The Nature of Strategic Management

STRATEGIC MANAGEMENT

Chapter 1

The Nature of Strategic Management

Strategic Management

-          The art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objective.

-          It focuses on integrating management, marketing, finance/accounting, production/operations, research and development, and computer information systems to achieve organizational success.

Stages of Strategic Management:

1.       Strategy Formulation – includes developing a vision and mission, identifying and organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue.

2.       Strategy Implementation - require as firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated  strategies can be executed. This is the “action stage”.

3.        Strategy Evaluation –  the primary means for obtaining information to know when particular strategies are not working well. The final stage in strategic management.  All strategies are subject to future modification because external and internal factors are constantly changing.

Strategy evaluation is needed because success today is no guarantee o success tomorrow. Success always create new and different problems, complacent organizations experience demise.

Three fundamental strategy evaluation activities:

a.       Reviewing external and internal factors that are bases for current strategies.

b.      Measuring performance

c.       Taking corrective actions

Integrating Intuition and Analysis

          Strategic management is not a pure science that lends itself to a nice neat, one-two-three approach.

          Based on past experiences, judgments, feelings, and most people recognize that intuition is essential to making good strategic decisions. Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent. It is also useful when highly interrelated variables exist or when it is necessary to chose from several alternatives.

          For example, Will Durant, who organized General Motors Corporation, was described as “a man who would proceed on a course of action guided solely by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.” Albert Einstein acknowledge the importance of intuition when he said, ”I believe in intuition and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas intuition embraces the whole world.”

          In a sense, the strategic management process is an attempt both to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and couple it with analysis.

Adapting to Change

          In today’s business environment, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.

Key Terms in Strategic Management

·         Competitive Advantage – anything that a firm does especially well compared to rival firms.

·         Strategists – the individuals who are most responsible for the success or failure of an organization.

·         Vision Statement – answers the question “What d we want to become?”

·         Mission Statement – answers the question “what is our business?”

·         External Opportunities and Threats –trends and events that could significantly benefit or harm an organization in the future and are largely beyond the control of the organization.

Environmental scanning (is needed) is the process of conducting research, gathering and assimilating external information.

·         Internal Strengths and Weaknesses – an organization’s controllable activities that are performed especially well or poorly.

·         Long-term objectives – specific results that an organization seeks to achieve in pursuing its basic mission, usually more than one year.

·         Strategies – the means by which long-term objectives will be achieved. They are the potential actions that require top management decisions and large amounts of the firm’s resources.

·         Annual Objectives – short-term milestones that organizations must achieve to reach long-term objectives.

·         Policies – guides to decision making and address repetitive or recurring situations. They include guidelines, rules, and procedures established to support efforts to achieved stated objectives.

Benefits of Strategic Management

·         Principal benefit – to help organizations formulate better strategies through the use of more systematic, logical, and rational approach to strategic choice.

Communication is key to successful strategic management.

·         Employee empowerment -  the act of strengthening employee’s sense of effectiveness by encouraging them to participate in decision making, to exercise initiative and imagination, and awarding them in doing so.

·         Decentralization – s strategic management process that recognize that planning must involve lower-level managers and employees.

Financial Benefits

          Businesses using strategic management concepts show significant improvement in sales, profitability compared to firms without systematic planning activities.

          Firms with  planning systems more closely resembling strategic management theory generally exhibit superior long-term financial performance relative to their industry.

Nonfinancial Benefits

          Strategic management offers other tangible benefits, such as:

-          Enhanced awareness of external threats

-          Improved understanding of competitor’s strategies

-          Increased employee productivity

-          Reduced resistance to change

-          Clearer understanding of performance-reward relationships

Some Reasons for Poor or No Strategic Planning:

·         Poor reward structure – when a firm assumes success, if often fails to reward success. When failure occurs, the firm may punish. In this situation, it is better for an individual to do nothing ( and not draw attention) than to risk to achieve something and be punished.

·         Fire-fighting – an organization can be so deeply embroiled in crisis management and fire-fighting that it does not have time to plan.

·         Waste of time – some firms see planning as a waste of time since no marketable product is produced. Time spent for planning is an investment.

·         Too expensive – some organizations are culturally opposed to spending resources.

·         Laziness – people may not want to put forth the effort needed to formulate a plan.

·         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.

·         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.

·         Overconfidence – as individuals 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 often the mark of professionalism.

·         Prior bad experience – people may have had a previous bad experience with planning, that is, cases in which plans have been long, impractical, or inflexible. Planning, like anything, can be done badly.

·         Self interest – when someone achieves a status privilege, and self esteem. He sees planning as am threat.

·         Fear of the unknown – some people may be uncertain of their abilities to take on new roles.

·         Honest difference of opinion – people may sincerely believe the plan is wrong. Different people in different jobs have different perceptions of a situation.

·         Suspicion – employees may not trust management.

Pitfalls (to watch for and avoid) in Strategic Planning (SP).

·         Using SP to gain control over decisions and resources.

·         Doing SP to satisfy accreditation or regulatory requirements.

·         Too hastily moving from mission development to strategy formulation.

·         Failing to communicate the plan to employees.

·         Top management make many intuitive decisions that conflict with the formal plan.

·         Top management is not actively supporting the SP process.

·         Failing to use plans as standard to measure performance.

·         Delegating planning to a planner rather than involving all managers.

·         Failing to involve key employees in all phases of planning.

·         Failing to create collaborative climate supportive of change.

·         Viewing planning as unnecessary or unimportant.

·          Becoming so engrossed in current problems that insufficient or no planning is done.

·         Being so formal in planning that flexibility and creativity are stifled.

Guidelines for Effective Strategic Management (SM)

“ Is our Strategic Management a People Process or a Paper Process”

·         Keep the process as simple and not routine as possible.

SM must no become ritualistic, orchestrated, too formal, predictable and rigid. 

·         Eliminate hard to understand planning language.

Words must be supported by numbers rather than numbers supported by words.

·         Open-mindedness.

·         Facilitate continuous organizational learning and change.

Business Ethics and Strategic Management.

          Business ethics refer to principles of conduct within organizations that guide decision making and behavior. Good business ethics is a prerequisite to good strategic management. Good ethics is good business.

“ A manager (strategist) who lacks character and integrity – no matter how knowledgeable, how brilliant, how successful – he destroys. He destroys the spirit, he destroys performance, he destroys people – the most valuable resource of an enterprise.”

“ The spirit of an organization is created from the top, if an organization is great in spirit, it is because the spirit of its top people is great. If it decays, it does so because its top rots.”

“ No one should ever become a strategist unless he is willing to have his character serve as the model of his subordinates.”