. In it, the CEO,
possibly with the assistance of a strategic planning team, decides on the
overall direction the company should take. Some organizations are starting to
experiment with collaborative strategic planning techniques that recognize the
emergent nature of strategic decisions.
Strategic decisions should focus on Outcome,
Time remaining, and current Value/priority. The outcome comprises both the
desired ending goal and the plan designed to reach that goal. Managing
strategically requires paying attention to the time remaining to reach a
particular level or goal and adjusting the pace and options accordingly.
Value/priority relates to the shifting, relative concept of value-add.
Strategic decisions should be based on the understanding that the value-add of
whatever you are managing is a constantly changing reference point. An
objective that begins with a high level of value-add may change due to
influence of internal and external factors. Strategic management by definition,
is managing with a heads-up approach to outcome, time and relative value, and
actively making course corrections as needed.
Simulation strategies are also used by managers
in an industry. The purpose of simulation gaming is to prepare managers make
well rounded decisions. There are two main focuses of the different simulation
games, generalized games and functional games. Generalized games are those that
are designed to provide participants with new forms of how to adapt to an
unfamiliar environment and make business decisions when in doubt. On the other
hand, functional games are designed to make participants more aware of being
able to deal with situations that bring about one or more problems that are
encountered in a corporate function within an industry.[4]
The strategy hierarchy
In most (large) corporations there are several
levels of management. Corporate strategy is the highest of these levels in the
sense that it is the broadest – applying to all parts of the firm – while also
incorporating the longest time horizon. It gives direction to corporate values,
corporate culture, corporate goals, and corporate missions. Under this broad
corporate strategy there are typically business-level competitive strategies
and functional unit strategies.
Corporate strategy refers to the overarching strategy of the
diversified firm. Such a corporate strategy answers the questions of
"which businesses should we be in?" and "how does being in these
businesses create synergy and/or add to the competitive advantage of the
corporation as a whole?" Business
strategy refers to the aggregated strategies of single business
firm or a strategic business unit (SBU) in a diversified corporation. According
to Michael Porter, a firm must formulate a business strategy that
incorporates either cost leadership, differentiation, or focus to achieve a sustainable competitive advantage and long-term
success. These three rules are also known as Porter's three generic Strategies;
this concept can be applied to any size or form of business. Porter considered
this concept as tradeoff strategy and argued that a person or company must only
choose only ONE strategy or risk having no strategy at all. Alternatively,
according to W. Chan Kim and Renée Mauborgne, an organization can achieve high
growth and profits by creating a Blue Ocean Strategy that breaks the previous value-cost trade
off by simultaneously pursuing both differentiation and low cost.
Functional strategies include marketing strategies, new product development strategies, human
resource strategies, financial strategies, legal strategies, supply-chain
strategies, and information technology management strategies. The emphasis is
on short and medium term plans and is limited to the domain of each
department’s functional responsibility. Each functional department attempts to
do its part in meeting overall corporate objectives, and hence to some extent
their strategies are derived from broader corporate strategies.
Many companies feel that a functional
organizational structure is not an efficient way to organize activities so they
have reengineeredaccording to processes or SBUs. A strategic business unit is a
semi-autonomous unit that is usually responsible for its own budgeting, new
product decisions, hiring decisions, and price setting. An SBU is treated as an
internal profit centre by corporate headquarters. A technology strategy, for example, although it is focused on
technology as a means of achieving an organization's overall objective(s), may
include dimensions that are beyond the scope of a single business unit,
engineering organization or IT department.
An additional level of strategy called operational strategy was
encouraged by Peter Drucker in his theory of management by
objectives (MBO). It is very
narrow in focus and deals with day-to-day operational activities such as
scheduling criteria. It must operate within a budget but is not at liberty to
adjust or create that budget. Operational level strategies are informed by
business level strategies which, in turn, are informed by corporate level
strategies.
Since the turn of the millennium, some firms
have reverted to a simpler strategic structure driven by advances in
information technology. It is felt that knowledge management systems should be used to share
information and create common goals. Strategic divisions are thought to hamper
this process. This notion of strategy has been captured under the rubric of dynamic strategy, popularized by
Carpenter and Sanders's textbook [1]. This work builds on that of Brown and
Eisenhart as well as Christensen and portrays firm strategy, both business and
corporate, as necessarily embracing ongoing strategic change, and the seamless
integration of strategy formulation and implementation. Such change and
implementation are usually built into the strategy through the staging and
pacing facets.
Historical development of strategic management
Birth of strategic management
The Strategic management discipline is
originated in the 1950s and 60s. Although there were numerous early
contributors to the literature, the most influential pioneers were Alfred D.
Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker. The discipline draws
from earlier thinking and texts on 'strategy' dating back thousands of years.
In 1985, Ellen-Earle
Chaffee summarized what
she thought were the main elements of strategic management theory by the 1970s:[9]
§ Strategic management involves adapting the
organization to its business environment.
§ Strategic management is fluid and complex.
Change creates novel combinations of circumstances requiring unstructured
non-repetitive responses.
§ Strategic management affects the entire
organization by providing direction.
§ Strategic management involves both strategy
formation (she called it content) and also strategy implementation (she called
it process).
§ Strategic management is partially planned and
partially unplanned.
§ Strategic management is done at several levels:
overall corporate strategy, and individual business strategies.
§ Strategic management involves both conceptual
and analytical thought processes.
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