ISL457U-STRATEGIC MANAGEMENT
Chapter 1: The Fundamentals of Strategic Management
Basic Concepts of Strategic Management
Strategic management is the art and science of formulating, implementing, and evaluating cross- functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance and accounting, production and operations, research and development (R&D), and information systems to achieve organizational success. A strategic plan is basically a company’s game plan. Profit margins among firms in most industries are so slim 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.
Strategy, Strategic Thinking, and Strategist
Strategy: The term strategy is derived from the Greek word for generalship or leading an army. The strategy includes “the determination of the basic long-term goals of a firm, the adoption of courses of action, and the allocation of resources necessary for carrying out these goals”. Strategies are the means through which firms achieve long-term objectives. It is also referred to as “The art and science of planning and marshalling resources for their most efficient and effective use”.
Strategic Thinking: Strategic thinking is the matching of opportunities with corporate resources to envision the future direction that leads to improved corporate performance and enhanced competitive advantage. Strategic thinking is described in two ways: vertical (rational) thinking and lateral (intuitive) thinking. Strategy demands from the strategist(s) both creativity – lateral thinking, often applied to divergent problems, and rationality – vertical thinking, often applied to convergent problems. Strategic leadership is “the ability to anticipate, envision, think strategically, and empower the team to initiate changes for adapting to the environment”.
Strategist: A strategist is the person who sets targets, formulates, and guides and empowers the execution of strategies for reaching these goals. The strategists in business and other organizations are the strategic leaders who monitor the environment and adapt their organizations according to future developments. For most companies, the strategists are top executives as we name the C-suite, executive-level managers within a company. All strategists have a vision and mission. The vision of a firm declares where it wants to be in the future. Mission is a statement about the reason for the existence of a company and why it differs from its competitors.
Resources, Capabilities and Core Competencies
Resources are the assets that an organization can benefit as an input into the production process of products and
services. Tangible resources are more visible and physical such as land, labor, or technology; intangible resources such as intellectual property, know-how, and copyright have no physical characteristics.
A capability is a capacity for a set of resources to perform a task or an activity in an integrative manner. Core competencies are processes that a company performs more efficiently and effectively than its competitors in a market.
Competitive Advantage
Competitive advantage refers to factors that allow a company to produce goods or services better or more cost- efficient than the competitors. Competitive advantage is obtained when a company reaches a performance level comparatively ahead of its competitors in the same market. The higher its profitability relative to rivals, the greater its competitive advantage will be. Successful and leading companies in the markets are those which sustain the competitive advantage for extended periods. A company has a sustainable competitive advantage when its strategies enable it to maintain above-average profitability for an extended period of time.
The Evolution of Strategic Management
The term strategy has been used since ancient times and is part and parcel of the conceptual vocabulary of business in modern times. One of the most historic and much used reference is The Art of War by the Chinese general and philosopher Sun Tzu. For Sun Tzu, strategy is key to the long-term survival and prosperity of a kingdom. Today, Sun Tzu’s strategies are discussed in the world of business, because his strategic principles are ideally suited to competitive business situations. The concept of strategy first entered the field of economics in the 1940s. In the following decades, the business world started using the idea of strategic thinking. The concept of strategic management emerged from the complexity and challenging market environments at the beginning of the 1970s. At that time, the oil crisis and resulting shock over oil prices, as well as the rising competition of Japan in global markets forced companies to rethink their traditional approach for management and planning. Then, the concept of strategy began to appear more frequently in both management literature and business practice. The 1980s witnessed the strengthening of the tendencies already seen in the 1970s. Michael Porter is perhaps the best-known proponent of the market-based view. He proposed a Five Forces Model that explains the underlying factors picturing competitive intensity in a given industry: rivalry among existing competitors, threats of new entrants, bargaining power of buyers and bargaining power of suppliers, and availability of substitute products. Peter Drucker, a leading management expert (1909-2005) argued that knowledge is the key resource of the modern firm. In so doing, he paved the way for what is known as the “core competency approach”. Many of the concepts relevant to strategic planning and strategic management have been developed by business corporations such as
General Electric and the Boston Consulting Group. Today, the strategic management approach to obtain competitiveness is widely used in the business world.
The Competitive Strategy
Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. The combination of strategies pursued by managers at different levels is the business model of a company. A business model is a conception of how the set of strategies will be integrated, enabling the company to gain a competitive advantage and achieve superior profitability, and profit growth.
Competitive advantage requires effective choices about how to be different and to decide what sets the business apart from others in the marketplace. A competitive strategy is designed with a focus on core competences, synergy building, and value delivery. Core competences are the processes that the company does better and more efficiently with lower costs than competitors. Synergy is obtained when inner and outer resources of a company are integrated in the most efficient way to produce a joint effect greater than the sum of the parts acting alone. Value for customers is the combination of costs and benefits. Businesses must make the best choice about value delivery, in other words, decide on the proper balance between costs and benefits. This should be delivered to customers more creatively than the rivals based on the core competences and the synergy created. Strategic flexibility pertains to a set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment.
The Strategic Management Model
Strategic management translates strategic intent into strategic action. All such actions should be organized around the realization of that intent. Intent defines the direction in which action should be taking the organization. There are three basic phases in the model: strategy formulation, strategy implementation, and strategic evaluation.
Strategy Formulation
The resources that firms will use to carry out their activities are limited. For this reason, scarce resources should be directed to the most beneficial alternatives and areas in the firm. Decisions taken during the strategy formulation phase bind the firms to certain products, markets, resources, and technologies over a long period of time, which indicates the critical importance of the process. The strategy formulation phase consists of activities related to developing vision and mission statements, conducting external and internal analyses, developing long-term goals, and generating, evaluating and selecting strategies.
Strategy implementation
Strategy implementation is the stage of taking action in the strategic management framework. After selecting the appropriate strategies that will help a firm accomplish its long-term goals, employees and managers need to be mobilized to put the strategies into action. During the strategy implementation phase, tasks such as establishing the annual targets, determining the policies that will guide the activities, motivating the employees in line with the targets, and allocating the necessary resources to fulfil the activities are carried out. The challenge of the strategy implementation phase is to motivate all staff to work ambitiously in line with their strategies.
Strategic Evaluation
The last step in the strategic management process is strategy evaluation. The strategy evaluation is the process of determining whether the strategy chosen serves long- term objectives. Timing of the evaluation process will differ from business to business, which can be time consuming and expensive. For this reason, firms usually evaluate their strategies in the sixth month of the year at the earliest and even at the end of the year. If there is a positive or negative deviation from the annual objectives, reasons contributing to the deviations are determined and corrective measures are taken.
The Role and the Significance of Strategic Management
The strategic management approach seeks the appropriate fit between the environmental forces and the organizational operations. The outcomes of the strategic management process are thorough self-evaluation as well as strategies to secure a competitive position in the market in any sector. The measurable and solid display of strategic intention is a strategic plan which is developed by top management teams. Strategic plans provide key guidelines for managers as well as internal and external stakeholders for shaping relatively a long-term operational future based on the mission, vision, objectives, and goals sequentially. Strategies provide organizations with advantages such as: obtaining a guide for new opportunities both inside and outside the firm; making high quality and focused decisions; better assessing threats based on the strategic decisions; ensuring that the overall resource allocation pattern is efficient; and best use of resources by staying focused.
The basic outcome of a strategic management process is a set of strategies at various levels. A strategy, revisited, is “the determination of the long-term goals, the adoption of courses of action, and the allocation of resources necessary for carrying out these goals effectively”. This tells us that well-formulated and executed strategies are key to win the race of competition in markets of any sector. Strategies provide organizations with advantages such as: obtaining a guide for new opportunities both inside and outside the firm, making high quality and
focused decisions, better assessing threats based on the strategies, and ensuring that the overall resource allocation pattern is efficient.
Effectiveness in Strategic Management Practice
The success of the strategic management process in any type of organization in any sector depends on several factors. Some are: Skills and capacity of top management teams, managerial style, the resilience ability of organizational structure, flow of communication channels, use of digitization and other essential advanced technology, commitment of top management and all others responsible for the entire process, effectiveness of information and control systems. Reasons for failure in this process should be avoided by all but especially by top managers. These conditions may be summarized as: reluctant top managers who tend to not favor strategic management approach, misevaluation of environmental elements and unrealistic goals and objectives, failure to follow up with the environmental changes and stay behind the competitors, insufficient resources, lack of motivation and empowerment both for managerial and nonmanagerial groups, poor coordination across the organization; and unexpected substantial positive or negative environmental developments such as economic, political, or natural crises.