Chapter One: Introduction To Business Policy And Strategic Management

This chapter provides an overview of business policy and strategic management. It introduces
a practical, integrative model of the strategic-management process and defines basic activities
and terms in strategic management.

1.1. Evolution, Definition, and Importance of Business Policy/Strategic Management

The Genesis of business policy went back to 1911 when Harvard Business School introduced
an integrative course in management aimed at providing general management capability. In
1969 the American Assembly of Collegiate Schools of Business (AACSB), a regulatory body
for business schools, made the course of business policy a mandatory requirement for the
purpose of recognition. The term “Business Policy” as a course is currently replaced by new
titles such as strategic management and corporate strategy.
Glueck has viewed the development in business policy as arising from managerial practices.
Starting from day today planning in earlier times, managers, till recently tried to anticipate
the future through the preparation of budgets and by using control systems like capital
budgeting and management by objectives. However, as these techniques were unable to
emphasise the role of the future adequately, long range planning came into use. But, soon
long range planning was replaced by strategic planning, and later by strategic management (a
term currently being used to describe the process of strategic decision-making.)

Day –to- Day Budgeting Long Range Strategic Strategic

Planning (Short rang e Planning Planning Management
planning)

Figure 1.1: Evolution of Business Policy /Strategic Management from view point of
Managerial practice
It is important to note that the development of business policy/strategic management as a
field of study has closely followed the demands of real-life business. Hofer and others have
viewed the evolution of business policy in terms of four paradigm shifts:
i. Ad hoc policy-making Paradigm: the first phase traced to mid 1930s, when policy
making arose due to the nature of the American business firms of that period. The
firms, which had originally commenced operations in a single product line
catering to a unique set of customers in a limited geographical area, expanded in
one or all of these other dimensions. Informal control and coordination became

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 partially irrelevant as expansion took place and the need to integrate functional
areas arose.
ii. Planned policy making Paradigm: Due to increased environmental changes in the
1930s and 40s in the US, ad hoc policy making was replaced by planned policy
formulation. During this time the emphasis shifted to the integration of functional
areas in a rapidly changing environment.
iii. Strategy Paradigm: Increasing complexity and accelerating changes in
environment made the planned policy paradigm irrelevant since the needs of
business could no longer be served by policy-making and functional-area
integration only. By 1960s, there was a demand for a critical look at the basic
concept of business and its relationship to environment. During early 1960s, the
concept of strategy satisfied this requirement.
iv. Strategic Management Paradigm: Current thinking which was emerged in 1980s.
The initial focus of strategic management was on the intersection of two broad
fields of enquiry: the strategic process of business firms and the responsibilities of
general management.
In 1960s and 1970s business policy/strategic management was consider to be cure for
business problems. But in 1980s two important revolutions occurred in business world.
 Computers
 Mobiles
The invention of these things has decreased the importance of strategic management. But at
the end of 1980, the business involves in computers and mobiles realized that they still
needed to adopt the policies for strategic management.
Business Policy Defined
Christensen and other defined business policy as “the study of the function and
responsibilities of senior management, the crucial problems that affect success in the total
enterprise, and the decisions that determine the direction of the organization and shape its
future. The problems of policy in business, like those of policy in public affairs, have to do
with the choice of purposes, the molding 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 the face of competition or adverse circumstances” Important aspects of
this definition are:

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  functions and responsibilities of the senior management in solving organizational
problem
 determination of future course of action that an organization has to adopt
 choosing the purpose and defining what needs to be done in order to mould the
character and identity of an organization
 mobilization of resources, which will help an organization to achieve its goals
During its earlier stage of development business policy as course of study was intended to
attain the following purposes:
i. to integrate the knowledge gained in various functional areas of management
ii. to adopt a generalist approach to problem solving and
iii. to understand the complex interlinkages operating within an organization through
the use of systems approach to decision-making and relating these to the changes
taking place in the external environment
Strategy Defined
The concept of strategy is central to understanding the process of strategic management. The
term “strategy” is derived from the Greek word strategos, which means generalship (the
actual direction of military force, as distinct from the policy governing its deployment).
Therefore, the word strategy means the art of the general. As business jargon, there is no
definite meaning assigned to strategy. It is often used loosely to mean a number of things. For
instance an old established company which has been profitable in the past starts facing new
threats in the environment (such as emergence of competitors), then it may rethink the course
of action it had been following. With such rethinking, new ways are devised to counter the
threats posed by the competitor. In this case we may call the course of action (previous or
later) strategy. Next we shall see few definitions of strategy given by different authors:
Alfred D Chandler (1962)
Chandler defined strategy as: “The determination of the basic long-term goals and objectives
of an enterprise and adoption of the course of action and the allocation of resources necessary
for caring out these goals”
Note three important aspects from Chandler’s definition:
 Determination of basic long-term goals and objectives
 Adoption of course of actions to achieve these goals and objectives
 Allocation of resources necessary for adopting these course of actions

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Kenneth Andrews (1965)
Andrew defines strategy as “The pattern of objectives, goals, and the major policies and plans
for achieving these goals stated in such a way so as to define what business a company is in
or is to be and the kink of company is or is to be.”
Igor Ansoff (1965)
Prof. Ansoff explained the concept of strategy as “The common thread among the
organization’s activities and product-markets… that defines the essential nature of business
that the organization was or planned to be in future.”
Henry Mintzberg (1987)
Mintzberg advocates the idea that strategies are not always the outcome of rational planning.
They can emerge from what an organization does without any plan. He defines strategy as “a
pattern in a stream of decisions and actions.” Mintzberg distinguishes between intended
strategies and emergent strategies. Intended strategies refer to the plans that managers
develop, while emergent strategies are actions that actually take place over a period of time.
In this manner, an organization may start with a deliberate design of strategy and end up with
another form of strategy that is actually realized.

Deliberate strategies are the appropriate tool for organizing action if three conditions are met.
First, the strategy must encompass and address correctly all of the important details required
to succeed, and those responsible for implementation must understand each important detail
in management’s deliberate strategy. Second, if the organization is to take collective action,
the strategy needs to make as much sense to all employees as they view the world from their
own context as it does to top management, so that they will all act appropriately and
consistently. Finally, the collective intentions must be realized with little unanticipated
influence from outside political, technological, or market forces. Because it is difficult to find
a situation in which all three of these conditions apply, the emergent strategy-making process
almost always alters the strategy that the company actually implements.

Emergent strategy, which bubbles up from within the organization, is the cumulative effect of
day-to-day prioritization and investment decisions made by middle managers, engineers,
salespeople, and financial staff. These tend to be tactical, day-to-day operating decisions that
are made by people who are not in a visionary, futuristic, or strategic state of mind.

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Emergent strategies result from managers’ responses to problems or opportunities that were
unforeseen in the analysis and planning stages of the deliberate strategy-making process.
When the efficacy of a strategy that was developed through an emergent process is
recognized, it is possible to formalize it, improve it, and exploit it, thus transforming an
emergent strategy into a deliberate one.
Michael E Porter (1996)
Michael Porter is professor of management in Harvard Business School. His contribution in
management includes the idea of competitive advantage, five-force model, generic strategies,
and value chain. He emphasized that the core duty of general management is strategy design
and communication. In this sense he defined strategy as “… developing and communicating
the company’s unique position, making trade-offs, and forging fit among activities.”
Strategic Management Defined

Glueck (1984) defines strategic management as “a stream of decisions and actions which
leads to the development of an effective strategy or strategies to help achieve corporate
objectives.” From this definition we can see that the end result of strategic management is
strategy or a set of strategies for the organization.
Hofer and others (1984) consider strategic management as “the process which deals with the
fundamental organizational renewal and growth with the development of strategies,
structures, and systems necessary to achieve such renewal and growth, and with the
organizational systems needed to effectively manage the strategy formulation and
implementation processes.”
Harrison and St. John (1998) define strategic management as “the process through which
organizations analyze and learn from their internal and external environments, establish
strategic direction, create strategies that are intended to help achieve established goals, and
execute these strategies, all in an effort to satisfy key organization stakeholders.”
Why Strategic Management? Importance of strategic Management

Strategic management becomes so important due to the following reasons:

 Globalization: the survival for business
First, global considerations impact virtually all strategic decisions! The boundaries of
countries no longer can define the limits of our imaginations. To see and appreciate the world
from the perspective of others has become a matter of survival for businesses. The
underpinnings of strategic management hinge upon managers' gaining an understanding of

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competitors, markets, prices, suppliers, distributors, governments, creditors,
shareholders, and customers worldwide. The price and quality of a firm's products and
services must be competitive on a worldwide basis, not just a local basis. The distance
between the business sectors are becoming less due to the provisions of certain facilities.
Although political boundaries are there but in order to become successful in business it is
essential to lay stress on globalization.
 E-Commerce: a business tool
A second theme is that electronic commerce (e-commerce) has become a vital strategic-
management tool. An increasing number of companies are gaining competitive advantage by
using the Internet for direct selling and for communication with suppliers, customers,
creditors, partners, shareholders, clients, and competitors who may be dispersed globally. E-
commerce allows firms to sell products, advertise, purchase supplies, bypass
intermediaries, track inventory, eliminate paperwork, and share information. In total,
electronic commerce is minimizing the expense and cumbersomeness of time, distance and
space in doing business, which yields better customer service, greater efficiency, improved
products and higher profitability.
 Environment has become a major strategic issue
A third theme is that the natural environment has become an important strategic issue. With
the demise of communism and the end of the Cold War, perhaps there is now no greater
threat to business and society than the continuous exploitation and decimation of our
natural environment. The resources are scarce but the wants are unlimited. In order to meet
the wants of the world, the resources should be efficiently utilized. For example, the use of
oil resources or energy resources will make the people to use these resources for a long time.
Climate change is another threat for businesses
 Strategic management – a route to success
The study of strategic management integrates different topics. Different courses are
integrated due to the study of this course so that businesses become successful in every
sector. It integrates the following:
 Marketing
 Management
 Finance
 Research and development

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The management and marketing are essential part of a business sectors. They should be
integrated, just like other sections of the business are integrated under this study. This term is
mostly used by academia but this is also used in media.
1.2. Levels at which Strategy Operates

Many companies work in different business lines with regard to either products/services,
markets or technology. Here are few illustrations:
Midroc Ethiopia is in several businesses such as:
 Construction  Banking
 Mining  Hotel and tourism
Hindustan Levers is in several businesses such as:
 Animal feeds  Soaps and detergents
 Beverages  Specialty chemicals
 Oils and dairy fat,
Flowmore Group
 Pumps for irrigation  Polyester films
 A range of engineering products  Consultancy service for power
 Turbines projects and environmental
 Castings engineering
 Specialized conversion equipments

For many companies, such as those illustrated above, a single strategy is not only inadequate
but also inappropriate. Such companies need multiple strategies that operate at different
levels. The following picture depicts organization of activities in many companies.
Corporate level strategy is an overarching plan of action covering the various functions
performed by different SBUs. The plan deals with the objectives of company, allocation of
resources and coordination of the SBUs for optimal performances.
SBU level strategy is a comprehensive plan providing objectives for SBUs, allocation of
resources among functional areas, and coordination between them for making an optimal
contribution to the achievement of corporate level objectives.
Functional strategy deals with a relatively restricted plan providing objectives for a specific
function, allocation of resources among different operations with that functional area, and
coordination between them for optimal contribution to the achievement of SBU and
corporate-level objectives. Some strategies are also required to be set at lower levels. One
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step down the functional level, a company could set its operations-level strategies. Each
functional area could have a number of operational strategies. These would deal with a highly
specific and narrowly-defined area. For instance, functional strategy at the marketing level
could be subdivided into sales, distribution, pricing, product and advertising strategies.
Activities in each of the operational areas of marketing, whether sales or advertising, could be
performed in such a way that they contribute to the functional objectives of the marketing
departments. The functional strategy of marketing is interlinked with those of the finance,
production, and personnel departments. All these functional strategies operate under the SBU
level. Different SUB-level strategies are put into action under the corporate-level strategies
which, in turn, is derived from the societal-level strategy of corporation (particular need or set
of needs that corporation strives to fulfil).

Level Struct Strate

ure gy
Corporate Corporat
Corpora Office e Level
te

SBU SBU 3 SBU 1 SBU 2 Business

Unit
Level

Function Financ Marketi Operati Person Informati

al e ng ons nel on Functional
Level
Figure 1.2: Different Levels of
Strategy
1.3. Key Terms in Strategic Management

The strategic management process is based on the belief that organization should
continuously monitor internal and external events and trends so that timely change can be
made as needed. The rate and magnitude of changes that affect the organization are
increasing dramatically. Consider for example, Ecommerce, laser surgery, the war on
terrorism, economic recession and the aging population etc.

To survive all organizations must be capable of wisely identifying and adapting to change.
The need to adapt to change leads organizations to key strategic management questions, such

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as “What kind of business should we become?” “Are we in right field?” “Should we reshape
our business?” “Are new technologies being developed that could put us out of business?”

Before we further discuss strategic management, we should define key terms: strategists,
vision statements, mission statements, external opportunities and threats, internal strengths
and weaknesses, long-term objectives, annual objectives, strategies and policies.
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 differ as much as organizations themselves and these differences must be

considered in the formulation, implementation, and evaluation of strategies. Some strategists
will not consider some types of strategies because of their personal philosophies. Strategists
differ in their attitudes, values, ethics, willingness to take risks, concern for social
responsibility, concern for profitability, concern for short-run versus long-run aims and
management style.
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. For example the vision statement of an Eye Clinic is "Our
vision is to take care of your vision."
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.
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

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and threats are largely beyond the control of a single organization, thus the term external. The
computer revolution, biotechnology, population shifts, climate change, 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. Other opportunities and threats may include the
passage of a law, the introduction of a new product by a competitor, a national
catastrophe, or the declining value of the dollar/birr. A competitor's strength could be a
threat. Unrest in East Africa, rising interest rates, or the war against drugs could represent an
opportunity or a threat.
Environmental Scanning
The process of conducting research and gathering and assimilating external information is
sometimes called environmental scanning or industry analysis. Lobbying is one activity that
some organizations utilize to influence external opportunities and threats. Environment
scanning has the management scan external environment for opportunities and threats and
internal environment for strengths and weaknesses. The factor which are most important for
corporation are referred as a strategic factor and summarized as SWOT standing for strength,
weaknesses, opportunities and threats.
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.
Long-Term Objectives
Objectives can be defined as specific results that an organization seeks to achieve in pursuing
its basic mission. Long-term objectives represent the results expected from pursuing certain
strategies. Strategies represent the actions to be taken to accomplish long-term objectives.
The time frame for objectives and strategies should be consistent, usually from two to five
years. Objectives should be quantitative, measurable, realistic, understandable, challenging,

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hierarchical, obtainable, and congruent among organizational units. Each objective should
also be associated with a time line.

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. Annual objectives represent the basis for
allocating resources.
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, divest, liquidation, and joint venture. 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 external and internal factors
facing the firm.
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. Policies
are most often stated in terms of management, marketing, finance/ accounting,
production/operations, research and development, and computer information systems
activities. 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

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expectations of its employees and managers. Policies allow consistency and coordination
within and between organizational departments.

1.4. Strategic Decision Making

Decision making is the most important function of any manager. Strategic decision making is
the prominent task of the senior management. While decision-making pertains to all
managerial functions, strategic decision-making largely relates to the responsibilities of the
senior management.
Conventional Decision Making
Most people agree that decision-making (DM) is the process of selecting a course of action
from among many alternatives. This process seems as:
 Objectives to be achieved are determined
 Alternative ways of achieving the objectives are identified
 Each alternative is evaluated in terms of its objective-achieving ability, and
 The best alternative is chosen
The end result of the above process is a decision or a set of decisions to be implemented.
Such process of DM is deceptively simple. In practice, DM is a highly complex phenomenon.
The first set of problems encountered in DM is related to objective setting. Second,
identification of alternative is difficult task. How to test the objective-achieving ability of
each alternative is easier said than done, and lastly, choosing the best alternative is
formidable task too.
Strategic Decision-Making
As indicated above, the problem encountered in decision-making is experienced by all
managers in the course of their day-to-day activities. On the other hand, strategic tasks are by
their very nature complex and varied. Decision-making in performing strategic task is,
therefore, an extremely difficult, complicated and, at times, fascinating and mysterious
process.
In the process of strategic management the basic thrust of strategic decision-making is to
make a choice regarding the courses of action to adopt. Thus, most aspects of strategy
formulation rest on strategic decision-making. The fundamental strategic decision relates to
the choice of a mission. In other word, the answers to questions:
 What is our business?
 What will it be? and
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  What should it be?
The answers to these questions are the basic concerns in strategic management. With regard
to objective-setting, the senior management is faced with alternatives regarding the different
yardsticks to measure performance. Finally at the level of choosing a strategy, the senior
management chooses from among a number of strategic alternatives in order to adopt one
specific course of action which would make the company achieve its objectives and realize its
mission.
Apart from the fundamental decisional choice, as pointed above, there are numerous
occasions when the senior management has to make important strategic decisions.
Environmental threats and opportunities are abundant; that the senior management focuses
its attention on only a few of those. Likewise, there are many company strengths and
weaknesses; the senior management considers only a limited number at any given time. With
regard to resource allocation, the management faces a strategic choice from among a number
of alternatives that it could allocate resources to. Thus, strategic decision-making forms the
core of strategic management.
1.5. The Strategic-Management Process/ Model

The strategic-management process best can be studied and applied using a model. Every
model represents some kind of process. The framework illustrated in Figure 1-3 is a widely
accepted, comprehensive model of the strategic-management process. This model does not
guarantee success, but it does represent a clear and practical approach for formulating,
implementing, and evaluating strategies. Relationships among major components of the
strategic-management process are shown in the model.

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
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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 semi-annually. The strategic-management process never really ends.

Application of the strategic-management process is typically more formal in larger and well-
established organizations. Formality refers to the extent that participants, responsibilities,
authority, duties, and approach are specified. Smaller businesses tend to be less formal. Firms
that compete in complex, rapidly changing environments such as technology companies tend
to be more formal in strategic planning. Firms that have many divisions, products, markets,
and technologies also tend to be more formal in applying strategic-management concepts.
Greater formality in applying the strategic-management process is usually positively
associated with the cost, comprehensiveness, accuracy, and success of planning across all
types and sizes of organizations.
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III. Strategy
Establishing II. Strategy Formulation Implementation IV. Strategic
IV. Strategic
Strategic Intent Project
Project Evaluation
External Internal Procedural
Evaluation
(Develop Procedural
(Develop ofof Vision,
Vision,
Mission, business
Environment Environment Resource
Resource allocation
allocation
Mission, business
definitions Appraisal Appraisal Structural
Structural
definitions and
and implementation
implementation
objectives)
objectives) Behavioural
Behavioural
implementation
implementation
SWOT Analysis Functional
Functional and
and
operational
operational
Corporate
Corporate level
level strategies
strategies implementation
implementation
Business
Business level
level strategies
strategies
Strategic
Strategic choice
choice
Strategic
Strategic plan
plan

Fig 1.3 Strategic Management Model

Benefits of Strategic management

Following are the major benefits of Strategic management:

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  Proactive in shaping firm’s future
 Initiate and influence actions
 Formulate better strategies (Systematic, logical, rational approach)
Financial benefits:
 Improved productivity  Improved profitability
 Improved sales
Non-Financial benefits:
 Increased employee productivity  Understanding of performance
 Improved understanding of reward relationships
competitors’ strategies  Better problem-avoidance
 Greater awareness of external  Lesser resistance to change
threats

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