STRATEGIC MANAGEMENT

Definition

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/accounting, production/operations, research and development and information systems to achieve organizational success. Sometimes the term strategic management is used to refer to strategy formulation, implementation and evaluation, with 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, in contrast, tries to optimize for tomorrow the trends of today.

Different Stages

The strategic management process consists of three stages:

1. Formulation

It 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 them. Strategy-formulation includes issues such as deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversify, and how to avoid a hostile takeover.

2. Implementation

It 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.

3. Evaluation

It 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.

Key Concepts

Following are the key concepts in strategic management:

a. Competitive advantage

Strategic management is all about gaining and maintaining competitive advantage which can be defined as “anything that a firm does especially well compared to rival firms.”

b. Strategists

They are the individuals most responsible for the success or failure of an organization. They hold various job titles, such as chief executive officer (CEO), president, owner, chair of the board, executive director, and so on.

c. Vision and mission statements

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.

d. External opportunities and threats

They refer to 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—thus the word external.

e. Internal strengths and weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities that are performed exceptionally well or poorly. Identifying and evaluating them 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. Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information.

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 – and thus to exert control over its own destiny. 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.

i. Financial benefits

Research indicates that organizations using strategic management concepts are more profitable and successful than those that do not. 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. Firms with planning systems more closely resembling strategic management theory generally exhibit superior long-term financial performance relative to their industry.

ii. Non-financial benefits

Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as an enhanced awareness on external threats, an improved understanding of competitors’ strategies, increased employee productivity, reduced resistance to change and a clearer understanding of performance–reward relationships. Strategic management enhances the problem-prevention capabilities of an organization because it promotes interaction among managers at all divisional and functional levels.

Pitfalls in Strategic Planning

Strategic planning is an involved, intricate and complex process that takes an organization into uncharted territories. 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 as under:

i. Strategic planning should not be used to gain control over decisions and resources.
ii. It should not be done only to satisfy accreditation or regulatory requirements.
iii. Too hastily moving from mission development to strategy formulation is another pitfall in planning.
iv. Failing to communicate the plan to employees, so they continue working in the dark.
v. Top managers make many intuitive decisions that conflict with the formal plans.
vi. Top managers do not support the strategic-planning process actively.
vii. Failing to use plans as a standard for measuring performance.
viii. Delegating planning to a “planner” rather than involving all managers and failing to involve key employees in all phases of planning.
ix. Failing to create a collaborative climate supportive of change and being so formal in planning that flexibility and creativity are stifled.

Guidelines for Effective Strategic Management

Failing to follow certain guidelines in conducting strategic management can foster criticisms of the process and create problems for the organization. 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 plans, treating the means and circumstances under which they will be implemented as afterthoughts!

Following are the guidelines for effective strategic management:

i. It must not be self-perpetuating

Strategic management must not become a self-perpetuating bureaucratic mechanism. Rather, it should be a self-reflective learning process that familiarizes managers and employees in the organization with key strategic issues and feasible alternatives for resolving them.

ii. It must not be ritualistic

Strategic management must not become ritualistic, stilted, orchestrated or too formal, predictable and rigid. Words supported by numbers, rather than numbers supported by words, should represent the medium for explaining strategic issues and organizational responses.

Strategy Implementation

Successful strategy formulation does not guarantee its successful implementation. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Strategy formulation and implementation can be contrasted in the following ways:

Strategy-formulation concepts and tools do not differ greatly for small or large, for-profit or non-profit organizations. However, strategy implementation varies substantially among different types and sizes of organizations. Implementing strategies requires such actions as altering sales territories, adding new departments, closing facilities, hiring new employees, changing an organization’s pricing strategy, developing financial budgets, developing new employee benefits, establishing cost-control procedures, changing advertising strategies, building new facilities, training new employees, transferring managers among divisions and building a better management information system. These types of activities obviously differ greatly between manufacturing, services and governmental organizations.

Aims of Strategy Implementation

i. Management perspectives

In small organizations, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional and functional managers. Implementation problems can arise because of this shift in responsibility, especially if strategy-formulation decisions come as a surprise to middle- and lower-level managers. Managers and employees are motivated more by perceived self-interests than by organizational interests, unless the two coincide. Therefore, it is essential that divisional and functional managers be involved as much as possible in strategy-formulation activities. Of equal importance, strategists should be involved as much as possible in strategy-implementation activities.

ii. Annual objectives

Establishing annual objectives is a decentralized activity that directly involves all managers in an organization. Active participation in establishing annual objectives can lead to acceptance and commitment. Annual objectives are essential for strategy implementation because they:

a) represent the basis for allocating resources.
b) are a primary mechanism for evaluating managers.
c) are the major instrument for monitoring progress toward achieving long-term objectives.
d) establish organizational, divisional and departmental priorities.

iii. Policies

Changes in a firm’s strategic direction do not occur automatically. On day-to-day basis, policies are needed to make a strategy work as they help in solving recurring problems and guide the implementation of strategy. Broadly defined, policy refers to specific guidelines, methods, procedures, rules, forms and administrative practices established to support and encourage work toward stated goals. Policies are instruments for strategy implementation. Policies set boundaries, constraints, and limits on the kinds of administrative actions that can be taken to reward and sanction behaviour; they clarify what can and cannot be done in pursuit of an organization’s objectives.

iv. Resource allocation

Resource allocation is a central management activity that allows for strategy execution. In organizations that do not use a strategic-management approach to decision-making, resource allocation is often based on political or personal factors. Strategic management enables resources to be allocated according to priorities established by annual objectives. Nothing could be more detrimental to strategic management and to organizational success than the allocation of resources in ways not consistent with priorities indicated by approved annual objectives.