Southern University Bangladesh
Business Policy & Strategy
Chapter 2: Introduction to Strategic Management
Lesson 3: Strategic Management Process
2.1 Strategic Management
Strategic management is a set of managerial decisions and actions that determines
the long-run performance of a corporation. It includes environmental scanning (both
external and internal), strategy formulation (strategic or long-range planning), strategy
implementation, and evaluation and control. The study of strategic management,
therefore, emphasizes the monitoring and evaluating of external opportunities and
threats in light of a corporations strengths and weaknesses. Originally called business
policy, strategic management incorporates such topics as strategic planning,
environmental scanning, and industry analysis.
2.2 Basic Model of Strategic Management
Strategic management consists of four basic elements:
Environmental scanning
Strategy formulation
Strategy implementation
Evaluation and control
Figure 11 illustrates how these four elements interact; Figure 12 expands each of
these elements and serves as the model for this book. This model is both rational and
prescriptive. It is a planning model that presents what a corporation should do in terms
of the strategic management process, not what any particular firm may actually do. The
rational planning model predicts that as environmental uncertainty increases,
corporations that work more diligently to analyze and predict more accurately the
changing situation in which they operate will outperform those that do not. Empirical
research studies support this model.
2.2.1 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 factorsthose external and internal
elements that will determine the future of the corporation. The simplest way to conduct
environmental scanning is through SWOT analysis. SWOT is an acronym used to
describe the particular Strengths, Weaknesses, Opportunities, and Threats that are
strategic factors for a specific company.
The external environment consists of variables (Opportunities and Threats) that are
outside the organization and not typically within the short-run control of top
management.
The internal environment of a corporation consists of variables (Strengths and
Weaknesses) that are within the organization itself and are not usually within the shortrun control of top management. These variables form the context in which work is done.
They include the corporations structure, culture, and resources. Key strengths form a set
of core competencies that the corporation can use to gain competitive advantage.
2.2.2 Strategy Formulation
Strategy formulation is the development of long-range plans for the effective
management of environmental opportunities and threats, in light of corporate strengths
and weaknesses (SWOT). It includes defining the corporate mission, specifying
achievable objectives, developing strategies, and setting policy guidelines.
1. Mission
An organizations mission is the purpose or reason for the organizations existence. It
tells what the company is providing to societyeither a service such as housecleaning or
a product such as automobiles. A well-conceived mission statement defines the
fundamental, unique purpose that sets a company apart from other firms of its type and
identifies the scope or domain of the companys operations in terms of products
(including services) offered and markets served.
A mission statement may also include the firms values and philosophy about how it does
business and treats its employees. It puts into words not only what the company is now
but what it wants to becomemanagements strategic vision of the firms future. The
mission statement promotes a sense of shared expectations in employees and
communicates a public image to important stakeholder groups in the companys task
environment. Some people like to consider vision and mission as two different concepts:
Mission describes what the organization is now; vision describes what the organization
would like to become.
One example of a mission statement is that of Google: To organize the worlds
information and make it universally accessible and useful.
2. Objectives
Objectives are the end results of planned activity. They should be stated as action verbs
and tell what is to be accomplished by when and quantified if possible. The achievement
of corporate objectives should result in the fulfillment of a corporations mission. In
effect, this is what society gives back to the corporation when the corporation does a
good job of fulfilling its mission. For example, by providing society with gums, candy,
iced tea, and carbonated drinks, Cadbury Schweppes, has become the worlds largest
confectioner by sales. One of its prime objectives is to increase sales 4%6% each year.
Even though its profit margins were lower than those of Nestl, Kraft, and Wrigley, its
rivals in confectionary, or those of Coca-Cola or Pepsi, its rivals in soft drinks, Cadbury
Schweppes management established the objective of increasing profit margins from
around 10% in 2007 to the mid-teens by 2011.
In contrast to an objective, we consider a goal as an open ended statement of what one
wants to accomplish, with no quantification of what is to be achieved and no time criteria
for completion.
Some of the areas in which a corporation might establish its goals and objectives are:
Profitability (net profits)
Efficiency (low costs, etc.)
Growth (increase in total assets, sales, etc.)
Shareholder wealth (dividends plus stock price appreciation)
Utilization of resources (ROE or ROI)
Reputation (being considered a top firm)
Contributions to employees (employment security, wages, diversity)
Contributions to society (taxes paid, participation in charities, providing a needed
product or service)
Market leadership (market share)
Technological leadership (innovations, creativity)
Survival (avoiding bankruptcy)
Personal needs of top management (using the firm for personal purposes, such as
providing jobs for relatives)
3. Strategies
A strategy of a corporation forms a comprehensive master plan that states how the
corporation will achieve its mission and objectives. It maximizes competitive advantage
and minimizes competitive disadvantage. For example, even though Cadbury Schweppes
was a major competitor in confectionary and soft drinks, it was not likely to achieve its
challenging objective of significantly increasing its profit margin within four years without
making a major change in strategy. Management therefore decided to cut costs by
closing 33 factories and reducing staff by 10%.
The typical business firm usually considers three types of strategy: corporate, business,
and functional.
a. Corporate strategy describes a companys overall direction in terms of its general
attitude toward growth and the management of its various businesses and product lines.
Corporate strategies typically fit within the three main categories of stability, growth,
and retrenchment. Cadbury Schweppes, for example, was following a corporate strategy
of retrenchment by selling its marginally profitable soft drink business and concentrating
on its very successful confectionary business.
b. Business strategy usually occurs at the business unit or product level, and it
emphasizes improvement of the competitive position of a corporations products or
services in the specific industry or market segment served by that business unit.
Business strategies may fit within the two overall categories, competitive and
cooperative strategies. For example, Staples, the U.S. office supply store chain, has used
a competitive strategy to differentiate its retail stores from its competitors by adding
services to its stores, such as copying, UPS shipping, and hiring mobile technicians who
can fix computers and install networks.
c. Functional strategy is the approach taken by a functional area to achieve corporate
and business unit objectives and strategies by maximizing resource productivity. It is
concerned with developing and nurturing a distinctive competence to provide a company
or business unit with a competitive advantage. Examples of research and development
(R&D) functional strategies are technological followership (imitation of the products of
other companies) and technological leadership (pioneering an innovation).
Business firms use all three types of strategy simultaneously. A hierarchy of strategy
is a grouping of strategy types by level in the organization. Hierarchy of strategy is a
nesting of one strategy within another so that they complement and support one
another. (See Figure 14.) Functional strategies support business strategies, which, in
turn, support the corporate strategy(ies).
4. Policies
A policy is a broad guideline for decision making that links the formulation of a strategy
with its implementation. Companies use policies to make sure that employees
throughout the firm make decisions and take actions that support the corporations
mission, objectives, and strategies. For example, when Cisco decided on a strategy of
growth through acquisitions, it established a policy to consider only companies with no
more than 75 employees, 75% of whom were engineers.
2.2.3 Strategy Implementation
Strategy implementation is a process by which strategies and policies are put into
action through the development of programs, budgets, and procedures. This process
might involve changes within the overall culture, structure, and/or management system
of the entire organization. Strategy implementation often involves day-to-day decisions
in resource allocation.
Programs
A program is a statement of the activities or steps needed to accomplish a single-use
plan. It makes a strategy action oriented. It may involve restructuring the corporation,
changing the companys internal culture, or beginning a new research effort.
Budgets
A budget is a statement of a corporations programs in terms of dollars. Used in
planning and control, a budget lists the detailed cost of each program. Many
corporations demand a certain percentage return on investment, often called a hurdle
rate, before management will approve a new program. This ensures that the new
program will significantly add to the corporations profit performance and thus build
shareholder value.
Procedures
Procedures, sometimes termed Standard Operating Procedures (SOP), are a system of
sequential steps or techniques that describe in detail how a particular task or job is to be
done. They typically detail the various activities that must be carried out in order to
complete the corporations program.
2.2.4 Evaluation and Control
Evaluation and control is a process in which corporate activities and performance
results are monitored so that actual performance can be compared with desired
performance. Managers at all levels use the resulting information to take corrective
action and resolve problems. Although evaluation and control is the final major element
of strategic management, it can also pinpoint weaknesses in previously implemented
strategic plans and thus stimulate the entire process to begin again.
Performance is the end result of activities.70 It includes the actual outcomes of the
strategic management process. The practice of strategic management is justified in
terms of its ability to improve an organizations performance, typically measured in
terms of profits and return on investment. For evaluation and control to be effective,
managers must obtain clear, prompt, and unbiased information from the people below
them in the corporations hierarchy.
2.2.5 Feedback or Learning Process
Note that the strategic management model depicted in Figure 12 includes a
feedback/learning process. Arrows are drawn coming out of each part of the model and
taking information to each of the previous parts of the model. As a firm or business unit
develops strategies, programs, and the like, it often must go back to revise or correct
decisions made earlier in the process. For example, poor performance (as measured in
evaluation and control) usually indicates that something has gone wrong with either
strategy formulation or implementation.
Lesson 4: Strategic Decision Making
2.3 Strategic Decision Making
The distinguishing characteristic of strategic management is its emphasis on strategic
decision making. As organizations grow larger and more complex, with more uncertain
environments, decisions become increasingly complicated and difficult to make. In
agreement with the strategic choice perspective mentioned earlier, this book proposes a
strategic decision-making framework that can help people make these decisions
regardless of their level and function in the corporation.
2.3.1 What make a decision strategic?
Unlike many other decisions, strategic decisions deal with the long-run future of an entire
organization and have three characteristics:
Rare: Strategic decisions are unusual and typically have no precedent to follow.
Consequential: Strategic decisions commit substantial resources and demand a
great deal of commitment from people at all levels.
Directive: Strategic decisions set precedents for lesser decisions and future
actions throughout an organization.
2.3.2 Mintzbergs Modes of Strategic Decision Making
According to Henry Mintzberg, the three most typical approaches, or modes, of strategic
decision making are entrepreneurial, adaptive, and planning (a fourth mode, logical
incrementalism, was added later by Quinn):
Entrepreneurial mode: Strategy is made by one powerful individual. The focus is on
opportunities; problems are secondary. Strategy is guided by the founders own vision of
direction and is exemplified by large, bold decisions. The dominant goal is growth of the
corporation.
Adaptive mode: Sometimes referred to as muddling through, this decision-making
mode is characterized by reactive solutions to existing problems, rather than a proactive
search for new opportunities. Much bargaining goes on concerning priorities of
objectives. Strategy is fragmented and is developed to move a corporation forward
incrementally.
Adaptive mode: This decision-making mode involves the systematic gathering of
appropriate information for situation analysis, the generation of feasible alternative
strategies, and the rational selection of the most appropriate strategy. It includes both
the proactive search for new opportunities and the reactive solution of existing problems.
Logical incrementalism: A fourth decision-making mode can be viewed as a synthesis
of the planning, adaptive, and, to a lesser extent, the entrepreneurial modes. In this
mode, top management has a reasonably clear idea of the corporations mission and
objectives, but, in its development of strategies, it chooses to use an interactive process
in which the organization probes the future, experiments and learns from a series of
partial (incremental) commitments rather than through global formulations of total
strategies.
2.3.3 Strategic Decision Making Process
There are eight steps in strategic decision making process which are briefly describe as
follows:
1. Evaluate current performance results in terms of (a) return on investment,
profitability, and so forth, and (b) the current mission, objectives, strategies, and
policies.
2. Review corporate governancethat is, the performance of the firms board of
directors and top management.
3. Scan and assess the external environment to determine the strategic factors
that pose Opportunities and Threats.
4. Scan and assess the internal corporate environment to determine the
strategic factors that are Strengths (especially core competencies) and Weaknesses.
5. Analyze strategic (SWOT) factors to (a) pinpoint problem areas and (b) review
and revise the corporate mission and objectives, as necessary.
6. Generate, evaluate, and select the best alternative strategy in light of the
analysis conducted in step 5.
7. Implement selected strategies via programs, budgets, and procedures.
8. Evaluate implemented strategies via feedback systems, and the control of
activities to ensure their minimum deviation from plans.
