Strategic management is the comprehensive collection of ongoing activities and processes that organizations use to systematically coordinate and align resources and actions with mission, vision and strategy throughout an organization. Strategic management activities transform the static plan into a system that provides strategic performance feedback to decision making and enables the plan to evolve and grow as requirements and other circumstances change.
Strategic management is divided into several schools of thought. A prescriptive approach to strategic management outlines how strategies should be developed, while a descriptive approach focuses on how strategies should be put into practice. These schools differ over whether strategies are developed through an analytic process in which all threats and opportunities are accounted for, or are more like general guiding principles to be applied. Business culture, the skills and competencies of employees, and organizational structure are important factors that influence how an organization can achieve its stated objectives. Inflexible companies may find it difficult to succeed in a changing business environment. Creating a barrier between the development of strategies and their implementation can make it difficult for managers to determine whether objectives were efficiently met. While an organization’s upper management is ultimately responsible for its strategy, the strategies themselves are often sparked by actions and ideas from lower-level managers and employees. An organization may have several employees devoted to strategy rather than relying on the chief executive officer (CEO) for guidance. Because of this reality, organization leaders focus on learning from past strategies and examining the environment at large. The collective knowledge is then used to develop future strategies and to guide the behavior of employees to ensure that the entire organization is moving forward. For these reasons, effective strategic management requires both an inward and outward perspective.
The Origins of Strategic Management
The strategic management discipline originated in the 1950s and 1960s. Among the numerous early contributors, the most influential were Peter Drucker, Philip Selznick, Alfred Chandler, Igor Ansoff, and Bruce Henderson. The discipline draws from earlier thinking and texts on 'strategy' dating back thousands of years. Prior to 1960, the term "strategy" was primarily used regarding war and politics, not business. Many companies built strategic planning functions to develop and execute the formulation and implementation processes during the 1960s. Peter Drucker was a prolific management theorist and author of dozens of management books, with a career spanning five decades. He addressed fundamental strategic questions in a 1954 book The Practice of Management writing: "... the first responsibility of top management is to ask the question 'what is our business?' and to make sure it is carefully studied and correctly answered." He wrote that the answer was determined by the customer. He recommended eight areas where objectives should be set, such as market standing, innovation, productivity, physical and financial resources, worker performance and attitude, profitability, manager performance and development, and public responsibility. In 1957, Philip Selznick initially used the term "distinctive competence" in referring to how the Navy was attempting to differentiate itself from the other services. He also formalized the idea of matching the organization's internal factors with external environmental circumstances. This core idea was developed further by Kenneth R. Andrews in 1963 into what we now call SWOT analysis, in which the strengths and weaknesses of the firm are assessed in light of the opportunities and threats in the business environment. Alfred Chandler recognized the importance of coordinating management activity under an all-encompassing strategy. Interactions between functions were typically handled by managers who relayed information back and forth between departments. Chandler stressed the importance of taking a long term perspective when looking to the future. In his 1962 ground breaking work Strategy and Structure, Chandler showed that a long-term coordinated strategy was necessary to give a company structure, direction and focus. He says it concisely, "structure follows strategy." Chandler wrote that: "Strategy is the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals." Igor Ansoff built on Chandler's work by adding concepts and inventing a vocabulary. He developed a grid that compared strategies for market penetration, product development, market development and horizontal and vertical integration and diversification. He felt that management could use the grid to systematically prepare for the future. In his 1965 classic Corporate Strategy, he developed gap analysis to clarify the gap between the current reality and the goals and to develop what he called "gap reducing actions". Ansoff wrote that strategic management had three parts: strategic planning; the skill of a firm in converting its plans into reality; and the skill of a firm in managing its own internal resistance to change. Bruce Henderson, founder of the Boston Consulting Group, wrote about the concept of the experience curve in 1968, following initial work begun in 1965. The experience curve refers to a hypothesis that unit production costs decline by 20–30% every time cumulative production doubles. This supported the argument for achieving higher market share and economies of scale. Porter wrote in 1980 that companies have to make choices about their scope and the type of competitive advantage they seek to achieve, whether lower cost or differentiation. The idea of strategy targeting particular industries and customers (i.e., competitive positions) with a differentiated offering was a departure from the experience-curve influenced strategy paradigm, which was focused on larger scale and lower cost. Porter revised the strategy paradigm again in 1985, writing that superior performance of the processes and activities performed by organizations as part of their value chain is the foundation of competitive advantage, thereby outlining a process view of strategy.
The Scope Of Strategic Management
J. Constable has defined the area addressed by strategic management as "the management processes and decisions which determine the long-term structure and activities of the organization". This definition incorporates five key themes which are fundamental to a study of the strategic management field:
- Management process. Management process as relate to how strategies are created and changed.
- Management decisions. The decisions must relate clearly to a solution of perceived problems (how to avoid a threat; how to capitalize on an opportunity).
- Time scales. The strategic time horizon is long. However, it for company in real trouble can be very short.
- Structure of the organization. An organization is managed by people within a structure. The decisions which result from the way that managers work together within the structure can result in strategic change.
- Activities of the organization. This is a potentially limitless area of study and normally centers upon all activities which affect the organization.
Components of Strategic Management
- Create an actionable plan or strategy. Set realistic goals at the level of individual departments and divisions. Write a company-wide mission statement. The first component of strategic management can be defined as the strategic planning portion of the overall process of creating and implementing a strategy. This is otherwise known as a general plan of action.
- Perform a SWOT analysis to prepare for implementation of the strategy. The acronym SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis takes various internal and external factors into account when considering potential challenges to a company's implementation of strategy. For example, as Technical Notes points out, does the company have the wherewithal to undertake full implementation, as conceived in the planning process? Are there external factors that might prevent successful implementation? Such questions are considered during SWOT analysis, a major component of strategic management.
- Design and implement the strategy. Outline actionable steps which will lead to desired outcomes of the strategy. For example, a company that includes assurance of job security and employee job satisfaction as part of its strategy might allocate resources to undersign a more comprehensive health insurance policy. The inclusion of implementation as a major component of strategic management differentiates this administrative model from strategic planning, which focuses almost exclusively on outlining an organization's mission and goals.
- Track the progress of the implementation. Develop and execute a strategic review or audit of individual departments. Conduct employee surveys to determine the effectiveness of desired goals. This component of strategic management is not only important in the implementation process itself, but also for the refinement of overall company strategy. Effective feedback will aid leaders in shifting priorities, as they polish the organization's strategic vision.
Elements of Strategic Management Framework
The strategic management model identifies concepts of strategy and the elements necessary for development of a strategy enabling the organization to satisfy its mission. Historically, a number of frameworks and models have been advanced which propose different normative approaches to strategy determination. Strategic management is a continuous and dynamic process. Therefore, it should be understood that each element interacts with the other elements and that this interaction often happens simultaneously. However, a review of the major strategic management models indicates that they all include the following elements:
- Performing an environmental analysis.
- Establishing organizational direction.
- Formulating organizational strategy.
- Implementing organizational strategy.
- Evaluating and controlling strategy.
source: CIO Index
Different Models of Strategic Management Process
There is no universal model of the strategic management process. This section illustrates and comments on 3 more well-known frameworks presented by recognized scholars in the strategic management field. More about these models can be found in the authors’ books.
- Strategy Formulation
- Strategy Implementation
- Strategy Evaluation
- Develop vision and mission
- External environment analysis
- Internal environment analysis
- Establish long-term objectives
- Generate, evaluate and choose strategies
- Implement strategies
- Measure and evaluate performance
- Indicates all the major steps that have to be met during the process.
- Illustrates that the process is a continuous activity.
- Arrows show the two way process. This means that companies may sometimes go a step or two back in the process rather than having to complete the process and start it all over from the beginning. For example, if in the implementation stage the company finds out that the strategy it chose is not viable, it can simply go back to the strategy selection point instead of continuing to the monitoring stage and starting the process from the beginning.
- Represents only strategy formulation stage and does separate situation analysis from strategy selection stages.
- Confuses strategy evaluation with strategy monitoring stage.
- Initial analysis
- External and internal analysis
- Business or corporate strategy formulation
- Shows that the process is a continuous activity.
- Separates initial analysis (in this articles it’s called initial assessment) from internal/external analysis.
- Emphasizes the main focus of strategic management: “Gain and sustain competitive advantage”.
- Does not include strategy monitoring stage.
- Arrows indicate only one way process. For example, after the strategy formulation the process continues to the implementation stage while this is not always the truth. Companies may go back and reassess their environments if some conditions had changed.
- Where are we?
- Where are we going?
- How are we getting there?
- How are we doing?
- Situation appraisal: review of corporate objectives
- Situation assessment
- Clarification of objectives
- Corporate and competitive strategies
- Strategic decisions
- Monitor progress
- Indicates all the major steps that have to be met during the process.
- Shows that the process is a continuous activity.
- The model is supplemented by 4 fundamental strategic management questions.
- Arrows indicate only one way process.
Strategic Management in Different Business Contexts
Strategic Management Strategy and strategic management varies in different business contexts.
- Small Business Context: Scope of operations are less strategic and more planning based. Unless the firm is a specialist in the field, it would be under heavy market pressures. Arranging resources & developing competences may be a big problem. Firm may not have a separate strategy team. Owner is the most important stakeholder.
- Multinational Context: Products and markets are diverse. The key strategic issues include: Aspects of structure and control at the corporate level , the relationships at the various business units level, Allocation of resources among the business units, and Coordination of operational logistics across business units and geographies. Competitive advantage in service organizations is much more related to the extent to which customers value less tangible features. For manufacturing organizations, the physical products is the central to competitive strategy and services are merely needed to support the product.
- Public Sector Context: The most powerful stakeholder in the case of public sector is the government. Scope and direction is determined by political rather than market conditions. The competition is mainly for the input of resources rather than towards the market and customers. Social issues and concerns are more important environmental factors rather than business sense.
- Not-for-Profit Sector: The values and ideologies are central to strategy development. There exists multiple source of income and revenue. They are more susceptible to lobbying and other political influences.
Benefits of Strategic Management
There are many benefits of strategic management and they include identification, prioritization, and exploration of opportunities. In recent years, virtually all firms have realized the importance of strategic management. However, the key difference between those who succeed and those who fail is that the way in which strategic management is done and strategic planning is carried out makes the difference between success and failure. Of course, there are still firms that do not engage in strategic planning or where the planners do not receive the support from management. These firms ought to realize the benefits of strategic management and ensure their longer-term viability and success in the marketplace.
- Financial Benefits: It has been shown in many studies that firms that engage in strategic management are more profitable and successful than those that do not have the benefit of strategic planning and strategic management. When firms engage in forward looking planning and careful evaluation of their priorities, they have control over the future, which is necessary in the fast changing business landscape of the 21st century. It has been estimated that more than 100,000 businesses fail in the US every year and most of these failures are to do with a lack of strategic focus and strategic direction. Further, high performing firms tend to make more informed decisions because they have considered both the short term and long-term consequences and hence, have oriented their strategies accordingly. In contrast, firms that do not engage themselves in meaningful strategic planning are often bogged down by internal problems and lack of focus that leads to failure.
- Non-Financial Benefits: The section above discussed some of the tangible benefits of strategic management. Apart from these benefits, firms that engage in strategic management are more aware of the external threats, an improved understanding of competitor strengths and weaknesses and increased employee productivity. They also have lesser resistance to change and a clear understanding of the link between performance and rewards. The key aspect of strategic management is that the problem solving and problem preventing capabilities of the firms are enhanced through strategic management. Strategic management is essential as it helps firms to rationalize change and actualize change and communicate the need to change better to its employees. Finally, strategic management helps in bringing order and discipline to the activities of the firm in its both internal processes and external activities.
Challenges to Strategic Management
Strategic management includes strategic planning, implementation and review/control of the strategy of an organization. All most all the modern organizations engage in strategic management to ensure that they achieve the desired level of performance. But in the modern business context strategic management faces many challenges such as:
- Orientation for globalization: Every aspect of the business is getting globalized and business organizations step in to global operations with MNC (Multinational Corporation) and other foreign business operations methods. Due to the globalized operations of the business world there are new orientations such as international human resource management (IHRM) and international finance are emerging. Company’s strategic management process has to be updated to cope up with these new orientations.
- Emerging e-commerce and internet culture: With the wide expansion of world wide wed (www) and the technology businesses have moved on to e-commerce where they conduct business electronic means such as online purchasing/selling and online advertising. Strategic management process of the business should be able to accommodate e-commerce motives into the business process.
- Cut throat competition: With the globalization, e-commerce and other changes in the business environment, todays business world has become hyper competitive where the organization can no longer survive without executing proper competitive strategy. Strategic management process should generate competitive intelligence and predict the next moves of the competitors and build the competitive strategy to win the battle with competitors.
- Diversification: With the rapid changing business environment and increased uncertainty the business risk has increased drastically. To diversify the business risk companies now engage in diversified operations where they focus on more than one business area/industry rather than specializing in one area. The strategic management should be able to identify diversified business opportunities and manage them well.
- Active Pressure Groups: In the modern world there are active pressure groups operating such as environmental activism and consumer protectionism. Strategic management should identify these external pressure groups and hear about their concerns.
- Motive for Corporate Social Responsibility (CSR) and Ethics: The modern business organizations have engage in CSR and ethics to keep up their corporate reputation and be competitive in the environment. Strategic management should look into possible CSR activities and implement those to be in line with expectations of the society.
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- Definition of Strategic Management Balanced Scorecard Institute
- Explaining Strategic Management Investopedia
- The Origins of Strategic Management Wikipedia
- Defining The Scope Of Strategic Management Ryszard Barnat
- What are the Components of Strategic Management? Bizfluent
- Elements of Strategic Management Framework 24xls.com
- Different Models of Strategic Management Process Strategic Management Insight
- Strategic Management in Different Business Contexts Anupam Kumar
- What are the Benefits of Strategic Management? Management Study Guide
- Challenges to Strategic Management Hajara Saleeth