PART ONE: OVERVIEW OF STRATEGIC MANAGEMENT

CHAPTER ONE: INTRODUCTION

Chapter Objectives
Chapter One: The
Up on completion of Nature
this unit,of
theStrategic
learner is Management
expected to:
 Defining strategic management
 Identify the Stages of strategic management
 Describe Key terms in strategic management
Chapter outlineof types of strategy
 Overview
 The strategic management approach
 List the Benefits of strategic management
 Discus the relation between Business ethics and strategic management

1.1. Defining strategic management

A strategy is all about integrating organizational activities and utilizing and allocating the scarce
resources within the organizational environment so as to meet the present objectives. Strategy is
the blueprint of decisions in an organization that shows its objectives and goals, reduces the key
policies, and plans for achieving these goals, and defines the business the company is to carry on,
the type of economic and human organization it wants to be, and the contribution it plans to
make to its shareholders, customers and society at large.

Michael Porter defined strategy in 1980 as the "...broad formula for how a business is going to
compete, what its goals should be, and what policies will be needed to carry out those goals" and
the "...combination of the ends (goals) for which the firm is striving and the means (policies) by
which it is seeking to get there." He continued that: "The essence of formulating competitive
strategy is relating a company to its environment."

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 objective.”
Strategic Management is “The on-going process of formulating, implementing and controlling
broad plans guide the organizational in achieving the strategic goals given its internal and
external environment”.
Interpretation:
1. On-going process: Strategic management is on-going process which is in existence throughout
the life of organization.
2. Shaping broad plans: First, it is an on-going process in which broad plans are firstly
formulated than implementing and finally controlled.
3. Strategic goals: Strategic goals are those which are set by top management. The broad plans
are made in achieving the goals.
4. Internal and external environment: Internal and external environment generally set the goals.
Simply external environment forced internal environment to set the goals and guide them that
how to achieve the goals?

Strategic management is a set of managerial decisions and actions that determines the long run
performance of a corporation. It includes environmental scanning (both external and internal),
strategy formulation (strategic or long-range planning), strategy implementation, and evaluation
and control. The study of strategic management, therefore, emphasizes the monitoring and
evaluating of external opportunities and threats in light of a corporation’s strengths and
weaknesses.
1.2. Stages of strategic management
The strategic management process consists of three stages:
 Strategy Formulation (strategy planning)
 Strategy Implementations
 Strategy Evaluation
Strategic Formulation:
It is the development of long-range plans for the effective management of environmental
opportunities and threats, in light of corporate strengths and weaknesses (SWOT). It includes
defining the corporate mission, specifying achievable objectives, developing strategies, and
setting policy guidelines.
Strategic formulation means a strategy formulate to execute the business activities. Strategy
formulation includes developing:-
 Vision and Mission (The target of the business)
 Strength and weakness (Strong points of business and also weaknesses)
  Opportunities and threats (These are related with external environment for the
business)
Strategy formulation is also concerned with setting long term goals and objectives, generating
alternative strategies to achieve that long term goals and choosing particular strategy to pursue.
Strategy Implementation
It is a process by which strategies and policies are put into action through the development of
programs, budgets, and procedures. This process might involve changes within the overall
culture, structure, and/or management system of the entire organization
Strategy implementation requires a firm to establish annual objectives, devise policies,
motivating employees and allocate resources so that formulated strategies can be executed.
Strategy implementation includes developing strategy supportive culture, creating an effective
organizational structure, redirecting marketing efforts, preparing budgets, developing and
utilizing information system and linking employee compensation to organizational performance.
Strategy implementation is often called the action stage of strategic management. Implementing
means mobilizing employees and managers in order to put formulated strategies into action. It is
often considered to be most difficult stage of strategic management. It requires personal
discipline, commitment and sacrifice.
Strategy formulation results in a plan of action for the company and its various levels, whereas
strategy implementation represents a pattern of decisions and actions that are intended to carry
out the plan. Strategy implementation involves managing stakeholder relationships and
organizational resources in a manner that moves the business toward the successful execution of
its strategies, consistent with its strategic direction.
Strategy evaluation:
It is a process in which corporate activities and performance results are monitored so that actual
performance can be compared with desired performance. Managers at all levels use the resulting
information to take corrective action and resolve problems. Although evaluation and control is
the final major element of strategic management, it can also pinpoint weaknesses in previously
implemented strategic plans and thus stimulate the entire process to begin again.
1.3. Key terms in strategic management
Before we further discuss strategic management, we should define the following key terms: competitive
advantage, strategists, mission statements, external opportunities and threats, internal strengths and
weaknesses, long-term objectives, strategies, annual objectives, and policies.
 Competitive Advantage
The 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.
 Strategists
Strategists are individuals who are most responsible for the success or failure of an organization.
Strategists are individuals who form strategies. Strategists have various job titles, such as chief
executive officer, president, and 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).
 Vision Statements
Many organizations today develop a "vision statement" which 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.

 Mission Statements
Mission statements are "enduring statements of purpose that distinguish one business from other
similar firms. A mission statement identifies the scope of a firm's operations in product and
market terms. It addresses the basic question that faces all strategists: What is our business? A
clear mission statement describes the values and priorities of an organization. Developing a
mission statement compels strategists to think about the nature and scope of present operations
and to assess the potential attractiveness of future markets and activities. A mission statement
broadly charts the future direction of an organization.
 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 term external. The computer
revolution, biotechnology, population shifts, changing work values and attitudes, space
exploration, recyclable packages, and increased competition from foreign companies are
examples of opportunities or threats for companies. These types of changes are creating a
different type of consumer and consequently a need for different types of products, services, and
strategies.
A basic tenet of strategic management is that firms need to formulate strategies to take advantage
of external opportunities and to avoid or reduce the impact of external threats. For this reason,
identifying, monitoring, and evaluating external opportunities and threats are essential for
success.
 Internal Strengths and Weaknesses/Internal assessments
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 computer 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 improve on
internal weaknesses.
Strengths and weaknesses are determined relative to competitors. Relative deficiency or
superiority is important information and also Strengths and weaknesses may be determined
relative to a firm's own objectives. For example, high levels of inventory turnover may not be
strength to a firm that seeks never to stock-out.
  Long-Term Objectives
Long-term objectives represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives. It can be defined as specific
results that an organization seeks to achieve in pursuing its basic mission. The time frame for
objectives and strategies should be consistent, usually from two to five years.
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.
 Strategies
Strategies are the means by which long-term objectives will be achieved. 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.
 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.
Annual objectives should be stated in terms of management, marketing, finance/accounting,
production/operations, research and development, and information systems accomplishments. A
set of annual objectives is needed for each long-term objective. Annual objectives are especially
important in strategy implementation, whereas long-term objectives are particularly important in
strategy formulation.
 Policies
Policies are the means by which annual objectives will be achieved. Policies include guidelines,
rules, and procedures established to support efforts to achieve stated objectives. Policies are
guides to decision making and address repetitive or recurring situations.
A policy is a broad guideline for decision making that links the formulation of strategy with its
implementation.
Companies use policies to make sure that the employees throughout the firm make decisions and
take actions that support the corporation’s mission, its objectives and its strategies. Policy
implies a decision as to what shall be done and how, when and where.
Policies can be established at the corporate level and apply to an entire organization, at the
divisional level and apply to a single division or at the functional level and apply to particular
operational activities or departments.
Policies, like annual objectives, are especially important in strategy implementation because they
outline an organization's expectations of its employees and managers.
1.4. Overview of types of strategy
Organizational hierarchy level
Corporate strategy
Corporate strategy defines what business or businesses the firm is in or should be in, how
each business should be conducted, and how it relates to society. This strategy is for the
company and all of its business as a whole. Corporate strategies are established at the
highest levels in the organization; they generally involve a long-range time horizon and
focus on the entire organization. At the corporate level the concern revolves around the
definition of business in which the corporation wishes to participate and the acquisition
and allocation of resources to these business units.
Business strategy
Business strategy defines how each individual business will attempt to achieve its
mission within its chosen field of endeavor. This strategy referred to each separate
business unit (SBU) or strategic planning unit (SPU). At this level strategy two critical
issues are specified: (1) the scope or boundaries of each business and the operational
 links with corporate strategy, and (2) the basis on which the business unit will achieve
and maintain a competitive advantage within its industry
Functional strategy
Functional strategy focuses on supporting the corporate and business strategies. This
strategy is that a strategy for each specific functional unit within a business. Functional
strategies primarily are concerned with the activities of the functional areas of a business
(i.e., operations, finance, marketing, personnel, etc.) will seaport the desired competitive
business level strategy and complement each other.
Action or operational level
Four alternative broad strategies like
 Integration strategy
 Intensive strategy,
 Diversification strategy and
 Defensive strategy.
An enterprise could peruse these strategies categorizing into 12 alternative options:
 forward integration, backward integration, horizontal integration
 market penetration, market development, product development,
 Concentric diversification, conglomerate diversification, horizontal diversification,
 retrenchment, divestiture and liquidation.
1.5. The strategic management approach
There are two the strategic management approach; Resource based View and industrial
organization view
The resource-based view (RBV) is a model that sees resources as key to superior firm
performance.

According to RBV proponents, it is much more feasible to exploit external opportunities using
existing resources in a new way rather than trying to acquire new skills for each different
opportunity

. There are two types of resources: tangible and intangible.

Tangible assets are physical things. Land, buildings, machinery, equipment and capital – all
these assets are tangible. Physical resources can easily be bought in the market so they confer
little advantage to the companies in the long run because rivals can soon acquire the identical
assets.

Intangible assets are everything else that has no physical presence but can still be owned by the
company. Brand reputation, trademarks, intellectual property are all intangible assets. Unlike
physical resources, brand reputation is built over a long time and is something that other
companies cannot buy from the market. Intangible resources usually stay within a company and
are the main source of sustainable competitive advantage.

The two critical assumptions of RBV are that resources must also be heterogeneous and
immobile.

Heterogeneous: The first assumption is that skills, capabilities and other resources that
organizations possess differ from one company to another. If organizations would have the same
amount and mix of resources, they could not employ different strategies to outcompete each
other. What one company would do, the other could simply follow and no competitive advantage
could be achieved. This is the scenario of perfect competition, yet real world markets are far
from perfectly competitive and some companies, which are exposed to the same external and
competitive forces (same external conditions), are able to implement different strategies and
outperform each other. Therefore, RBV assumes that companies achieve competitive advantage
by using their different bundles of resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how two
companies that operate in the same industry and thus, are exposed to the same external forces,
can achieve different organizational performance due to the difference in resources. Apple
competes with Samsung in tablets and smart phones markets, where Apple sells its products at
much higher prices and, as a result, reaps higher profit margins. Why Samsung does not follow
the same strategy? Simply because Samsung does not have the same brand reputation or is
capable to design user-friendly products like Apple does. (Heterogeneous resources)
Immobile: The second assumption of RBV is that resources are not mobile and do not move
from company to company, at least in short-run. Due to this immobility, companies cannot
replicate rivals’ resources and implement the same strategies. Intangible resources, such as brand
equity, processes, knowledge or intellectual property are usually immobile.

Industrial Organization (I/O MODEL)

The I/O (Industrial Organization) Model adopts an external perspective to explain that forces
outside of the organization represent the dominate influences on a firm's strategic actions

The five forces model is an analytical tool used to address and describe these industry
characteristics.

Figure: Five step Process of the I/O Model

Based on its underlying assumptions, the I/O model prescribes a five-step process for companies
to achieve above-average returns as shown in the figure above:
 1. Study the external environment-general, industry and competitive-to determine the
characteristics of the external environment that will both determine and constrain the
company's strategic alternatives.

2. Select an industry (or industries) with a high potential for returns based on the
structural characteristics of the industry.

3. Based on the characteristics of the industry, in which the company chooses to

compete, strategies that are linked with above-average returns should be selected. A
model or framework that can be used to assess the requirements and risks of these
strategies, the Generic Strategies (cost leadership and differentiation)

4. Acquire or develop the critical resources-skills and assets-needed to successfully

implement the strategy that has been selected.

5. The I/O model indicates that above-average returns will accrue to companies that
successfully implement relevant strategic actions that enable the company to leverage
its strengths (skills and resources) to meet the demands or pressures and constraints of
the industry in which they have elected to compete.

1.6. Benefits of strategic management

Strategic management emphasizes long-term performance. Many companies can manage short-
term bursts of high performance, but only a few can sustain it over a longer period of time. For
example, of the original Forbes 100 Companies listed in 2002, only 13 have survived to the
present day. To be successful in the long-run, companies must not only be able to execute current
activities to satisfy an existing market, but they must also adapt those activities to satisfy new
and changing markets.

Research reveals that organizations that engage in strategic management generally outperform
those that do not. The attainment of an appropriate match, or “fit,” between an organization’s
environment and its strategy, structure, and processes has positive effects on the organization’s
performance.
A survey of nearly 50 corporations in a variety of countries and industries found the three most
highly rated benefits of strategic management to be:
 Clearer sense of strategic vision for the firm.
 Sharper focus on what is strategically important.
 Improved understanding of a rapidly changing environment.
A recent survey by McKinsey & Company of 800 executives found that formal strategic
planning processes improve overall satisfaction with strategy development.
To be effective, however, strategic management need not always be a formal process. It can
begin with a few simple questions:
 Where is the organization now? (Not where do we hope it is!)
 If no changes are made, where will the organization be in one year? two years? five
years? 10 years? Are the answers acceptable?
 If the answers are not acceptable, what specific actions should management undertake?
 What are the risks and payoffs involved?
Greenly stated that strategic management offers the following benefits:
 It allows for identification, prioritization, and exploitation of opportunities.
 It provides an objective view of management problems.
 It represents a framework for improved coordination and control of activities.
 It minimizes the effects of adverse conditions and changes.
 It allows major decisions to better support established objectives.
 It allows more effective allocation of time and resources to identified
opportunities.
 It allows fewer resources and less time to be devoted to correcting erroneous or
ad hoc decisions.
 It creates a framework for internal communication among personnel.
 It helps integrate the behavior of individuals into a total effort.
 It provides a basis for clarifying individual responsibilities.
 It encourages forward thinking.
 It provides a cooperative, integrated, and enthusiastic approach to tackling
problems and opportunities.
 It encourages a favorable attitude toward change.
  It gives a degree of discipline and formality to the management of a business.
1.7. Business ethics and strategic management
The term ethics refers to accepted principles of right or wrong that govern the conduct of a
person, the behavior of members of a profession, or the actions of an organization.
Business ethics are the accepted principles of right or wrong governing the conduct of
businesspeople and also it can be defined as principles of conduct within organizations that guide
decision making and behavior. Ethical decisions are those that are in accordance with accepted
principles of right and wrong, whereas an unethical decision is one that violates accepted
principles. Good business ethics is a prerequisite for good strategic management; good ethics is
just good business.
Strategists are the individuals primarily responsible for ensuring that high ethical principles are
espoused and practiced in an organization. All strategy formulation, implementation, and
evaluation decisions have ethical ramifications.
A new wave of ethics issues related to product safety, employee health, sexual harassment, AIDS
in the workplace, smoking, acid rain, affirmative action, waste disposal, foreign business
practices, cover-ups, takeover tactics, conflicts of interest, employee privacy, inappropriate gifts,
security of company records, and layoffs has accented the need for strategists to develop a clear
code of business ethics. A code of business ethics can provide a basis on which policies can be
devised to guide daily behavior and decisions at the work site.
Merely having a code of ethics, however, is not sufficient to ensure ethical business behavior. A
code of ethics can be viewed as a public relations gimmick, a set of platitudes, or window
dressing. To ensure that the code is read, understood, believed, and remembered, organizations
need to conduct periodic ethics workshops to sensitize people to workplace circumstances in
which ethics issues may arise. If employees see examples of punishment for violating the code
and rewards for upholding the code, this helps reinforce the importance of a firm's code of ethics.