STRATEGIC MANAGEMENT - AN INTRODUCTION

Strategic Management is all about the identification and description of the strategies that
managers can carry to achieve better performance and a competitive advantage for their
organization. An organization is said to have a competitive advantage if its profitability is
higher than the average profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a manager
undertakes and which decides the result of the firm’s performance. The manager must have a
thorough knowledge and analysis of the general and competitive organizational environment
to make the right decisions. They should conduct a SWOT Analysis (Strengths, Weaknesses,
Opportunities, and Threats), i.e., they should make the best possible utilization of strengths,
minimize the organizational weaknesses, make use of arising opportunities from the business
environment, and shouldn’t ignore the threats.

Strategic management is nothing but planning for both predictable as well as unfeasible
contingencies. It applies to both small as well as large organizations as even the smallest
organizations face competition and, by formulating and implementing appropriate strategies,
they can attain sustainable competitive advantage.

It is a way in which strategists set the objectives and proceed about attaining them. It deals with
making and implementing decisions about the future direction of an organization. It helps us
to identify the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls the business and the
industries in which an organization is involved; evaluates its competitors and sets goals and
strategies to meet all existing and potential competitors; and then reevaluates strategies
regularly to determine how it has been implemented and whether it was successful or does it
needs replacement.

Strategic Management gives a broader perspective to the employees of an organization

and they can better understand how their job fits into the entire organizational plan and
how it is co-related to other organizational members. It is nothing but the art of managing
employees in a manner that maximizes the ability to achieve business objectives. The
employees become more trustworthy, more committed, and more satisfied as they can co-relate
themselves very well with each organizational task. They can understand the reaction of
environmental changes on the organization and the probable response of the organization with
the help of strategic management. Thus the employees can judge the impact of such changes
on their job and can effectively face the changes. The managers and employees must
appropriately do appropriate things. They need to be both effective as well as efficient.

One of the major roles of strategic management is to incorporate various functional areas of
the organization completely, as well as, to ensure these functional areas harmonize and get
together well. Another role of strategic management is to keep a continuous eye on the goals
and objectives of the organization.

STRATEGIC PLANNING PROCESS

Even though the phrases, ‘Long-term Planning’ and ‘Strategic Planning’ are interchangeably
used, we may have a line of discrimination in between them. Philip Kotler puts “whereas the
company’s annual and long-range plans deal with current businesses and how to keep them
going, the strategic plan involves adapting the firm define Strategic Planning as the process of
developing and maintaining a strategic fit between the organizational goals and capabilities
and its changing marketing opportunities”.

Strategic planning is the foundation for another type of plan. It depends upon developing a
clear company mission, supporting objectives of a sound business portfolio, and coordinated
functional strategies. The strategic planning process is one in which the management converts
its mission, objectives, and goals into a workable strategy. It involves the preparation of ways
and means to the circumstances of the organization’s environment.

In today’s highly competitive business environment, budget-oriented planning or forest-based

planning methods are insufficient for a large corporation to survive and prosper. The firm must
engage in strategic planning that clearly defines objectives and assesses both the internal and
external situation to formulate strategy, implement the strategy, evaluate the progress and make
adjustments as necessary to stay on track.

The Strategic Management Process can be studied under five, different components.

1. Missions and Objectives:

A mission statement reveals the long-term vision of an organization in terms of what it wants
to be and whom it wants to serve. It describes an organization’s purpose, customers, products
or services, markets, philosophy, and basic technology. The mission statement describes the
company’s business vision, including the unchanging values and purposes of the firm and
forward-looking visionary goals that guide the pursuit of future opportunities.
Objectives may be defined as “those ends which the organization seeks to achieve by its
existence and operations”. It covers long-range company aims, more specific department goals,
and even individual assignments.

Guided by the business vision, the firm’s leader can define measurable financial and strategic
objectives. Financial objectives involve measures such as sales targets and earnings growth.
Strategic objectives are related to the firm’s business position and may include measures such
as market share and reputation.

The mission justified the organization and legitimizes the corporate role in society. It tells
insiders and outsiders what the corporate stands for. The mission would carry the grand design
of the firm and communicate what it wants to be. It will indicate broadly the businesses it will
be in and the customer needs it seeks to satisfy. The mission is shaped by the capabilities and
vision of the corporation’s leaders.

The main task in setting the corporate objectives is to decide the extent of growth the firm
wants to achieve. Balancing the opportunities with the organization’s capabilities and
ambitions, the firm figures out its growth objectives. In addition to growth, there are certain
other key determinants of corporate success, which apply to all firms – profitability,
productivity, technology, competitive position, human resources, social responsibility, and
corporate image. The objectives are set in a measurable and time-bound manner.

2. Environmental Scanning or Surveying the Environment:

This is central to strategic planning. The second aspect of the strategic planning process is the
environmental analysis. Since the basic objective of strategies is to integrate the organization
with its environment, it must know the kind of environment in which it has to work. This can
be known by environmental analysis.

The process of environmental analysis includes a collection of relevant information from the
environment, interpreting its impact on the future organizational working, and determining
what opportunities and threats-positive and negative aspects are offered by the environment.

The environmental information can be collected from various sources like publications, verbal
information from various people, spying, and forecasting. The process of environmental
analysis works better if it is undertaken continuously and is made an intrinsic part of the
strategy formulation.
A firm gathers all relevant information relating to the environment and analyzes them in detail.
It analyses both the Macro Environmental factors as well as environmental factors that have
specific to the business concerned.

i. Macro Environmental Factors or External Factors:

Under the macro-environmental factors, it studies the demographic, socio-cultural, economic,

political, and legal environment. Business-specific environmental factors include emerging
trends in the industry, the structure of the industry, the nature of the competition, and the scope
for invasion by substitute products.

ii. Internal Factors:

This is the process of assessing the company’s capabilities and resources, strengths and
weaknesses, core competencies, and competitive advantages. The firm also has to examine
which of its perceived strengths constitutes the competitive advantage for the firm. The firm
compares itself against the competition and develops its Competitive Advantage Profile (CAP).
The process of internal appraisal also throws up the capability gaps of the firms, i.e., the gaps
between their existing capabilities and the needed capabilities for tapping the opportunities
spotted through the environmental survey.

3. Strategy Formulation:

Given the information from the environmental scan, the firm should match its strengths to the
opportunities that it has identified, while addressing its weaknesses and external threats.

To attain superior profitability, the firm seeks to develop a competitive advantage over its
rivals. A competitive advantage can be based on cost or differentiation. Michael Porter
identified three industry-independent generic strategies from which a firm can choose.

After the strategy is chosen, it is put to implementation, that is, it is put into action. Various
factors which are necessary for implementation are designed for suitable organization structure,
developing and motivating people to take up the work, designing effective control and
information system, allocation of resources, etc.

The most crucial task is formulating the corporate strategy. The effectiveness of the entire
strategic planning process of a firm is tested and proved by the effectiveness of the corporate
strategy it walks out. While the objectives clarify where the firm wants to go, the strategy
provides the design to get there.
The main function of the corporate strategy is to provide strategic direction to the firm. It is a
corporate strategy that ensures the fit between the firm and its environment. It finally sets the
pace of the corporation’s total growth, and thereby its future and overall prospects. It can be
stated that the primary corporate strategy denotes the firm-product market posture. It is the
route map chosen for navigating the firm through all the fluctuations and turbulence the firm
may face.

4. Strategy Implementation:

The selected strategy is implemented using programs, budgets, and procedures.

Implementation involves the organization of the firm’s resources and the motivation of the staff
to achieve objectives.

How the strategy is implemented can have a significant impact on whether it will be successful.
In a large company, those who implement the strategy likely will be different people from those
who formulated it. For this reason, care must be taken to communicate the strategy and the
reasoning behind it. Otherwise, the implementation might not succeed if the strategy is
misunderstood or if lower-level managers resist its implementation because they do not
understand why the particular strategy was selected.

5. Evaluation and Control:

The strategy has to be monitored and adjustments that become necessary have to be brought.
Essentially, the thing had to be compatibility of the strategy with the environment as well as
internal realities.

The implementation of the strategy must be monitored and adjustments made as needed.

Evaluation and control consist of the following steps:

i. Defining parameters to be measured

ii. Defining target values for those parameters

iii. Performing measurements

iv. Comparing measured results to the pre-defined standards

v. Making necessary changes.

The results of implementation can be compared in the light of objectives set, and the control
process comes into operation. If the results and objectives differ, further analysis is required to
find out the reasons for the gap and take suitable actions to overcome the problems because of
 which the gap exists. This may also require a change in strategy if there is a problem because
of the formulation n inadequacy. This puts back the managers at the starting point of the
strategy formulation.

BENEFITS/IMPORTANCE OF STRATEGIC PLANNING

The volatility of the business environment causes many firms to adopt reactive strategies rather
than proactive ones. However, reactive strategies are typically only viable for the short-term,
even though they may require spending a significant amount of resources and time to execute.
Strategic planning helps firms prepare proactively and address issues with a more long-term
view. They enable a company to initiate influence instead of just responding to situations.

Among the primary benefits derived from strategic planning are the following:

1. Financial Benefits:

Firms that make strategic plans have better sales, lower costs, higher EPS (earnings per share),
and higher profits. Firms have financial benefits if they make strategic plans.

2. Guide to Organisational Activities:

Strategic planning guides members towards organizational goals. It unifies organizational

activities and efforts towards long-term goals. It guides members to become what they want to
become and do what they want to do.

3. Competitive Advantage:

In the world of globalization, firms that have a competitive advantage (capacity to deal with
competitive forces) capture the market and excel in financial performance. This is possible if
they foresee the future; the future can be predicted through strategic planning. It enables
managers to anticipate problems before they arise and solve them before they become worse.

4. Minimises Risk:

Strategic planning provides information to assess risk and frame strategies to minimize risk
and invest in safe business opportunities. Chances of making mistakes and choosing wrong
objectives and strategies, thus, get reduced.

5. Beneficial for Companies with Long Gestation Gap:

The time gap between investment decisions and income generation from those investments is
called the gestation period. During this period, changes in technological or political forces can
disrupt the implementation of decisions and plans may, therefore, fail. Strategic planning
discounts the future and enables managers to face threats and opportunities.

6. Promotes Motivation and Innovation:

Strategic planning involves managers at top levels. They are not only committed to objectives
and strategies but also think of new ideas for the implementation of strategies. This promotes
motivation and innovation.

7. Optimum Utilisation of Resources:

Strategic planning makes the best use of resources to achieve maximum output.

General Robert E. Wood remarks, “Business is like a war in one respect. If its grand strategy
is correct, any number of tactical errors can be made and yet the enterprise proves successful.”
Effective allocation of resources, scientific thinking, effective organization structure,
coordination and integration of functional activities, and effective system of control, all
contribute to successful strategic planning.

MCKINSEY’S 7S FRAMEWORK

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.”
The goal of the model is to depict how effectiveness can be achieved in an organization through
the interactions of seven key elements – Structure, Strategy, Skill, System, Shared Values,
Style, and Staff. The model was developed in the late 1970s by Tom Peters and Robert
Waterman, former consultants at McKinsey & Company. They identified seven internal
elements of an organization that need to align for it to be successful.

When to Use the McKinsey 7-S Model

You can use the 7-S model in a wide variety of situations where it's useful to examine how
the various parts of your organization work together.

For example, it can help you to improve the performance of your organization, or to determine
the best way to implement a proposed strategy.

The framework can be used to examine the likely effects of future changes in the organization
or to align departments and processes during a merger or acquisition. You can also apply the
McKinsey 7-S model to elements of a team or a project.
 Understanding McKinsey 7S Model

The 7S Model specifies seven factors that are classified as "hard" and "soft" elements. Hard
elements are easily identified and influenced by management, while soft elements are fuzzier,
more intangible, and influenced by corporate culture. The hard elements are as follows:

 Strategy

 Structure

 Systems

The soft elements are as follows:

 Shared values

 Skills

 Style

 Staff

The framework is used as a strategic planning tool by organizations to show how seemingly
disparate aspects of a company are, in fact, interrelated and reliant upon one another to achieve
overall success.

The Figure below shows how the elements depend on each other, and how a change in one
affects all the others.
 A Closer Look at the 7 S's

1. The strategy is the plan deployed by an organization to remain competitive in its industry and
market. An ideal approach is to establish a long-term strategy that aligns with the other
elements of the model and communicates what the organization’s objective and goals are.

2. The structure of the organization is made up of its corporate hierarchy, the chain of
command, and divisional makeup that outlines how the operations function and interconnect.
In effect, it details the management configuration and responsibilities of workers.

3. Systems of the company refer to the daily procedures, workflow, and decisions that make up
the standard operations within the organization.

4. Shared values are the commonly accepted standards and norms within the company that both
influence and temper the behavior of the entire staff and management. This may be detailed
in company guidelines presented to the staff. In practice, shared values relate to the actual
accepted behavior within the workplace.

5. Skills comprise the talents and capabilities of the organization’s staff and management, which
can determine the types of achievements and work the company can accomplish. There may
come a time when a company assesses its available skills and decides it must make changes
to achieve the goals outlined in its strategy.

6. Style speaks to the example and approach that management takes in leading the company, as
well as how this influences performance, productivity, and corporate culture.

7. Staff refers to the personnel of the company, how large the workforce is, where their
motivations reside, as well as how they are trained and prepared to accomplish the tasks set
before them.

The McKinsey 7-S Model is applicable in a wide variety of situations where it's useful to
understand how the various parts of an organization work together. It can be used as a tool to
make decisions on future corporate strategies.

The framework can also be used to examine the likely effects of future changes in the
organization or to align departments and processes during a merger or acquisition. Elements
of the McKinsey Model 7s can also be used with individual teams or projects.
 PEST ANALYSIS

Changes in your business environment can create great opportunities for your organization –
and cause significant threats. For example, opportunities can come from new technologies that
help you reach new customers, from new funding streams that allow you to invest in better
equipment, and from changed government policies that open up new markets. Threats can
include deregulation that exposes you to intensified competition; a shrinking market; or
increases to interest rates, which can cause problems if your company is burdened by debt.

PEST Analysis is a simple and widely used tool that helps you analyze the Political, Economic,
Socio-Cultural, and Technological changes in your business environment. This helps you
understand the "big picture" forces of change that you're exposed to, and, from this, take
advantage of the opportunities that they present.

Harvard professor Francis Aguilar is thought to be the creator of PEST Analysis. He included
a scanning tool called ETPS in his 1967 book, "Scanning the Business Environment." The
name was later tweaked to create the current acronym.

PEST Analysis is useful for four main reasons:

1. It helps you to spot business or personal opportunities, and it gives you advanced warning of
significant threats.
2. It reveals the direction of change within your business environment. This helps you shape what
you're doing, so that you work with change, rather than against it.
3. It helps you avoid starting projects that are likely to fail, for reasons beyond your control.
4. It can help you break free of unconscious assumptions when you enter a new country, region,
or market; because it helps you develop an objective view of this new environment.

Understanding the PEST Factors in PEST Analysis

Before you jump ahead and start using this analysis, you should understand what each of these
factors in this analysis signifies.

 Political – Here government regulations and legal factors are assessed in terms of their ability
to affect the business environment and trade markets. The main issues addressed in this section
include political stability, tax guidelines, trade regulations, safety regulations, and employment
laws. You will experience them on a federal and national level. If you expand your business to
several states, you must be aware of the laws in each location, respectively.

Consider these:
  Tax incentives.

 FDA regulations.

 Employment laws.

 Import restrictions.

 Health and safety laws.

 Regulation and deregulation.

There’s plenty more where that came from. But consider a few things on the list. FDA
regulations must be followed by food establishments and drug companies. If you’re selling
mattresses, this won’t entirely apply to you — the FDA risks are limited. So while the list of
political factors (and economic, social, and technology) are long, they’re not necessarily
relevant to your business. But profits? Revenue? Interest? That will affect your business.

 Economic – Through this factor, businesses examine the economic issues that are bound to
have an impact on the company. This would include factors like inflation, interest rates,
economic growth, the unemployment rate, and policies, and the business cycle followed in the
country.

Consider these:

 Taxes.

 Recession.

 Inflation rates.

The factors can go further. But no matter where you are, taxes will follow you. They can’t be
ignored (unless you want big trouble knocking on headquarters’ door). But the percentage of
tax and the type of tax depends on your business.

The recession affects every business. But some (such as the real estate industry) over others
(IT-related careers). The recession, among other things, affects your customers too.

 Social – With the social factor, a business can analyze the socio-economic environment of its
market via elements like customer demographics, cultural limitations, lifestyle attitude, and
education. With these, a business can understand how consumer needs are shaped and what
brings them to the market for purchase.
 These factors are more unpredictable than economic and political factors. Because social
factors influence your target market. And people are unpredictable. But every business needs
customers. What and how they buy depends on many different factors.

Consider these:

 Location.

 Lifestyles.

 Family size.

 Ethnic background.

 Health consciousness.

 Culture and sub-cultures.

This is a small portion of the many factors that affect social buying behavior. Many of these
things are what marketers use to create buyer personas. These personas are necessary to market
to your customers successfully.

If you’re selling whey powder, you go after gym rats and bodybuilders — not a father who
spends his whole day in a cubicle and eats most of his meals from a fast-food restaurant.

But social factors affect consumer attitude. It’s what makes a customer buy now rather than
buy later (or never). And we use technology to understand customers and create products they
need.

 Technological – How technology can either positively or negatively impact the introduction
of a product or service into a marketplace is assessed here. These factors include technological
advancements, the lifecycle of technologies, the role of the Internet, and the spending on
technology research by the government.

If you run a tech-related business, this part of PEST analysis is particularly important. But even
if you don’t, technology is in every business. The impact differs but it’s non-negotiable.

Consider these:

 Wireless.

 POS systems.

 Cybersecurity.

 Online databases.
 Debit/credit machines.

 Distribution and supply chains.

If you offer Wi-Fi in your store, it’s an added luxury. It’s annoying if it goes down but won’t
ruin sales. However, if you handle all receipts on your online database and that goes offline —
then you have a major problem. Especially after big holidays like various Festivals. Again, this
is about impact. How hurt will sales be if X technology doesn’t work? How will it affect
business in the long and short term?