Strategy of a business enterprise consists of what management decides about the future direction and scope of the business.
It entails managerial choice among alternative action programmes, commitment to specific product markets, competitive moves and business approaches to achieve enterprise objective. In short, it may be called the game plan of management.
The decisions constituting strategy ideally involve matching of enterprise resources to the changing environment, and determining what the enterprise ought to be engaged in doing in future and how it should position itself to take advantage of the future market opportunities.
Learn about:- 1. Meaning and Concept of Strategic Management 2. Features of Strategic Management 3. Role of Stakeholders 4. Components 5. Strategic Approach 6. Process 7. Strategic Decision Making.
8. Strategy and Business Ethics 9. Phases in the Development 10. Advantages 11. Disadvantages.
Strategic Management: Meaning, Features, Components, Process, Development and Advantages
Strategic Management – Meaning and Concept
Whatever may be done by management nothing affects the success or failure of a business enterprise more than how well the long term direction of the business is set. This is a well-recognized dictum but its fuller understanding can be possible only through the delineation of what is meant by Strategy.
Strategy of a business enterprise consists of what management decides about the future direction and scope of the business. It entails managerial choice among alternative action programmes, commitment to specific product markets, competitive moves and business approaches to achieve enterprise objective. In short, it may be called the game plan of management.
The decisions constituting strategy ideally involve matching of enterprise resources to the changing environment, and determining what the enterprise ought to be engaged in doing in future and how it should position itself to take advantage of the future market opportunities.
The concept of strategy has a bearing on what is known as the business model. Briefly speaking, a company’s business model refers to the revenue cost profit implication of its strategy. In other words, the business model centers round the issue of a given strategy being appropriate from the point of view of revenue generation, cost structure and profit margins reflecting business viability.
According to Thompson and Strickland, MA Company’s Strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully and achieve organizational objectives.
And others have defined strategy with reference to the basic goals and objectives of an organization, the major programmes of action chosen to reach these goals and objectives and major patterns of resources allocation used to relate the organization to its environment.
Based on this definition, a distinction is made between Master strategy and Programme strategies. A Master strategy refers to the determination of the mission and long term objectives of an organization and the policies necessary for achieving the mission and objectives.
Programme Strategies are specific action plans drawn up to accomplish any established objective within a time frame. Thus, if an organization has sent the long terms objective of growth in turnover, it may require programme strategies involving improvement in product design or market penetration, or sales promotion.
Presenting conceptual; framework of strategic management in a precise way is quite difficult because different management thinkers have defined strategy and strategic management in different ways. Reconciling these ways is a tedious task because each way is contradictory to other ways. Nevertheless, an attempt has been made in the direction of reconciling these ways based on current thinking in strategic management. Strategic management has evolved over the period of time and its nomenclature has been different in different periods like general management, business policy, and strategic management at present.
Let us define business policy, the nomenclature that has been replaced by strategic management. Long back, Christensen, et al have defined business policy, as a field of study, as “the study of the functions and responsibilities of senior management, the crucial problems that affect success in the total enterprise and the direction of the organization and shape its future. The problems of policy in business, like those in public affairs, have to do with the choice of purposes, the moulding of organizational identity and character, the continuous definition of what needs to be done, and the mobilization of resources for the attainment of goals in face of competition and adverse situation.”
This approach of managing organizations led to development of strategic management over the period of time.
Strategic Management – 5 Important Features
On the basis of the definition, the following are features of strategic management:
1. The various processes of strategic management may be –
(a) Evaluation and monitoring of the outcome of these strategies to ensure that organisational objectives are being achieved. Depending on the nature and characteristics of the organisation, some of these processes may form the part of strategic management while others may not truly form its part,
(b) Surveillance of environment both external and internal,
(c) Implementation of the these strategies,
(d) Evaluation of the organisation’s strengths and weaknesses in the light of these opportunities and threats,
(e) Identification of various opportunities offered by the environment and threats presented,
(f) Formulation of various strategies for achieving these objectives,
(g) Formulation of various objectives of the organisation.
2. Strategic management is basically a process. It has emerged out of management in other fields where the concept of management is taken as a process for achieving certain objectives of the organisation. Thus strategic management involves establishing a framework to perform various processes. The concept of strategic management must embody all general management principles and practices devoted to strategy formulation and implementation in the organisation.
3. Strategic management is basically top management function. Thus in order to ensure effective top management function, it is necessary that a distinction should be made between strategic management and operational management which emphasises day-to-day operations in the organisation, so that top management can focus more attention on the strategic aspect rather than emphasising on operational management.
Since the environment of the organisation is always changing providing new opportunities and threats, top management must spend more and more time on this aspect. Thus there is a considerable change of top management function is the organisations. The change is from operational management to strategic management.
4. The focus of strategic management is on relating the organisation to its external environment. This emphasizes that there is continuous interaction between organisation and its environment taking an open systems approach. Thus the organisation must create adequate channel through which external information will pass to various points in the organisation.
5. While strategic planning helps to resolve the problem of strategic formulation on the basis of mission-and objective-setting and the analysis of environment and internal factors, it falls short of taking into account a few relevant aspects. Ansoff et al., deals with these shortcomings in terms of three variables.
First, with regard to managerial problems, strategic planning considers the external linkages with the environment “under a basic assumption that the internal configuration of the organisation will remain essentially unchanged”. Second, dealing with the process of resolving managerial problems, it covers only problem-solving (or planning) while assuming that implementation and control will follow. Thirdly, the variables included in strategic planning analysis are exclusively “technological-economic-informational while social and political dynamics both within and outside the organisation are assumed to be irrelevant and unaffected.”
The sub-variables, which have been excluded from consideration, have a major impact on resolving strategic problems. For instance, it is essential to consider the impact that formulation of strategy, and changes in it, have on the organisation. Again, the solution of managerial problems can only be done through a comprehensive approach that not only considers formulation but also implementation and control of strategy. Factors like psychological are the myriad of problems faced by managers.
Strategic management, a newer and broader concept of managing organization strategically, takes into account all the aspects of managerial problems, the processes of solving them and the many variables that operate in a problem-solving environment.
Strategic Management – Role of Stakeholders in Strategic Management
A stakeholder is an individual or group that has a legitimate interest in a company. A corporate stakeholder is an individual or group who can affect or be affected by the actions of a business. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research Institute. It defined stakeholders as “those groups without whose support the organization would cease to exist.”
In the last decades of the 20th century, the word “stakeholder” has become more commonly used to refer to a person or group that has a legitimate interest in a project. In discussing the decision-making process for institutions—including large business corporations, government agencies, and NGOs – the concept has been broadened to include everyone with an interest (or “stake”) in what the entity does.
A stakeholder is best defined as “a person, group or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization’s actions, objectives, and policies”. It was in the year 1980 that the concept of stakeholders was developed by R. Edward Freeman.
4. Labour Unions
5. Industry Trade Groups
7. Prospective customers
8. National Communities
13. Government regulatory Agencies
14. Professional Associates
15. Prospective employees
16. Local communities
17. Public (Community)
A. Internal Stakeholders
B. External Stakeholders
A. Internal Stakeholders:
Internal stakeholders are groups within a business or people who work directly within the business, such as employees, owners, and investors. Employees want to earn high wages and keep their jobs. Owners are interested in maximizing the profit the business makes.
B. External Stakeholders:
External stakeholders are groups outside a business or people who are not directly working within the business but are affected in some way from the decisions of the business, such as customers, suppliers, creditors, community, trade unions, and the government. The government wants the business to pay taxes, employ more people, follow laws, and truthfully report its financial conditions.
Customers want the business to produce quality products at reasonable prices. Suppliers want the business to continue to buy their products. Creditors want to be repaid on time and in full. The community has a stake in the business as employers of local people.
All stakeholders are not essentially equal and are entitled to different considerations.
Stakeholder Management is the process by which the key stakeholders are identified and their support can be sought the best. Stakeholder Analysis is the first stage of this, where one identifies and starts to understand the most important stakeholders.
Stakeholder analysis utilizes the technique of identifying the key people who have to be won over. Next step involves the stakeholder planning process to successfully build the support.
1. Valuable opinions, views and suggestions of the powerful stakeholders can help to shape the business.
2. Powerful stakeholders provide access to useful resources as well. This way, the likelihood the business hitting higher success levels is higher.
3. The active participation of stakeholders in business will make them understand the nature of business and they can then contribute by actively supporting the same.
It is equally important to prioritize the stakeholders. Successfully conduction a stakeholder analysis in the early stages of planning can greatly improve the quality of a project.
Strategic Management – Components
Strategic management is a highly complex and new subject. To more clearly understand it, we must examine its components.
These are as follows:
The mission of a company is the unique purpose that sets it apart from other companies. This is a statement of why the company exists.
Company statements of purpose may fall into three groups:
i. The purpose is to create shareholder value.
ii. The purpose is to meet the needs and expectations of all the stakeholders – employees, customers suppliers and the community as well as investors.
iii. The purpose is of a higher order in that it is aspirational and idealistic, or challenging and inspiring.
In short, the company mission describes the company’s product, market, and technological areas of emphasis. For example, Bank of Baroda’s mission is to be a top-ranking National Bank of international standards.
In the context of company strategy, policies are guiding rules or principles that are regarded as an integral part of the company’s success. They are practices or ways of doing things. Policies are broad, precedent-setting decisions that guide managerial decision making. Creating policies guides and “preauthorizes” the thinking, decisions, and actions of operating managers in implementing the business’s policies. Policies empower actions.
The results that a company seeks over a multiyear period are its long-term objectives. Such objectives typically belong to profitability, return on investment, competitive position, technological leadership, productivity, employee relations, employee development, etc. Short-term objectives are the desired results that a company seeks over a period of one year or less.
The company should analyze:
i. The quantity and quality of the company’s financial, human, and physical resources.
ii. The strengths and weaknesses of the company’s management and organisational structure.
iii. Company’s current capabilities or distinctive competences.
iv. Costs and benefits structure, and
v. Company’s past successes and failures.
A firm’s external environment consists of the conditions and forces that affect its strategic options and define its competitive situation. The external environment may relate to industry forces, the remote and operating environments of various types.
An important part of the strategic process is the identification of opportunities in the market-place. These are then matched with the company’s capabilities. The competitive environment is also scanned for potential threats to the competitiveness of the business.
Organisational design matches the strategic goals and purpose of the organisation with the people who will do the work and the way they are organised to do it.
Strategic decisions are ones that are of fundamental importance. They are normally such that they are irreversible or at least can only be reversed at considerable cost. Grand strategy indicates how the objectives are to be achieved.
In any organisation, the strategists include all the people who influence an organisation’s overall strategies. These include the board of directors, the CEO, various managers, outside planners and consultants, and sometimes those in middle management positions. The duty of strategist is to see the organisation as a whole, to understand the inter-dynamics of the organisation, and to make decisions in light of the environment in which the organisation operates.
Strategic analysis and choice center around identifying strategies that are most effective at building sustainable competitive advantage based on core competencies of the firm.
These are skills and technologies that enable a company to provide a particular benefit to customers.
To be considered a core competence a skill must pass four tests:
i. It must be difficult for competitors to copy.
ii. It must make a contribution to customer value.
iii. It must be competitively unique.
iv. It must be applicable to a range of products.
This distinctive capability includes – Architecture, Reputation, Innovation, Strategic assets like costs of infrastructure or benefits from regulations or licensing requirements that restrict entry to the market.
Action plans translate strategies into “action” by incorporating these elements:
i. They identify specific actions to be undertaken.
ii. They establish a clear time frame for completion of each action.
iii. Action plans create accountability by identifying who is responsible for each ‘action’ in the plan.
Within the general framework of generic and grant strategies, each business function needs to undertake activities that help build a sustainable competitive advantage. These short-term, limited scope plans are called functional tactics.
Rivals almost always copy ideas that work. The challenge, therefore, is to create competitive advantages that are sustainable. This is what the strategy is designed to achieve — a position in the market such that the company is not only able to earn a higher profit margin than its competitors, but is able to sustain the position over a long period of time.
Some Other Components of Strategic Management:
The key components of the strategic management model will be defined and briefly described. The intention here is simply to provide an introduction to the major concepts.
The mission of a business is the fundamental and unique purpose that sets it apart from other firms of its type and identifies the scope of its operations in product and market terms. The mission is a general, enduring statement of company intent. It embodies the business philosophy of strategic decision makers, implies the image the company seeks to project, reflects the firm’s self-concept, and indicates the principal product or service areas and primary customer needs the company will attempt to satisfy.
In short, the mission describes the product, market, and technological areas of emphasis for the business in a way that reflects the values and priorities of the strategic decision-makers.
Because conceptualizing a company mission can be difficult. The mission statement of ABC Ltd., is abstracted from an annual report to its stockholders.
A firm’s internal analysis determines its performance capabilities based on existing or accessible resources. From this analysis, a company profile is generated. At any designated point in time, the company profile depicts the quantity and quality of financial, human, and physical resources available to the firm.
The profile also assesses the inherent strengths and weaknesses of the firm’s management and organizational structure. Finally, it contrasts the historical successes of the firm and the traditional values and concerns of management with the firm’s current capabilities in an attempt to identify the future capabilities of the business.
We, the management of ABC Ltd., here set forth our belief as to the purpose for which the company is established and the principle under which it should operate. We pledge our effort to the accomplishment of these purposes within these principles.
The basic purpose of ABC Ltd., is to perpetuate an investor-owned company engaging in various phases of the energy business, striving for balance among those phase so as to render needed satisfactory products and services and earn optimum, long-range profits.
What we do:
The principal business of the company, through its utility subsidiary, is the provision of energy through a pipe system to meet the needs of ultimate consumers. To accomplish its basic purpose, and to ensure its strength, the company will engage in other energy- related activities, directly or through subsidiaries or in participation with other persons, corporations, firms, or entities.
All activities of the company shall be consistent with its responsibilities to investors, customers, employees, and the public and its concern for the optimum development and utilization of natural resources and for environmental needs.
Where we do it:
The company’s operations shall be primarily in the India, but no self-imposed or regulatory geographical limitations are placed upon the acquisition, development, processing, transportation, or storage of energy resources, or upon other energy-related ventures in which the company may engage. The company will engage in such activities in any location where, after careful review, it has determined that such activity is in the best interest of its stockholders.
Utility service will be offered in the territory of the company’s utility subsidiary to the best of its ability, in accordance with the requirements of regulatory agencies and pursuant to the subsidiary’s purposes and principles.
2. External Environment:
A firms’ external environment consists of all the conditions and forces that affect its strategic options but are typically beyond the firm’s control. The strategic management model shows the external environment as consisting of two interactive and interrelated segments – the operating environment and the remote environment.
The operating environment consists of the forces and conditions within a specific industry and a specific competitive operating situation, external to the firm that influences the selection and attainment of alternative objective/strategy combinations. Unlike changes in the remote environment, changes in the operating environment often result from strategic actions taken by the firm or its competitors, consumers, users, suppliers, and/or creditors.
Thus, a consumer shift toward greater price consciousness, a loosening of local bank credit restrictions, a new entrant into the marketplace, the development of a substitute product, or the opening of a new wholesale outlet by a competitor are all likely to have direct and international positive or negative effects on a firm.
The remote environment refers to forces and conditions that originate beyond and usually irrespective of any single firm’s immediate operating environment and provide the general economic, political, social, and technological framework within which competing organization operate.
For example, a company’s strategic planners and managers may face spiraling inflation (economic), import restrictions on raw materials (political), demographic swings of population in the geographic area they serve (social), or revolutionary technological innovations that make their production systems unexpectedly obsolete technologically.
3. Strategic Analysis and Choice:
Simultaneous assessment of the external environment and company profile enables a firm to identify a range of possibly attractive interactive opportunities. These opportunities are possible avenues for investment. However, the full list must be screened through the criterion of the company mission before a set of possible and desired opportunities is generated. This process results in the selection of a strategic choice. It is meant to provide the combination of long-term objectives and grand strategy that will optimally position the firm in the external environment to achieve the company mission.
Consider the case when strategic managers feel that a firm is overly dependent on a single customer group. For example, a chain of record shops with principal customers 10 to 20 years old. The firm’s interactive opportunities might include expanding the product line, heavily emphasizing related products, accepting the status quo, or selling out profitably to a competitor.
While each of these option might be possible, a firm with a mission that stressed commitment to continued existence as a growth- oriented, autonomous organization might find that only the first two opportunities are desirable. In that case, these options would be evaluated on the basis of payoff and risk potential, compatibility with or capability for becoming the firm’s competitive advantage, and other critical selection criteria.
A complicated sub-process is used to derive the strategic choice. Strategic analysis involves matching each of the possible and desirable interactive opportunities with reasonable long-term objectives and targets. In turn, these are matched with the most promising means – known as grand strategies- for achieving the desired results. Each of the sets of alternatives is then evaluated individually and comparatively to determine the single set or group of sets that is expected to best achieve the company mission. The chosen set (or sets) is known as the strategic choice.
Critical assessment of strategic alternatives initially involves developing criteria for comparing one set of alternatives with all others. As is the case in making any choice, a company’s strategic selection involves evaluating alternatives that are rarely wholly acceptable or wholly unacceptable. The alternatives are therefore compared to determine which option will have the most favorable overall, long run impact on a firm.
Among the criteria used in assessing strategic choice alternative are strategic managers’ attitudes toward risk, flexibility, stability, growth, profitability and diversification. Other factors included in the decision-making process are volatility of the external environment, life-cycle stages of the evaluated products, and the company’s current level of commitment to its organizational structure, access to needed resources, traditional competitive advantages, as well as the potential reaction of influential external or internal interest groups.
The results an organization seeks over a multiyear period are its long-term objectives. Such objectives typically involve some or all of the following areas – profitability, return investment, competitive position, technological leadership, productivity, employee relations, public responsibility, and employee development. To be of greater value, each objective must be specific, measurable, achievable, and consistent with other objectives of the firm.
Objectives are a statement of what is expected from pursuing a given set of business activities. Examples of common company objectives include the following – doubling of earnings per share within five years with increases in each intervening year; moving from third to second as a seller of commercial electrical fixtures in Oregon; and a decrease of 10 percent a year in undesirable employee turnover over the next five years.
The comprehensive, general plan of major actions through which a firm intends to achieve its long-term objectives in a dynamic environment is called the grand strategy. This statement of means indicates how the objectives or ends of business activity are to be achieved.
Although every strategy is, in fact, a fairly unique package of long-term strategies, 12 basic approaches can be identified – concentration, market development, product development, innovation, horizontal integration, vertical integration, joint venture, concentric diversification, conglomerate diversification, retrenchment/ turnaround, divestiture, and liquidation.
Any of these grand, master, or business strategies are meant to guide the acquisition and allocation of resources over an extended period of time. Admittedly, no single grand strategy, or even several in combination, can describe in adequate detail the strategic actions a business will undertake over a long period. However, when a firm’s strategic managers are committed to a fundamental approach for positioning the business in the competitive marketplace, it provides a galvanizing central focal point for subsequent decision making.
Some brief examples of grand strategies include Hewlett-Packard’s technological innovation approach for capturing the high profit margins on new products.
The results an organization seeks to achieve within a one-year period are annual objectives. Short- term or annual objectives involve areas similar to those entailed in long-term objectives. The differences between them stem principally from the greater specificity possible and necessary in short-term objectives. For example, a long-term objectives of increasing company wide sales volume by 20 percent in five years might be translated into a 4 percent growth objective in year one. In addition, it is reasonable that the planning activities of all major functions or divisions of the firm should reflect this company wide, short-run objective.
5. Functional Strategies:
Within the general framework of the grand strategy, each distinctive business function or division needs a specific and integrative plan of action. Most strategic managers attempt to develop an operating strategy for each related set of annual objectives (for example, there will be a functional strategy to indicate how the marketing department’s annual objectives will be achieved, one for the production department’s and so on).
Operating strategic are detailed statement of the means that will be used to achieve objectives in the following year. The company’s budgeting process is usually coordinated with the development of the operating strategic to ensure specificity, practicality, and accountability in the planning process.
Polices are directives designed to guide the thinking, decisions, and actions of managers and their subordinates in implementing the organization’s strategy. Policies provide guidelines for establishing and controlling the on-going operating processes of the firm consistent with the firm’s strategic objectives. Policies are often referred to as standard operating procedures and serve to increase managerial effectiveness by standardizing many routine decisions and to limit the discretion of managers and subordinates in implementing operation strategic.
Institutionalizing the Strategy:
Annual objectives, functional strategies, and specific policies provide important means of communicating what must be done to implement the overall strategy. By translating long-term intentions into short-term guides to action, they make the strategy operational. But the strategy must also be institutionalized-must permeate the very day-to-day life of the company-if it is to be effectively implemented.
Three organizational elements provide the fundamental, long-term means for institutionalizing the firm’s strategy – (1) structure, (2) leadership, and (3) culture. Successful implementation requires effective management and integration of these three element to ensure the strategy “takes hold” in the daily life of the firm.
Control and Evaluation:
An implemented strategy must be monitored to determine the extent to which objectives are achieved. The process of formulating a strategy is largely subjective despite often-extensive efforts at objectivity. Thus, the first substantial reality test of a strategy comes only after implementation. Strategic managers must watch for early signs of marketplace response to their strategies. Managers must also provide monitoring and controlling methods to ensure their strategic plan is followed.
Although early review and evaluation of the strategic process concentrates on market-responsive modifications, the underlying and ultimate test of a strategy is ability to achieve its end-the annual objectives, long-term objectives, and mission. In the final analysis, a firm is only successful when its strategy achieves designated objectives.
The strategic approach mainly consists of four main elements:
1. The strategic approach is oriented towards the future. It recognises that the environment will change. It is a long range orientation, one that tries to anticipate events rather than simply react as they occur. The approach leads the manager to ask where his/her organisation wants to be after a certain period, what it will need to get to where it want’s, and how to develop strategies and the means to get there, and finally, how to manage those strategies to achieve the organisation’s goals and objectives. It is recognised that the future cannot be controlled, but the argument can be made that by anticipating the future, organisations can help to shape and modify the impact of environmental change.
2. The strategic approach has an external emphasis. It takes into account several components of the external environment, including technology, politics, economics and the social dimension. Strategic thinking recognises that each of these can either constrain or facilitate an organisation as it seeks to implement policy.
Politics will determine the policies that are to be implemented, economics will determine the organisation’s level of resources, and social factors might well determine who the organisation’s beneficiaries will be. In particular, strategic thinking recognises and emphatically takes into account politics and the exercise of political authority.
Managers are not free to do anything they decide. Managers must be sensitive to the needs and respond to demands of constituents over whom they have little or no control. Among those constituents, political actors are perhaps the most important.
3. The strategic approach concentrates on assuring a good fit between the environment and the organisation (including its mission and objectives, strategies, structures, and resources) and attempts to anticipate what will be required to assure continued fit. Under conditions of rapid political, economic and social change, strategies can quickly become outmoded or no longer serve useful purposes; or the resources traditionally required by the organisation to produce its goods and services may suddenly become unavailable.
The strategic approach recognises that to maintain a close fit with the environment, the different elements of the organisation will need to be continuously reassessed and modified as the environment evolves.
4. The strategic approach is a process. It is continuous and recognises the need to be open to changing goals and activities in light of shifting circumstances within the environment. It is a process that requires monitoring and review mechanisms capable of feeding information to managers continuously. Strategic management or planning are not one-shot approaches, they are on-going.
When all taken together these attitudes and behaviours are really a way of approaching or thinking about how to manage or how to implement policy change. Strategic management (or planning) is not something that can be applied only once and then forgotten about or ignored. In that sense it is more than a tool; it is a mental framework.
Strategic Management – Process: 3 Steps Involved in the Strategic Management Process
The strategic management process encompasses three phases which together involve a number of systematic steps. These three phases are strategy formulation, implementation and evaluation and control.
Process # 1. Strategy Formulation:
Strategy formulation involves four important steps, viz., determination of mission and objectives, analysis of strengths and weaknesses of the firm and the environmental opportunities and threats (SWOT), generation of alternative strategies and choosing the most appropriate strategy.
Determination of Mission and Objectives – “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.” In short, strategy is a means to achieve the objectives. It is, therefore, quite obvious that determining the mission (which influences objectives) and objectives is the first step in strategy formulation.
The mission defines the broad social purpose and scope of the organization whereas, objectives more specifically define the direction to achieve the mission. Objective, help translate the organizational mission into results. While objectives may be generic in their expression, goals set specific targets to be achieved within a time frame.
For example, a fertilizer company may state its mission as to fight world hunger and its objectives as to increase agricultural productivity through development, efficient production of improved fertilizers, generate profits to finance R&D and to ensure satisfactory returns on investment. The goals will specify the quantity of production or growth rate or market penetration to be achieved within specified periods.
In strategic management, the term strategic is used to mean “pertaining to the relation between the firm and its environment.” This indicates the role of SWOT in strategic management.
The strengths and weaknesses of the firm and opportunities and threats in the environment will indicate the portfolio strategy and other strategies it should pursue.
An organization should address questions such as what are the changes, including possible future changes, in the environment which have implications for us and how should we respond to them? What are the opportunities in the environment which can be exploited utilizing our strength? What are the threats and do we have the strength to combat the threats? How can we mass up our strength? What are our weaknesses? Can we overcome or minimize the weaknesses?
The economic liberalization in India has opened up enormous new opportunities. The liberalization, at the same time, has posed severe threats to many existing firms because of the increase in competition. Taking advantage of these opportunities many Indian companies have entered new businesses and expanded the existing ones.
A number of companies have made an exit from some of their businesses as they realized that they do not have enough strength to be successful or that the resources can be put to better use elsewhere. Several companies have both added new businesses and dropped some of the existing ones.
Given the mission and objectives and having analyzed the strengths and weaknesses of the firm and the environmental opportunities and threats the strategists should proceed to generate possible alternative strategies. There may be different strategic options for accomplishing a particular objective.
For example, growth in business may be achieved by increasing the share in the existing markets or by entering new markets, by horizontal integration or by a combination of these. Increase in supply may be achieved by putting up new plants or by M&A. An entry into new business may be affected by establishing a Greenfield wholly owned enterprise, a joint venture of acquisition. There are, thus, a number of strategic options. It is necessary to consider all possible alternatives to make the base for choice wide.
Evaluation and Choice:
The purpose of considering different strategic options is to adopt the most appropriate strategy. This necessitates the evaluation of the strategy alternatives with reference to certain criteria.
For assessing the suitability of the strategy, questions such as the following may be posed:
i. Is the strategy in conformity with the corporate philosophy?
ii. Does the strategy help accomplish the mission and objectives?
iii. Does the strategy appropriately exploit the organizational strengths and environmental opportunities?
iv. Is the strategy capable of combating environmental threats and overcoming the internal weaknesses?
v. Is the strategy consistent? (i.e., there must not be mutually inconsistent goals and policies)
The criteria of feasibility examines whether the strategy is realistic and workable. A strategy may outwardly appear to be good but if it is beyond the capability of the company, it is unrealistic and unworkable, i.e., it is not feasible.
Questions to be answered include:
i. Can the required resources (finance, human, technology etc.,) be obtained?
ii. Is the technology appropriate?
iii. Can the necessary inputs (power, raw materials etc.,) be arranged?
iv. Can the estimated sales be generated and market position attained?
Besides the criteria of suitability and feasibility, there are several factors to be considered to evaluate the acceptability of the strategy.
i. What will be the impact of the strategy on the cash flow and profitability?
ii. Does the strategy satisfy the cut off ROI criterion?
iii. How does the strategy affect the capital structure and shareholding pattern?
iv. How does it affect the relationships with stockholders?
v. How does it affect the present employees?
vi. How does it affect the corporate image?
vii. How does in affect the internal environment?
Operationalising the strategy requires transcending the various components of the strategy to different levels; mobilization and allocation of resources; structuring authority, responsibility, tasks and information flows; and establishing policies.
In a multi-SBU enterprise, strategies for the SBUs based on the corporate strategy, will also have to be formulated.
Implementation of strategy involves a number of administrative and operational decisions.
Evaluation and control is the last phase of the strategic management process. The objective is to examine whether the strategy as implemented is meeting its objectives and if not to take corrective measures.
Continuous monitoring of the environment and implementation of the strategy is essential. The loop connecting the evaluation and control to the starting point of the strategic management process indicates that strategic management is a continuous process, the evaluation providing the feedback for modifications.
In present day scenario the main emerging global trends are as follows:
1. Economic Reforms:
Far reaching economic reforms have been established in communist and non-communist countries particularly in development ones. Economic liberalisation is encompassing greater scope and freedom for both domestic and foreign private enterprise. Trade liberalisation has been the centre point of these reforms. Simplification of procedures and de-bureaucratisation have also been important in countries like India.
The political and economic business environment has been fast changing all over the world. The economic reforms carried out in the erstwhile USSR, East European Countries, Cuba etc., are revolutionary. In the People’s Republic of China, following one of the most conservative policies, economic reforms began as early as the 1970s.
Marketing privatisation and internationalisation have been progressing in these countries at an amazing speed. Several of them have effectively eliminated state monopoly of foreign trade and have drastically reduced import controls. There has been an influx of foreign private capital and technology. The barrier of political ideology to international business is fast disappearing.
2. Global Economic Boom:
Naisbitt and Aburdene point out that the world is entering a period of economic prosperity in the decade of the 1990s. There is no single factor, but an extraordinary confluence of factors behind the economic boom. The economic forces of the world are surging across national borders, resulting in more democracy, more freedom, more trade, more opportunity and greater prosperity.
Although the problems, strategies and pattern of development and rates of growth may vary, all national economies are on the growth path. Economic considerations ultimately transcend political considerations in the centrally planned economies.
The growing population, the rising income and the new conducive policy environment have attracted more investment into the developing countries. Recent figures suggest that MNCs are shifting from the developed countries to developing countries. In 1991, there was an increase of 38 per cent in the MNCs’ investments in the developing countries, while there was a decline of 23 per cent in the developed countries.
The developments all over the world indicate growing economic internationalisation and privatisation. The privatisation movement ushered in the United Kingdom by Margret Thatcher spread to other developed and developing countries, including the ‘communist’ ones, like a wave.
In India, privatisation has been accepted by the Government as an important means of industrial and economic rejuvenation. Privatisation has significant socio-political and economic implications. As the proportion of shareholders in the total population increases and as the economic lot of the workers and the poor improve, leftist parties increasingly lose their ground. Conservative Party was voted to power in Britain for the fourth consecutive period. The Labour Party remained out of power for such a long period. Since 1979 the membership of the trade unions in the U.K., has sunk by more than 25 per cent.
The consumer boom is the most conspicuous in Asia, particularly in the Pacific Rim. North America and Europe are facing more competitions from the Asian countries. Japan is moving from an export driven economy to a consumer-driven economy, shift that other Asian countries will follow in the 1990s.
Asians are the consumers of the 1990s. Wages that are increasing everywhere are creating millions of consumers. During the decade 80 million more will be added to the wealthiest Asian countries creating great opportunities for North American and Europeans, as well as for Asian producers.
5. National Strategies:
Governments of different countries have been taking following measures to improve their economic competitiveness and protect their economic and non-economic interests:
(a) Regional Economic Groupings:
Regional economic grouping for mutual benefits is not a new development. The EC 92 is by far the most ambitious of such schemes. Through the referendum of June 1992 Spanish people rejected the Maastricht Treaty regarding the establishment of a monetary and economic union.
But the development of the European Economic Community towards economic integration, has been considerable by January, 1993. To overcome the European Fortress many companies from outside the Community have made strategic moves, including establishment of production bases within the Community.
(b) Free Trade Agreements:
Several Free Trade Agreements have been in existence for quite some time now. Some important new ones took birth recently while some more are likely to come into being. The North American Free Trade Agreement of 1988 between the U.S., and Canada has been extended to Mexico, making North America a giant free trade area. The Australia-New Zealand Closer Economic Relations Trade Agreement west into effect in 1988.
The ASEAN has agreed to establish a free trade area in the year 2000. There has also been talks about a US- Japan Free Trade accord. According to Naisbitt and Aburdene, as we turn to the next century, we will witness the link up of North America, Europe and Japan to form a golden triangle of free trade with a powerful, overcharging megatrend towards worldwide free trade.
While the GATT has made some achievements in reducing the tariff barriers, there has been a substantial growth of Non-Tariff Barriers (NTBs), often referred to as the new protectionism measure. These include voluntary export restraints and administered protection such as health and product standards, customs precedes, licensing etc.
The developing countries, have been facing growing NTB to their exports to developed countries. According to a World Bank Study, NTB in major industrial countries has affected more than one-third of imports from developing countries, compared to one- forth from all countries. Several advanced countries like the USA have resorted to NTBs.
The Super 301 and Special 301 of the U.S. Omnibus Trade and Competitiveness Act, 1988, have been used to make other countries to fall in line with the U.S. policies or to restrict imports to the U.S. Even Peoples Republic of China liberalised the economic policies under their threat.
Protectionism has increasingly taken the covert shape in the U.S. and E.C. In these countries, there has been a growing demand for more protective measures in the wake of the challenge to their trade supremacy, particularly by the Pacific Rim countries. Measures like the Super 301 have been used for covert protectionism like harassment of foreign rivals.
One of the major trade rivals of the U.S., and who has been constantly facing the threat of Super 301, Japan has recently described the US as the biggest ‘unfair trader’ of the world. The developed countries have been using their economic supremacy to compel the developing countries to accept the Dunkel Draft of the Uruguay Round of trade negotiations under the GATT, several provisions of which are very harmful to the interest of the developing countries.
(d) Government Support:
Government not on y support and encourage national industries in various ways but also foreign investment. Even the centrally planned economies are now luring multinationals. Government of many non- communist developing countries also have now a more positive attitude toward domestic private sector and foreign capital and technology.
In America and Europe, although there is a resentment because of the expanding foreign ownership of the economy and increased competition to established industries, government, several enterprises, and economists welcome foreign capital and technology because they bring the promise of jobs, tax revenues to cash- strapped local government and help export and import substitution.
Strategic Management – Strategic Decision Making
Strategic management is a complex process, and it requires competent and capable people for strategy formulation and implementation. Sometimes, human beings are bounded by our own cognitive capabilities. Strategy formulation is based on the huge information obtained from though-out the firm and also external information.
It may be difficult to remember all information and sometimes it may lead to systematic errors in the decision formulation and selection. Systematic errors arise from a series of cognitive biases in the process of decision making process. Thus, many managers end up making poor strategic decisions.
A number of biases have been verified repeatedly in laboratory settings. So, we can be reasonably sure that they exist and that we are all prone to them.
The following are the important biases:
1. Prior Hypothesis – Refers to the fact that decision makers who have strong prior beliefs about the relationship between two variables tend to make decisions on the basis of these belief. For example, if a CEO who is strong prior belief that a strategy that is right, may also be right in future after changing business environment.
2. Escalating Commitment – It takes place when decision makers already allocated huge resources to a project and commit even more resources, even if the project is failed.
3. Reasoning by Analogy – In the competitive environment, reasoning by analogy may not be true.
4. Representativeness – Collecting data through sampling, and assuming it represents population is not appropriate.
5. Illusion of Control – Refers to overestimation of one’s ability to control events. Generally, high level authorities feel this. It is known as hubris hypothesis of takeovers.
Cognitive biases not only makes poor strategic planning and groupthink but also leads to poor strategic decisions. Group think occurs when a group of decision makers embark on formulation of action plan without questioning underlying assumptions.
There are many potential pitfalls of strategic management that decrease the effectiveness of the strategic planning process. One of these pitfalls is failure to include different viewpoints. The common problem is cognitive conflict and the other problem is groupthink.
There are two techniques available to enhance strategic thinking and improve decision making.
1. Devil’s Advocacy, and
2. Dialectic Inquiry.
1. Devil’s Advocacy:
In this technique, one member (expert) develops plan and another member of the decision making group acts as a devil’s advocate and criticises the plan by taking all the possible reasons that make the export plan unacceptable.Through this process, decision making can avoid possible dangers of directing wrong action.
2. Dialectic Inquiry:
In this technique, there is a need to develop two expert plans [(thesis), one plan (Thesis) and the other on counter plan (anti-thesis)]. The later one indicates plausible but conflicting courses of action.
In the second stage, strategy formulators listen to a debate between advocates of Plan 1 and Plan 2, and finally make judgment, which plan is better for higher performance. Generally, this process helps in revealing problem, solutions for problems, and assumption of both plans. This will result in right strategy formulation.
Strategic Management – Strategy and Business Ethics
Strategies are formulated by top level (employees) officials who were given the responsibility by shareholders (owners). The decision makers are the agents of shareholders. They should take strategic decisions which improve the value of the organisation thereby stakeholders’ benefits. A company’s stakeholders are individuals or groups or institutions who have interest over the company’s performance. The stakeholders include shareholders, creditors, employees, customers, government and society in which company does business.
Stakeholders can be divided into two – Internal stakeholders and External stakeholders. Internal stakeholders are employees including officers, managers and Board members. External stakeholders are customers, creditors, suppliers, government and society. All stakeholders have an exchange relationship with the company, since all of them contribute their part to the organisation’s performance and expects their interests are benefited.
For example, creditors provide capital to the company and they expect repayment loan/amount given with interest on the scheduled installments. Governments provide legal and physical (roads, communication) infrastructure and expects fair competition among companies and tax from companies when they have income.
Therefore, a company must take stakeholders’ interests into account when formulating strategies. When a company takes strategic decision without considering their stakeholders’ interests, they may withdraw their support. Shareholders may sell their shares and buy some other company’s shares; debt holders may demand higher interest payments on new debt; employees leave job; customer may buy competitors’ products. All these lead to reduction in the value of the company, i.e., value minimization.
It studies the problems arising in a company when one group/person delegates the responsibility of decision making to another (called as agents). Agents should take decision in the best interests of Stakeholders but, sometime they forget the relationship (as agent) and take unethical decisions that affect stakeholders’ interests.
Ethics refers to the accepted beliefs, values, and principles of right or wrong that influence the behaviour (conduct) of a person, the member of a profession or the actions of a business organisation. Business ethics are the accepted beliefs, values, and principles of right or wrong that influence the conduct of a business.
Simple moral Standards any decision is said to be ethical when it is taken in accordance with accepted beliefs, values, and principles and vice versa. When we say accepted beliefs, values, and principles, they are acceptable by the majority the people in society, but the same may not be acceptable by a few.
Strategy ought to be ethical. Therefore, it should be a rightful action, and not wrong action. A decision should pass the test or moral scrutiny. Ethics and moral standards go beyond the law.
Every company has an ethical duty to each of the stakeholders – owners, employees, suppliers, creditors, customers, government and the community at large. But, conflict may arise between the goals of a company or the goals of an individual manager and the interests of various stakeholders. Strategic managers should respect the basic rights of stakeholders. Violation of those rights is unethical.
Stakeholders have the right to timely and accurate information about their investment, expect rate of return on investment; Employees have right to safe working conditions, fair compensation for the work and good treatment by superiors; Customers have right to be informed about the products and services they purchase, and to know the harmful effects of using the product or service; Suppliers have right to expect contracts to be respected, if need company need to rewrite the contract; Community have the right to expect that a company will respect the expectations that they place like paying taxes, not polluting environment, not dumping pollutants, overcharging for product or price.
Manager behaves unethically when they forgot the goals of company and decide to achieve their personal goals.
The unethical behaviour may be:
1. Information Manipulation:
Control corporate data show wrongly to enhance their performance in delivering a job, secure higher position, higher salaries and benefits. For example, Satyam Computers manipulated financial data.
Opportunistic exploitation of players in value chain – employers, suppliers and buyers. In the late 1990, Boeing entered a contract with Titanium Metal Corporation to buy some titanium for ten years. But, Titanium Company started production expansion program to supply titanium to Boeing and spent $100 million, then Boeing demanded to reduce price through contract modification.
3. Sub-Standard Working Conditions:
This will be done to reduce cost of production and this happens in countries where there is no or less workplace regulations. Nike’s sub-standard working conditions and very low wage. It happened in Vietnam where a young woman at a Vietnamese subcontractor worked for 6 days a week in poor working conditions with the toxic materials for only 20 cents an hour.
4. Anticompetitive Behaviour:
It refers of range at actions by a company aiming harming competition (actual – potential) thereby enhancing long-run prospects. In 1990s, Microsoft monopoly in operating systems forced PC makers to bundle Microsoft web browser, Internet Explorer with Windows and to display Internet Explorer prominently on the desktop. This was reported by Justice Department. Microsoft would not supply with Windows to PC makers unless they did this.
Environment Pollution; Corruption; improper use of scarce available resources; use of child labour and the like.
Strategic decision makers live up to the ethical standards and he/she should be proactive rather than reactive in their decision and ethics. Ethical decision goes long way in ensuring that the business actions reflect integrity and ethical standards.
There are three tests to be used to evaluate the merits a good ethical strategy:
1. The Goodness a Fit Test – A good strategy has to be well matched to the internal and external environment. It should have crafted to the company’s strengths and weaknesses, competencies and competitive capabilities. In other words, a strategy is said to be good only when it fits tight with the company’s external environment and internal circumstances.
2. The Competitive Advantage Test – Strategy is said to be good when it help gain and sustain competitive advantage.
3. The Performance Test – Boosting the company’s performance is the one of the attributes of a good strategy. The two main types of performance are – profitability and long-term market position.
The above given are the three prime tests. However, there are some additional criteria used for judging whether a strategy is good or not. They are completeness and courage of all the bases internal consistency among all the pieces of strategy; the degree of risk involved and flexibility.
Strategic Management – Phases in the Development of Strategic Management
Strategic Management is a development of the process embodied in Strategic Planning. Strategic Planning in organization appears to evolve through four phases according to Glueck, Kaufman, and Walleck which starts with the annual budgeting process.
The four phases of evaluation are shown as follows:
In Phase I, companies often have sound strategies, but the business strategy is reflected in its budgeting procedure. The annual budgeting process reduces the functioning of the organization to a financial problem. Procedures are developed to forecast revenue, costs, and capital needs.
This a budget that identifies limits for expenses on an annual basis. Information systems/reportage on functional performance is compared with budgetary targets to establish control and feedback. These may be reflected in the projected sales/earnings growth rate, occasionally qualified by certain debt/equity target or other explicit financial objectives.
The Chief Executive Officer and his top team plan the future on their knowledge of their company’s products and markets. They try to sense what major competitors are doing and are expected to do. Based on this framework and their own cost Structure, they can estimate what the impact of a product or marketing change will be on their plants, their distribution system, or their sales force. With this knowledge, and if they are not planning for the business to grow beyond reasonable limits, the need to set up an expensive planning system may not be there.
Difficulties increase when companies become large, the number of products and markets served, the degree of technological sophistication required, and the complex economic systems involved far exceed the intellectual grasp of any one manager or small group of managers. Explicit documentation in place of implicit knowledge is required to chart the strategy of the organization.
The financial planning system is extended to estimate the capital needs and the trade-off between alternative financing plans. This requires extrapolation of past trends and an attempt for future impact of political, economic, and social forces. This is the basis of the second phase, i.e., forecast-based planning. Today, many Indian companies use a Phase II planning system in long-range planning today.
Phase II is the traditional long-range planning system.
The objective of the long-range planning activities is to provide the organization with answers to the following questions:
i. Where is the organization now?
ii. Where is it going?
iii. Where does it want to go?
iv. What does it have to do to get to where it wants to go?
In its most elementary form, traditional long-range planning identifies four key activities on which the concept of planning is based-monitoring, forecasting, goal setting, and implementing policies and actions to facilitate the goals. Long-range plans are produced by performing these key activities as continuing process.
The cycle begins with:
i. Monitoring selected trends of interest to the organization.
ii. Forecasting the expected future of those trends.
iii. Defining the desired future by setting organizational goals in the context of the expected future.
iv. Developing and implementing specific policies and actions designed to reduce the different between the expected future and the desired future.
v. Monitoring the effects of these actions and policies on the selected trends.
The major drawback of the long-range planning model is that information about the changing external environment is usually not taken into account systematically or comprehensively. It is assumed that there is continuity in the environment. This assumption is valid only under very special circumstances, for example, mature industries, or to basic industries like mining etc. Hence, the usefulness of this type of model under dynamic conditions is limited.
As business become more competitive, planners typically reach for advanced forecasting tools to handle the complexities of the marketplace. This may include trend analysis and regression models, and eventually computer simulation models. These models are in improvement. They add information from the external environment to the long-range process.
Environment scanning is used to:
i. Identify new and potentially crucial information that should be added to those identified and tracked during monitoring.
ii. Identify possible developments that must be used to adjust the forecasts of the internal issues derived from forecasting.
The limitations in the traditional long-term planning model lead to the development of environmental scanning model.
Activities of Environmental Scanning:
i. Scanning the external environment for threats or opportunities to the organization.
ii. Each potential issue or trend is then analyzed as to the likelihood that it will emerge and the nature and degree of its impact on the organization if it should actually materialize. This stage produces a rank ordering of the issues and trends according to their important of current or planned operations.
iii. Forecasting focuses on developing an understanding of the expected future for the most important issues and trend, using forecasting techniques.
iv. Monitoring is used to track the continued relevance of each issue and identify areas for additional and continued scanning.
In an environment of rapid change, an unforeseen can render market forecasts obsolete almost overnight. The understanding provided on the basic marketplace results in a new grasp of the key determinants of business success and improved planning effectiveness.
In this phase, resource allocation is both dynamic and creative. The Phase III planners can look for opportunities to ‘shift’ business into more attractive sectors, with a greater level of confidence. They can initiate action on developing new business capabilities or redefining the market to better fit their companies’ strengths. For example, a conglomerate, with an under-utilized steel-fabricating capacity in its shipyard and an unsuccessful high-rise concrete smokestack business can combine them into a successful pollution control ventures.
Features of Phase III:
The highlighting features of Phase III in diversified companies is the formal grouping of related businesses into strategic business units. This approach recognizes two distinct strategic levels. They are corporate decisions that affect the shape and direction of the enterprise as a whole and the business unit decisions that affect only the individual strategic business unit (SBU) operating in its own environment. Planning, therefore, becomes more meaningful as decision-making is linked more closely to strategy implementation. This becomes the explicit responsibility of operating management of SBUs.
Many organizations, such as vertically integrated companies in process-oriented industries, for example, Reliance Industries, share important corporate resources like sales, manufacturing, R&D etc. Sometimes, several SBUs meet the needs of a shared customer group, such as in the automotive industry. Often, the combined purchasing power of several SBUs or the freedom to transfer technologies from one business to another can be more valuable than the opportunity to maximize profit. In such case, the SBUs concept has limitations.
The most significant way in which Phase III differs from Phase II is that corporate planners are expected to offer a number of alternatives to top management. Each choice is usually characterized by different risk/reward profiles. This provides management the option of prioritizing different objectives of the organization. For example, greater employment securing at some cost to the return to the shareholders, etc.
Phase III planning requires management to make strategic choices. As the organizational capability for detailed product/market and business planning spreads through the company, planners and managers often make choices without top-level participation and as these decisions can significantly affect their company’s long-term competitive strength and well-being, it promotes the case for introducing strategic planning process.
By combining the two models of planning, long-range planning and environmental scanning to form an interrelated model that is the Strategic Planning Model was framed.
The strategic planning model is a tool that:
i. Helps an organization in setting up goals or objectives
ii. The analysis of the environment and the resources of the organization
iii. The generation of strategic options and their evaluation, and
iv. The planning, design and implementation of control systems or monitoring mechanisms.
This model consists of six stages that fulfill the requirements of the management thinkers.
i. Environmental Scanning
ii. Evaluation of Issues
iv. Goal Setting
The integrated model allows information of the external environment in the form of emerging developments to enter the traditionally inwardly focused planning system, thereby enhancing the overall effectiveness on an organization’s planning. More specially, it allows the identification of issues and trends that must be used to modify the internal issues derived from monitoring.
The argument for combining these two models is becoming apparent when the future that happens to the organization and the future that happens for the organization are contrasted.
In future that happens to the firm, new developments are not anticipated before they force their way to the top of the agenda, demanding crisis management and latest fire-fighting techniques. In this future, issues are usually defined by others whose interest do not necessary include those of the firm or its purpose. Not only are threats from the external environment not anticipated as early as possible, but key opportunities will also be missed or diminished in value.
In future that happens for the organization, in contrast, management leadership is focused more on the fire prevention and less on fire fighting. Hence, it is able to exercise more careful; judgment in the orderly and efficient allocation of resource. Certainly, management will still have to deal with unforeseen developments, but they will probably be few and less traumatic. Thus, organizations are able to pursue their mission with greater confidence and consistency because they will be interrupted by fewer and smaller fire-fighting services.
The words, ‘strategic planning’, provide the key elements that underlie its meaning. The process is strategic because it involves preparing the best way to respond to the circumstances of the organization’s environment. It is strategic, because it is clear about the organization objectives and resources. It involves anticipating the future environment of decisions that are made in the present. The process is about planning because it involves developing an approach to achieving this future. The plan is a set of decisions about what to do, why to do it, and how to do it.
Strategic planning and management are joined together in a single process in the Phase IV. This phase links strategic planning operation decision-making. Strategic planning provides management a tool to dynamically align strategies. It is a disciplined effort to produce decisions and actions that shape and guide what an organization is, what it does, and why it does it, with a focus on the future. It helps the organization to focus its energy, to work towards its goals, to assess and adjust the direction of the organization more efficiently in response to a changing environment.
Increasing change and complexity in the company’s external environment most likely cause the evolution from Phase I to Phase IV. Change from primarily an inward looking orientation in the first phase to primarily an outward looking orientation in the third phase, and to a more integration orientation in the final strategic management phase, with equal emphasis on both the external and internal environments, comes into the picture.
Strategic Management – Advantages
Formulation and implementation of strategies which constitute the two main aspects of strategic management may be expected to yield several benefits.
1. Financial Benefits:
On the basis of empirical studies and logical analysis it may be claimed that the impact of strategic management is primarily that of improved financial performance in terms of profit and growth of firms with a developed strategic management systems having major impact on both planning and implementation of strategies.
2. Enhanced Capability of Problem Preventions:
This is likely to result from encouraging rewarding subordinate attention to planning consideration and managers being assisted in their monitoring and forecasting role by employees who are alerted to the needs of strategic planning
3. Improved Quality of Strategic Decision through Group Interaction:
The process of group interaction for decisions making facilitates generation of alternative strategies and better screening of option due to specialized perspectives of group of members. The best alternatives are thus likely to be chosen and acted upon
4. Greater Employee Motivation:
Participation of employees or their representatives in strategy formulation leads to a better understanding of the priorities and operations of the reward system. Also there is better appreciation on their part of the productivity reward linkage inherent in the strategic plan. Hence goal directed behavior is likely to follow the incentives.
5. Reduction of Gaps and Overlaps in Activities:
Strategy formulation undertaking through the participation process there is better understanding of the responsibilities of individuals and groups. Role differentiation which is there by clarified should reduce the gaps and overlaps in the activities of groups and individuals.
6. Minimum Resistance to Change:
The benefit of acceptability of change with minimum resistance is also likely to follow the participative process of strategy making as there is greater awareness of the basis of choosing a particular option and the limits to available alternatives. The uncertainty which is associated with change is v also eliminated in the process and resistance to change is rendered innocuous.
Strategic Management – Disadvantages
Some disadvantages, risks pitfalls or unintended negative consequences to watch for and avoid in strategic management are as follows:
The time that managers spend on the strategic management process may have a negative impact on operational responsibilities. In the same, many top managers become too locked into everyday problems. This blocks managers to have no time to consider long-term issues, nor does it prepare them to take a strategic perspective on the organisation.
If formulators of strategy are not intimately involved in its implementation, they may shirk their individual responsibility for the decisions reached. Due to laziness, people may not want to put forth the effort needed to formulate a strategic plan.
Many managers are tempted to exaggerate the output from their planned inputs. Sometimes, it may be due to overconfidence or due to genuine over enthusiasm. The fact is, many times the output may be less than what is forecasted. Being overconfident or overestimating experience may create problems.
There remains a risk of strategic drift in strategic management. It has been found that many unforeseen constraints create strategic drift. Typically, organisations go through long periods of relative continuity during which established strategy remains largely unchanged or changes incrementally. In strategic drift, strategies progressively fail to address the strategic position of organisation. Thus, performance deteriorates. This is typically followed by a period of flux in which strategies change but in no very clear direction.
When an organisation assumes success, it often fails to reward success. But when failure occurs, then the firm may punish. In such situation, employees feel to do nothing than to risk trying to achieve something, fail, and be punished. High expectations of employees also create frustration when they are not materialised.
Some firms see strategic management as a waste of time since no marketable product is produced. Some organisations are culturally opposed to spending resources.
People may have had a previous bad experience with strategic decisions and plans which have been impractical or inflexible. Strategic decisions, like anything else, can be taken badly. People also have fear of unpredictable, unknown or uncertain situations. Employees may be fearful of their abilities to learn new skills, of their aptitude with new systems, or their ability to take on new roles.
Managers and people may view strategic management as unnecessary or unimportant. That is why they may fail to create a collaborative climate supportive of change. Managers may fail to communicate the concept of strategic management to employees, who continue working in the dark. Due to this negative thinking, top managers may not actively support the strategic management process or they may too hastily move from mission development to strategy formulation.
Strategic management has a formal and complex process to formulate strategies. Such formality and rigidity may certainly stifle creativity, imagination, foresight, analytical ability and fortitude to identify alternatives and choose most suitable strategy for direction. Thus, it may prove cumbersome exercise. Strategic management brings rigidity in the organisation through strategic planning. Strategies are selected and implemented in a given set of environment, external as well as internal.
Many firms become so deeply involved in crisis management and firefighting that they do not have time and aptitude for strategic management. Particularly if a firm is successful, employees may feel there is no need for strategic management because things are fine as they stand. But success of crisis management today does not guarantee success tomorrow. Strategic management is a long-term investment in success.
There are some powerful managers who have a vested interest in maintaining the status quo. They know that they have achieved status, privilege, or self- esteem through effectively using an old system, they often see a new concept of management as ‘threat’. They try to perpetuate the existing strategy because the new strategic view can lower or change their position.
Environmental conditions are changing so fast that managers cannot do any long-range planning. With the increasing complexity and accelerating rate of change, it becomes more and more difficult to predict the future outcome. People think that by not taking action, there would be little risk of failure. But whenever something worthwhile is attempted, there is some risk of failure.
There are many problems in implementing a strategy. The internal conflicts among departments, individuals, or organisational and personal values cannot be solved by strategic management. Every action in implementation has certain limitations.
Strategic management is not an exact approach, since it is founded on forecasting of future events, which are uncertain and hazy. Strategic plans are based on various assumptions and parameters. If they do not hold true and future events do not occur as expected, the whole system will fail.
i. Employees may not trust top management.
ii. Different people in different jobs have different perceptions of a situation. This creates conflicting views.
iii. Strategic management is a time consuming process.
iv. Failing to involve key employees in all phases of strategic management.
v. Strategic management is not a solution to all business and managerial problems.