NATURE OF STRATEGIC ENVIRONMENT

CHAPTER I

Nature of Strategic Environment

OVERVIEW OF CLASS MODULE

This module provides an overview of strategic management. It introduces a practical, integrative model
of the strategic management process it defines basic activities and terms in strategic management. It
also introduces the notion of boxed inserts. This boxed insert is provided in each chapter to examine
how some firms are doing really well in competing in a global economic recession. The boxed insert in
each chapter showcases excellent strategic management under harsh economic times. The end-of-the
chapter exercises apply chapter tools and concepts.

LEARNING OBJECTIVES

By the end of this module, the students should be able to:

1. Describe the strategic management process;
2. Explain the need for integrating analysis and intuition in strategic management;
3. Discuss the nature of strategy formulation, implementation, and evaluation activities;
4. Describe the benefits of good strategic management; and
5. Discuss how a firm may achieve sustained competitive advantage .

LEARNING CONTEXT
DEFINING STRATEGIC MANAGEMENT

Strategic management can be defined as the art and

science of formulating, implementing, and evaluating cross- “Most of us fear change. Even
functional decisions that enable an organization to achieve its when our minds say change is
objectives. As this definition implies, strategic management focuses normal, our stomachs quiver at
on integrating management, marketing, finance/accounting, the prospect. But for strategists
and managers today, there is
production/operations, research and development, and information
no choice but to change.”
systems to achieve organizational success.
-Robert Waterman Jr.
The term strategic management in this text is used
synonymously with the term strategic planning – more often used in the business world,
whereas the former is often used in academia. Sometimes the term strategic management
is used to refer to strategy formulation, implementation, and evaluation, with strategic
planning referring only to strategy formulation. The purpose of strategic management is to
exploit and create new and different opportunities for tomorrow; long-range planning, in
contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was very popular between
the mid-1960s and the mid-1970s. During these years, strategic planning was widely
believed to be the answer for all problems. At the time, much of corporate America was “obsessed”
with strategic planning. Following that “boom,” however, strategic planning was cast aside during the
1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival
of strategic planning, and the process is widely practiced today in the business world.

A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good
game plan to have a chance for success, a company must have a good strategic plan to compete
successfully. Profit margins among firms in most industries have been so reduced by the global
economic recession that there is little room for error in the overall strategic plan. A strategic plan
results from tough managerial choices among numerous good alternatives, and it signals commitment
to specific markets, policies, procedures, and operations in lieu of other, “less desirable” courses of
action.

STAGES OF STRATEGIC MANAGEMENT

Strategic-management process consists of the following three stages:

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 Strategy Formulation

It includes developing a vision and mission, identifying an organization’s external

opportunities and threats, determining internal strengths and weaknesses, establishing long-term
objectives, generating alternative strategies, and choosing particular strategies to pursue.
Strategy-formulation issues include deciding what new businesses to enter, what businesses to
abandon, how to allocate resources, whether to expand operations or diversify, whether to enter
international markets, whether to merge or form a joint venture, and how to avoid a hostile
takeover.

 Strategy Implementation

It requires a firm to establish annual objectives, devise policies, motivate employees, and
allocate resources so that formulated strategies can be executed. Strategy implementation
includes developing a strategy-supportive culture, creating an effective organizational structure,
redirecting marketing efforts, preparing budgets, developing and utilizing information systems,
and linking employee compensation to organizational performance.

 Strategy Evaluation

It is the final stage in strategic management. Managers desperately need to know when
particular strategies are not working well; strategy evaluation is the primary means for obtaining
this information. All strategies are subject to future modification because external and internal
factors are constantly changing.

The three fundamental strategy-evaluation activities are (1) reviewing external and
internal factors that are the bases for current strategies, (2) measuring performance, and (3)
taking corrective actions. Strategy evaluation is needed because success today is no guarantee of
success tomorrow. Success always creates new and different problems; complacent organizations
experience demise.

KEY TERMS IN STRATEGIC MANAGEMENT

 Competitive Advantage

This term can be defined as “anything that a firm does especially well compared to rival
firms.” When a firm can do something that rival firms cannot do, or owns something that rival
firm’s desire, that can represent a competitive advantage.

For example, in a global economic recession, simply having ample cash on the firm’s
balance sheet can provide a major competitive advantage. Some cash-rich firms are buying
distressed rivals. For example, BHP Billiton, the world’s largest miner, is seeking to buy rival firms
in Australia and South America. Freeport-McMoRan Copper & Gold Inc. also desires to expand its
portfolio by acquiring distressed rival companies. French drug company SanofiAventis SA also is
acquiring distressed rival firms to boost its drug development and diversification. Cash-rich
Johnson & Johnson in the United States also is acquiring distressed rival firms. This can be an
excellent strategy in a global economic recession.

Thus it is not adequate to simply obtain competitive advantage. A firm must strive to
achieve sustained competitive advantage by (1) continually adapting to changes in external
trends and events and internal capabilities, competencies, and resources; and by (2) effectively
formulating, implementing, and evaluating strategies that capitalize upon those factors.

For example, newspaper circulation in the United States is steadily declining. Most national
newspapers are rapidly losing market share to the Internet, and other media that consumers use
to stay informed. Daily newspaper circulation in the United States totals about 55 million copies
annually, which is about the same as it was in 1954. Strategists ponder whether the newspaper
circulation slide can be halted in the digital age. The six broadcast networks—ABC, CBS, Fox, NBC,
UPN, and WB—are being assaulted by cable channels, video games, broadband, wireless
technologies, satellite radio, high-definition TV, and digital video recorders. The three original
broadcast networks captured about 90 percent of the prime-time audience in 1978, but today their
combined market share is less than 50 percent.

 Strategist

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These are the individuals who are most responsible for the success or failure of an
organization.

Strategists have various job titles, such as chief executive officer, president, owner,
chair of the board, executive director, chancellor, dean, or entrepreneur. Strategists help
an organization gather, analyze, and organize information. They track industry and competitive
trends, develop forecasting models and scenario analyses, evaluate corporate and divisional
performance, spot emerging market opportunities, identify business threats, and develop creative
action plans. Strategic planners usually serve in a support or staff role.

Usually found in higher levels of management, they typically have considerable authority for
decision making in the firm. The CEO is the most visible and critical strategic manager. Any
manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or
direct authority over a major piece of the business is a strategic manager (strategist).

 Mission and Vision Statements

Mission statements are “enduring statements of purpose that distinguish one business
from other similar firms. It identifies the scope of a firm’s operations in product and market terms.”
It addresses the basic question that faces all strategists: “What is our business?” A clear mission
statement describes the values and priorities of an organization.

Developing a mission statement compels strategists to think about the nature and scope of
present operations and to assess the potential attractiveness of future markets and activities. A
mission statement broadly charts the future direction of an organization. A mission statement is a
constant reminder to its employees of why the organization exists and what the founders
envisioned when they put their fame and fortune at risk to breathe life into their dreams.

Many organizations today develop a vision statement that answers the question “What do
we want to become?” Developing a vision statement is often considered the first step in strategic
planning, preceding even development of a mission statement. Many vision statements are a single
sentence.

 External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural,

demographic, environmental, political, legal, governmental, technological, and competitive trends
and events that could significantly benefit or harm an organization in the future.

Opportunities and threats are largely beyond the control of a single organization—thus the
word external. In a global economic recession, a few opportunities and threats that face many firms
are as follow:

- Availability of capital can no longer be taken for granted;

- Consumers expect green operations and products;
- Marketing has moving rapidly to the Internet;
- Consumers must see value in all that they consume;
- Global markets offer the highest growth in revenues;
- As the price of oil has collapsed, oil rich countries are focused on supporting their own
economies, rather than seeking out investments in other countries;
- Too much debt can crush even the best firms;
- Layoffs are rampant among many firms as revenues and profits fall and credit sources dry
up; and
- The housing market is depressed.

 Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities

that are performed especially well or poorly. They arise in the management, marketing,
finance/accounting, production/operations, research and development, and management
information systems activities of a business.

Identifying and evaluating organizational strengths and weaknesses in the functional areas
of a business is an essential strategic management activity. Organizations strive to pursue
strategies that capitalize on internal strengths and eliminate internal weaknesses.

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 Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in

pursuing its basic mission. Long-term means more than one year. Objectives are essential for
organizational success because they state direction; aid in evaluation; create synergy; reveal
priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and
controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and
clear. In a multidimensional firm, objectives should be established for the overall company and
for each division.

 Strategies

Strategies are the means by which long-term objectives will be achieved. Business
strategies may include geographic expansion, diversification, acquisition, product development,
market penetration, retrenchment, divestiture, liquidation, and joint ventures.

Strategies are potential actions that require top management decisions and large amounts
of the firm’s resources. In addition, strategies affect an organization’s long-term prosperity,
typically for at least five years, and thus are future-oriented. Strategies have multifunctional or
multidivisional consequences and require consideration of both the external and internal factors
facing the firm.

 Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach
long-term objectives. Like long-term objectives, annual objectives should be measurable,
quantitative, challenging, realistic, consistent, and prioritized. They should be established at the
corporate, divisional, and functional levels in a large organization.

These objectives should be stated in terms of management, marketing, finance/accounting,

production/operations, research and development, and management information systems (MIS)
accomplishments. A set of annual objectives is needed for each long-term objective. Annual
objectives are especially important in strategy implementation, whereas long-term objectives are
particularly important in strategy formulation. Annual objectives represent the basis for allocating
resources.

 Policies

Policies are the means by which annual objectives will be achieved. These include
guidelines, rules, and procedures established to support efforts to achieve stated objectives.
Policies are guides to decision making and address repetitive or recurring situations.

THE STRATEGIC-MANAGEMENT LEVEL

The strategic-management process can best be studied and applied using a model. Every model
represents some kind of process. The framework illustrated in Figure 1-1 is a widely accepted,
comprehensive model of the strategic-management process.

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Figure 1.1 Comprehensive Strategic-Management Model

These are three important
questions to answer in developing a strategic plan:

1. Where are we now?

2. Where do we want to go?

3. How are we going to get there?

Thing to Ponder:

Identifying an organization’s existing vision, mission, objectives, and strategies is the

logical starting point for strategic management because a firm’s present situation and
condition may preclude certain strategies and may even dictate a particular course of
action. Every organization has a vision, mission, objectives, and strategy, even if these
elements are not consciously designed, written, or communicated. The answer to
where an organization is going can be determined largely by where the organization
has been!
The strategic-management process is dynamic and continuous. A change in any one of the
major components in the model can necessitate a change in any or all of the other components.
For instance, a shift in the economy could represent a major opportunity and require a change in
long-term objectives and strategies; a failure to accomplish annual objectives could require a
change in policy; or a major competitor’s change in strategy could require a change in the firm’s
mission. Therefore, strategy formulation, implementation, and evaluation activities should be
performed on a continual basis, not just at the end of the year or semiannually. The strategic-
management process never really ends.

BENEFITS OF STRATEGIC MANAGEMENT

Historically, the principal benefit of strategic management has been to help organizations
formulate better strategies through the use of a more systematic, logical, and rational approach to
strategic choice. This certainly continues to be a major benefit of strategic management, but research
studies now indicate that the process, rather than the decision or document, is the more important
contribution of strategic management.

Communication is a key to successful strategic management. Through involvement in the

process, in other words, through dialogue and participation, managers and employees become
committed to supporting the organization. Figure 1-2 illustrates this intrinsic benefit of a firm engaging
in strategic planning. Note that all firms need all employees on a mission to help the firm succeed.

Figure 1.2 Benefits to a Firm that Does Strategic Planning

 Financial Benefits

Research indicates that organizations using strategic-management concepts are more

profitable and successful than those that do not. Businesses using strategic-management
concepts show significant improvement in sales, profitability, and productivity compared to firms
without systematic planning activities. High-performing firms tend to do systematic planning to
prepare for future fluctuations in their external and internal environments. Firms with planning
systems more closely resembling strategic-management theory generally exhibit superior long-
term financial performance relative to their industry.

 Nonfinancial Benefits

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Besides helping firms avoid financial demise, strategic management offers other tangible
benefits, such as an enhanced awareness of external threats, an improved understanding of
competitors’ strategies, increased employee productivity, reduced resistance to change, and a
clearer understanding of performance–reward relationships.

Strategic management enhances the problem-prevention capabilities of organizations

because it promotes interaction among managers at all divisional and functional levels. Firms
that have nurtured their managers and employees, shared organizational objectives with them,
empowered them to help improve the product or service, and recognized their contributions can
turn to them for help in a pinch because of this interaction.

Greenley stated that strategic management offers the following benefits:

1. It allows for identification, prioritization, and exploitation of opportunities.

2. It provides an objective view of management problems.
3. It represents a framework for improved coordination and control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows major decisions to better support established objectives.
6. It allows more effective allocation of time and resources to identified opportunities.
7. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc
decisions.
8. It creates a framework for internal communication among personnel.
9. It helps integrate the behavior of individuals into a total effort.
10. It provides a basis for clarifying individual responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and
opportunities.
13. It encourages a favorable attitude toward change.
14. It gives a degree of discipline and formality to the management of a business.

WHY SOME FIRMS DO NO STRATEGIC PLANNING

Some firms do not engage in strategic planning, and some firms do strategic planning but receive
no support from managers and employees. Some reasons for poor or no strategic planning are as
follows:

1. Lack of knowledge or experience in strategic planning—No training in strategic planning.

2. Poor reward structures—When an organization assumes success, it often fails to reward
success. When failure occurs, then the firm may punish.
3. Firefighting—An organization can be so deeply embroiled in resolving crises and firefighting
that it reserves no time for planning.
4. Waste of time—Some firms see planning as a waste of time because no marketable product is
produced. Time spent on planning is an investment.
5. Too expensive—Some organizations see planning as too expensive in time and money.
6. Laziness—People may not want to put forth the effort needed to formulate a plan.
7. Content with success—Particularly if a firm is successful, individuals may feel there is no
need to plan because things are fine as they stand. But success today does not guarantee
success tomorrow.
8. Fear of failure—By not taking action, there is little risk of failure unless a problem is urgent
and pressing. Whenever something worthwhile is attempted, there is some risk of failure.
9. Overconfidence—As managers amass experience, they may rely less on formalized planning.
Rarely, however, is this appropriate. Being overconfident or overestimating experience can
bring demise. Forethought is rarely wasted and is often the mark of professionalism.
10. Prior bad experience—People may have had a previous bad experience with planning, that is,
cases in which plans have been long, cumbersome, impractical, or inflexible. Planning, like
anything else, can be done badly.
11. Self-interest—When someone has achieved status, privilege, or self-esteem through
effectively using an old system, he or she often sees a new plan as a threat.
12. Fear of unknown—People may be uncertain of their abilities to learn new skills, of their
aptitude with new systems, or of their ability to take on new roles.
13. Honest difference of opinion—People may sincerely believe the plan is wrong. They may
view the situation from a different viewpoint, or they may have aspirations for themselves or
the organization that are different from the plan. Different people in different jobs have different
perceptions of a situation.
14. Suspicion—Employees may not trust management.

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PITFALLS IN STRATEGIC PLANNING

Strategic planning is an involved, intricate, and complex process that takes an organization into
uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes the
organization through a journey and offers a framework for addressing questions and solving problems.
Being aware of potential pitfalls and being prepared to address them is essential to success.

Some pitfalls to watch for and avoid in strategic planning are these:

 Using strategic planning to gain control over decisions and resources;

 Doing strategic planning only to satisfy accreditation or regulatory requirements;
 Too hastily moving from mission development to strategy formulation;
 Failing to communicate the plan to employees, who continue working in the dark;
 Top managers making many intuitive decisions that conflict with the formal plan;
 Top managers not actively supporting the strategic-planning process;
 Failing to use plans as a standard for measuring performance;
 Delegating planning to a “planner” rather than involving all managers;
 Failing to involve key employees in all phases of planning;
 Failing to create a collaborative climate supportive of change;
 Viewing planning as unnecessary or unimportant;
 Becoming so engrossed in current problems that insufficient or no planning is done; and
 Being so formal in planning that flexibility and creativity are stifled.

17 GUIDELINES FOR THE STRATEGIC-PLANNING PROCESS TO BE EFFECTIVE

Failing to follow certain guidelines in conducting strategic management can foster criticisms of
the process and create problems for the organization. Issues such as “Is strategic management in our
firm a people process or a paper process?” should be addressed.

1. It should be a people process more than a paper process;

2. It should be a learning process for all managers and employees;
3. It should be words supported by numbers rather than numbers supported by words;
4. It should be simple and non-routine;
5. It should vary assignments, team memberships, meeting formats, and even the planning
calendar;
6. It should challenge the assumptions underlying the current corporate strategy;
7. It should welcome bad news;
8. It should welcome open-mindedness and a spirit of inquiry and learning;
9. It should not be a bureaucratic mechanism;
10. It should not become ritualistic, stilted, or orchestrated;
11. It should not be too formal, predictable, or rigid;
12. It should not contain jargon or arcane planning language;
13. It should not be a formal system for control;
14. It should not disregard qualitative information;
15. It should not be controlled by “technicians.”
16. Do not pursue too many strategies at once; and
17. Continually strengthen the “good ethics is good business” policy.

COMPARING BUSINESS AND MILITARY STRATEGY

A strong military heritage underlies the study of strategic management. Terms such as
objectives, mission, strengths, and weaknesses first were formulated to address problems on the
battlefield. According to Webster’s New World Dictionary, strategy is “the science of planning and
directing large-scale military operations, of maneuvering forces into the most advantageous position
prior to actual engagement with the enemy.” The word strategy comes from the Greek strategos,
which refers to a military general and combines stratos (the army) and ago (to lead). The history of
strategic planning began in the military. A key aim of both business and military strategy is “to gain
competitive advantage.”

Similarities can be construed from Sun Tzu’s writings to the practice of formulating and
implementing strategies among businesses today. The following provides narrative excerpts from
The Art of War. As you read through the table, consider which of the principles of war apply to
business strategy as companies today compete aggressively to survive and grow.

1. War is a matter of vital importance to the state: a matter of life or death, the road either to

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survival or ruin. Hence, it is imperative that it be studied thoroughly.
2. Warfare is based on deception. When near the enemy, make it seem that you are far away;
when far away, make it seem that you are near. Hold out baits to lure the enemy. Strike the
enemy when he is in disorder. Avoid the enemy when he is stronger. If your opponent is of
choleric temper, try to irritate him. If he is arrogant, try to encourage his egotism. If enemy
troops are well prepared after reorganization, try to wear them down. If they are united, try to
sow dissension among them. Attack the enemy where he is unprepared, and appear where you
are not expected. These are the keys to victory for a strategist. It is not possible to formulate
them in detail beforehand.
3. A speedy victory is the main object in war. If this is long in coming, weapons are blunted and
morale depressed. When the army engages in protracted campaigns, the resources of the state
will fall short. Thus, while we have heard of stupid haste in war, we have not yet seen a clever
operation that was prolonged.
4. Generally, in war the best policy is to take a state intact; to ruin it is inferior to this. To capture
the enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or a
squad is better than to destroy it. For to win one hundred victories in one hundred battles is not
the acme of skill. To subdue the enemy without fighting is the supreme excellence. Those
skilled in war subdue the enemy’s army without battle.
5. The art of using troops is this: When ten to the enemy’s one, surround him. When five times his
strength, attack him. If double his strength, divide him. If equally matched, you may engage
him with some good plan. If weaker, be capable of withdrawing. And if in all respects unequal,
be capable of eluding him.
6. Know your enemy and know yourself, and in a hundred battles you will never be defeated.
When you are ignorant of the enemy but know yourself, your chances of winning or losing are
equal. If ignorant both of your enemy and of yourself, you are sure to be defeated in every
battle.
7. He who occupies the field of battle first and awaits his enemy is at ease, and he who comes
later to the scene and rushes into the fight is weary. And therefore, those skilled in war bring
the enemy to the field of battle and are not brought there by him. Thus, when the enemy is at
ease, be able to tire him; when well fed, be able to starve him; when at rest, be able to make
him move.
8. Analyze the enemy’s plans so that you will know his shortcomings as well as his strong points.
Agitate him to ascertain the pattern of his movement. Lure him out to reveal his dispositions
and to ascertain his position. Launch a probing attack to learn where his strength is abundant
and where deficient. It is according to the situation that plans are laid for victory, but the
multitude does not comprehend this.
9. An army may be likened to water, for just as flowing water avoids the heights and hastens to
the lowlands, so an army should avoid strength and strike weakness. And as water shapes its
flow in accordance with the ground, so an army manages its victory in accordance with the
situation of the enemy. And as water has no constant form, there are in warfare no constant
conditions. Thus, one able to win the victory by modifying his tactics in accordance with the
enemy situation may be said to be divine.
10. If you decide to go into battle, do not announce your intentions or plans. Project “business as
usual.”
11. Unskilled leaders work out their conflicts in courtrooms and battlefields. Brilliant strategists
rarely go to battle or to court; they generally achieve their objectives through tactical
positioning well in advance of any confrontation.
12. When you do decide to challenge another company (or army), much calculating, estimating,
analyzing, and positioning bring triumph. Little computation brings defeat.
13. Skillful leaders do not let a strategy inhibit creative counter-movement. Nor should commands
from those at a distance interfere with spontaneous maneuvering in the immediate situation.
14. When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold
their position and give their rivals the opportunity to surrender or merge. They do not allow
their forces to be damaged by those who have nothing to lose.
15. Brilliant strategists forge ahead with illusion, obscuring the area(s) of major confrontation, so
that opponents divide their forces in an attempt to defend many areas. Create the appearance
of confusion, fear, or vulnerability so the opponent is helplessly drawn toward this illusion of
advantage.

SOURCE:

 David, Fred R. (2011). “Strategic Management: Concepts and Cases.” 13th Edition. Pearson
Education, Inc.

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