STRATEGIC MANAGEMENT STUDY MATERIAL

III BBA SEM 5

Definition of strategic management:

“Strategic management is concerned with the determination of the basic long-term goals and
the objectives of an enterprise, and the adoptionof courses of action and allocation of
resources necessary for carrying out these goals”.

This definition consists of three basic elements:

l. Determination of long-term goals

2. Adoption of courses of action
3. Allocation of resources to achieve those goals

Though this definition is simple, it does not consist of all the elements and does not capture
the essence of strategic management. The definitionsof Fred R. David, Pearce and Robinson,
Johnson and Sholes and Dell, Lumpkinand Taylor are some of the definitions of recent
origin. Taken together, these definitions capture three main elements that go to the heartof
strategic management. The three on-going processes are strategic analysis, strategic
formulation and strategic implementation. These three components parallel the processes of
analysis, decisions and actions.

Nature of Strategic Management

Strategic Management can be defined as the art & science of formulating, implementing, and
evaluating, cross-functional decisionsthat enable an organisation to achieve its objectives.

Strategic management is different in nature from other aspects of management. An individual

manager is most often required to deal with problems of operational nature. He generally
focuses on day-to- day problems such as the efficient production of goods, the managementof
a sales force, the monitoring of financial performance or the designof some new system that
will improve the level of customer service.

Dimensions of Strategic Management

The characteristics of strategic management are as follows:

1. Top management involvement: Strategic management relates to several areas of a firm’s

operations. So, it requires top management’s involvement. Generally, only the top
managementhas the perspective needed to understand the broad implicationsof its decisions
and the power to authorize the necessary resource allocations.

2. Requirement of large amounts of resources: Strategic management requires commitment of

the firm to actions over anextended period of time. So they require substantial resources, such
as, physical assets, money, manpower etc.

3. Affect the firm’s long-term prosperity: Once a firm has committed itself to a particular
strategy, its image and competitive advantage are tied to that strategy; its prosperity is
dependent upon such a strategy for a long time.
4. Future-oriented: Strategic management encompasses forecasts, what is anticipated by the
managers. In such decisions,emphasis is placed on the development of projections that will
enable the firm to select the most promising strategic options. In the turbulent environment, a
firm will succeed only if it takes aproactive stance towards change.

5. Multi-functional or multi-business consequences: Strategic management has complex

implications for most areas of the [Link] impact various strategic business units especially
in areasrelating to customer-mix, competitive focus, organisational structure etc. All these
areas will be affected by allocations or reallocations of responsibilities and resources that
result from these decisions.

6. Non-self-generative decisions: While strategic management mayinvolve making decisions

relatively infrequently, the organisation must have the preparedness to make strategic
decisions at any point of time. That is why Ansoffcalls them “non-self-generative decisions.”

Benefits of Strategic Management

1. It reduces uncertainty: Planning forces managers to look ahead, anticipate change

anddevelop appropriate responses. It also encourages managers to consider the risks
associated withalternative responses or options.

2. It provides a link between long and short terms: Planning establishes a means of
coordination between strategic objectivesand the operational activities that support the
objectives.

3. It facilitates control: By setting out the organisation’s overallstrategic objectives and

ensuring that these are replicated at operational level, planning helps departments to move in
the samedirection towards the same set of goals.

4. It facilitates measurement: By setting out objectives and standards, planning provides a

basis for measuring actual performance.

Strategic management has thus both financial and non-financial benefits:

1. Financial Benefits:

Research indicates that organizations that engage in strategic management are more
profitable and successful than those that do not. Businesses that followed strategic
management concepts have shown significant improvements in sales, profitability and
productivity compared to firms without systematic planning activities.

2. Non-financial benefits: Besides financial benefits, strategic management offers

other intangible benefits to a firm. They are;

(a)Enhanced awareness of external threats (b)Improved understanding of competitors’

strategies

(c)Reduced resistance to change

(d) Clearer understanding of performance-reward relationship
(e)Enhanced problem-prevention capabilities of organisation
(f)Increased interaction among managers at all divisional andfunctional levels

(g) Increased order and discipline.

Strategic Management Process

Developing an organizational strategy involves four mainelements – strategic analysis,

strategic choice, strategy implementation and strategy evaluation and control. Each of these
contains further steps, corresponding to a series of decisions and actions, that form the basisof
strategic management process

1. Strategic Analysis:

The foundation of strategy is a definition of organizational purpose. This defines the

business of an organization and what type of organization it wants to be. Many
organizations develop broad statements of purpose, in the form of vision and mission
statements. These form the spring – boards for the development of more specific
objectives and the choiceof strategies to achieve them.

2. Strategic Choice: The analysis stage provides the basis for strategic choice. It allows
managers to consider what the organization could do given the mission, environment
and capabilities – a choice which also reflects the values of managers and other
stakeholders.
3. Strategy Implementation: Implementation depends on ensuring that the organization
has a suitable structure, the rightresources and competencies (skills, finance,
technology etc.), right leadership and culture. Strategy implementation dependson
operational factors being put into place.
4. Strategy Evaluation and Control: Organizations set up appropriate monitoring and
control systems, develop standardsand targets to judge performance.

Strategy Formulation and Defining Vision

Strategy formulation is the process of determining appropriatecourses of action for achieving

organizational objectives and thereby accomplishing organizational purpose.

There are four primary steps in this phase:

1. Reviewing the current key objectives and strategies of the organization, which usually
would have been identified andevaluated as part of the diagnosis
2. Identifying a rich range of strategic alternatives to address the three levels of strategy
formulation outlined below, including butnot limited to dealing with the critical
issues.
3. Doing a balanced evaluation of advantages and disadvantages of the alternatives
relative to their feasibility plus expected effectson the issues and contributions to the
success of the organization.
4. Deciding on the alternatives that should be implemented or recommended. In
organisations, and in the practice of strategic management, strategies must be
implemented to achieve the intended results. Here it has to be remembered that the
 most wonderful strategy in the history of the world is useless if not implemented
successfully.

Strategic Intent

Definition: Strategic Intent can be understood as the philosophical base of the strategic
management process. It implies the purpose, which an organization endeavor of
achieving. It is a statement, that provides a perspective of the means, which will lead the
organization, reach the vision in the long run.

Strategic intent gives an idea of what the organization desires to attain in future. It answers
the question what the organization strives or stands for? It indicates the long-term market
position, which the organization desires to create or occupy and the opportunity for exploring
new possibilities.
Strategic Vision:

The first task in the process of strategic management is to formulatethe organisation’s vision
and mission statements. These statements define the organisational purpose of a firm.
Together with objectives, they forma “hierarchy of goals.”

• Plans
• Objectives • Goals
• Mission

• Vision

3. 3 A clear vision helps in developing a mission statement, which in turn facilitates

setting of objectives of the firm after analyzing external and internal environment.
Though vision, mission and objectives together reflect the “strategic intent” of the
firm, they have their distinctive characteristics and play important roles in strategic
management.
4. 4 Vision can be defined as “a mental image of a possible and desirable future state of
the organisation” (Bennis and Nanus). It is “avividly descriptive image of what a
company wantsto becomeinfuture”. Vision represents top management’s aspirations
about the company’sdirection and focus. Every organisation needs to develop avision
of the future. A clearlyarticulated vision moulds organisational identity, stimulates
managers in a positive way and prepares the companyfor the future.

According to Collins and Porras, a well-conceived vision consists oftwo major

components:

1. Core ideology
2. Envisioned future

Coreideologyisbasedontheenduringvaluesoftheorganization (“whatwestandfor
and why we exist”), which remain unaffected by environmental changes.
Envisioned future consists of along-term goal (what we aspire to become, to
achieve, to create”) which demands significant change and progress.

Definig Vision:
 Vision has been defined in several different ways. Richard Lynchdefines
vision as “ a

challenging and imaginative picture of the future role and objectives of an organisation,
significantly going beyond its current environment and competitive position.” E1-Namaki
defines it as “a mental perception of the kind of environment that an organisation aspires to
create within a broad time horizon and the underlying conditions for the actualization of this

perception”. Kotter defines it as “a descriptionof something (an organisation, corporate

culture, a business, a technology,an activity) in the future.”

Characteristics of Vision Statements

As may be seen from the above definitions, many of the characteristics of vision given by
these authors are common such as being clear, desirable, challenging, feasible and easy to
communicate. Nutt and Back off have identified four generic features of visions that are
likely to enhance organizational performance:

[Link] means the vision should entail innovative possibilities for dramatic
organisational improvements.

2. Desirability means the extent to which it draws upon shared organizational norms and
values about the way things should be done.

3. Action ability means the ability of people to see in the vision, actions that they can take
that are relevant to them.

4. Articulation means that the vision has imagery that is powerful enough to communicate
clearly a picture of where the organisation is headed.

Defining Mission:

Defines mission as
“The essential purpose of the organization, concerning particularly why it is in existence, the
nature ofthe business it is in, and the customers it seeks to serve and satisfy”.

Importance of Mission Statement

The purpose of the mission statement is to communicate to all thestakeholders inside and
outside the organization what the company stands for and where it is headed. It is important
to develop a mission statementfor the following reasons:

1. It helps to ensure unanimity of purpose within the organisation.

2. It provides a basis or standard for allocating organisational resources.
3. It establishes a general tone or organisational climate.
4. It serves as a focal point for individuals to identify with the organisation’s purpose

and direction.

5. It facilitates the translation of objectives into tasks assigned to responsible people

 within the organisation.

6. It specifies organisational purpose and then helps to translate this purpose into

objectives in such a way that cost, time and performance parameters can be assessed
and controlled.

Characteristics of a Mission Statement

A good mission statement should be short, clear and easy to understand. It should therefore
possess the following characteristics:

1. Not lengthy: A mission statement should be brief.

2. Clearly articulated: It should be easy to understand so that the values, purposes,

and goals of the organisation are clear to everybody in the organisation and will be a guide to
them.

3. Broad, but not too general: A mission statement should achieve a fine balance between
specificity and generality.

4. Inspiring: A mission statement should motivate readers to action. Employees should find it
worthwhile working for such an organisation.

5. It should arouse positive feelings and emotions of both employees and outsiders about the
organisation.

6. Reflect the firm’s worth: A mission statement should generatethe impression that the firm
is successful, has direction and isworthy of support and investment.

Components of a Mission Statement

Mission statements may vary in length, content, format and specificity. But most agree that
an effective mission statement must becomprehensive enough to include all the key
components. Because a mission statement is often the most visible and public part of the
strategic management process, it is important that it includes all the following essential
components:

[Link] product or service: What are the firm’s major products orservices?

[Link] markets: Where does the firm compete? [Link] technology: Is the firm
technologically current?

[Link]: Who are the firm’s customers?

[Link] for survival, growth and profitability: Is the firmcommitted to growth and financial
soundness?
[Link] philosophy: What are the basic beliefs, values,aspirations and ethical priorities of
the firm?

[Link] self-concept: What is the firm’s distinctive competenceor major competitive

advantage?

[Link] for public image: Is the firm responsive to social,community and environmental
concerns?

[Link] for employees: Are employers considered a valuableasset of the firm? [Link]
for quality: Is the firm committed to highest quality?

Concept of Goals and Objectives

The terms “goals and objectives” are used in a variety of ways, sometimes in a conflicting
sense. The term “goal” is often used interchangeably with the term “Objective”. But some
authors prefer todifferentiate the two terms. A goal is considered to be an open- ended
statement of what one wants to accomplish with no quantification of what is to be achieved
and no time criteria for its completion. For example, a simple statement of “increased
profitability” is thus a goal, not an objective, because it does not state how much profit the
firm wants to make. Objectives are the end results of planned activity.

Stated vs. Operational Goals

Operational goals are the real goals of an organisation. Stated goals are the official goals of
an organisation. Operational goals tell us what the organisation is trying to do, irrespective of
what the official goals say the aims are. Official goals generally reflect the basic

philosophyof the company and are expressed in abstract terminology, for example,‘sufficient
profit’, ‘market leadership’ etc. According to Charles Perrow, the following are the important
operational goals:

1. Environmental Goals: An organisation should be responsive tothe broader concerns of the

communities in which it operates, and should have goals that satisfy people in the external
environment. For example, goals like customer satisfaction and social responsibility may be
important environmental goals.

2. Output Goals: Output goals are related to the identification of customer needs. Issues like
what markets should we serve, which product lines should be followed, etc. are examples of
output goals.

3. System Goals: These goals relate to the maintenance of the organisation itself. Goals like
growth, profitability, stability [Link] examples.

4. Product Goals: These goals relate to the nature of products delivered to customers. They
define quantity, quality, variety, innovativeness of products.
[Link] Goals: These goals relate to derived or secondary areaslike contribution to political
activities, promoting social service institutions etc.

Objectives:

Objectives are the results or outcomes an organisation wants to achieve in pursuing its basic
mission. The basic purpose of setting objectives is to convert the strategic vision and mission
into specific performance targets. Objectives function as yardsticks for tracking an
organisation’s performance and progress.

Characteristics of Objectives

Well – stated objectives should be: 1. Specific

2. Quantifiable

3. Measurable
4. Clear
5. Consistent
6. Reasonable
7. Challenging
8. Contain a deadline for achievement
9. Communicated through out the organisation

Role of Objectives

Objectives play an important role in strategic management. Theyare essential for strategy
formulation and implementation because:

1. They provide legitimacy 2. They state direction

3. They aid in evaluation 4. They create synergy

5. Theyrevealpriorities
6. They focus coordination
7. They provide basis for resource allocation
8. They act as benchmarks for monitoring progress 9. They provide motivation

Environmental Scanning

Environmental analysis or scanning is the process of monitoring the events and evaluating
trends in the external environment, to identify both present and future opportunities and
threats that may influence the firm’s ability to reach its goals. Strategists need to analyse a
variety ofdifferent components of the external environment, identify “Key Players”within
those domains, and be very cognizant of both threats and opportunities within the
environment. It is from such an analysis that managers can make decisions on whether to
react to, ignore, or try toinfluence or anticipate future opportunities and threats discovered.

Features of Environmental Analysis

In the context of a changing environment, the process of environmental analysis is very well
comparable to the functions of radar. From this analogy, it is possible to derive three
important features ofthe process of environmental analysis (Ian Wilson).

Holistic Exercise

Environmental analysis is a holistic exercise in the sense that it must comprise a total view of
the environment rather than a piecemeal viewof trends. It is a process of looking at the forest,
rather than the trees.

Continuous Activity

The analysis of environment must be a continuous process rather than a one – shot deal.
Strategists must keep on tracking shifts in theoverall pattern of trends and carry out detailed
studies to keep a closewatch on major trends.

Exploratory Process

Environmental analysis is an exploratory process. A large part of the process seeks to explore
the unknown terrain and the dimensions of possible future. The emphasis must be on
speculating systematically about alternative outcomes, assessing probabilities, questioning
assumptions and drawing rational conclusions.

the following sources for environmental analysis:

1. Verbal and written information : Verbal information is generally obtained by

direct talk with people, by attending meetings, seminars etc, or through media. Written or
documentary information includes both published and unpublished material.

2. Search and scanning : This involves research for obtainingthe required information. 3.
Spying : Although it may not be considered ethical, spyingto get information about

competitor’s business is not uncommon.

3. Forecasting : This involves estimating the future trends and changes in the
environment. There are many techniques of forecasting. It can be done by the
corporate planners or consultants. For the above purpose, firms use a number of tools
and techniques depending on their specific requirements in terms of quality,
relevance, cost etc.
Some of the techniques which are generally used for carryingout environmental analysis are:
1. PESTEL analysis

2. SWOT analysis 3. ETOP

4. QUEST
5. EFE Matrix

6. CPM
7. Forecasting techniques

(a) Time series analysis

(b) Judgmental forecasting (c) Expert opinion

Delphi’s technique

(a) Multiple scenario

(b) Statistical modelling
(c) Cross-impact analysis
(d) Brainstorming
(e) Demand/hazard forecasting

Importance of InternalAnalysis

Strategic management is ultimately a “matching game” between environmental opportunities

and organisational strengths. But, before a firm actually starts tapping the opportunities, it is
important to know itsown strengths and weaknesses. Without this knowledge, it cannot
decidewhich opportunities to choose and which ones to reject. One of the ingredients

critical to the success of a strategy is that the strategy mustplace “realistic” requirements on
the firm’s resources. The firm therefore cannot afford to go by some untested assumptions or
gut feelings. Onlysystematic analysis of its strengths and weaknesses can be of help.

This is accomplished in internal analysis by using analytical techniques like RBV, SWOT
analysis, Value chain analysis, Benchmarking, IFE Matrixetc. Thus, systematic internal
analysis helps the firm:

2.

Threats: A threat is a major unfavourable situation in a firm’s environment. Examples include

increase in competition; slow market growth, increased power of buyers or suppliers, changes
in regulations etc. These forces pose serious threats to a company

1. To find where it stands in terms of its strengths and weaknesses

2. To exploit the opportunities that are in line with its capabilities

3. To correct important weaknesses

4. To defend against threats
5. To assess capability gaps and take steps to enhance its capabilities.
SWOTAnalysis

SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis is a
widely used framework to summaries a company’s situation or current position. Any
company undertaking strategic planning will have to carry out SWOT analysis: establishing
its current position in the light of its strengths, weaknesses, opportunities and threats.
Environmental and industry analyses provide information needed to identify opportunities
and threats, while internal analysis provides information needed to identify strengths and
weaknesses. These are the fundamental areas of focus in SWOT analysis. SWOT analysis
stands at the core of strategic management. Purposes of SWOT analysis.

1.

Opportunities: An opportunity is a major favourable situation in afirm’s environment.

Examples include market growth, favourable. changes in competitive or regulatory
framework, technological developments or demographic changes, increase in demand,
opportunity to introduce products in new markets, turning R&D into cash by licensing or
selling patents etc. The level of detail and perceived degree of realism determine the extent of
opportunity analysis.

because they may cause lower sales, higher cost of operations, higher cost of capital, inability
to make break-even, shrinking margins or profitability etc. Your competitor’s opportunity
may well be a threatto you.

3. Strengths: Strength is something a company possesses or is goodat doing. Examples

include a skill, valuable assets, alliances or cooperative ventures, experienced sales force,
easy access to raw materials, brand reputation etc. Strengths are not a growing market,new
products, etc.

4. Weaknesses: A weakness is something a company lacks or does poorly. Examples include

lack of skills or expertise, deficiencies in assets, inferior capabilities in functional areas etc.
Though weaknesses are often seen as the logical ‘inverse’ of the company’s threats, the
company’s lack of strength in a particular area or market is not necessarily a relative
weakness because competitors may also lack this particular strength.

Advantages and Limitations of SWOT analysis

Advantages

1. It is simple.
2. It portrays the essence of strategy formulation: matching a firm’s internal

strengths and weaknesses with its external opportunities and threats.

[Link] with other techniques like Value Chain Analysis and Resource Based View and
Strengths Weaknesses and opportunities and Threats (RBV, SWOT) analysis improves the
quality of internal analysis.

Limitations
1. It gives a static perspective, and does not reveal the dynamics of competitive environment.

2. SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and

ignores other factors needed for competitive success.
3. A firm’s strengths do not necessarily help the firm createvalue or competitive
advantage.
4. SWOT’s focus on the external environment is too narrow.

Porter’s Five Force Analysis

In 1979, the Harvard Business Review published the article “HowCompetitive Forces Shape
Strategy” by the Harvard Professor Michael Porter. It started a revolution in the strategy field.
In subsequent decades, “Porter’s five forces” have shaped a generation of academic research
and business practice. This unit explores how competitive analysis can be doneusing Porter’s
five forces model.

The Five Forces

In essence, the job of the strategist is to understand and cope with competition. However,
managers define competition too narrowly, as if it occurs only among today’s direct
[Link] competition for profits goes beyond established industry rivals. It includes
four other competitiveforces as well: customers, suppliers, potential entrants and substitutes.

The Five Forces model developed by Michnal E. Porter has beenthe most commonly used
analytical tool for examining competitive environment. According to this model, the intensity
of competition inan industry depends on five basic forces. These five forces are:

1. Threat of new entrants

2. Intensity of rivalry among industry competitors 3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products and services.

Each of these forces affects a firm’s ability to compete in a given [Link], they

determine the profit potential for a particular industry

Industry Analysis

1. Industry Features : Industries differ significantly. So, analyzing a company’s industry

begins with identifying the industry’s dominant economic features and forming a picture of
the industrylandscape. An industry’s dominant economic features include suchfactors as:

(a) Overall size

(b) Market growth rate

(c) Geographic boundaries of the market

(d) Number and sizes of competitors

(e) Pace of technological change

(f) Product innovations etc.

2. IndustryBoundaries:[Link]

the same industry could differ acrossvarious parameters, such as: (a) Breadthofmarket
(b) Product/service quality
(c) Geographic distribution

(d) Level of vertical integration (e) Profit motives

3. IndustryEnvironment:Basedontheirenvironment,industriesarebasicallyoftwotypes:

(a) Fragmented Industries : A fragmented industry consists ofa large number of small or
medium-sized companies, none ofwhich is in a position to determine industry price. Many
fragmented industries are characterized by low entry barriersand commodity type products
that are hard to differentiate.

According to Michael Porter, industries can be categorized into:

• Emerging industries : Are those in the introductory and growth phases of their

life cycle.
• Matureindustries:Arethosewhoreachedthematuritystageoftheirlifecycle.
• Declining industries : Are those in the transition stagefrom maturity to decline. • Global
industries : Are those with manufacturing bases and marketing

operations in several countries. Competition varies during each stage of industry life cycle.

information necessary to facilitate the decision making proceeds & enable the organization
planning, control & operational functions to be carried out effectively. It helps in making
decisions based on future environment.

The profile involves,- Environment, Threats & Opportunities Profile