Giacomo Balli profile picture
Giacomo Balli
Innovation consultant specializing in mobile strategy
Let's Chat

Basic Concepts of Strategic Management (Feb 2006)

Today competition has reached levels which could have never even dreamt 50 years ago. Nowadays there are so many elements that influence and mine our business that an effective strategic management is the only salvation for a company. “Strategic management is the process of specifying an organization's objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans. It is the highest level of managerial activity, usually performed by the company's Chief Executive Officer (CEO) and executive team. It provides overall direction to the whole enterprise. An organization's strategy must be appropriate for its resources, circumstances, and objectives. The process involves matching the companies' strategic advantages to the business environment the organization faces” (Wikipedia). “It determines where an organization is going over the next year or more and how it's going to get there” (www.managementhelp.org). We may say that it is made up of four basic categories: environmental scanning, strategy formulation, strategy implementation and evaluation and control. Environmental Scanning “Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation. Its purpose is to identify strategic factors, i.e. those factors which will have a long term impact on the organization” (Wheelen & Hunger, p. 9). A key challenge in environmental scanning is the monitoring of the societal environment. The societal environment includes economic, technological, socio-cultural and political-legal forces that do not touch on the short-run activities of the firm, but can and do influence long-run decisions. The task environment includes those elements that directly affect the corporation. These are governments, local communities, suppliers, competitors, customers, creditors, labor unions, special-interest groups, and trade associations. A corporation's task environment is typically the industry within which that firm operates. Industry analysis refers to an in-depth examination of key factors within a corporation's task environment. Both the societal and task environments must be monitored to detect the strategic factors that are likely to have a strong impact on corporate success or failure. Strategic analysis gives the clear picture of the changes in the environment and how these changes affecting the organization and its activities. It gives idea about the resources and competencies present and their contribution to competitive advantage and development of new opportunities. Societal Environment The societal environment comprises factors that originate beyond, and usually irrespective of, any single firm's operating situation. It includes general forces that do not directly touch on the short-run activities but often influence its long-term decisions. Many corporations categorize the societal environment in any one geographic region into four areas, and focus their scanning in each area on trends with corporate-wide relevance. Political-legal Trends in the political-legal part of the societal environment have a significant impact not only on the level of competition within an industry, but also on which strategies might be successful. Political factors define the legal and regulatory parameters within firms must operate. Political constraints are placed on firms through fair-trade decisions, antitrust laws, tax programs, minimum wage legislation, pollution and pricing policies, administrative jawboning and many other actions aimed at protecting employees, consumers, the general public and the environment. Economic Economic factors concern the nature and direction of the economy in which a firm operates. Since consumption patterns are affected by the relative affluence of various market segments, each firm must consider economic trends in the segments that affect its industry. On both the national and international level, managers must consider the general availability of credit, the level of disposable income and the propensity of people to spend. Prime interest rates, inflation rates and trends in the growth of the gross national product are other economic factors they should monitor. Socio-cultural Socio-cultural factors that affect the corporation involve the beliefs, values, attitudes, opinions, and lifestyles of persons in the firm's external environment, as developed from cultural, demographic, ecological, religious, educational and ethnic conditioning. As socio-cultural change, so too does the demand for various type of clothing, books, leisure activities and so on. Like other forces in the remote external environment, socio-cultural forces are dynamic, with constant change resulting form the efforts of individuals to satisfy their desires and needs by controlling and adapting to environmental factors. Technological Changes in the technological of the societal environment can also have a great impact on multiple industries. A technological breakthrough may spawn sophisticated new markets and products or significantly shorten the anticipated life of a manufacturing facility. For example, improvements in computer microprocessors have not only led to the widespread use of home computers, but also to better automobile engine performance in terms of power and fuel economy through the use of microprocessors to monitor fuel injection. Task or Industrial Environment A corporation's scanning of environment will include analyses of all relevant elements in the task environment, which includes not only competitors but also suppliers, customers and other organizations with which the firm directly interacts. These analyses take the form of individual reports written by various people in different parts of the firm. For example at Procter & Gamble, people from each of the brand management teams work with key people from the sales and market research departments to research and write a "competitive activity report" each quarter on each of the product categories. Internal Environment Scanning and analyzing the external environment for opportunities and threats is not enough to provide an organization a competitive advantage. Wheelen & Hunger suggest analysts must also look within the corporation itself to identify internal strategic factors. Internal environmental scanning is a strategic management process, serves to pinpoint the strengths and weaknesses of the organization. Management can determine whether the firm can take advantage of opportunities while avoiding threats. Outward-In-Approach The strategic planning model has been characterized as an "outward-in-approach". Managers consider all the components of the strategic management process are important, and they do have to analyze the external environment to identify opportunities and threats. They have to analyze the company's resources and capabilities to identify strengths and weaknesses, so that there is 'fit' between the internal resources and capabilities of an organization, and external environmental opportunities, organization and external environment. Managers need to be familiar with the range of functional level, business-level, global, and corporate-level strategies that are available to them. They also need to have an appreciation for the structures required to implement different strategies. Gary Hamel and C. K. Prahalad (1994, cited by Hill & Jones 1998) stress that weakness of formal strategic planning is particularly apparent in a dynamic competitive environment, in which new competitors are continually arising and new ways of doing business are constantly being invented. Strategic management process should begin with challenging goals, such as attaining global leadership, that stretch the organization. Throughout the process the emphasis should be on finding strategies to develop the resources and capabilities necessary to achieve goals, building new resources and capabilities to create a exploit future opportunities, rather than on exploiting existing strengths to take advantage of existing opportunities. Societal Environmental analysis It is useful to consider as a starting point what environmental influences have been particularly important in the past and the extent to which there are changes occurring which may make any of these more or less significant in the future for the organization and its competitors. PEST Analysis PEST analysis is concerned with the environmental influences on a business. The acronym stands for Political, Economic, Social and Technological issues that could affect the strategic development of a business. Identifying PEST influences is a useful way of summarizing the external environment in which business operates. However, it must be followed up by consideration of how a business should respond to these influences. Political Political analysis consists of assessing the internal political systems, sources of power and influence, key individuals, key groups of staff, key departments, key managers and key executives; questions of management style, human resource management and industrial relations issues general levels of motivation and morale. Economic Economic concerns the financial structure, objectives and constraints placed upon the organization. This relates to both the external and the internal financial position, such as level of profit and turnover generated and the extent to which this is viable and able to sustain current and envisaged levels of activity and also financial controls, budgeting systems, budgets and financial management etc. It also considers the market position, general levels of economic activity, the competition for the offerings made by the organization and the commercial prospects and potential of the products and services offered. Social Social factor is to deal with the social systems in place at the workplace, departmental and functional structures, work culture, attitudes, organization and working methods; it also includes both formal and informal aspects of the organization. In external terms, this is the relationship between the organization and its environment as regards the nature and social acceptability of its products and services and the ways in which it does business; consideration is also given to the impact of marketing, promotion and public relations activities; and the general regard with which the organization is held in its markets, communities and the wider environment. Technological This relates to the organization's technology and the uses to which it is put, and also its potential uses; to the technology and the uses to which it is put, and also its potential uses; to the technology that is potentially available to the organization and others operating in the given sector; to the technological advances that are present or envisaged elsewhere in the sector and the opportunities afforded by these to the organization in question. Some possible factors that could indicate important environmental influences for a business under PEST headings (Political / Legal Economic Social Technological) (Pettigrew) Scenario Analysis Scenario analysis is generally used for long-term forecasting, all too often, the greater is the uncertainty and thus the reliability of the quantitative analysis, and the stronger is the need for the qualitative approach provided by scenario analysis. What defines long term is in itself all too often a bone of contention. All too often, within a business planning perspective this is defined by the how far in the future the organization is committing resources. Or a long range can be defined at the length of time in which large changes can be expected in the environment. The number of scenarios to be included in the analysis differs. There seems to be consensus that three scenarios are best, however there is a move towards the development of two scenarios - good-and-bad as being most cost effective. The rationale for focusing on two is that it avoids having management being presented with three options which all too often favor the adoption of the middle of the road scenario. Two scenarios force the scenario writing to deal more directly with the critical assumptions and develop the positive and negative outcomes. This tends to fit in with many organizations' requirement for strategic planning to face worst-case and most-likely scenarios. Industry or Task Environment An industry is a group of firms producing a similar product or service, such as banking services or property development. An examination of the important stakeholder groups, such as suppliers and customers, in a particular corporation' task environment is a part of industry analysis. Porter's Approach The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model. Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are the threat of entry of new competitors or entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the degree of rivalry between existing competitors. Potential Entrants New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries such as shipbuilding, whereas other industries are very easy to enter, examples are estate agency, restaurants. Key barriers to entry include economic of scale, product differentiation, capital requirements, switching costs, access to distribution channels and cost disadvantages independent of size. The higher the barriers to entry, the lower are the risk of entry and the greater are the profits that can be earned in the industry. Industry Competitors The extent of rivalry among established companies is a function of an industry's competitive structure, demand conditions, and barriers to exit. According to Michael Porter (cited by Wheelen & Hunger), the intensity of rivalry between competitors in an industry will depend on a number of factors.
  1. The structure of competition. Rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader
  2. The structure of industry costs. Industries with high fixed costs encourage competitors to fill unused capacity by price cutting;
  3. Degree of differentiation. Industries where products are commodities such as steel or coal will have greater rivalry; while industries where competitors can differentiate their products have less rivalry;
  4. Switching costs. Rivalry is reduced where buyers have high switching costs, i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier;
  5. Strategic objectives. When competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less.
  6. Exit barriers. When barriers to leaving an industry are high for example the cost of closing down factories, then competitors tend to exhibit greater rivalry
Buyers Buyers are the people or organizations who create demand in an industry. The bargaining power of buyer is greater when there are few dominant buyers and many sellers in the industry, products are standardized, buyers threaten to integrate backward into the industry, suppliers do not threaten to integrate forward into the buyer's industry or the industry is not a key supplying group of buyers. Suppliers Suppliers are the businesses that supply materials and other products into the industry. The cost of items bought from suppliers, such as raw materials or components can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when there were many buyers and few dominant suppliers, there are undifferentiated, highly valued products, suppliers threaten to integrate forward into the industry, brand manufacturers threatening to set up their own retail outlets is an example. Substitutes Substitute products are those of companies serving consumers' needs that are similar to the needs served by the industry being analyzed. The more similar the substitute products are to each other, the lower is the price that companies can charge without losing customers to the substitutes. The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on whether buyers' willingness to substitute, the relative price and performance of substitutes and the costs of switching to substitutes. Strategic Group Most industries are composed of strategic groups. Strategic groups are groups of companies pursuing the same or a similar strategy. Companies in different strategic groups pursue different strategies. The members of a company's strategic group constitute its immediate competitors. Since different strategic groups are characterized by different opportunities and threats, it may pay a company to switch strategic groups. The feasibility of doing so is a function of the height of mobility barriers. In practice, companies in an industry often differ from each other with respect to factors such as the distribution channels they use, the market segments they serve, the quality of their products, technological leadership, customer service, pricing policy, advertising policy and promotions. As a result of these differences within most industries, it is possible to observe groups of companies in which each member follows the same basic strategy as other companies in the group but follows the same basic strategy as other companies in the group but follows a different strategy than that of companies in other groups. These groups of companies are known as strategic groups. Competitive Intelligence Gathering "competitor intelligence" is more popular than ever. Bateman& Zeithaml (1990) found that competition is so intense that large and small companies want to learn about their competitor's product costs, corporate financial structures, products under development, marketing strategies, labor costs and principal suppliers and customers. Most of the common techniques of competitor intelligence gathering are legal and ethical; others cross the lines of ethicality. Most corporations rely on outside organizations to provide them with environmental data. Firms such as A.C. Nielsen Co. provide subscribers with bimonthly data on brand share, retail prices, percentages of stores stocking an item, and percentage of stock-out stores. Some companies, however, choose to use industrial espionage or other intelligence-gathering techniques to get their information straight from their competitors. Using current or former competitor's employees and by using private contractors, some firms attempt to seal trade secrets, technology, business plans and pricing strategies. Internal Environment The external environment in which a business operates can create opportunities which a business can exploit, as well as threats which could damage a business. However, to be in a position to exploit opportunities or respond to threats, a business needs to have the right resources and capabilities in place. An important part of business strategy is concerned with ensuring that these resources and competencies are understood and evaluated. Resource-Based Approach Wheelen & Hunger define a resource as an asset, competency, process, skill or knowledge controlled by the corporation. On the basis of this definition, the task of defining organizational resources calls for an in-depth analysis of the very process by which the organization adds value to its customers. It calls for an understanding of the skill set and knowledge base which allows the individuals throughout the organization to interpret the various information streams and contribute towards the value creation effort of the organization. Identifying and investing to develop the core resources into specific capabilities which can then be honed into core competencies is an essential process for the long term prosperity of the organization. Wheelan & Hunger identify the two characteristics that determine the sustainability of a firm's distinctive competencies as durability, imitability, transparency, transferability and replicability. On the basis of these criteria, the resources and capabilities of an organization can be mapped on a continuum of sustainability to highlight their relative vulnerability. At one extreme there are slow-cycle resources, which are sustainable because they are shielded by patents etc. and on the other extreme are fast-cycle resources which face the highest imitation pressures. An organization's resources and capabilities can be placed on a continuum to the extent they are durable and can't be imitated by another firm. At one extreme are slow-cycle resources, which are sustainable because they are shielded by patents, geography, strong brand name or tacit knowledge. These resources and capabilities are distinctive competencies as they provide a sustainable competitive advantage. The other extreme include fast-cycle resources, which face the highest imitation pressures as they are based on a concept or technology that can be easily duplicated, such as plasma television. To the extent that a company has fast-cycle resources, the primary way it can compete successfully is through increased speed from lab to marketplace. Otherwise it has no real sustainable competitive advantage. Value Chain Analysis Value chain analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Each corporation has its own internal value chain of activities. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: Primary Activities Those that are directly concerned with the creating and delivering a product, example are component assembly. Support Activities Support activities are not directly involved in production, which may increase effectiveness or efficiency, such as human resource management. It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others or out sourced. Value chain analysis can be broken down into a three sequential steps. First of all, break down a market or organization into its key activities under each of the major headings in the model. Secondly, assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage. Finally, determine strategies built around focusing on activities where competitive advantage can be sustained. What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. SWOT Analysis SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five Forces analysis. Strengths and weaknesses are internal factors, for example, strength could be the company's specialist marketing expertise. A weakness could be the lack of new product. While opportunities and threats are external factors, for example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete. SWOT analysis can be very subjective; two people rarely come-up with the same version of a SWOT analysis even when given the same information about the same business and its environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighting criteria to each factor increases the validity of the analysis. Some of the key areas to consider when identify and evaluating Strengths, Weaknesses, Opportunities and Threats are listed in the example SWOT analysis below: Conclusion “Strategic management can be used to determine mission, vision, values, goals, objectives, roles and responsibilities, timelines, etc.” (www.pim.com.pk). Strategic formulation is done to ensure the fit of the existing resources and capabilities of the company and the environmental opportunities. Bibliography Bateman S. Thomas & Zeithaml, 1990, Management Function and Strategy, Orwin, Boston (good point of view on competitor intelligence) Pettigrew, R. 1996, Strategic and environment analysis - Introduction to Corporate Strategy. MacMillan Press Ltd (information on SWOT and PEST analysis) Wheelen Thomas L & Hunger David J., 2004, 9th Edition, Strategic Management and Business Policy, Addison Wesley, New Jersey (fundamental source for the whole project) http://www.managementhelp.org/plan_dec/str_plan/basics.htm (definitions and additional information) http://en.wikipedia.org/wiki/Strategic_management (good explanations and links, definitions) http://www.pim.com.pk/faq.htm (definitions and good view as a whole)

Published: Sat, 24 Nov 2012 15:02:00 +0000