Strategic management is the formulation and implementation of the major goals and initiatives taken by a company’s top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes.
We can define Strategic management as the process of formulation and implementation of the chief goals and initiatives taken by a company’s top management on behalf of the owners, on the basis of the resources and the internal and external environments in which the organization competes.
Strategic management involves – Strategic Planning and Strategic Thinking
Strategic management involves two major processes – Formulation and Implementation of strategy. In practice the two processes are iterative and each provides input for the other. Strategic management aims at providing overall direction to the enterprise and involves specifying the organization’s objectives, thereby developing policies and plans designed to achieve these objectives, and then allocating resources to implement the plans. Strategic management is not static in nature; this model often includes a feedback loop to monitor execution and inform the next round of planning.
Strategic planning process is a formalized procedure (analytical nature) to produce the data and analyses used as inputs for strategic thinking, which then blends the data resulting in the strategy. Strategic planning is a control mechanism that is used to implement the strategy once it is determined. We can therefore say that, strategic planning happens around the strategic thinking or strategy making activity.
Strategy Formulation
The first phase in the process of strategic management is strategy formulation.
Steps involved in the process of strategy formulation
- Step 1 : Involves analyzing the environment in which the organization operates
- Step 2 : Making a series of strategic decisions about how the organization will compete
- Step 3 : Ends with a series of goals or objectives and measures for the organization to pursue
Step 1: Analyzing the environmental
Includes the remote external environment, including the political, economic, social, technological, legal and environmental landscape (i.e., PESTLE)
Includes the industry environment, such as the competitive behavior of rival organizations, the bargaining power of buyers/customers and suppliers, threats from new entrants to the industry, and the ability of buyers to substitute products (i.e., Porter’s 5 forces)
Includes the internal environment, involving the strengths and weaknesses of the organization’s resources (i.e., its people, processes and IT systems).
Step 2: Strategic Decisions
The strategic decisions are based on insight from the environmental assessment and are responses to strategic questions with reference to organizational functioning and market environment
What is the organization’s business?
Who is the target customer for the organization’s products and services?
Where are the customers and how do they buy?
What is considered “value” to the customer?
What is the scope of the business?
What differentiates the company from its rivals for customers and other stakeholders?
Which skills and capabilities to focus on within the firm?
Step 3: Strategic Goals and Objectives
The answers to these and many other strategic questions result in the organization’s strategy and a series of specific short-term and long-term goals or objectives and related measures.
Strategy Implementation
The second phase of strategic management is strategy implementation, which primarily revolves around decisions of aligning the organizational resources properly and mobilizing towards the objectives. Strategic implementation is concerned with the structuring of the organization’s resources (in terms of product or service or location) leadership arrangements, communication, incentives, and monitoring mechanisms to track progress towards objectives, among others.
Strategy Frameworks
Since 1960 the progress of strategy has been charted by a variety of frameworks and concepts introduced by management consultants and academicians with an increased focus on cost, competition and customers. As industries and organizations got disaggregated into business units, activities, processes, and individuals in the search for sources of competitive advantage, the three C’s (cost, competition and customer) became much more robust with practical analysis at granular levels of detail.
Common Frameworks used for Strategic Management
SWOT Analysis
In 1960’s, the capstone business policy course at the Harvard Business School introduced the concept of matching the distinctive competence of a company that is its internal strengths and weaknesses with its environment that is the external opportunities and threats in the context of its objectives. This framework became popular by SWOT analysis and became a major step in bringing explicitly competitive thinking to bear on questions of strategy.
Experience Curve
In 1966, Boston Consulting Group developed the experience curve. Under this framework there is a hypothesis which states that the total per unit costs declines systematically by as much as 15–25% every time the cumulative production doubles (i.e., experience). There can be various factors causing the decline in cost such as learning curve, substitution of labor for capital, and technological sophistication.
Author Walter Kiechel gave several insights on this,
Company can always improve its cost structure
Competitors have varying cost positions based on their experience
Firms could achieve lower costs through higher market share, attaining a competitive advantage
Increased focus on empirical analysis of costs and processes, a concept which author Kiechel refers to as “Greater Taylorism”.
The experience curve is the most important concept in launching the strategy revolution. With the experience curve, the strategy revolution began to imply an acute awareness of competition into the corporate consciousness. It provides a basis for the retail sale of business ideas, which helps drive the management consulting industry.
Corporate Strategy and Portfolio Theory
In 1970, the Boston Consulting Group developed the concept of the corporation as a portfolio of business units (each plotted graphically) that was based on its market share and the industry growth rate summarized in the growth–share matrix. Around 1979, a study predicted that 45% of the Fortune 500 companies used some variation of the matrix in the process of their strategic planning. This strategic framework helped the companies to decide where to invest their resources (i.e., in their high market share, high growth businesses) and which businesses to divest (i.e., low market share, low growth businesses.)
Porter mentioned the four concepts of corporate strategy,
- Portfolio Theory: Primarily this strategy was based on diversification through acquisition. In this case the corporation shifts resources among the units and monitors the performance of each business unit and its leaders, where each unit generally runs autonomously, with limited interference from the corporate center provided goals.
- Restructuring: Corporate office initially acquires and then actively intervenes in a business where it finds some potential, regularly by replacing management and implementing a new business strategy.
- Transferring skills: These are one of the most important managerial skills and organizational capability to essentially spread to multiple businesses. These transferring skills are necessary for competitive advantage.
- Sharing activities: Sharing activities indicate the ability of the combined corporation to leverage centralized functions (like sales, finance, etc) thereby reducing costs.
Competitive Advantage
Porter defined two types of competitive advantage in 1980 which an organization can achieve relative to its rivals – Lower cost and Differentiation. The competitive advantage is derived from attribute which allow an organization to outperform its competition (in accordance to superior market position, skills, or resources). According to Porter, strategic management should be concerned with building and sustaining competitive advantage.
Industry Structure and Profitability
In 1980, Porter developed a framework to analyze the profitability of industries and its allotment among the participants. Porter developed the five forces analysis in which he identified the forces that shape the industry structure or environment. This strategic framework takes into account the bargaining power of buyers and suppliers, the threat of new entrants, availability of substitute products, and competitive rivalry of firms in the industry. These forces primarily affect the organization’s ability to raise its prices as well as the costs of inputs for its processes.
A company can maximize its profitability by competing in industries with favorable structure. Competitors can initiate to grow the overall profitability of the industry, or to take profit away from other parts of the industry structure.
Value Chain
In 1985, Porter defined the value chain as the chain of activities (processes or collections of processes) which an organization performs to deliver a valuable product or service for the market that includes functions such as inbound and outbound logistics, operations management, sales and marketing, service supported by systems and technological infrastructure. A firm can achieve a competitive advantage by aligning various activities in its value chain in parlance with organization’s strategy in a coherent manner. According to Porter strategy is an internally consistent configuration of activities that differentiates a firm from its rivals. Robust competitive position can be achieved by cumulating the activities so that they fit coherently together.
Core Competence
In 1990, Gary Hamel and C. K. Prahalad described the idea of core competency which states that each organization has some capability in which it excels and that the business should focus on opportunities in that area, by whichever way possible. Here, core competency is hard to duplicate, since it involves the skills and coordination of people across a variety of functional areas or processes used to deliver value to customers. With the help of outsourcing, companies expanded the concept of the value chain, with some elements within the entity and others without. Core competency is a branch of strategy called the resource-based view of the firm, which assumes that in case the activities are strategic in nature as indicated by the value chain, then the organization’s capabilities and ability to learn or adapt are also strategic in nature.
