Module 1 -A

The Strategic Management Process

LEARNING OBJECTIVES:

In this introductory lesson, the learning objectives are to understand:

• The elements or stages of the strategic management process.

• The scope of the external and internal environments of business.
• The meaning and importance of strategic direction, strategy formulation, and strategy
implementation.
• The processes of strategic control and restructuring.

CHAPTER TOPICS:

This module introduces the strategic management process and its role in business organizations.
The lessons introduce the strategic management process including external environmental analysis,
organizational analysis, the establishment of strategic direction, strategy formulation, strategy
implementation, strategic control, and restructuring.

LECTURE OUTLINE:

I. Opening Vignette—IBM

IBM provides computer hardware, software, and services in more than 170 countries. Several years
ago, the company saw fundamental changes coming. Developing economies were growing rapidly,
a new computing architecture was providing unprecedented computing power and an ability to
transform oceans of data into usable information, and companies were seeking to integrate their
advanced information technologies with other business operations to improve efficiency and facilitate
innovation and growth. In response to these trends, IBM made several bold moves. First, the
company remixed its businesses to take advantage of the most attractive business segments. The
company exited commodity businesses such as PCs and disk drives as well as acquiring over 100
companies in less than ten years, including PricewaterhouseCoopers Consulting. Internally, the
company has formed new units in areas such as analytics, which employs four thousand IBM
consultants. Now the company’s historically large hardware operations provide less than 10% of its
revenues, with approximately 40% each coming from software and services (the rest is from
financing operations). Also, about one-third of IBM’s revenues now come from non-U.S. operations.
Growth is especially strong in Brazil, Russia, India, and China. Moving forward, IBM’s CEO Samuel
J. Palmisano is positioning the company to be a major player in infusing intelligence into the way the
world actually works.

II. What Is Strategic Management?

A. Strategic management is the process through which organizations analyze and learn from
their internal and external environments, establish strategic direction, create strategies that are
intended to help achieve established goals, and execute those strategies, all in an effort to satisfy
key organizational constituencies, which are called stakeholders.

B. External environmental analysis involves evaluation of the broad and task environments to
determine trends, threats, and opportunities and to provide a foundation for strategic direction.
1. The broad environment consists of domestic and global environmental forces such as
sociocultural, technological, political, and economic trends. The broad environment forms the context
within which the firm and its task environment exist.

2. The task environment consists of external stakeholders—groups or individuals outside the

organization that is significantly influenced by or have a major impact on the organization.

3. All of the external stakeholders should be analyzed at both the domestic and international
levels.

C. Internal stakeholders include managers, employees, and the owners and their representatives
(e.g., board of directors).

1. A fully developed internal analysis includes an evaluation of internal stakeholders and the
organization’s resources and capabilities to determine strengths, weaknesses, and opportunities for
competitive advantage and to identify organizational vulnerabilities that should be corrected.

D. A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is a useful technique for

organizing an assessment of internal and external environmental sources of influence.

1. Strengths are firm resources and capabilities that can lead to a competitive advantage.

2. Weaknesses are resources and capabilities that the firm does not possess but that are
necessary, resulting in a competitive disadvantage.

3. Opportunities are conditions in the broad and task environments that allow a firm to take
advantage of organizational strengths, overcome organizational weaknesses, and/or neutralize
environmental threats.

4. Threats are conditions in the broad and task environments that may stand in the way of
organizational competitiveness or the achievement of stakeholder satisfaction.

E. Strategic direction pertains to the longer-term goals and objectives and defines the purposes for
which an organization exists and operates.

1. Strategic leaders have a large impact on the strategies and performance of the firm. One of
the most important responsibilities of a strategic leader is to establish direction. Strategic direction
pertains to the enduring goals and objectives of the organization. It encompasses a definition of the
businesses in which a firm operates, its vision for the future, and its purpose.

2. As a practical matter, there is no way to discuss purpose without also including a discussion
of the ethics of the organization. Ethics are the moral standards by which people judge behavior.
Business ethics, then, pertain to the moral obligations of businesses to individuals, groups (such as
stakeholders), and society as a whole. More often than not, an organization’s ethics are discussed in
terms of its values. Organizational values define what matters when making decisions and what is
rewarded and reinforced. For instance, organizations may promote values such as honesty, service,
hard work, quality, or responsible treatment of stakeholders.

3. Strategic direction may be contained, in part, in a mission statement. Unlike shorter-term

goals and strategies, the mission is an enduring part of planning processes within the organization.
A well-established strategic direction provides guidance to the managers and employees who are
largely responsible for carrying it out. It also can provide external stakeholders with a greater
understanding of the organization and what it is seeking to accomplish.

F. Strategy formulation is divided into three types: corporate, business, and functional.

1. A strategy is an organizational plan of action that is intended to move an organization toward

the achievement of its shorter-term goals and, ultimately, toward the achievement of its fundamental
purposes.

2. Business strategy formulation pertains to domain direction and navigation or how businesses
compete in the areas they have selected.

3. Corporate strategy formulation refers primarily to domain definition or the selection of

business areas in which the organization will compete.

4. Functional strategy formulation contains the details of how the functional areas such as
marketing, operations, finance, and research should work together to achieve the business-level
strategy.

5. Corporate strategy decisions are made by the CEO and/or board of directors. If an
organization is involved in only one area of business, then business strategy decisions tend to be
made by the same people.

6. In diversified organizations, business strategy decisions are made by division heads or

business unit managers.

7. Functional decisions are made by functional managers, who represent organizational areas
such as operations, finance, personnel, accounting, research and development, or information
systems.

G. Strategy implementation involves creating a pattern of decisions and actions that are intended
to carry out a plan.

1. Strategy implementation involves creating the functional strategies, systems, structures, and
processes needed by the organization in achieving strategic ends. Functional strategies outline the
specific actions that each function must undertake to convert business- and corporate-level
strategies into actions.

2. Strategic control refers to the processes that lead to adjustments in strategic direction,
strategies, or the implementation plan when necessary.

H. As noted earlier, the strategic management process is usually not as sequential or linear as
implied by the previous discussion. The activities are usually performed simultaneously, with
constant adjustments to assumptions, direction, strategies, and processes as new information is
learned and new assessments are made.

I. Strategic restructuring typically involves a renewed emphasis on the things an organization

does well, combined with a variety of tactics to revitalize the organization and strengthen its
competitive position.

Module 1 - B
The Strategic Management Process

LEARNING OBJECTIVES:

In this introductory lesson, the learning objectives are to understand:

• The different perspectives on strategy development.

• The importance of innovation and entrepreneurship.
• The elements of strategic thinking.

CHAPTER TOPICS:

This module introduces the alternative perspectives on the process of strategy development,
including situation analysis, environmental determinism, deliberate versus emergent strategies, the
resource-based view of the firm, stakeholder theory, and global strategic management. Strategic
thinking, as it relates to corporate entrepreneurship, is also introduced.

LECTURE OUTLINE:

III. Alternative Perspectives on Strategy Development

A. The traditional process for developing strategy consists of analyzing the internal and external
environments of the organization to arrive at organizational strengths, weaknesses, opportunities,
and threats (SWOT). The results from this “situation analysis,” as this process is sometimes called,
are the basis for developing missions, goals, and strategies.

B. Environmental determinism argues that good management is associated with determining

which strategy will best fit environmental, technical, and human forces at a particular point in time,
and then working to carry it out. From this perspective, the most successful organization will be the
one that best adapts to existing forces.

C. The principle of enactment, on the other hand, assumes that organizations do not have to
submit to existing forces in the environment—they can, in part, create their environments through
strategic alliances with stakeholders, advertising, political lobbying, and a variety of other activities.

D. Deliberate strategy implies that managers plan to pursue an intended strategic course.

E. In some cases, the strategy simply emerges from a stream of decisions. An emergent strategy
is one that was not planned or intended. According to this perspective, managers learn what will
work through a process of trial and error.

F. The resource-based view of the firm takes the position that an organization is a bundle of
resources.

1. Financial resources, including all of the monetary resources from which a firm can draw.

2. Physical resources, such as plant, equipment, location, and access to raw materials.
3. Human resources, which pertains to the skills, background, and training of the individuals
within the firm.

4. Knowledge and learning resources, which help the firm to innovate and remain competitive.

5. General organizational resources, which includes a variety of factors that are peculiar to
specific organizations.

G. The stakeholder view of strategic management considers the organization from the
perspective of the internal and external constituencies that have a strong interest in the organization.

1. One of the first activities associated with any well-done stakeholder analysis is the
establishment of priorities given to each stakeholder.

2. Stakeholder analysis involves identifying and prioritizing key stakeholders, assessing their
needs, collecting ideas from them, and integrating this knowledge into strategic management
processes such as the establishment of strategic direction and the formulation and implementation
of strategies.

3. Stakeholder management includes communicating, negotiating, contracting, and managing

relationships with stakeholders, and motivating them to behave in ways that are beneficial to the
organization and its other stakeholders.

4. A firm that manages for stakeholders allocates more resources to satisfying the needs and
demands of its legitimate stakeholders than what is necessary to simply retain their willful
participation in the productive activities of the firm. Firms that exhibit this sort of behavior develop
trusting relationships with stakeholders based on principles of distributional, procedural, and
interactional justice.

5. Distributional justice means that firms give more value back to the stakeholders that helped to
create it than what they really need to provide simply to retain their involvement in transactions with
the firm. Procedural justice refers to a stakeholder’s perception of how fair a decision-making
process is, and interactional justice pertains to fairness in the way that stakeholders are treated in
transactions with the firm.

H. Many forces are leading firms into an international arena. Yet, global strategic management
offers many new management challenges. Although the values, resources, and business practices
of countries vary widely, many of the management techniques are slowly converging.

I. The strategic management process model upon which this book is based relies, to some
degree, on each of the theories and ideas that have been described in these sections.

IV. Strategic Thinking and Entrepreneurship

A. Entrepreneurship is the process through which individuals, groups, or firms pursue

opportunities to create new value. It involves recognizing or creating an opportunity, assembling the
resources necessary to pursue it, and then managing those resources to bring the new venture into
being.
B. Entrepreneurship can occur both within firms and independently of them. This type of
entrepreneurship is sometimes called strategic entrepreneurship or intrapreneurship. It is how
innovation is used to create new business for the firm.

C. Strategic thinking is the term used to describe the creative aspects of strategic management.
A rigid strategic planning process can drive out strategic thinking. Strategic thinking has several
characteristics:

1. Focus on strategic intent or the overall vision of the organization.

2. Long-term orientation.

3. Consideration of past and present.

4. Systems perspective.

5. Ability to seize opportunities.

6. Scientific approach, which involves generating ideas through a creative process, then
testing them (like hypotheses) to see if they will work.