Ch-1 THE NATURE OF STARTEGIC MANAGEMNT

“Without a strategy an organization is like a ship without a rudder, going round in

circles. It’s like a tramp; it has no place to go”

“He who will not worry about what is far off will soon find something worse than
worry”
THE PURPOSE

This chapter provides an over view of

• Strategic Management
• Model of Strategic Management Process
• Definition of Basic Activities & Terms
• Some Important Themes

What is strategic management?

All firms have strategy even if it is informal, unstructured & sporadic all organizations do
not know where they are heading.
• A Strategic Plan is a game plan that can lead to sustainable competitive advantage
to any type of business. By adapting to change in external trends, internal
capabilities & resources. Effectively formulating, implementing & evaluating
strategies
• Represents a systematic, logical, & objective approach for determining the future
direction & competitive position of an enterprise for a long time.
• Focuses on multiple functions simultaneously. Integrating management,
marketing, finance / accounting, production / operations, R &D, MIS to achieve
organizational success. Hence top managers are in best position to decide &
understand the ramifications, besides having the authority to commit resources.
• Tough managerial choices among numerous good alternatives. It signals
commitment to specific products, markets, resources, technologies, policies,
procedures & operations over an extended period of time.
• A firm needs to formulate strategy to take advantage of external opportunities &
reduce impact of external threats for e.g. via lobbying
• Organizations try to pursue strategies that capitalize on their internal strengths &
eliminate internal weaknesses
• The prime task of SM according to Peter Ducker is thinking through overall
mission of a business
o Asking the question, “what is our business?” This leads to setting of
objectives, development of strategies, making of today’s decisions for
tomorrow results. This must be clearly done by a part of the organization
that can see the entire business; that can balance the objectives & needs of
today against the needs of tomorrow, &that can allocate the resources of
men & money to key results”
“The art & science of formulating, implementing, & evaluating, cross-functional
decisions that enable an organization to achieve its objective”

Strategic Management Process

The SM process can be described as
• Integrating Intuition & Analysis. As intuition alone is grossly inadequate when
decisions are strategic in nature & have major irreversible consequences.

• An objective, logical, systematic approach for making major decisions organizing

qualitative & quantitative information to take decisions under conditions of
uncertainty.

Three Stages of Strategic Management Process

1. Strategy formulation
2. Strategy implementation
3. Strategy evaluation

• Note communication is key to successful strategic management to achieve the

understanding & commitment from all managers & employees which leads to
ownership.

Strategy formulation includes

• Developing a vision & mission

• Identifying external opportunities & threats
• Determining internal strengths & weaknesses
• Establishing long-term objectives
• Generating alternative strategies
• Choosing particular strategy

Strategy formulation issues include deciding about

• What new business to enter, what business to abandon

• Whether to expand operations or diversify, whether to enter
international markets
• Whether to merge or form a joint venture or Partnering or to buy a
business or how to avoid a hostile take over
• How to allocate resources
• Business ethics
 • Global Vs. domestic operations
• Vision/Mission
• Matrix analysis
• Partnering
• Competitive analysis
• Governance
• & guidelines for conducting an internal/ external strategy
assessment

Strategy Implementation (action stage, the most difficult one) requires a Firm to

• Establish annual objectives

• Devise policies
• Motivate employees
• Allocate resources

Strategy implementation issues includes

• Developing a strategy supportive culture
• Creating an effective organizational structure
• Redirecting Marketing efforts or introducing new marketing
concepts
• Outsourcing
• Preparing budgets & doing financial analysis, developing new
controls
• Developing & utilizing information systems
• Linking employee compensation to organizational performance
• Business ethics

Strategy Evaluation

Why:-
 To know whether particular strategies are working or not
 Strategies need modification because internal & external factors are constantly
changing

Three fundamental strategy evaluation activities

• Reviewing Internal & External factors
• Measuring performance
• Taking Corrective actions

The Hierarchical Levels Involved

• Corporate level
 • Divisional or Strategic Business Unit level
• Functional

*Need for communication, integration & to work as a team

Adapting to Change__ Key Strategic management Questions

• The businesses need to continually monitor internal / external events & trends so
to make timely changes. (E.g. e commerce, environment, Enron scandal, war on
terrorism, economic recession, merger mania aging population)
• Continuously adopting their bureaucracies, strategies, systems, products &
cultures

• What kind of business should we become

• Are we in the right fields
• Are there new competitors
• What strategies should we pursue
• How are our customers changing

Definition of Key terms & Activities

Competitive Advantage
Anything that a firm does well compared to rival firms, essential for long term success.
For maintaining it see refer to what is SM

Strategists
• Individuals with ultimate responsibility for success & failure of a firm( CEO,
President, Owner, Chairman of Board, Executive Director, Chancellor, Dean,
Entrepreneur)

• Or Any manager who has a responsibility for a unit or division , responsibility for
profit & loss or direct authority over a major piece of business is a strategist

• They help gather, analyze & organize information. Track industry & competitive
rends, develop forecasting models & scenario analysis, evaluate corporate &
divisional performance, spot emerging market opportunities, identify business
threats & develop creative action plans.

Vision Statement
What do we want to become? The first step in strategic planning

Mission Statement
What is our business? Hence the scope of operations in product & market terms

Opportunities & Threats (external)

 Analysis of trends (environmental scanning or industry analysis) which can
significantly benefit or harm the organization, (largely beyond the control) like
• Economic
• Social
• Cultural
• Demographic
• Environmental
• Political, legal, governmental
• Technological
• Customers
• Competitors

 E.g. wireless /mobile revolution, biotechnology, population shifts,

changing work values & attitudes, space exploration, recyclable packages
increased foreign competition, online sales, rising oil prices, war on
terrorism, natural catastrophe,, declining value of rupee, new product by
competitor. Each of these could be a threat or an opportunity
 These changes create different type of consumer & consequently need for
different type of product, services & strategies.

Strength & Weaknesses (internal)

Typically related to functional areas of the firm (determined relative to competitors in
number of ways like, accounting ratios, comparing performance with past periods &
industry averages)
• Management
• Marketing
• Finance / Accounting
• Production / Operations
• Research & development
• Information systems

Long Term Objectives

Objectives: - specific results that an organization seeks to achieve in pursuing its basic
mission. Established for the Co. & for each division should be challenging, measurable,
consistent,, reasonable & clear
Long-Term:- more than one year
Why objectives:-
 Give a direction
 Helps in evaluation
 Reveal priorities & create synergies & coordination
 Basis for planning, organizing, motivating & controlling activities
Strategies
 • Means by which long term objectives are achieved. Important for strategy
formulation
• Strategies are future oriented & have multifunctional & multi divisional
consequences
• Business Strategies include
 Geographic expansion (market development)
 Diversification
 Acquisition
 Product development
 Market penetration
 Retrenchment
 Divestiture
 Liquidation
 Joint ventures & partnership

Annual Objectives
• Short term milestones to reach long term objectives important for strategy
implementation, become basis for resource allocation
• Established at corporate, divisional &functional levels.
• Set for Management, marketing, finance / accounting, production / operations,
R&D, MIS

Policies
• Means by which annual objectives are achieved, important for strategy
implementation
• Outline an organizations expectation of its employees & managers
• Stated in terms of various functional activities
• May be developed at corporate, divisional or functional level(operational
activities or departments) to help achieve consistency & coordination
• Include
 Guidelines, rules & procedures to support efforts to achieve the
objectives. Particularly includes guides to decision making &
address recurring situations

Strategic Management Model

• Logical starting point is to identify existing, vision, mission, objectives &
strategies, as current circumstances may put certain limitations. Where an
organization would be is largely determined by where it has been
• It is dynamic & continuous \effected by internal & external changes
• Strategic meetings (Many firms hold formally in a CO at off premises called
retreats to encourage creativity & candor) to update firms’ vision / mission,
 opportunities / threats, strengths/ weaknesses, strategies, objectives, policies &
performance
• Formality refers to the extent that the participants, responsibilities, authority,
duties & approach are specified, positively associated with cost,
comprehensiveness, accuracy & success of planning across all types & sizes of
organizations

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External Audit

CH-3

Vision
& Mission Long Term Generate, Implement Implement Measure &
Objectives Evaluate & strategies strategies: Evaluate
select Managemen Marketing, performanc
Ch_2
strategies t Issues fin / Acc, e
R&D, MIS
CH-5 CH-6 CH-7 CH-8 CH- 9

Internal Audit

CH-4

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Benefits of Strategic Management

Financial Benefits
• Improvement in sales
• Improvement in profitability
 • Improvement in productivity

Non Financial Benefits: More proactive than reactive

• Improved understanding of competitors’ strategy
• Enhanced awareness of threats
• Reduced resistance to change
• Enhanced problem prevention capabilities
• Enhances interaction among managers at divisional & functional level
• Results in better strategies for being more systematic, rationale, & logical
• Leads to ownership & empowerment (strengthening employee’s sense of
effectiveness by encouraging them to participate in decision making & to exercise
initiative & imagination). Decentralized line manager planning is replacing
centralized staff planning.

Business Ethics & Strategic Management

Code of Business Ethics

• Provides Basis on which policies can be devised to guide daily behavior &
decisions in the workplace

Advantages of International Operations

• Absorb excess capacity
• Reduce unit costs
• Spread risk over world markets
• Low cost production facilities

Disadvantages of International Operations

• Difficult communications
• Underestimate foreign competition
• Cultural barriers to effective management
• Complications arising from currency differences

Guidelines for Effective Strategic Management

1. Ensure implementation as it achieves more than a perfect plan that never gets off
the paper
2. It’s a people process not a paper process. Keep it as simple & non routine,
eliminate jargon
3. Attend to psychological, social, political, information, administrative dimensions
4. Stimulate thinking that challenges assumptions underlying current corporate
strategy
5. Open mindedness to accept new information, ideas, etc.
6. Subjective factors such as attitudes towards risk, concern for social responsibility
& organizational culture ill always affect strategy.
Avoid Pitfalls
1. Pursuing too many strategies spread the firm resources that all strategies are
jeopardized
2. using SM to gain control over decision & resources
3. doing SM for sake of regulatory requirements
4. hastiness in formulation
5. failure to communicate the employees
6. intuitive decision making despite having a strategic plan
7. Lack of top management support
8. failure to measure performance
9. not involving all the managers or key employees rather doing it by a planner
10. failure to create a supportive climate for change
11. being over formal in planning that flexibility & creativity are stifled

Why Some Firms Do Not Do Strategy Planning

• Poor reward structure
• Fire fighting
• Waste of time
• Too expensive
• Laziness
• Content with success
• Fear of failure
• Overconfidence
• Prior bad experience
• Self esteem
• Fear of the unknown
• Honest difference of opinion
• suspicion

Themes
1. Global Considerations Impact Virtually All Strategic Decisions

 Doing global business has now become a necessity rather than luxury in
most of industries

 A borderless world with global citizens, competitors, customers, suppliers,

distributors

 The underpinning of strategic management hinge upon manager’s gaining

an understanding of competitors, markets, prices, suppliers, distributors,
governments, creditors, shareholders & customers on a worldwide basis.

 The dynamics of political, economic & cultural differences across countries

directly affect strategic management decisions
2. Electronic commerce Has Become A Vital Strategic Management
Tool

 Companies are gaining a competitive advantage by using the internet for

direct selling and for communication with suppliers, customers, creditors,
shareholders, partners, clients & competitors who may be dispersed globally.

 Internet is being used to gather, analyze, send & receive information.

 E commerce allows the firm to purchase supplies, sell products, advertise,

by pass intermediaries, track inventory, eliminate paper work & share
information. B2B e-commerce is 5 to 10 times greater than consumer e-
commerce

 In short e-commerce is minimizing the expense & cumbersome of time,

distance & space in doing business yielding higher efficiency & customer
convenience

 Internet promotes endless comparison shopping transferred the powers from

the businesses to the individuals

3. Natural Environment Has Become An Important Strategic Issue

 Environment refers to the natural environment & is defined as
“surroundings in which an organization operates, including air, water, land,
natural resources, flora, fauna, humans & their interrelation.” Some burning
issues are global warming, bio-terrorism, increased pollution etc

 This theme includes social responsibility & business ethics issues

 To promote & encourage firms to conduct operations in an environmentally

sound manner.