1 The Nature of Strategic Management

Learning objectives
After studying this chapter, student should be able to do the following:

 Describe the strategic management process.

 Discuss the three stages of strategy formulation, implementation, and evaluation
activities.
 Explain the need for integrating analysis and intuition in strategic management.
 Define and give examples of key terms in strategic management.
 Illustrate the comprehensive strategic-management model.
 Describe the benefits of engaging in strategic management.
 Explain why some firms do no strategic planning.
 Describe the pitfalls in actually doing strategic planning.

Key words
Annual Objectives, Competitive Advantage, Empowerment, External Opportunities,
External Threats, Internal Strengths, Internal Weaknesses, Intuition, Long-Range
Planning, Long-Term Objectives, Mission Statements, Policies, Retreats, Strategic
Management, Strategic-Management Model, Strategic-Management Process, Strategic
Planning, Strategies, Strategists, Strategy Evaluation, Strategy Formulation, Strategy
Implementation, Sustained Competitive Advantage, Vision Statement.

Study time requirements

It is a complex text, the studying takes approximately 2–3 hours of your time.

Contents
1.1 What Is Strategic Management?
1.2 Stages of Strategic Management
1.3 Integrating Intuition and Analysis
1.4 Key Terms in Strategic Management
1.5 The Strategic-Management Model
1.6 Benefits of Engaging in Strategic Management
1.7 Why Some Firms Do No Strategic Planning
1.8 Pitfalls in Strategic Planning
1.9 Guidelines for Effective Strategic Management
Summary
1.1 What Is Strategic Management?
Strategic Management can be defined as the art and science of formulating,
implementing, and evaluating cross-functional decisions that enable an organization to
achieve its objectives.

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.

1.1.1 Strategic management vs. Strategic planning

The term strategic management is sometimes used as synonym to the term Strategic
planning. Strategic management is used more in academia, whereas Strategic planning
is often used in the business world.

Strategic management is used to refer to strategy formulation, implementation and

evaluation. Strategic planning refers only to strategy formulation.

The purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; long-range planning, in contrast, tries to optimize for
tomorrow the trends of today.

1.1.2 Why the need of strategic management in recent economy?

There are many reason why strategic management is being used in corporations:

 Low interest rates,

 big stock market declines,
 bankruptcies,
 unemployment,
 liquidations,
 unavailability of credit,
 falling consumer demand,
 intense price competition.

1.2 Stages of Strategic Management

The strategic-management process consists of three stages: strategy formulation,

strategy implementation, and strategy evaluation.

Fig. 1 The strategic-management process

Source: Own processing
1.2.1 Strategy formulation stage

Strategy formulation includes developing a vision and mission, identifying an

organization’s external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating alternative strategies, and
choosing particular strategies to pursue.

Strategy-formulation issues include deciding what new businesses to enter, what

businesses to abandon, how to allocate resources, whether to expand operations or
diversify, whether to enter international markets, whether to merge or form a joint
venture, and how to avoid a hostile takeover.

Because no organization has unlimited resources, strategists must decide which

alternative strategies will benefit the firm most. Strategies determine long-term
competitive advantages.

1.2.2 Strategy implementation stage

Strategy implementation requires a firm to establish annual objectives, devise policies,

motivate employees, and allocate resources so that formulated strategies can be
executed. Strategy implementation includes developing a strategy-supportive culture,
creating an effective organizational structure, redirecting marketing efforts, preparing
budgets, developing and utilizing information systems, and linking employee
compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management.

Implementing strategy means mobilizing employees and managers to put formulated

strategies into action. Successful strategy implementation hinges upon managers’ ability
to motivate employees, which is more an art than a science. Strategies formulated but
not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation.

Strategy-implementation activities affect all employees and managers in an
organization.

1.2.3 Strategy evaluation stage

Strategy evaluation is the final stage in strategic management. Managers desperately

need to know when particular strategies are not working well; strategy evaluation is the
primary means for obtaining this information. All strategies are subject to future
modification because external and internal factors are constantly changing.

Three fundamental strategy-evaluation activities are (1) reviewing external and

internal factors that are the bases for current strategies, (2) measuring performance,
and (3) taking corrective actions. Strategy evaluation is needed because success today
is no guarantee of success tomorrow! Success always creates new and different
problems; complacent organizations experience demise.
Strategy formulation, implementation, and evaluation activities occur at three
hierarchical levels in a large organization: corporate, divisional or strategic business
unit, and functional. By fostering communication and interaction among managers and
employees across hierarchical levels, strategic management helps a firm function as a
competitive team. Most small businesses and some large businesses do not have
divisions or strategic business units; they have only the corporate and functional levels.
Nevertheless, managers and employees at these two levels should be actively involved
in strategic-management activities.

1.3 Integrating Intuition and Analysis

The strategic management process can be described as an objective, logical, systematic

approach for making major decisions in an organization. It attempts to organize
qualitative and quantitative information in a way that allows effective decisions to be
made under conditions of uncertainty.

Based on past experiences, judgment, and feelings, most people recognize that intuition
is essential to making good strategic decisions. Intuition is particularly useful for
making decisions in situations of great uncertainty or little precedent.

Some managers and owners of businesses profess to have extraordinary abilities for
using intuition alone in devising brilliant strategies. “I believe in intuition and
inspiration. At times I feel certain that I am right while not knowing the reason.
Imagination is more important than knowledge, because knowledge is limited, whereas
imagination embraces the entire world.”

Most organizations can benefit from strategic management, which is based upon
integrating intuition and analysis in decision making. Choosing an intuitive or analytic
approach to decision making is not an either–or proposition. Managers at all levels in an
organization inject their intuition and judgment into strategic-management analyses.
Analytical thinking and intuitive thinking complement each other.

1.3.1 Adapting to Change

The strategic-management process is based on the belief that organizations should

continually monitor internal and external events and trends so that timely changes can
be made as needed.

In today’s business environment, more than in any preceding era, the only constant is
change. Successful organizations effectively manage change, continuously adapting
their bureaucracies, strategies, systems, products, and cultures to survive the shocks and
prosper from the forces that decimate the competition.

E-commerce and globalization are external changes that are transforming business and
society today. We have become a borderless world with global citizens, global
competitors, global customers, global suppliers, and global distributors!

The need to adapt to change leads organizations to key strategic-management questions,

such as “What kind of business should we become?”; “Are we in the right field(s)?”;
“Should we reshape our business?”; “What new competitors are entering our industry?”;
“What strategies should we pursue?”; “How are our customers changing?”; “Are new
technologies being developed that could put us out of business?”.

1.4 Key Terms in Strategic Management

Before we further discuss strategic management, we should define key terms which are
being used in the text.

1.4.1 Competitive Advantage

Strategic management is all about gaining and maintaining competitive advantage. This
term can be defined as “anything that a firm does especially well compared to rival
firms.” When a firm can do something that rival firms cannot do, or owns something
that rival firms desire, that can represent a competitive advantage.

Normally, a firm can sustain a competitive advantage for only a certain period due to
rival firms imitating and undermining that advantage. A firm must strive to achieve
sustained competitive advantage by:

 continually adapting to changes in external trends and events and internal

capabilities, competencies, and resources; and by
 effectively formulating, implementing, and evaluating strategies that capitalize
upon those factors.

1.4.2 Strategists

Strategists are the individuals who are most responsible for the success or failure of an
organization. Strategists have various job titles, such as chief executive officer,
president, owner, chair of the board, executive director, chancellor, dean, or
entrepreneur.

Strategists help an organization gather, analyze, and organize information. They track
industry and competitive trends, develop forecasting models and scenario analyses,
evaluate corporate and divisional performance, spot emerging market opportunities,
identify business threats, and develop creative action plans.

Any manager who has responsibility for a unit or division, responsibility for profit and
loss outcomes, or direct authority over a major piece of the business is a strategic
manager (strategist).

1.4.3 Vision and Mission Statements

Many organizations today develop a vision statement that answers the question “What
do we want to become?” Developing a vision statement is often considered the first step
in strategic planning, preceding even development of a mission statement. Many vision
statements are a single sentence.

Mission statements are “enduring statements of purpose that distinguish one business
from other similar firms. A mission statement identifies the scope of a firm’s operations
in product and market terms.” It addresses the basic question that faces all strategists:
“What is our business?” A clear mission statement describes the values and priorities of
an organization. Developing a mission statement compels strategists to think about the
nature and scope of present operations and to assess the potential attractiveness of future
markets and activities. A mission statement broadly charts the future direction of an
organization.

1.4.4 External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural,

demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization in
the future. Opportunities and threats are largely beyond the control of a single
organization—thus the word external.

A basic principle of strategic management is that firms need to formulate strategies to

take advantage of external opportunities and to avoid or reduce the impact of external
threats. For this reason, identifying, monitoring, and evaluating external opportunities
and threats are essential for success. This process of conducting research and gathering
and assimilating external information is sometimes called environmental scanning or
industry analysis.

1.4.5 Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities

that are performed especially well or poorly. They arise in the management, marketing,
finance/accounting, production/operations, research and development, and management
information systems activities of a business.

Identifying and evaluating organizational strengths and weaknesses in the functional

areas of a business is an essential strategic-management activity. Organizations strive to
pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.

Internal factors can be determined in a number of ways, including computing ratios,

measuring performance, and comparing to past periods and industry averages.

Both internal and external factors should be stated as specifically as possible, using
numbers, percentages, finances, and ratios, as well as comparisons over time to rival
firms. Specificity is important because strategies will be formulated and resources
allocated based on this information.

1.4.6 Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in

pursuing its basic mission. Long-term means more than one year.

Objectives are essential for organizational success because they state direction; aid in
evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for
effective planning, organizing, motivating, and controlling activities. Objectives should
be challenging, measurable, consistent, reasonable, and clear.
In a multidimensional firm, objectives should be established for the overall company
and for each division.

1.4.7 Strategies

Strategies are the means by which long-term objectives will be achieved. Business
strategies may include geographic expansion, diversification, acquisition, product
development, market penetration, retrenchment, divestiture, liquidation, and joint
ventures.

Strategies are potential actions that require top management decisions and large
amounts of the firm’s resources. In addition, strategies affect an organization’s long-
term prosperity, typically for at least five years, and thus are future-oriented.

Strategies have multifunctional or multidivisional consequences and require

consideration of both the external and internal factors facing the firm.

1.4.8 Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach
long-term objectives. Like long-term objectives, annual objectives should be
measurable, quantitative, challenging, realistic, consistent, and prioritized. They should
be established at the corporate, divisional, and functional levels in a large organization.

Annual objectives are especially important in strategy implementation, whereas long-

term objectives are particularly important in strategy formulation. Annual objectives
represent the basis for allocating resources.

1.4.9 Policies

Policies are the means by which annual objectives will be achieved. Policies include
guidelines, rules, and procedures established to support efforts to achieve stated
objectives.

Policies can be established at the corporate level and apply to an entire organization at
the divisional level and apply to a single division, or at the functional level and apply to
particular operational activities or departments. Policies, like annual objectives, are
especially important in strategy implementation because they outline an organization’s
expectations of its employees and managers.

1.5 The Strategic-Management Model

The strategic-management process can best be studied and applied using a model. Every
model represents some kind of process. This model does not guarantee success, but it
does represent a clear and practical approach for formulating, implementing, and
evaluating strategies.

These are three important questions to answer in developing a strategic plan:

 Where are we now?

  Where do we want to go?
 How are we going to get there?

Identifying an organization’s existing vision, mission, objectives, and strategies is the

logical starting point for strategic management because a firm’s present situation and
condition may preclude certain strategies and may even dictate a particular course of
action.

The strategic-management process is dynamic and continuous. A change in any one of

the major components in the model can necessitate a change in any or all of the other
components. For instance, a shift in the economy could represent a major opportunity
and require a change in long-term objectives and strategies; a failure to accomplish
annual objectives could require a change in policy; or a major competitor’s change in
strategy could require a change in the firm’s mission. Good communication and
feedback are needed throughout the strategic-management process.

Fig. 2 A Comprehensive Strategic-Management Model

Source: Own processing based on Fred R. David

Application of the strategic-management process is typically more formal in larger and

well-established organizations. Firms that have many divisions, products, markets, and
technologies also tend to be more formal in applying strategic-management concepts.
Greater formality in applying the strategic-management process is usually positively
associated with organizational success.
1.6 Benefits of Strategic Management

Strategic management allows an organization to be more proactive than reactive in

shaping its own future; it allows an organization to initiate and influence (rather than
just respond to) activities.

Historically, the principal benefit of strategic management has been to help

organizations formulate better strategies through the use of a more systematic, logical,
and rational approach to strategic choice. But research studies now indicate that the
process, rather than the decision or document, is the more important contribution of
strategic management.

Communication is a key to successful strategic management. Through involvement in

the process or through dialogue and participation, managers and employees become
committed to supporting the organization. When managers and employees understand
what the organization is doing and why, they often feel they are a part of the firm and
become committed to assisting it. Empowerment is the act of strengthening employees’
sense of effectiveness by encouraging them to participate in decision making and to
exercise initiative and imagination, and rewarding them for doing so. Ownership of
strategies by the people who have to execute them is a key to success!

1.6.1 Financial Benefits

Businesses using strategic-management concepts show significant improvement in

sales, profitability, and productivity compared to firms without systematic planning
activities. High-performing firms tend to do systematic planning to prepare for future
fluctuations in their external and internal environments. They seem to make more
informed decisions with good anticipation of both short- and long-term consequences.

In contrast, firms that perform poorly often engage in activities that are short-sighted
and do not reflect good forecasting of future conditions. Business failures include
bankruptcies, foreclosures, liquidations, and court-mandated receiverships.

1.6.2 Nonfinancial Benefits

Strategic management also offers other tangible benefits, such as an enhanced

awareness of external threats, an improved understanding of competitors’ strategies,
increased employee productivity, reduced resistance to change, and a clearer
understanding of performance–reward relationships.

In addition to empowering managers and employees, strategic management often brings

order and discipline to an otherwise floundering firm. It can be the beginning of an
efficient and effective managerial system.

Some nonfinancial benefits, according to Greenley, are:

 increased discipline,
 improved coordination,
 enhanced communication,
 reduced resistance to change,
  increased forward thinking,
 improved decision making,
 increased synergy,
 more effective allocation of time and resources.

1.7 Why Some Firms Do No Strategic Planning

Some firms do not engage in strategic planning, and some firms do strategic planning
but receive no support from managers and employees. Some reasons for poor or no
strategic planning are as follows:

 Lack of knowledge or experience in strategic planning.

 Poor reward structures - When an organization assumes success, it often fails
to reward success. When failure occurs, then the firm may punish.
 Firefighting - An organization can be so deeply embroiled in resolving crises
and firefighting that it reserves no time for planning.
 Waste of time - Some firms see planning as a waste of time because no
marketable product is produced. Time spent on planning is an investment.
 Too expensive - Some organizations see planning as too expensive in time and
money.
 Laziness - People may not want to put forth the effort needed to formulate a
plan.
 Content with success - Particularly if a firm is successful, individuals may feel
there is no need to plan because things are fine as they stand. But success today
does not guarantee success tomorrow.
 Overconfidence - Being overconfident or overestimating experience can bring
demise. Forethought is rarely wasted and is often the mark of professionalism.
 Self-interest - When someone has achieved status, privilege, or self-esteem
through effectively using an old system, he or she often sees a new plan as a
threat.
 Fear of the unknown - People may be uncertain of their abilities to learn new
skills, of their aptitude with new systems, or of their ability to take on new roles.

1.8 Pitfalls in Strategic Planning

Strategic planning is an involved, intricate, and complex process that takes an
organization into uncharted territory. It does not provide a ready-to-use prescription for
success; instead, it takes the organization through a journey and offers a framework for
addressing questions and solving problems. Being aware of potential pitfalls and being
prepared to address them is essential to success.

Some pitfalls to watch for and avoid in strategic planning are these:

 Using strategic planning to gain control over decisions and resources.

 Doing strategic planning only to satisfy accreditation or regulatory requirements.
 Too hastily moving from mission development to strategy formulation.
 Failing to communicate the plan to employees who continue working in the
dark.
  Top managers making many intuitive decisions that conflict with the formal
plan.
 Top managers not actively supporting the strategic-planning process.
 Failing to use plans as a standard for measuring performance.
 Delegating planning to a “planner” rather than involving all managers.
 Failing to involve key employees in all phases of planning.
 Failing to create a collaborative climate supportive of change.
 Viewing planning as unnecessary or unimportant.
 Becoming so engrossed in current problems that insufficient or no planning is
done.
 Being so formal in planning that flexibility and creativity are stifled.

1.9 Guidelines for Effective Strategic Management

Even the most technically perfect strategic plan will serve little purpose if it is not
implemented. Many organizations tend to spend an inordinate amount of time, money,
and effort on developing the strategic plan, treating the means and circumstances under
which it will be implemented as afterthoughts! Change comes through implementation
and evaluation, not through the plan. A technically imperfect plan that is implemented
well will achieve more than the perfect plan that never gets off the paper on which it is
typed.

According to David seventeen guidelines for the strategic-planning process to be

effective are:

1. It should be a people process more than a paper process.

2. It should be a learning process for all managers and employees.
3. It should be words supported by numbers rather than numbers supported by
words.
4. It should be simple and nonroutine.
5. It should vary assignments, team memberships, meeting formats, and even the
planning calendar.
6. It should challenge the assumptions underlying the current corporate strategy.
7. It should welcome bad news.
8. It should welcome open-mindness and a spirit of inquiry and learning.
9. It should not be a bureaucratic mechanism.
10. It should not become ritualistic, stilted, or orchestrated.
11. It should not be too formal, predictable, or rigid.
12. It should not contain jargon or arcane planning language.
13. It should not be a formal system for control.
14. It should not disregard qualitative information.
15. It should not be controlled by “technicians.”
16. Do not pursue too many strategies at once.
17. Continually strengthen the “good ethics is good business” policy.

Summary
All firms have a strategy, even if it is informal, unstructured, and sporadic. The
strategic-management process is becoming more widely used by small firms, large
companies, nonprofit institutions, governmental organizations, and multinational
conglomerates alike. The process of empowering managers and employees has almost
limitless benefits.

Organizations should take a proactive rather than a reactive approach in their industry,
and they should strive to influence, anticipate, and initiate rather than just respond to
events. Successful strategists take the time to think about their businesses, where they
are with their businesses, and what they want to be as organizations - and then they
implement programs and policies to get from where they are to where they want to be in
a reasonable period of time.

It is a known and accepted fact that people and organizations that plan ahead are much
more likely to become what they want to become than those that do not plan at all. A
good strategist plans and controls his or her plans, whereas a bad strategist never plans
and then tries to control people!

Review questions
1. Describe the three activities that comprise strategy evaluation.
2. Distinguish between the concepts of vision and mission.
3. What aspect of strategy formulation do you think requires the most time? Why?
4. Why strategy implementation is often considered the most difficult stage in the
strategic management process?
5. Why is it so important to integrate intuition and analysis in strategic management?
6. List 10 guidelines for making the strategic-planning process effective. Arrange your
guidelines in prioritized order of importance in your opinion.
7. Discuss the importance of feedback in the strategic-management model.
8. How can strategists best ensure that strategies will be effectively implemented?
9. How can a firm best achieve sustained competitive advantage?
10. TUL has fierce competitors. List three external opportunities and three external
threats that face this university. List three internal strengths and three internal
weaknesses that characterize your university.

References
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GREENLEY, Gordon. 1986. Does Strategic Planning Improve Company Performance?

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