Lesson 1-Nature of

Strategic Management
STRATEGIC MANAGEMENT
 What is Strategic Management?

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.

The term Strategic Management is used to refer to strategy formulation,

implementation and evaluation, with strategic planning referring only to strategy
formulation.
 Stages in Strategic Management
The strategic management process consist of three stages:

✓ Strategy formulation
✓ Strategy implementation
✓ Strategy evaluation.
 Strategy formulation
• Includes developing a vision and mission,
• Identifying an organizations external opportunities and threats, determining internal
strengths and weaknesses,
• establishing long term objectives, generating alternative strategies, and choosing
particular strategies to pursue.
• Strategy-formulation issues include deciding what new business to enter, what
business to abandon, how to allocate resources, whether to expand operations or
diversify, whether to enter international markets, whether to merge or form a joint
venture, and how to avoid 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. For better or worse,
strategic decisions have major multi-functional consequences and enduring effects
on an organization.
• Top managers have the best perspective to understand fully the ramifications of
strategy-formulation decision; they have the authority to commit the resources
necessary for implementations.
 Strategy implementation
• Requires a firm to establish annual objectives, devise policies, motivates
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, linking
employee compensation to organizations performance.
• Strategy implementation often is called the “Action Stage” of strategic management.
Implementing strategy means mobilizing employees and managers to put formulated
strategies into action.
• Often considered to be the most difficult stage in strategic management, 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.
• Every division and department must decide on answers to question such as “ What must we
do to implement our part of the organization’s strategy?” and how can we get the job done?”
the challenge of implementation is to stimulate managers and employees throughout the
organization to work with pride and enthusiasm toward achieving stated objectives.
 Strategy Evaluation
The final stage in strategic management. Managers desperately need to know
when particular strategies are not working well; strategy evaluation is the
primary means for obtaining this information. All strategies are subject future
modification because internal and external factors are continuously changing.
Three Fundamental strategy-evaluation activities
are:
• Reviewing the external and internal factors that are bases for current
strategies.
• Measuring performance
• Taking corrective actions
Strategy evaluation is needed because success today is no guarantee of success
tomorrow! Success creates new and different problem; complacent
organizations experience demise.
• Peter Drucker says the prime task of strategic management is thinking through
the overall mission of the business:

• “That is of asking the question, “What is our business?” this leads to the setting
of objectives, the development of strategies, and making today’s decision for
tomorrows results.
• This clearly must be done by a part of the organization that can see the entire
business; that can balance objectives and the needs of today against the needs of
tomorrow; and that can allocate resources and money to key results.
 Key terms in Strategic Management
• Competitive Advantage
Strategic management is all about gaining and maintaining competitive
advantage. This term can be defined as “anything that a firm does especially well
compared to rival firms.” When a firm can do something that rival firms cannot
do, or owns something that rival firms desire, that can represent a major
competitive advantage.
• Strategists
Strategists are the individual who are most responsible for the success or failure of an
organization. Strategist 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.

• Vision and Mission Statements

Many organizations today develop a Vision Statement that answers the question “what do
we want to become?” developing a vision statement is often considered the first step in
strategic planning, preceding even development of a mission statement.
• Mission statements are enduring of purpose that distinguished one business from
other similar firms.
• A mission statement identifies the scope of a firm’s operations in product and
market terms”. It addresses the basic question that faces all strategists: “What is our
business?” 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. A
mission statement is a constant reminder to its employees of why the organization
exists and what the founders envisioned when they put their fame and fortune at risk
to breathe life into their dreams.
 External opportunities and threats

External opportunities and threats refer to Political, Economic, Socio-cultural,

Technological, Environmental, Legal, and Competitive trends and events that
could significantly benefit or harm an organization in the future. Opportunities
and threats are largely beyond the control of a single organization –thus the
word external. A few opportunities and threats that face many firms are listed
below:
• Availability of capital can no longer be • Product life cycles are becoming shorter
taken for granted • States and local governments are
• Consumers expect green operations and financially weak
products • Winters are colder and summers hotter
• Marketing moving rapidly to the internet than usual.
• Commodity food prices are increasing • Home prices remain exceptionally low.
• Political unrest in the middle east is raising • Global Markets offer the highest growth
oil prices in revenue.
• Computer hacker problems are increasing
• Intense price competition is plaguing
most firms
• Unemployment and underemployment
rates remain high
• Interest rates are rising
A basic tenet of strategic management is that firms need to formulate strategies to
take advantage of the external opportunities and to avoid or reduced the impact of
external threats. For this reason, 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 Strength and Weaknesses
Internal Strength and Weaknesses are an organization’s controllable activities that
are performed especially well or poorly. They arise in the management, marketing,
finance/accounting, production/operations, R&D, MI activities of a business.
Identifying and evaluating organizational strengths and weaknesses in the
functional areas of a business is an essential strategic-management activity.
Organizations strive to pursue activities that capitalize on internal strength and
eliminate internal weaknesses.
• Strengths and weaknesses are determined relative to competitors. Relative deficiency or
superiority is important information. Also strengths and weaknesses can be determined
by elements of being rather than performance.

• For example, a strength may involve ownership of natural resources or a historic

reputation for quality. Strengths and weaknesses maybe determine 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.

• Internal factors 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 define as specific results that an organization seeks to achieve in

pursuing its basic mission. Long term means more than one year. Objectives are
essential for organizational success because they state direction; create synergy;
reveal priorities; focus coordination; and provide a basis for effective planning,
organizing, motivating, and controlling activities.
• 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 firms resources. In addition, strategies affect an organization’s long term
prosperity, typically for atleast five year, 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 milestone that organizations must achieve to reach
long-term objectives. Like long-term objectives, annual objectives should be
measurable, 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 management, marketing, finance/
accounting, research and development, and management information system
accomplishments. 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. .
Policies
Are the means by which annual objectives will be achieved. Policies, include guidelines,
rules, and procedures established to support efforts to achieve stated objectives.
Policies are guideline 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 they can be established at the
functional level and apply to particular operational activities or departments Policies,
like annual objectives, are especially important in strategy implementation because they
outline an organizations expectations of its employees and managers. Policies allow
consistency and coordination within and between organizational departments.
 The Strategic
Management Model

The strategic
management process can
best be studied using a
model. Every model
represents some kind of
process. Relationships
among major components
of the strategic-
management process are
shown in this model
 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.
• “ Communication is the key to successful strategic
management”
 Benefits of Strategic Management

• Financial Benefits
• Research indicates that organizations that use strategic-management concepts are more
profitable and successful than those who do not. Business 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.
 Benefits of Strategic Management

• Non-Financial Benefits
• Greenley stated that strategic management offers the following benefits:
1. It allows for identification, prioritization, and exploitation of opportunities.
2. It provides an objective view of management problems
3. It represent a framework for improved coordination and control of activities.
4. It minimize the effects of adverse conditions and changes.
5. It allows major decisions to better support established objectives.
 Benefits of Strategic Management

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

opportunities
7. It allows fewer resources and less time to be devoted to correcting
erroneous or ad hoc decisions.
8. It creates a framework for internal communication among personnel.
9. It helps integrate the behavior of individuals into a total effort.
10. It encourages forward thinking.
 Why do some firms do no strategic planning?

• Some reasons for poor strategic planning are as follows:

• Lack of knowledge or experience in strategic planning- no training in strategic
planning
• Poor reward structures- when an organization assumes success, it often fails to
rewards success. When failure occurs, then the firm may punish.
• Firefighting- an organization can be so deeply embroiled in resolving crises and
firefighting that it reserves no time for planning.
• Waste of time- Some firms see planning as a waste of time because to
marketable product is produced. Time spent on planning is an investment.
 Why do some firms do no strategic planning?

• Too expensive- organization see planning as too expensive in time and money.
• 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.