CHAPTER ONE: INTRODUCTION

NATURE OF STRATEGIC MANAGEMENT

Understanding Strategy
Strategy was originally a term applied to warfare; it was defined as ‘the art of planning and directing
larger military movements and the operations of war.’ The term ‘strategy’ is derived from the Greek
word strategos, which means generalship – the actual direction of military force, as directed from the
policy governing its deployment. The term was first used around 360 BC, when the Chinese military
strategist Sun Tzu wrote The Art of War, a work which is said to have influenced the thinking of many
modern Japanese businesses, and has led to a number of thoughts about how the ‘art’ can be applied to
modern business.
What the concept actually means? Fundamentally, it is about the purpose of the business, why it
exists and what it exists to do. From this ‘mission’ the strategy will define the activities or projects that
the business will adopt in order to achieve it. The projects that deliver the strategy demand the use of
resources. Resources have a cost and so represent an investment in the business. Critically, a strategy
will define how these resources will be used to compete against the other businesses that are trying to
attract customers’ valuable money. A strategy gives the firm a competitive advantage. A competitive
advantage is the basis for a relationship with customers, which is beneficial to both customers and
supplying company. A good strategy will make this relationship resistant to competitive attack. It will
make it sustainable.
1.1 Defining and Explaining Strategy
Despite its importance, or perhaps because of it, there is no one, single universally agreed definition of
strategy. Every authority gives his or her own version.
 One of the earliest contributors, Alfred D Chandler, defined strategy as: ‘the
determination of the basic long-term goals and objectives of an enterprise and the adoption of
the courses of action and the allocation of resources necessary for carrying out these goals’.
 William F. Glueck (in Business Policy and Strategic Management) defines strategy as: ‘a
unified, comprehensive, integrated plan designed to ensure that the basic objectives of the
enterprise are achieved.
 Hill and Jones (in Strategic Management Theory) define strategy as: ‘a specific pattern of
decisions and actions that managers take to achieve superior organizational performance’.
 Thompson and Strickland (in Strategic Management) defines strategy as: ‘the pattern of
actions and business approaches managers employ to please customers, build an attractive

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 market position, and achieve organizational objectives; a company’s actual strategy is partly
planned and partly reactive to changing circumstances’.
Looking at these definitions we can say that strategy is about:
 A game plan or course of action or pattern of actions or competitive moves or business
approaches that manager’s employ in running a company
 A strategy is the means used to achieve the ends (objectives)
 Strategy is both proactive (intended) and reactive (adaptive)
 Strategies are partly visible and partly hidden to outside view
1.2. Meaning of Strategic Management
Strategic management has been defined and interpreted differently by various authors.
1. Strategic management is a stream of decisions and actions which leads to the development of an
effective strategy or strategies to help achieve corporate objectives. According to this definition the
end result of strategic management is a strategy or a set of strategies for the organization (Glueck).
2. Strategic management is the formulation and implementation of plans and the carrying out of
activities related to the matters which are of vital, pervasive, or continuing importance to the total
organization (Sharplin)
3. Strategic management is a systematic approach to a major and increasingly important responsibility
of general management to position and relate the firm to its environment in a way which will
assure its continued success and make it secure from surprises (Ansoff).
We observe that different authors have defined strategic management differently. Strategic
management is considered as either decision-making or planning, or the set of activities related to the
formulation and implementation of strategies to achieve organizational objectives. The emphasis in
strategic management is on those general management responsibilities which are essential to relate the
organization to the environment in which a way that its objectives may be achieved.
1.3. The Strategic Management Process OR Stages in Strategic Management

The strategic management process, as illustrated in figure below, is a five-step process that encompasses
Strategic Planning, Implementation, and Control.

Strategic Planning

Strategic Intent

Strategic Analysis

Strategy Formulation

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 Strategy Implementation

Structural/Functional/Operational/ Behavioral

Strategic Control & Evaluation

Figure 1.1 Strategic Management Process

STRATEGIC MANAGEMENT PROCESS:

 Strategic Intent--Deciding a firm’s goals
 Strategic Analysis--Knowing one’s surroundings
 Strategy Formulation--Crafting strategies
 Strategy Implementation--putting plans into action
 Strategic Control & Evaluation--monitoring progress

A. STRATEGIC INTENT
 Vision--What a firm aspires to become
 Mission--A firm’s reason for being
 Goals--Qualitative goals for various performance areas
 Objectives--Quantitative operational targets to achieve

B. STRATEGIC ANALYSIS
 External analysis--A firm’s economic, political, cultural, technological, and international environment
 Internal analysis--A firm’s capacities to compete: technology, human resources, capital, corporate
culture

C. STRATEGY FORMULATION
 Corporate level strategy--selecting businesses to be in
 Business Level strategy--developing competitive advantages (Generic strategies)
 Functional (or operational) strategy--functional value chains

D. STRATEGY IMPLEMENTATION
 Activating strategies – Communicating and Institutionalizing strategies
 Structural Implementation - Building and adjusting organizational structures
 Operational/Functional Implementation - Developing operational systems
 Behavioral implementation - Developing human resources and Nurturing corporate culture
 Achieving strategic fits

E. STRATEGIC EVALUATION
 Develop performance goals
 Assess actual performance
 Compare actual with performance goals
 Reinforce or Take corrective actions

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 F. STRATEGIC CONTROLS
 Administrative controls
 Operational controls
 Strategic controls
 Financial controls
 Cultural controls
1.4. Key Terms in Strategic Management
 Vision Statement – What do we want to become?
 Mission Statement – What is our business?
 Opportunities & Threats (External) - Analysis of Trends: Economic, Social, Cultural,
Demographic/Environmental, Political, Legal, Governmental, Technological, Competitors.
 Strengths & Weaknesses (Internal) - Typically located in functional areas of the firm:
Management, Marketing, Finance/Accounting, Production/Operations, Research &
Development, Computer Information Systems.

1.5. Overview of Types of Strategy OR levels at which Strategy Operates

A. Corporate Strategy
Corporate Strategy is regarded as encompassing the aims and objectives of the organization together
with the means of how these are to be achieved. It is, by definition, holistic, i.e., it embraces all of the
company’s different businesses and functions. Andrews defined corporate strategy as: ‘the pattern of
major objectives, purposes or goals and essential policies or plans for achieving those goals, stated in
such a way as to define what business the company is in or is to be in and the kind of company it is or is
to be’. More specifically corporate strategy deals with:
 basic values and overall vision
 portfolio of activities (Strategic Business Units - SBU’s)
 mission of each strategic business unit
 overall allocation of resources
B. Business Strategy
Business strategy or competitive strategy is empowered to make key decisions about current and future
strategy within the framework of the overall corporate strategy. It seeks to determine how an
organization should compete in each of its businesses. For a small organization in only one line of
business or the large organization that has not diversified into different products or markets, the
business-level strategy typically overlaps with the organizations corporate strategy. For organizations
in multiple businesses, however, each division (SBUs) will have its own strategy that defines the
products or services it will offer, the customers it wants to reach, and the like. For example, Pepsi Co.

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has different business-level strategies for its various business units – Soft drinks (Pepsi, Mirinda, 7up)
More specifically business strategy deals with:
 competitive positioning of the business unit
 choice of segments
 trade-offs, specific strengths
 action towards customers`
The essence of business strategy is achieving sustainable competitive advantage. It has three aspects:
- deciding what product/service attributes (lower costs and prices, a better product, a wider
product line) offer the best chance to win a competitive edge;
- developing skills, expertise, and competitive capabilities that set the company apart from
rivals; and
- trying to insulate the business as much as possible from the effects of competition.
C. Functional Strategy
Functional Strategy seeks to determine how to support the business-level strategy. A firm needs a
functional strategy for every competitively relevant business activity and organizational unit – for
R&D, Production, Marketing, Customer service, Distribution, Finance, HR, IT, and so on.
Functional strategies, while narrower in scope than business strategies, add relevant detail to the
overall business game plan by setting forth the actions, approaches, and practices to be employed in
managing a particular functional department or business process or key activity. They aim at
establishing or strengthening specific competencies and competitive capabilities calculated to enhance
the company’s market position and standing with its customers.
More specifically functional strategy deals with: development of functional strengths and resources as
required by businesses and the corporation.

Corporate MNC


Business Unit

SBU 1 SBU 2 SBU 5
SBU 3 SBU 4


Functional
 Finance Marketing
R&D HRM
& Sales

Figure 1.2: Levels at which Strategy Operates

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1.6. Strategic Management Approaches
A) Industrial Organization (I/O) Model
The industrial organization (I/O) model explains the external environment is a dominant influence on a
firm’s strategic actions. The model specifies that the industry in which a company chooses to compete
has a stronger influence on performance than do the choices managers make inside their organizations.
The firm’s performance is believed to be determined primarily by a range of industry properties,
including economies of scale, barriers to market entry, diversification, product differentiation, and the
degree of concentration of firms in the industry.
I/O model steps
1. Study the external environment, especially the industry environment.
2. Locate an industry with high potential for above average returns.
3. Identify the strategy called for by the attractive industry to earn above average returns.
4. Develop or acquire assets and skills needed to implement the strategy.
5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy.
B) The Resource-Based Model
The resource-based model assumes that each organization is a collection of unique resources and
capabilities. The uniqueness of its resources and capabilities is the basis for a firm’s strategy and its
ability to earn above-average returns.
 Resources are inputs into a firm’s production process, such as capital equipment, the skills of
individual employees, patents, finances, and talented managers. In general, a firm’s resources are
classified into three categories: physical, human, and organizational capital and resources are either
tangible or intangible in nature.
 Capability is the capacity for a set of resources to perform a task or an activity in an integrative
manner. Capabilities evolve over time and must be managed dynamically in pursuit of above-
average returns.
 Core competencies are resources and capabilities that serve as a source of competitive advantage
for a firm over its rivals. Core competencies are often visible in the form of organizational
functions.
Resource-Based model steps
1. Identify the firm’s resources. Study its strengths and weaknesses compared with those of
competitors.
2. Determine the firm’s capabilities. What do the capabilities allow the firm to do better than its
competitors?

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 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive
advantage.
4. Locate an attractive industry.
5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to
opportunities in the external environment.
1.7. Benefits of Strategic Management
 Financial Benefits;
 Productivity improvement
 Improvement in sales
 Improvement in profitability
 Non-Financial Benefits;
 Improved understanding of competitors strategies
 Enhanced awareness of threats
 Reduced resistance to change
 Enhanced problem-prevention capabilities
1.8. Business Ethics and Corporate Social Responsibility ……………… (Reading Assignment)
What is Ethics?
Ethics is a collection of moral principles and rules of conduct accepted by part or all of the members of
a society. Ethics guides behavior based on beliefs about what is right or wrong. The sources of these
beliefs may be tradition, religion or reasonable judgment about what is best for the individual and
society as a whole.
1.8.1. Meaning of Business Ethics
Business ethics means the behavior of a businessman while conducting a business, by observing
morality in his/her business activities.
The behavior of a businessman has more impact within the business organization than outside. So, he
should obey the laws even though he may personally believe them to be unjust or immoral. If the
businessman feels that the provisions of laws are unjust, he can take steps to change the provisions
instead of disobeying them.
A businessman should observe morality not only in business activities but also in non-business
activities. Such observation of morality is not required out of fear for punishment. He should observe
ethics inspired by his own interest in his business and society as a whole. The reason is that, there is no
distinction between a businessman and his business. According to Drucker, every individual and

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organization in society should abide by certain moral codes and that there is no separate ethics of
business.
Definition of Business Ethics
In the words of Robert Gwinner and others, “Business ethics may be defined as those principles,
practices and philosophies that are concerned with moral judgments and good conduct, as they are
applicable to business situations.”
In the words of Rogene A. Buchholz, “Business ethics refers to right or wrong behavior in business
decisions.”
Thomas M. Garrett, defines business ethics as “Business ethics is concerned primarily with the
relationship of business goals and techniques to specifically human ends.”
Business ethics may be defined as a set of moral rules and principles to protect the interest of
customers, employees, society, business unit and the industry as a whole.
Importance of Business Ethics
The development of a business has an impact on the lifestyle of a businessman. The behavior of a
businessman has close relationship with his lifestyle. Hence, it is necessary to observe business ethics
for the following reasons.
1. Survival of the business unit
Businessmen should consider the interest of the business unit. Unethical practices of businessmen will
lead to the closure of business unit. The closure of a business unit does not only create problems to
business but also to employees and the society in general. Normally, good behavior is rewarded and
bad behavior is punished. Since, a business is an economic institution, it aims at maximizing profits.
The behavior of a businessman is affected by some of the factors such as leadership qualities, integrity,
knowledge, skills, influence and exercising power. Businessmen are expected to protect their units in
all respects.
2. Growth of business unit
Whenever a businessman observes ethics strictly, definitely the particular business unit well gets
developed. A business could not be run in such a manner as is detrimental to the interest of society or
business itself. So, it is argued that there should be some business ethics for the growth of a business.
3. Earning goodwill
The prime objective of any business is to earn profit. At the same time, no business is allowed to earn
profit without following business ethics. If business ethics are properly followed by a business,
automatically that particular business unit earns a good name among the public.

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 4. Improving the confidence
Business ethics are necessary to improve the confidence of the customers, employees, and the like. If
confidence is infused, customers and employees will popularize the name of excellent consumer
services of the particular business unit.
5. Maintaining Inter-relationship
No business functions separately or independently. Each business has close relationship with another
business even though the nature and size of the other business differs. The proverb, “No tree can be
considered as a forest” attests this fact. It is expected that each business unit should have a smooth
relationship with others. The inter-relationship of business is maintained by adopting business ethics.
6. Solving social problems
If a businessman observes ethics in his business, the public have no difficult in having their wants
fulfilled. There is no bargaining between the businessman and public. There is a fair treatment of an
employee by him. This will avoid social problems like strike, lockout, etc.
Principles of Business Ethics
Some of the principles of business ethics developed by various known authorities are explained below:
1. Service motive should be in the first place rather than profit motive, even though the very
purpose of any business is to earn profits.
2. There is no discrimination against any particular group of people, say the rich, the poor, the high,
he low, the caste, the religion, etc.
3. Fullest satisfaction should be available to consumers.
4. There is no lack of consideration for clean environment.
5. Human feelings are properly considered while rendering service.
6. There is no wastage or misuse of available scarce resources.
7. Business must be a dynamic and efficient one.
8. Business should provide quality products at reasonable price.
9. Business must maintain or improve standard of living.
10. There must be healthy competition.
11. Employees have no fear regarding the security of job. In other words, there should be job security
to employees.
12. Businessman must be sincere in payment of fair wages.
13. Better working conditions or environment should be provided.
14. Efficient employees are properly motivated and recognized.
15. Employees are requested to participate in management.

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 16. Monetary and non-monitory incentives must be available to employees.
17. Businessman must pay taxes promptly and obey other obligations promptly.
18. Business unit must avoid unfair trade practices like hoarding, black- marketing, etc.
19. There should be no formation of cartel agreements to control production, price, etc
20. Businessman must disclose all relevant information to needy persons
21. Businessman must prepare genuine books of accounts and presents before all authorized persons
as and when required by them.
22. He should protect the interests of its members at the time of amalgamations, absorption and the
like.
23. He should be ready to extend mutual cooperation and mutual help.
24. Business should act as a particular in the development of nation.
25. He should follow proper communication system at all levels.
26. He should not make promises that could not be fulfilled.
27. Business assets should not be utilized by its owner or employees for personal use.
28. Employees are allowed free speech in the work place.
29. Business unit should follow proper personnel policy with regard to promotion, transfer and the
like.
30. Businessman should not indulge in politics.
Factors Affecting Business Ethics
Business ethics reflects its responsibility, authority, and dignity. So, the business organization wants to
conduct its business without affecting the interest of society and the business itself by assuming
responsibility, exercising authority and maintaining dignity. But there are some factors affecting the
observation or adoption of business ethics. These are:
1. Unhealthy competition
Businessman adopts unfair trade practices to have an edge over other competitors. This will ruin
business in the long run. Gentle- man businessman does not prefer unhealthy competition.
2. Abnormal profit motive
The very purpose of starting a business unit is to earn profit. Only a lesser amount of profit is earned
during the initial period of business. But, the businessman wants to earn more profits by economizing
establishment expenses.
3. Political interference
Political parties approach the businessman to get donation. Now, the businessman is not ready to deny
it, as it would affect the smooth running of business. The donation given to a political party is

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considered unnecessary expenses from the business point of view. This will affect profit and the
smooth running of business.
4. Political uncertainty
The policy of government affects the business ethics to some extent. If a number of governments are in
power for short periods, there is every chance for changes in the policies of the government. A stable
government alone does not affect business ethics.
5. Unjust legislation
An act is passed only after through discussion. But, the person who participates in the discussion does
not know the practical difficulties and practices and no business experience. So, a legally right practice
may not be ethically right.
6. Corruption
The government through its officials regulates a business. Straightforward and able officials are
working in the government departments. However, the businessman does not appreciate the approach
or behavior of some government officials.
7. Lack of ethical attitude
A businessman wants to stand out distinctly form other fellow businessman. At the same time, he does
not prefer to practice business ethics in spite of his sound knowledge of them.
8. Lack of education
Here, education refers to the knowledge of ethical value. Businessman wants to follow business ethics
strictly but he does not know what the business ethics is relating to his business.
9. Noncooperation of workers
Workers or employees do not care about the business ethics. They want just to do their work as quickly
as possible for remuneration. The impact of non-adoption of business ethics affects the business and
not the workers or employees.
10 . Red-Tapism
The existence of red- tapism also affects business ethics. Business unit should get prior permission of
the government for all its proceedings at every stages of development. Red-tapism is found to be at its
maximum in the issue licenses and in the taxation policy.

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