LESSON 2: INTRODUCTION TO STRATEGIC MANAGEMENT

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1 LESSON 2: INTRODUCTION TO STRATEGIC MANAGEMENT Learning Objectives On the completion of this chapter you should be able to: You should be able to understand the model of strategic management process. You will understand that the model is representative of further subsequent chapters, which includes in-depth discussions of one of the major components of the model. You will understand how companies determine their mission including broad statement about its purpose, philosophy and goals. You will understand how a company profile reflects internal conditions and capabilities. You will understand how to assess the company s external environment, in terms of both competitive and contextual factors. You will understand how to choose the strategy which is needed to achieve the desired options. You will understand that how strategic choice decisions are implemented based on budgeted resource allocation. You will understand the review and evaluation of the success of the strategic process to serve as a basis for control and as an input for future decision making. Thus, you will understand a strategy reflects a company s awareness of how to compete against whom, when, where and for what. Strategic Management Processes I had already explained and described the historical evolution of business strategy and said that strategic management is carried out through a process of strategic management. So, you will find organizations devise various methods for strategy formulation. The strategic management formulation and implementation methods vary with product profile, company profile, environment within and outside the organization, and various other factors. Large organizations which use sophisticated planning use detailed strategic management models whereas smaller organizations where formality is low use simpler models. Small businesses concentrate on planning steps compared to larger companies in the same industry. Large firms have diverse products, operations, markets, and technologies and hence they have to essentially use complex systems. In spite of the fact that companies have different structures, systems, product profiles, etc, various components of models used for analysis of strategic management are quite similar. You must have observed that different thinkers have defined business strategy differently, yet there are some common elements in the way it is defined and understood. The strategic management consists of different phases, which are sequential in nature. What are these Phases? There are four essential phases of strategic management process. In different companies these phases may have different, nomenclatures and the phases may have a different sequences, however, the basic content remains same. The four phases can be listed as below. i Defining the vision, business mission, purpose, and broad objectives. ii.. Formulation of strategies. iii. Implementation of strategies. iv. Evaluation of strategies. These phases are linked to each other in a sequence as shown in Exhibit It may not be possible to draw a clear line of difference between each phase, and the change over from one phase to another is gradual. The next phase in the sequence may gradually evolve and merge into the following phase. An important linkage between the phases is established through a feedback mechanism or corrective action. The feedback mechanism results in a course of action for revising, reformulating, and redefining the past phase. The process is highly dynamic and compartmentalization of the process is difficult. The change over is not clear and boundaries of phases overlap. My purpose to depict this diagram is to assist you in remembering and recalling it with ease Exhibit Phases of Strategic Management Process Strategic Management Process Strategic management process that could be followed in a typical organization is presented in Fig. The process takes place in the following stages: i. The Strategic Planner has to define what is intended to be accomplished (not just desired). This will help in defining the objectives, strategies and policies. ii. In the light of stage I, the result of the current performance of the organization are documented. iii. The Board of Directors and the top management will have to review the current performance of the documented. iv. In view of the review, the organization will have to scan the internal environment for strengths and weaknesses and the external environment for opportunities and threats. v. The internal and external scan helps in selecting the strategic factors. vi. These have to be reviewed and redefined in relation to the Mission and Objectives. vii.at this stage a set of strategic alternatives and generated. viii.the best strategic alternative is selected and implemented through programmed budgets and procedures

2 ix. Monitoring, evaluation and review of the strategic alternative chosen is undertaken in this mode. This can provide a feedback on the changes in the implementation if required. As can be seen, this provides a rational approach to strategic decision-making and it can be successfully practiced by Indian organizations, which now have to operate in a competitive environment. Benefits of Strategic Management Studies have revealed that organizations following strategic management have outperformed those that do not 13. Strategic planning ensures a rational allocation of resources and improves co-ordination between various divisions of the organization. It helps managers to think ahead and anticipate problems before they occur. The main benefit of the planning process is a continuous dialogue about the organization s future between the hierarchical levels in the organization. In short, the most highly rated benefits of strategic management are: Clarity of strategic vision for the organization Focus on what is strategically important to the organization Better understanding of the rapidly changing business environment. Strategic management need not always be a formal process. It can begin with answering a few simple questions: 1.Where are we now? 2.In no changes are made, where will we be in the next one year? Next two years? Next three years? Next five years? Are the answers acceptable? If the answers are not acceptable, what actions should the top management take? With what results and payoffs? Today, as you know that business is becoming more complex due to rapid changes in environment. It is becoming increasingly difficult to predict the environment accurately. The internal and external environments of organizations are now driven by multitudes of forces that were hitherto non-existent. Earlier the changes in technology were not so rapid but today the information from all over the globe is pouring in through the computers. The world in fact has shrunk. This has created fierce competition as the customers and stakeholders have become more aware of their rights. Think of yourself as a consumer who has got several alternatives to choose from? You as a customer looks for real value for your money. You have become aware of quality and cost ratios and then diligently select the products. You are now more demanding for better service in the least possible time. This has brought in new rules of business that companies all over the world are evolving through their experience. The obsolesce has become so rapid that the time when you are in the process of buying a computer it might have already become obsolete in some part of the globe. The number of events that affect domestic and world market are now far too many and too often. Over reliance on experience in such situations may really work out to be very costly for companies. E.g. Reliance has shifted to more creativity, innovation and new ways of looking at business and doing it in novel ways. The earlier concepts of having highly fictionalized departments and developing specialization of labour is losing its credibility. Organizations are becoming more responsive, flexible, and adaptable to changing business situations. In such environments that are charged with high level of competition, developing competitive edge for survival and growth has become imperative for companies. What do you think will Business Strategy Concepts and Techniques Benefit Foreign Businesses as much as Domestic Firms? Give an example. The need is now to distinguish between long-range planning and strategic planning. The importance of strategic management in setting the directions for growth of organizations is being increasingly realized these days. The evolution of objectives after setting directions for growth of organizations has become necessary. The technique of strategic management is used as a major vehicle for planning and implementing major changes in organization. The implementation of the strategic plans needs good teamwork and understanding of the concept at grass root Have a Look at the Difference Between the Two Top Management Decisions on Strategic Issues To establish the vision of the firm, stating of corporate objectives, and strategic thrust areas, defining a comprehensive corporate philosophy and values, identifying the domains in which an organization would operate, learning and recognizing worldwide business trends, and allocation of resources in line with corporate priorities, are some of the key areas wherein top management of organizations take decisions. Let us now look at the domain of top management? Strategic Issues for Sharing of Concern and Resources To meet certain specific needs of certain customers, use of common upgraded technologies by certain business units, deployment of people, physical assets or money from internal or external sources and to achieve economics of scale in deployment, certain decisions may be taken by the management. Strategic Issues Likely to have Long Term Impact Strategic decisions for implementing a course of action have broad implications and long-term ramifications and the people of an organization have to commit themselves to the decisions and plans for a long period of time. Once a firm takes strategic decisions and implements the action programs, the impact is seen slowly on its competitive image and the advantage tied to the particular strategy start pouring in. The companies become known in certain markets, products, or technologies or the decisions may adversely affect the previous progress

3 In today s business world, where changes are by leaps and bounds, some organizations may decide for radical changes through re-engineering of their business processes to gain strategically better position Strategic Directions are Futuristic Strategies are essentially for the future. Strategic decisions are taken based o forecasts that are in turn based on available data on trends. The managers involved in strategic planning concentrate on developing projections that would take the company to better strategic position. The companies thus become proactive rather than being reactive to business situations. Strategies have Multi-functional and Multi-business Effects Every company has several business units. Strategic decisions are coordinative in nature among all the business units of the company. Many strategic decisions on product mix, competitive edge, organizational structure etc. affect various departments and functions that may be classified as strategic business units (SBUs). Each of these units get affected by the decision taken at the top level, regarding allocation of resources and deployment of personnel etc. So, Business Strategy as a discipline focuses at the organization as one single unit. Strategies are Defined Based on Study of Environment The organization culture internal to the organization and also the external environment must be thoroughly scanned and studied to decide on strategies. The interaction between the organizations and the external environment affects both of them. The organization tends to change the environment and the same environment makes an impact on the organization. The firms have to define their strategic position with regard to the environment and decide strategies that will take it to the desired position. The firms are part of the system, where customers, stake holders, competitors etc. exist and the firm cannot remain insulated from these determinants of the external environment i. Defining the vision of the company ii. Defining the mission of the company iii. Determining the purposes or goals iv. Defining the objectives v. Environment scanning vi. Carrying out corporate appraisal vii.developing strategic alternatives viii.selecting a strategy ix. Formulating detailed strategy x. Preparing a plan xi. Implementing a strategy xii.evaluating a strategy Strategic Management Models Firstly have a look at the various model which has got relevance to the strategic process. Now think of a firm which in your opinion has been successful over the past 15 years and list down the things you think have attributed to its success: Some of the strategic management models are shown. Now, I will discuss each of the elements of strategic management model. Exhibit Strategic Management Model Company vision statement Company mission statement Company profile External environment and internal environment Evolution-strategic choices and selection Long-term objectives Grand strategy Annual objective Functional strategy Operating policies Institutionising Strategy Control and evaluation Strategic Planning Model Elements in Strategic Management Process Each phase of strategic management process can be viewed to be consisting of a number of elements, which can be clearly defined with input and output relationships. The steps have logical connectivity and hence these are sequential. These steps can be illustrated with the help of a flow diagram. The following discrete twelve steps can be considered as comprehensive. Comprehensive Model of Strategic Management Working Model of Strategic Management After looking at the above given flow charts I will now discuss each phase in detail. Let us, now discuss in details the model of strategic management

4 Vision of the Company Vision of a company is rather a permanent statement articulated by the CEO of the company who may be Managing Director, President, Chairman, etc. The purpose of a vision statement is to: i.communicate with the people of the organization and to those who are in some way connected or concerned with the organization about its very existence in terms of corporate purpose, business scope, and the competitive leadership. ii. Cast a framework that would lead to development of interrelationships between firm and stakeholders viz. employees, shareholders, suppliers, customers, and various communities that may be directly or indirectly involved with the firm. iii. Define broad objective regarding performance of the firm and its growth in various fields vital to the firm. So, lets talk about our own Rai University, find out what is the vision statement and list down various purposes of our vision statement. Vision is a theme, which gives a focused view of a company. It is a unifying statement and a vital challenge to all different units- of an organization that may be busy pursuing their independent objectives. It consists of a sense of achievable ideals and is a fountain of inspiration for performing the daily activities. It motivates people of an organization to behave in a way which would be congruent with the corporate ethics and values. Many firms do not have clear vision statements. An indirect method of knowing whether a firm has reached the stage of corporate strategic management is emergence of a vision statement. Vision of a firm cannot be high jacked from a company; however, the vision statement of another firm may definitely inspire a firm. It has to be evolved after a lot of deliberations, brainstorming, and thinking. It is pertinent that you as an individual working in a firm should become an active participant and collaborator in accomplishing corporate objectives. You must understand and share the vision of the firm because you would have to contribute in transformation of vision into a reality through his or her actions. The basic framework of vision should condition total behaviour of people of an organization. Personal objectives of individuals are very important to them and only to fulfill these objectives people join organizations. Vision of a company when translated into action program must be able to meet personal needs of people. This includes the need of achievement also. Vision of a firm thus encompasses personal objectives of people, which they try to achieve. Step 1. Name of the company Step 2. Practices that have made the company successful The primary purpose of the strategic management process is to enable companies to achieve strategic competitiveness and earn above-average returns. Research have indicated that companies that engage in strategic management generally out perform those that do not. The attainment of an appropriate match or fit between a company s environment and its strategy, structure, and processes has positive effects on the company s performance. Bruce Henderson, founder of the Boston Consulting Group, pointed out that a company cannot afford to follow intuitive strategies once it becomes large, has layers of management, or its environment changes substantially. As the world s environment becomes increasingly complex and changing, today s companies, as one way to make the environment more manageable, use strategic management. Strategic competitiveness is achieved when a company successfully formulates and implements a value-creating strategy. By implementing a value-creating strategy that current and potential competitors are not simultaneously implementing and that competitors are unable to duplicate, a company achieves a sustained or sustainable competitive advantage

5 So long as a company can sustain (or maintain) a competitive advantage, investors will earn above-average returns. Aboveaverage returns represent returns that exceed returns that investors expect to earn from other investments with similar levels of risk (investor uncertainty about the economic gains or losses that will result from a particular investment). In other words, above average-returns exceed investors expected levels of return for given levels of risk. In the long run, companies must earn at least average returns and provide investors with average returns if they are to survive. If a company earns below average returns and provides investors with below-average returns, investors will withdraw their funds and place them in investments that earn at least average returns. Internationally these types of companies are prime take over targets, a concept that is picking up in India. A framework that can assist companies in their quest for strategic competitiveness is the strategic management process, the full set of commitments, decisions and actions required for a company to systematically achieve strategic competitiveness and earn above-average returns. This process is illustrated in Figure below. This diagram will show you about the areas I will be discussing in coming lectures. Strategic Management Process From the above figure you will see the dynamic, interrelated nature of the elements of the strategic management process and provides an outline of where the different elements of the process are covered is given below: Feedback linkages among the three primary elements indicate the dynamic nature of the strategic management process: Is guided by the company s strategic intent and strategic mission, and is represented by strategies that are formulated or developed and subsequently implemented or put into action. Strategy Implementation Strategic competitiveness and above-average returns result when a company is able to successfully formulate and implement value-creating strategies that others are unable to duplicate. Strategy Evaluation and Control Links the elements of the strategic management process together and helps companies continuously adjust or revise strategic inputs and strategic actions in order to achieve desired strategic outcome So, Lets get down to an activity, which is aiming at how companies in your city are doing strategic, planning. This will help you to gain experience interacting on a professional basis. Now perform the following steps: Step1. Use the telephone to contact local business owners or top managers. Find out a company that does strategic planning. So it s a kind of phone interview Step 2. Seek answers to the following questions or else you can design your own question. 1. How does your company conduct strategic planning? 2. Who is involved in the process? 3. Does your company have a formal mission statement? 4. How was the statement developed? 5. When was the statement last changed? 6. What are the benefits of engaging in strategic planning? Notes Situation Analysis, Strategy Formulation and Strategy Implementation. Situation Analysis In the form of information gained by scrutinizing the internal environment and scanning the external environment, is used to develop the company s strategic intent and strategic mission. Strategy Formulation