Strategic Management

Strategic management can be defined as the art and science of formulating, implementing, and
evaluating cross-functional decisions that enable an organization to achieve the laid down
objectives.
Thus, it focuses on business domains such as marketing, finance, operations, integrated
management, research and development, and information systems to achieve organizational
success.
The purpose of strategic management is to exploit and create new and different opportunities
for tomorrow; long-range planning for the business and focusing on trends that could lead to
some future benefit to the firm.
Stages of Strategic Management
Strategic management consist of 3 stages:
1. Strategy formulation: It includes developing a vision and mission statement for the
business, identifying the external opportunities and threats to the business and
determining internal strengths and weaknesses in order to develop long-term objectives
thereby generating multiple alternative strategies, and choosing one to pursue.

Issues under Strategy formulation

• Which new business to enter

• Which business to abandon
• How to allocate resources
• Whether to expand or diversify
• Whether to enter international market
• Whether to merge of form joint venture

Since organizations do not have unlimited resources, therefore a strategist should decide which
strategy would benefit most for the organization.
2. Strategy Implementation: In this stage, the firm now requires to develop their annual
objectives, formulate policies and thus allocate resources so that the strategies can be
implemented.
However, this stage also involves bringing in all the employees and managers to
implement the strategies into action and is thus considered to be the most difficult
stage in strategic management.
 Therefore, in order to implement strategic planning, there is a primary need to motivate
the employees, which is an art more than a science., since a strategy formulated but not
implemented is of no use.

3. Strategy Evaluation: This is the final stage in strategic management. Once strategic
formulation and implementation has been carried out, it becomes extremely important
to evaluate the working of these strategies, which is then carried under this step.

3 Strategy evaluation activities are:

a. reviewing external and internal factors that form the bases of current strategies,
b. measuring the performance of implemented strategies, and
c. taking corrective actions

Strategy evaluation is therefore needed because all factors whether external or internal
are continuously changing and therefore a strategy working today may not work
tomorrow.

Key terms in Strategic Management

• Competitive Advantage: When a firm can do something that rival firms cannot do, or
owns something that rival firms desire, that can represent a competitive advantage.
For example, in a global economic recession, simply having ample cash on the firm’s
balance sheet can provide a major competitive advantage. Some cash-rich firms are
buying distressed rivals.
• Vision and Mission statements
• Strategists: Strategists are the individuals who are most responsible for the success or
failure of an organization.
Strategists have various job titles, such as chief executive officer, president, owner, chair
of the board, executive director, chancellor, dean, or entrepreneur.
• External opportunities and external threats: refer to economic, social, cultural,
demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization in
the future.
Opportunities and threats are largely beyond the control of a single organization—thus
the word external.
• Internal strengths and internal weaknesses: are an organization’s controllable activities
that are performed especially well or poorly.
They arise in the management, marketing, finance/accounting, production/operations,
research and development, and management information systems activities of a
business.
 • Objectives: can be defined as specific results that an organization seeks to achieve in
pursuing its basic mission.
Long-term means more than one year.
Objectives should be challenging, measurable, consistent, reasonable, and clear. In a
multidimensional firm, objectives should be established for the overall company and for
each division.
• Annual objectives are short-term milestones that organizations must achieve to reach
long-term objectives.
Like long-term objectives, annual objectives should be measurable, quantitative,
challenging, realistic, consistent, and prioritized.
• Policies: are the means by which annual objectives will be achieved. Policies include
guidelines, rules, and procedures established to support efforts to achieve stated
objectives.
Policies are guides to decision making and address repetitive or recurring situations.
Policies are most often stated in terms of management, marketing, finance/accounting,
production/operations, research and development, and computer information systems
activities.

Model of a Strategic Management Process (Diagram)

Benefits to a firm provided by strategic planning
1. Enhanced Communication: Dialogue, Participation
2. Deeper improved understanding: of other’s view and of what the firm is doing/planning
and why?
3. Greater commitment: to achieve objective, to implement strategies and to work hard
4. As a result, all managers and employ work on a mission to help the firm succeed.

Vision and Mission

“A business is not defined by its name, statutes, or articles of incorporation. It is defined by the
business mission. Only a clear definition of the mission and purpose of the organization makes
possible clear and realistic business objectives."
We can best understand vision and mission by focusing on a business when it is first started.
In the beginning, a new business is simply a collection of ideas. Starting a new business rests on
a set of beliefs that the new organization can offer some product or service to some customers,
in some geographic area, using some type of technology, at a profitable price.
A new business owner typically believes that the management philosophy of the new
enterprise will result in a favorable public image and that this concept of the business can be
communicated to, and will be adopted by, important constituencies.
We can perhaps best understand vision and mission by focusing on a business when it is first
started.
In the beginning, a new business is simply a collection of ideas. Starting a new business rests on
a set of beliefs that the new organization can offer some product or service to some customers,
in some geographic area, using some type of technology, at a profitable price.
A new business owner typically believes that the management philosophy of the new
enterprise will result in a favorable public image and that this concept of the business can be
communicated to, and will be adopted by, important constituencies.
What Do We Want to Become?
A vision statement should answer the basic question, “What do we want to become?” A clear
vision provides the foundation for developing a comprehensive mission statement. Many
organizations have both a vision and mission statement, but the vision statement should be
established first and foremost. The vision statement should be short, preferably one sentence,
and as many managers as possible should have input into developing the statement.
Vision versus Mission
Many organizations develop both a mission statement and a vision statement. Whereas the
mission statement answers the question “What is our business?” the vision statement answers
the question “What do we want to become?” Many organizations have both a mission and
vision statement.
It can be argued that profit, not mission or vision, is the primary corporate motivator. But profit
alone is not enough to motivate people. Profit is perceived negatively by some employees in
companies. Employees may see profit as something that they earn and management then uses
and even gives away to shareholders.
Although this perception is undesired and disturbing to management, it clearly indicates that
both profit and vision are needed to motivate a workforce effectively.
Examples of vision statements
Procter & Gamble’s vision is to be, and be recognized as, the best consumer products company
in the world. (Author comment: statement is too vague and readability is not that good)
General Motors’ vision is to be the world leader in transportation products and related services.
(Author comment: Good statement)
Dell’s vision is to create a company culture where environmental excellence is second nature.
(Author comment: Statement is too vague; it should reveal computer business in some manner;
the word environmental is generally used to refer to natural environment so is unclear in its use
here).
The external assessment
The Nature of an External Audit
The purpose of an external audit is to develop a finite list of opportunities that could benefit a
firm and threats that should be avoided.
As the term finite suggests, the external audit is not aimed at developing an exhaustive list of
every possible factor that could influence the business; rather, it is aimed at identifying key
variables that offer actionable responses.
Key external forces

• Economic forces
• Social, Cultural, demographic and environmental forces
• Political, Legal and Governmental forces
• Technological forces
• Competitive forces

The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and employees as
possible.
To perform an external audit, a company first must gather competitive intelligence and
information about economic, social, cultural, demographic, environmental, political,
governmental, legal, and technological trends.
Individuals can be asked to monitor various sources of information, such as key magazines,
trade journals, and newspapers.
These persons can submit periodic scanning reports to a committee of managers charged with
performing the external audit.
This approach provides a continuous stream of timely strategic information and involves many
individuals in the external-audit process.
The Internet provides another source for gathering strategic information, as done in corporate,
university, and public libraries.
Suppliers, distributors, salespersons, customers, and competitors represent other sources of
vital information.
Once information is gathered, it should be assimilated and evaluated. A meeting or series of
meetings of managers is needed to collectively identify the most important opportunities and
threats facing the firm.
Freund emphasized that these key external factors should be
(1) important to achieving long-term and annual objectives,
(2) measurable,
(3) applicable to all competing firms, and
(4) hierarchical in the sense that some will pertain to the overall company and others will be
more narrowly focused on functional or divisional areas.
A final list of the most important key external factors should be communicated and distributed
widely in the organization. Both opportunities and threats can be key external factors.

The Industrial Organization View

The Industrial Organization approach to competitive advantage advocates that external
(industry) factors are more important than internal factors in a firm achieving competitive
advantage.
Proponents of the view, such as Michael Porter, contend that organizational performance will
be primarily determined by industry forces.
I/O theorists contend that external factors in general and the industry in which a firm chooses
to compete has a stronger influence on the firm’s performance than do the internal functional
decisions managers make in marketing, finance, and the like.
Firm performance, they contend, is primarily based more on industry properties, such as
economies of scale, barriers to market entry, product differentiation, the economy, and level of
competitiveness than on internal resources, capabilities, structure, and operations.
The global economic recession’s impact on both strong and weak firms has added credence of
late to the notion that external forces are more important than internal. Many thousands of
internally strong firms in 2006–2007 disappeared in 2008–2009.
The I/O view has enhanced our understanding of strategic management.
However, it is not a question of whether external or internal factors are more important in
gaining and maintaining competitive advantage.
Effective integration and understanding of both external and internal factors is the key to
securing and keeping a competitive advantage.
In fact, as discussed earlier, matching key external opportunities/threats with key internal
strengths/weaknesses provides the basis for successful strategy formulation.

Economic Forces
Economic factors have a direct impact on the potential attractiveness of various strategies.
For example, when interest rates rise, funds needed for capital expansion become more costly
or unavailable.
Also, when interest rates rise, discretionary income declines, and the demand for discretionary
goods falls.
When stock prices increase, the desirability of equity as a source of capital for market
development increases. Also, when the market rises, consumer and business wealth expand.
Key economic variables
Availability of credit, Level of disposable income, Propensity of people to spend, Interest rates,
Inflation rates, Federal government budget deficits, Gross domestic product trend,
Consumption patterns, Import/export factors, Tax rates.
Key Social, Cultural, Demographic, and Natural Environment Variables
Number of marriages, Number of births, Number of deaths, Immigration rates, Life expectancy
rates, Per capita income, Location of retailing, manufacturing, and service businesses, Attitudes
toward business, Lifestyles, Attitudes toward retirement, Attitudes toward leisure time,
Attitudes toward product quality, Attitudes toward customer service, Pollution control.
Some Political, Governmental, and Legal Variables
Government regulations, Changes in tax laws, Special tariffs, Sino-American relationships,
Import–export regulations, Government fiscal and monetary policy changes, Political conditions
in foreign countries, Size of government budgets World oil, currency, and labor markets,
Location and severity of terrorist activities.
Technological variable
Examples of the Impact of Wireless Technology
Airlines—Many airlines now offer wireless technology in flight,
Automotive—Vehicles are becoming wireless,
Banking—Visa sends text message alerts after unusual transactions.
Competitors
Key Questions About Competitors
1. What are the major competitors’ strengths?
2. What are the major competitors’ weaknesses?
3. What are the major competitors’ objectives and strategies?
4. How will the major competitors most likely respond to current economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and competitive
trends affecting our industry?
Competitive Analysis: Porter’s Five-Forces Model (Diagram)
Industry Analysis: The External Factor Evaluation (EFE) Matrix
An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate
economic, social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive information.
Process/Steps
1. List key external factors as identified in the external-audit process. Include a total of 15 to 20
factors, including both opportunities and threats, that affect the firm and its industry. List the
opportunities first and then the threats. Be as specific as possible, using percentages, ratios,
and comparative numbers whenever possible. Recall that Edward Deming said, “In God we
trust. Everyone else bring data.”
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important).
The weight indicates the relative importance of that factor to being successful in the firm’s
industry. Opportunities often receive higher weights than threats, but threats can receive high
weights if they are especially severe or threatening. Appropriate weights can be determined by
comparing successful with unsuccessful competitors or by discussing the factor and reaching a
group consensus. The sum of all weights assigned to the factors must equal 1.0.
3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the
firm’s current strategies respond to the factor, where 4 = the response is superior, 3 = the
response is above average, 2 = the response is average, and 1 = the response is poor. Ratings
are based on effectiveness of the firm’s strategies. Ratings are thus company-based, whereas
the weights in Step 2 are industry-based. It is important to note that both threats and
opportunities can receive a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.

The Competitive Profile Matrix (CPM)

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular
strengths and weaknesses in relation to a sample firm’s strategic position.
The weights and total weighted scores in both a CPM and an EFE have the same meaning.
However, critical success factors in a CPM include both internal and external issues; therefore,
the ratings refer to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2
= minor weakness, and 1 = major weakness.
The critical success factors in a CPM are not grouped into opportunities and threats as they are
in an EFE.
In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample
firm. This comparative analysis provides important internal strategic information.

The Internal Assessment

The Nature of an Internal Audit
All organizations have strengths and weaknesses in the functional areas of business.
No enterprise is equally strong or weak in all areas.
Key Internal Forces
For different types of organizations, such as hospitals, universities, and government agencies,
the functional business areas, of course, differ.
In a hospital, for example, functional areas may include cardiology, hematology, nursing,
maintenance, physician support, and receivables.
Functional areas of a university can include athletic programs, placement services, housing,
fund-raising, academic research, counseling, and intramural programs. Within large
organizations, each division has certain strengths and weaknesses.
A firm’s strengths that cannot be easily matched or imitated by competitors are called
distinctive competencies.
Building competitive advantages involves taking advantage of distinctive competencies.
For example, 3M exploits its distinctive competence in research and development by producing
a wide range of innovative products.
The Process of Performing an Internal Audit
The process of performing an internal audit closely parallels the process of performing an
external audit.
Representative managers and employees from throughout the firm need to be involved in
determining a firm’s strengths and weaknesses.
The internal audit requires gathering and assimilating information about the firm’s
management, marketing, finance/accounting, production/operations, research and
development (R&D), and management information systems operations.
Key factors should be prioritized as described in Chapter 3 so that the firm’s most important
strengths and weaknesses can be determined collectively.
Compared to the external audit, the process of performing an internal audit provides more
opportunity for participants to understand how their jobs, departments, and divisions fit into
the whole organization.
This is a great benefit because managers and employees perform better when they understand
how their work affects other areas and activities of the firm.
Performing an internal audit requires gathering, assimilating, and evaluating information about
the firm’s operations.
Critical success factors, consisting of both strengths and weaknesses, can be identified and
prioritized in the manner discussed in external audit.