Defining Strategic Management

The notion of strategic management is to achieve and maintain competitive advantage.

Strategic management is 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/accounting,

production/operations, research and development, and computer information systems to achieve
organizational success.

Strategic management is used to refer to strategy formulation, implementation, and evaluation, however,
strategic planning referring only to strategy formulation.

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

A strategic plan is an organizations game plan; a company must have a good strategic plan to compete
successfully.

Profit margins have been so reduced that there is little room for error in the overall strategic plan.

A strategic plan results from tough managerial choices among numerous good alternatives

Characteristics of strategic management:

(a) It’s not a reaction to short term changes rather a response to long term perspectives (5 years or more).

(b) It’s not primarily a quantitative exercise rather a qualitative one.

(c) It’s not a plan for a single function rather an integration of all major functions of the firm.

(d) It’s not a normative statement rather a road map describing the steps a firm should take.

(e) It’s not a set of mechanical forms and procedures rather a set of practical, well-thought out perspectives
and actions on how to deal with uncertainties and ambiguities of the future.

Stages of Strategic Management

1) 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.

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, 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. Strategy-formulation decisions commit an organization to specific products, markets,
resources, and technologies over an extended period of time. Strategies determine long-term competitive
advantages.

Strategic decisions have major multifunctional consequences on an organization.

Top managers have the best perspective to understand fully the ramifications of strategy-formulation
decisions; they have the authority to commit the resources necessary for implementation.

2) Strategy implementation “action stage”: requires a firm to establish annual objectives, devise policies,
motivate employees, and allocate resources so that formulated strategies can be executed.

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.

It means mobilizing employees and managers to put formulated strategies into action.

It is the most difficult stage; strategy implementation requires personal discipline, commitment, and sacrifice.
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.

The challenge is to stimulate managers and employees throughout an organization to work with pride and
enthusiasm toward achieving stated objectives.

3) Strategy evaluation: here managers can know if particular strategies are not working well.

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 basis for current strategies.

2. Measuring performance.

3. Taking corrective actions.

Strategy formulation, implementation, and evaluation activities occur at three levels in a large organization: (1)
Corporate level, (2) Divisional or strategic business unit level, and (3) Functional level

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 have only the corporate and functional levels. Nevertheless,
managers and employees at these two levels should be actively involved in strategic-management activities.

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.

Intuition is essential to making good strategic decisions. Intuition is particularly useful for making decisions in
situations of great uncertainty or little precedent. Also when highly interrelated variables exist.

In the Arab world there is a tendency to emphasize the role of intuition and imagination in decision making.
Western managers are more likely to place emphasis on the role of objective information alongside intuition
based on experience.

Adapting to change

Organizations should continually monitor internal and external events and trends so that timely changes can
be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically.

By eliminating boundaries and speeding the flow of information, e-commerce and globalization are
transforming business and society.

Nine Key Terms:

1. Competitive Advantage

A competitive advantage: is anything that a firm does especially well in comparison to rival firms. When a firm
can do something that rival firms cannot do, or owns something that rival firm’s desire.

Getting and keeping a competitive advantage is essential for long-term success in an organization.

The Industrial/Organization (I/O) and the Resource-Based View (RBV) theories of organization present
different perspectives on how best to capture and keep competitive advantage—that is, how best to manage
strategically.

Pursuit of competitive advantage leads to organizational success or failure.

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:

(1) Continually adapting to changes in external trends and events and internal capabilities, competencies, and
resources.

(2) Effectively formulating, implementing, and evaluating strategies that capitalize upon those factors.

Business-to-Business e-commerce is five times greater than consumer e-commerce.

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.

Leadership is about being a role model.

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.

Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they
typically have considerable authority for decision making in the firm. The CEO is the most visible and critical
strategic manager.
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).

The position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of
many organizations.

Strategists differ as much as organizations themselves and these differences must be considered in the
formulation, implementation, and evaluation of strategies.

Some strategists will not consider some types of strategies because of their personal philosophies.

Strategists differ in their attitudes, values, ethics willingness to take risks, concern for social responsibility,
concern for profitability, concern for short-run versus long-run aims, and management style and thus the
strategies they use.

Vision and Mission Statements

Vision statements “What do we want to become?”: It is the first step in strategic planning. Many vision
statements are a single sentence. It is a point of view about the future and has to be based on a solid factual
foundation.

Mission statements “What is our business?”: enduring statements of purpose that distinguish one business
from other similar firms. Primarily focus on current business.

A mission statement identifies the scope of a firm’s operations in product and market terms.

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.

External Opportunities and Threats

Economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization. Opportunities and
threats are largely beyond the control of a single organization.

These create different types of consumers and consequently a need for different types of products, services,
and strategies.

Other opportunities and threats may include the passage of a law, the introduction of a new product by a
competitor, a national catastrophe, or the declining value of the dollar. A competitor’s strength could be a
threat. Unrest in the Middle East, rising energy costs, or the war against terrorism could represent an
opportunity or a threat.

Firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the
impact of external threats. Thus, 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.

Lobbying is one activity that some organizations utilize to influence external opportunities and threats.

Internal Strengths and Weaknesses

An organization’s controllable activities that are performed especially well or poorly. They arise in all functional
activities of a business.

Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal
weaknesses.

Strengths and weaknesses are determined relative to competitors. Also, strengths and weaknesses can be
determined by elements of being rather than performance. For example, strength may involve ownership of
natural resources or a historic reputation for quality.

Strengths and weaknesses may be determined relative to a firm’s own objectives. For example, high levels of
inventory turnover may not be a strength to a firm that seeks never to stock-out.

They can be determined in a number of ways, including computing ratios, measuring performance, and
comparing to past periods and industry averages. Various types of surveys also can be developed and
administered to examine internal factors such as employee morale, production efficiency, advertising
effectiveness, and customer loyalty.

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.

They state directions; 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.

Objectives should be established for the overall company and for each division.

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.

Annual Objectives

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

Annual objectives should be stated in terms of each business function.

A set of annual objectives is needed for each long-term objective.

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.

Policies

The means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures.
Policies are guides to decision making and address repetitive or recurring situations.

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 are especially important in strategy implementation because they outline an organization’s
expectations of its employees and managers. Policies allow consistency and coordination within and between
organizational departments.

A healthier workforce can more effectively and efficiently implement strategies.

The Strategic-Management Model

The answer to where an organization is going can be determined largely by where the organization has been.

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.

Strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not
just at the end of the year or semiannually. The strategic-management process never really ends.

Strategists do not go through the process in lockstep fashion.

Many organizations semiannually conduct formal meetings to discuss and update the firm’s vision/mission,
opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and performance.

These meetings are commonly held off-premises and called retreats. Good communication and feedback are
needed throughout the strategic-management process.

Application of the strategic-management process is typically more formal in larger and well-established
organizations.

Formality refers to the extent that participants, responsibilities, authority, duties, and approach are specified.

Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environments,
have many divisions, products, markets, and technologies tend to be more formal in applying strategic-
management concepts. Greater formality in applying the strategic-management process is usually positively
associated with the cost, comprehensiveness, accuracy, and success of planning.

Benefits of Strategic Management

The principle 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. Communication is a
key to successful strategic management. The major aim of the communication process is to achieve
understanding and commitment throughout the organization. It results in the great benefit of empowerment.
It also allows an organization to be more proactive than reactive in shaping its own future; and exert control
over its own destiny.

A. Financial Benefits
1. Research indicates that organizations using strategic-management concepts are more profitable and
successful than those that do not.

2. High-performing firms tend to do systematic planning to prepare for future fluctuations in the external and
internal environments. Firms with planning systems more closely resembling strategic-management theory
generally exhibit superior long term financial performance relative to their industries.

3. Firms that perform poorly often engage in activities that are shortsighted and do not reflect good
forecasting of future conditions. They are often preoccupied with solving internal problems and meeting
paperwork deadlines. They typically underestimate their competitors’ strengths and overestimate their own
firm’s strengths. They often attribute weak performance to uncontrollable factors.

B. Nonfinancial Benefits

1. Enhanced awareness of external threats, an improved understanding of competitors’ strengths, increased

employee productivity, reduced resistance to change, and a clearer understanding of performance-reward
relationships.

2. In addition to empowering managers and employees, strategic management often brings order and
discipline to an otherwise floundering firm.

3. Strategic management enhances the problem-prevention capabilities of organizations because it promotes

interaction among manager’s at all divisional and functional levels.

4. Strategic management may renew confidence in the current business strategy or point to the need for
corrective actions.

5. Greenley stated that strategic management offers these benefits:

a. It allows for identification, prioritization, and exploitation of opportunities.

b. It provides an objective view of management problems.

c. It represents a framework for improved coordination and control of activities.

d. It minimizes the effects of adverse conditions and changes.

e. It allows major decisions to better support established objectives.

f. It allows more effective allocation of time and resources to identified opportunities.

g. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.

h. It creates a framework for internal communication among personnel.

i. It helps integrate the behavior of individuals into a total effort.

j. It provides a basis for clarifying individual responsibilities.

k. It encourages forward thinking.

l. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and opportunities.

m. It encourages a favorable attitude toward change.

n. It gives a degree of discipline and formality to the management of a business.

Understanding may be the most important benefit of strategic management, followed by commitment. When
managers and employees understand what the organization is doing and why they often feel that they are a
part of the firm and become committed to assisting it and become more creative and innovative. This is
especially true when employees also understand linkages between their own compensation and organizational
performance.

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.

More and more organizations are decentralizing the strategic-management process, recognizing that planning
must involve lower-level managers and employees.

Strategic-management dialogue is more important than a nicely bound strategic-management document.

Through involvement in the process, line managers become ‘owners’ of the strategy. Ownership of strategies
by the people who have to execute them is a key to success!

Although making good strategic decisions is the major responsibility of an organization’s owner or CEO, both
managers and employees must also be involved in strategy formulation, implementation, and evaluation
activities. Participation is a key to gaining commitment for needed changes.

Strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.

Why Some Firms Do No Strategic Planning

• Poor Reward Structures - When an organization assumes success, it often fails to reward success.
When failure occurs, then the firm may punish. In this situation, it is better for an individual to do
nothing (and not draw attention) than to risk trying to achieve something, fail and be punished.

• Fire Fighting - An organization can be so deeply embroiled in crisis management and firefighting
that it does not have time to plan.

• Waste of Time - Some firms see planning as a waste of time no marketable product is produced.
Time spent on planning is an investment.

• Too Expensive - Some organizations are culturally opposed to spending resources.

• 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.

• Fear of Failure - By not taking action, there is little risk of failure unless a problem is urgent and
pressing. Whenever something worthwhile is attempted, there is some risk of failure.

• Overconfidence - As individuals amass experience, they may rely less on formalized planning.
Rarely, however, is this appropriate. Being overconfident or overestimating experience can bring
demise. Forethought is rarely wasted and is often the mark of professionalism.

• Prior Bad Experience - People may have had a previous bad experience with planning, that is,
cases in which plans have been long, cumbersome, impractical, or inflexible. Planning, like
anything else, can be done badly.
 • 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.

• Honest Difference of Opinion – People may view the situation from a different viewpoint, or they
may have aspirations for themselves or the organization that are different from the plan.
Different people in different jobs have different perceptions of a situation.

• Suspicion - Employees may not trust management.

Pitfalls in Strategic Planning

It does not provide a ready-to-use prescription for success; instead, takes the organization through a journey
and offers a framework for addressing questions and solving problems.

• 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.

Guidelines for Effective Strategic Management

Failure to Follow Certain Guidelines in Planning Can Cause Problems

1. An integral part of strategy evaluation must be to evaluate the quality of the strategic management process.
Issues such as whether strategic management is a people process or a paper process should be addressed.

2. An important guideline for effective strategic management is open-mindedness. A willingness to consider

new information, viewpoints, ideas, and possibilities is essential.

3. Strategic decisions require trade-offs such as long-range versus short-range considerations or maximizing
profits versus increasing shareholders’ wealth.

4. Subjective factors such as attitudes toward risk, concern for social responsibility, and organizational culture
will always affect strategy-formulation decisions, but organizations must remain as objective as possible.
5. Strategic management must not become a self-perpetuating bureaucratic mechanism, rather a reflective
learning process.

6. Words supported by numbers rather than numbers supported by words should represent the medium for
explaining strategic issues and organizational responses.

Business Ethics and Strategic Management

1. Business ethics can be defined as principles of conduct within organizations that guide decision making and
behavior. Good business ethics are a prerequisite for good strategic management; good ethics is just good
business.

2. A code of business ethics can provide a basis on which policies can be devised to guide daily behavior and
decisions at the work site.

3. Organizations need to conduct periodic ethics workshops to sensitize people to workplace circumstances in
which ethics issues may arise.

Comparing Business and Military Strategy

1. Terms such as objectives, mission, strengths, and weaknesses were first formulated to address problems on
the battlefield.

2. The key aim of both is to gain a competitive advantage.

3. A fundamental difference between military and business strategy is that business strategy is formulated,
implemented, and evaluated with the assumption of competition, while military strategy is based on an
assumption of conflict.

The Nature of Global Competition

Organizations that conduct business operations across national borders are called international firms or
multinational corporations.

The term parent company refers to a firm investing in international operations; host country is the country
where that business is conducted.

The process is more complex, more variables and relationships because different cultures have different
values, norms, and work ethics.

Advantages of International Operations

1. Foreign operations can absorb excess capacity, reduce unit costs, and spread economic risks over a wider
number of markets.

2. Foreign operations can allow firms to establish low-cost production facilities in locations close to raw
materials and/or cheap labor.

3. Competitors in foreign markets may not exist, or competition may be less intense than in domestic markets.

4. Foreign operations may result in reduced tariffs, lower taxes, and favorable political treatment in other
countries.

5. Joint ventures can enable firms to learn the technology, culture, and business practices of other people and
to make contacts with potential customers, suppliers, creditors, and distributors in foreign countries.
6. Many foreign governments and countries offer varied incentives to encourage foreign investment in specific
locations.

7. Economics of scale can be achieved from operation in global rather than solely domestic markets. Larger-
scale production and better efficiencies allow higher sales volumes and lower price offerings.

8. Perhaps the greatest advantage is that firms can gain new customers for their products and services, thus
increasing revenues.

Disadvantages of International Operations

1. Firms confront different social, cultural, demographic, environmental, political, governmental, legal,
technological, economic, and competitive forces when doing business internationally.

2. Weaknesses of competitors in foreign lands are often overestimated and strengths underestimated.

3. Language, culture, and value systems differ among countries.

4. It is necessary to gain an understanding of regional organizations such as the European Economic

Community and the Latin American Free Trade Area.

5. Dealing with two or more monetary systems can complicate international business operations.

6. The availability, depth, and reliability of economic and marketing information in different countries vary
extensively, as do industrial structures, business practices, and nature of regional organizations.