STRATEGIC MANAGEMENT

Module for

Strategic Management

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Module 1
BASIC CONCEPTS IN BUSINESS POLICY AND STRATEGIC MANAGEMENT
Week 1-3
Introduction
Many of the concepts and techniques that deal with strategic management have been
developed and used successfully by business corporations. In this chapter, we will know
why strategic management was of most use to large corporations operating in multiple
industries. Increasing risks of error, costly mistakes, and even economic ruin are causing
today’s professional managers in all organizations to take strategic management
seriously in order to keep their companies competitive in an increasingly volatile
environment.

Learning Objectives:
Understand the benefits of strategic management
Explain how globalization and environmental sustainability influence
strategic management
Understand the basic model of strategic management and its
components
Understand strategic decision-making modes

WHAT IS STRATEGIC MANAGEMENT?

Strategic management is a set of managerial decisions and actions that
determines the long run performance of a corporation. It includes environmental scanning
(both external and internal), strategy formulation (strategic or long-range planning),
strategy implementation, and evaluation and control. The study of strategic management,
therefore, emphasizes the monitoring and evaluating of external opportunities and threats
in light of a corporation’s strengths and weaknesses. Originally called business policy,
strategic management incorporates such topics as strategic planning, environmental
scanning, and industry analysis.

PHASES OF STRATEGIC MANAGEMENT

Phase 1—Basic financial planning: Managers initiate serious planning when they are
requested to propose the following year’s budget. Projects are proposed on the basis of
very little analysis, with most information coming from within the firm. The sales force
usually provides the small amount of environmental information.
Phase 2—Forecast-based planning: As annual budgets become less useful at
stimulating long term planning, managers attempt to propose five-year plans. At this point
they consider projects that may take more than one year. In addition to internal
information, managers gather any available environmental data—usually on an ad hoc
basis—and extrapolate current trends five years into the future.
Phase 3—Externally oriented (strategic) planning: Frustrated with highly political yet
ineffectual five-year plans, top management takes control of the planning process by

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initiating strategic planning. The company seeks to increase its responsiveness to

changing markets and competition by thinking strategically. Planning is taken out of the
hands of lower-level managers and concentrated in a planning staff whose task is to
develop strategic plans for
the corporation. Consultants often provide the sophisticated and innovative techniques
that the planning staff uses to gather information and forecast future trends.
Phase 4—Strategic management: Realizing that even the best strategic plans are
worthless without the input and commitment of lower-level managers, top management
forms planning groups of managers and key employees at many levels, from various
departments and workgroups. They develop and integrate a series of strategic plans
aimed at achieving the company’s primary objectives.

BENEFITS OF STRATEGIC MANAGEMENT

Strategic management emphasizes long-term performance. Many companies can
manage short-term bursts of high performance, but only a few can sustain it over a longer
period of time. To be successful in the long-run, companies must not only be able to
execute current activities to satisfy an existing market, but they must also adapt those
activities to satisfy new and changing markets.

● Clearer sense of strategic vision for the firm.

● Sharper focus on what is strategically important.
● Improved understanding of a rapidly changing environment.

To be effective, however, strategic management need not always be a formal process.

It can begin with a few simple questions:

1. Where is the organization now? (Not where do we hope it is!)

2. If no changes are made, where will the organization be in one year? two years? five
years? 10 years? Are the answers acceptable?
3. If the answers are not acceptable, what specific actions should management
undertake? What are the risks and payoffs involved?

WHAT IS GLOBALIZATION?
Not too long ago, a business corporation could be successful by focusing only on
making and selling goods and services within its national boundaries. International
considerations were minimal. Profits earned from exporting products to foreign lands were
considered frosting on the cake, but not really essential to corporate success.

Today, everything has changed. Globalization, the integrated internationalization

of markets and corporations, has changed the way modern corporations do business. As
more industries become global, strategic management is becoming an increasingly
important way to keep track of international developments and position a company for
long-term competitive advantage. For example, General Electric moved a major research
and development lab for its medical systems division from Japan to China in order to learn
more about developing new products for developing economies. Microsoft’s largest
research center outside Redmond, Washington, is in Beijing. According to Wilbur Chung,

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a Wharton professor, “Whatever China develops is rolled out to the rest of the world.
China may have a lower GDP per-capita than developed countries, but the Chinese have
a strong sense of how products should be designed for their market.”

WHAT IS ENVIRONMENTAL SUSTAINABILITY?

Environmental sustainability refers to the use of business practices to reduce a
company’s impact upon the natural, physical environment. Climate change is playing a
growing role in business decisions.

The effects of climate change on industries and companies throughout the world
can be grouped into six categories of risks: regulatory, supply chain, product and
technology, litigation, reputational, and physical.

1. Regulatory Risk: Companies in much of the world are already subject to the Kyoto
Protocol, which requires the developed countries (and thus the companies
operating within them) to reduce carbon dioxide and other greenhouse gases by
an average of 6% from 1990 levels by 2012. The European Union has an
emissions trading program that allows companies that emit greenhouse gases
beyond a certain point to buy additional allowances from other companies whose
emissions are lower than that allowed. Companies can also earn credits toward
their emissions by investing in emissions abatement projects outside their own
firms.
2. Supply Chain Risk: Suppliers will be increasingly vulnerable to government
regulations— leading to higher component and energy costs as they pass along
increasing carbon-related costs to their customers. Global supply chains will be at
risk from an increasing intensity of major storms and flooding. Higher sea levels
resulting from the melting of polar ice will create problems for seaports.
3. Product and Technology Risk: Environmental sustainability can be a
prerequisite to profitable growth. For example, worldwide investments in
sustainable energy (including wind, solar, and water power) more than doubled to
$70.9 billion from 2004 to 2006. Sixty percent of U.S. respondents to an Environics
study stated that knowing a company is mindful of its impact on the environment
and society makes them more likely to buy their products and services.
4. Litigation Risk: Companies that generate significant carbon emissions face the
threat of lawsuits similar to those in the tobacco, pharmaceutical, and building
supplies (e.g., asbestos) industries. For example, oil and gas companies were
sued for greenhouse gas emissions in the federal district court of Mississippi,
based on the assertion that these companies contributed to the severity of
Hurricane Katrina.
5. Reputational Risk: A company’s impact on the environment can heavily affect its
overall reputation. The Carbon Trust, a consulting group, found that in some
sectors the value of a company’s brand could be at risk because of negative
perceptions related to climate change. In contrast, a company with a good record
of environmental sustainability may create a competitive advantage in terms of
attracting and keeping loyal consumers, employees, and investors.

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6. Physical Risk: The direct risk posed by climate change includes the physical
effects of droughts, floods, storms, and rising sea levels. Average Arctic
temperatures have risen four to five degrees Fahrenheit (two to three degrees
Celsius) in the past 50 years, leading to melting glaciers and sea levels rising one
inch per decade.41 Industries most likely to be affected are insurance, agriculture,
fishing, forestry, real estate, and tourism. Physical risk can also affect other
industries, such as oil and gas, through higher insurance premiums paid on
facilities in vulnerable areas.

WHAT IS LEARNING ORGANIZATION?

Strategic flexibility demands a long-term commitment to the development and
nurturing of critical resources. It also demands that the company become a learning
organization—an organization skilled at creating, acquiring, and transferring knowledge
and at modifying its behavior to reflect new knowledge and insights. Organizational
learning is a critical component of competitiveness in a dynamic environment. It is
particularly important to innovation and new product development.

Learning organizations are skilled at four main activities:

● Solving problems systematically
● Experimenting with new approaches
● Learning from their own experiences and past history as well as from the
experiences of others
● Transferring knowledge quickly and efficiently throughout the organization.

BASIC MODEL OF STRATEGIC MANAGEMENT

Figure 1-1

Figure 1–1 illustrates how these four elements interact; Figure 1–2 expands each
of these elements and serves as the model for this module. This model is both rational
and prescriptive. It is a planning model that presents what a corporation should do in
terms of the strategic management process, not what any particular firm may actually do.
The rational planning model predicts that as environmental uncertainty increases,

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corporations that work more diligently to analyze and predict more accurately the
changing situation in which they operate will outperform those that do not. Empirical
research studies support this model. The terms used in Figure 1–2 are explained in the
following pages.

Figure 1-2

WHAT IS ENVIRONMENTAL SCANNING?

Environmental scanning is the monitoring, evaluating, and disseminating of
information from the external and internal environments to key people within the
corporation. Its purpose is to identify strategic factors—those external and internal
elements that will determine the future of the corporation. The simplest way to conduct
environmental scanning is through SWOT analysis. SWOT is an acronym used to
describe the particular Strengths, Weaknesses, Opportunities, and Threats that are
strategic factors for a specific company. The external environment consists of variables
(Opportunities and Threats) that are outside the organization and not typically within the
short-run control of top management. These variables form the context within which the
corporation exists. Figure 1–3 depicts key environmental variables. They may be general
forces and trends within the natural or societal environments or specific factors that
operate within an organization’s specific task environment—often called its industry.

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Figure 1-3

The internal environment of a corporation consists of variables (Strengths and

Weaknesses) that are within the organization itself and are not usually within the short-
run control of top management. These variables form the context in which work is done.
They include the corporation’s structure, culture, and resources. Key strengths form a set
of core competencies that the corporation can use to gain competitive advantage.

WHAT IS STRATEGY FORMULATION?

Strategy formulation is the development of long-range plans for the effective
management of environmental opportunities and threats, in light of corporate strengths
and weaknesses (SWOT). It includes defining the corporate mission, specifying
achievable objectives, developing strategies, and setting policy guidelines.

Mission
An organization’s mission is the purpose or reason for the organization’s existence. It
tells what the company is providing to society—either a service such as housecleaning or
a product such as automobiles. A well-conceived mission statement defines the
fundamental, unique purpose that sets a company apart from other firms of its type and
identifies the scope or domain of the company’s operations in terms of products (including
services) offered and markets served.

Objectives
Objectives are the end results of planned activity. They should be stated as action verbs
and tell what is to be accomplished by when and quantified if possible. The achievement

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of corporate objectives should result in the fulfillment of a corporation’s mission. In effect,

this is what society gives back to the corporation when the corporation does a good job
of fulfilling its mission. In contrast to an objective, we consider a goal as an open ended
statement of what one wants to accomplish, with no quantification of what is to be
achieved and no time criteria for completion.

Some of the areas in which a corporation might establish its goals and objectives are:
● Profitability (net profits)
● Efficiency (low costs, etc.)
● Growth (increase in total assets, sales, etc.)
● Shareholder wealth (dividends plus stock price appreciation)
● Utilization of resources (ROE or ROI)
● Reputation (being considered a “top” firm)
● Contributions to employees (employment security, wages, diversity)
● Contributions to society (taxes paid, participation in charities, providing a needed
product or service)
● Market leadership (market share)
● Technological leadership (innovations, creativity)
● Survival (avoiding bankruptcy)
● Personal needs of top management (using the firm for personal purposes, such
as providing jobs for relatives)

Strategies
A strategy of a corporation forms a comprehensive master plan that states how the
corporation will achieve its mission and objectives. It maximizes competitive advantage
and minimizes competitive disadvantage. For example, even though Cadbury
Schweppes was a major competitor in confectionary and soft drinks, it was not likely to
achieve its challenging objective of significantly increasing its profit margin within four
years without making a major change in strategy. Management therefore decided to cut
costs by closing 33 factories and reducing staff by 10%. It also made the strategic decision
to concentrate on the confectionary business by divesting its less-profitable.

The typical business firm usually considers three types of strategy: corporate, business,
and functional.

1. Corporate strategy describes a company’s overall direction in terms of its general

attitude toward growth and the management of its various businesses and product
lines. Corporate strategies typically fit within the three main categories of stability,
growth, and retrenchment.
2. Business strategy usually occurs at the business unit or product level, and it
emphasizes improvement of the competitive position of a corporation’s products
or services in the specific industry or market segment served by that business unit.
Business strategies may fit within the two overall categories, competitive and
cooperative strategies. For example, Staples, the U.S. office supply store chain,
has used a competitive strategy to differentiate its retail stores from its competitors
by adding services to its stores, such as copying, UPS shipping, and hiring mobile

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technicians who can fix computers and install networks. British Airways has
followed a cooperative strategy by forming an alliance with American Airlines in
order to provide global service. Cooperative strategy may thus be used to provide
a competitive advantage. Intel, a manufacturer of computer microprocessors, uses
its alliance (cooperative strategy) with Microsoft to differentiate itself (competitive
strategy) from AMD, its primary competitor.
3. Functional strategy is the approach taken by a functional area to achieve
corporate and business unit objectives and strategies by maximizing resource
productivity. It is concerned with developing and nurturing a distinctive competence
to provide a company or business unit with a competitive advantage. Examples of
research and development (R&D) functional strategies are technological
followership (imitation of the products of other companies) and technological
leadership (pioneering an innovation).

Business firms use all three types of strategy simultaneously. A hierarchy of strategy
is a grouping of strategy types by level in the organization. Hierarchy of strategy is a
nesting of one strategy within another so that they complement and support one another.

Figure 1-4

Policies
A policy is a broad guideline for decision making that links the formulation of a
strategy with its implementation. Companies use policies to make sure that employees
throughout the firm make decisions and take actions that support the corporation’s
mission, objectives, and strategies. Policies such as these provide clear guidance to
managers throughout the organization.

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WHAT IS STRATEGY IMPLEMENTATION?

Strategy implementation is a process by which strategies and policies are put
into action through the development of programs, budgets, and procedures. This process
might involve changes within the overall culture, structure, and/or management system
of the entire organization. Except when such drastic corporatewide changes are needed,
however, the implementation of strategy is typically conducted by middle- and lower-level
managers, with review by top management. Sometimes referred to as operational
planning, strategy implementation often involves day-to-day decisions in resource
allocation.

Programs
A program is a statement of the activities or steps needed to accomplish a single-use
plan. It makes a strategy action oriented. It may involve restructuring the corporation,
changing the company’s internal culture, or beginning a new research effort.

Budgets
A budget is a statement of a corporation’s programs in terms of denominations. Used in
planning and control, a budget lists the detailed cost of each program. Many corporations
demand a certain percentage return on investment, often called a “hurdle rate,” before
management will approve a new program. This ensures that the new program will
significantly add to the corporation’s profit performance and thus build shareholder value.
The budget thus not only serves as a detailed plan of the new strategy in action, it also
specifies through pro forma financial statements the expected impact on the firm’s
financial future.

Procedures
Procedures, sometimes termed Standard Operating Procedures (SOP), are a system of
sequential steps or techniques that describe in detail how a particular task or job is to be
done. They typically detail the various activities that must be carried out in order to
complete the corporation’s program.

WHAT IS EVALUATION AND CONTROL?

Evaluation and control is a process in which corporate activities and performance
results are monitored so that actual performance can be compared with desired
performance. Managers at all levels use the resulting information to take corrective action
and resolve problems. Although evaluation and control is the final major element of
strategic management, it can also pinpoint weaknesses in previously implemented
strategic plans and thus stimulate the entire process to begin again.

Performance is the end result of activities. It includes the actual outcomes of the
strategic management process. The practice of strategic management is justified in terms
of its ability to improve an organization’s performance, typically measured in terms of
profits and return on investment. For evaluation and control to be effective, managers
must obtain clear, prompt, and unbiased information from the people below them in the
corporation’s hierarchy. Using this information, managers compare what is actually
happening with what was originally planned in the formulation stage.

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FEEDBACK/LEARNING PROCESS
As a firm or business unit develops strategies, programs, and the like, it often must
go back to revise or correct decisions made earlier in the process. For example, poor
performance (as measured in evaluation and control) usually indicates that something
has gone wrong with either strategy formulation or implementation. It could also mean
that a key variable, such as a new competitor, was ignored during environmental scanning
and assessment.

WHAT IS STRATEGIC DECISION MAKING?

The distinguishing characteristic of strategic management is its emphasis on
strategic decision making. As organizations grow larger and more complex, with more
uncertain environments, decisions become increasingly complicated and difficult to make.
In agreement with the strategic choice perspective mentioned earlier, this book proposes
a strategic decision-making framework that can help people make these decisions
regardless of their level and function in the corporation.

Unlike many other decisions, strategic decisions deal with the long-run future of
an entire organization
and have three characteristics:

1. Rare: Strategic decisions are unusual and typically have no precedent to follow.
2. Consequential: Strategic decisions commit substantial resources and demand a great
deal of commitment from people at all levels.
3. Directive: Strategic decisions set precedents for lesser decisions and future actions
throughout an organization.

Reference:
Wheelen Thomas L., Hunger David J. (2012), Strategic Management and Business
Policy. 13th Edition. Pearson, George Washington University

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