PART 1.

STRATEGIC MANAGEMENT OVERVIEW

What's in it for Me?

Reading these chapters will help you do the following:
1. See how strategy fits in the planning-organizing-leading-controlling (P-O-L-C) framework.
2. Better understand how strategies emerge.
3. Understand strategy as trade-offs, discipline, and focus.
4. Conduct internal analysis to develop strategy.
5. Conduct external analysis to develop strategy.

What Is Strategic Management?

Strategic management, strategy for short, is essentially about choice — in terms of what the
organization will do and won’t do to achieve specific goals and objectives, where such goals
and objectives lead to the realization of a stated mission and vision. Strategy is a central part
of the planning function in P-O-L-C. Strategy is also about making choices that provide the
organization with some measure of a sustainable competitive advantage. For the most part,
this chapter emphasizes strategy formulation (answers to the “What should our strategy be?”
question) as opposed to strategy implementation (answers to question “How do we execute
our strategy?”). The central position of strategy is summarized in Figure 1.1.

Figure 1.1 The P-O-L-C Framework

Planning Organizing Leading Controlling

1. Leadership
1. Vision & Mission 2. Decision Making
1. Organization Design
2. Strategizing 3. 1. Systems/Processes
2. Culture
3. Goals & Communications 2. Strategic Human Resources
3. Social Networks
Objectives 4. Groups/Teams
5. Motivation

As you can see in Figure 1.1, the P-O-L-C framework starts with “planning”. Planning is
related to, but not synonymous with, strategic management. The concept of strategic
management reflects what a firm is doing to achieve its mission and vision as seen by its
achievement of specific goals and objectives. A more formal definition tells us that strategic
management “is the process by which a firm manages the formulation and implementation
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of its strategy.”
Using the definition of strategic management above then, the strategic management
 process is “the coordinated means by which an organization achieves its goals and
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objectives.” Others have described strategy as the pattern of resource allocation choices and
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organizational arrangements that result from managerial decision making. Planning
activities that lead to the formulation of a strategy is sometimes called strategic planning.
Strategy implementation then refers to the tasks
and tactics managers must perform to put the desired strategy into action. See Figure 1.2
for a description of how strategy fits with planning.

1. Carpenter, M. A., & Sanders, W. G. (2009). Strategic management (p. 8). Upper Saddle River,
NJ: Pearson/Prentice-Hall.
2. Carpenter, M. A., & Sanders, W. G. (2009). Strategic management (p. 10).
3. Mintzberg, H. 1978. Patterns in strategy formulation. Management Science, 24, 934–949.
 The concept of strategy is relevant to all types of organizations, from large, public companies
like GE, to religious organizations, political parties, and nonprofits.

Strategic Management in the P-O-L-C Framework

If vision and mission are the heart and soul of planning (in the P-O-L-C framework), then
strategy, particularly strategy formulation, would be the brain. Figure 1.3 summarizes where
strategy formulation (strategizing) and implementation fit in the planning and other components
of P- O-L-C. We will focus primarily on the strategy formulation aspects of strategic management
because implementation is essentially organizing, leading, and controlling P-O-L-C components.
Unit 4: Internal Capabilities of this textbook will provide additional information regarding
the implementation components (O-L-C).
 You see that planning starts with vision and mission and concludes with setting goals and
objectives. In between is the critical role played by strategy. Specifically, a strategy captures and
communicates how vision and mission will be achieved and sets forth the goals and objectives
needed to demonstrate that the organization is on the right path for achieving them. At this
point, even in terms of strategy formulation, there are two aspects of strategizing that you should
recognize. The first, corporate strategy answers strategy questions related to “What business or
businesses should we be in?” and “How does business X help us compete in business Y, and vice
versa?” In many ways, corporate strategy considers an organization to be a portfolio of
businesses, resources, capabilities, or activities.

Example 1.1 – Synergy

The largest U.S. grocery chain, Kroger, has invested in autonomous vehicles which will deliver groceries to online shoppers. Kroger’s is
working to create a better shopping experience for their customers. Rather than simply shopping online and picking up, the customer
has the option to have a self driving vehicle show up loaded with groceries for them to unload. Customers are notified via text message
when the vehicle arrives at their delivery address. This is expected to bring more business to Kroger’s and creates a better experience
for its customers. For the time, the autonomous vehicles will still have a safety operator who can take control in emergencies as well as
a co-pilot who monitors the technology. But the Texas Department of Transportation is monitoring the program and may allow it freer
range of operation in the future.
Source: Houston Chronicle, Kroger’s autonomous delivery cars latest salvo in Houston grocery wars, 2019Sp

The logic behind corporate strategy is one of synergy and diversification. That is, synergies arise
when each of YUM! Brands a food outlet does better because they have common ownership and
can share valuable inputs into their businesses. Specifically, synergy exists when the interaction of
two or more activities (such as those in a business) create a combined effect greater than the sum
of their individual effects. The idea is that the combination of certain businesses is stronger than
 those same businesses would be individually. Their coordination under a common owner allows
them to either do things less expensively, or of a higher quality.

Example 1.2 – Concentric Diversification

The German software company, SAP, recently acquired the experience management software company, Qualtrics, after Qualtrics
announced their IPO price range. SAP plans to implement Qualtrics’ cloud-based experience data into their own operational data
software to diversify into the customer relationship management market so they may compete against companies like Salesforce.
Source: Forbes, SAP Acquires Cloud Unicorn Qualtrics For $8 Billion Just Before Its IPO, 2018Fa

Diversification, in contrast, is where an organization participates in multiple businesses that

are in some way distinct from each other, as Taco Bell is from Pizza Hut, for instance. Just as with
a portfolio of stock, the purpose of diversification is to spread out risk and opportunities over a
larger set of businesses. Some may be high growth, some slow growth or declining; some may
perform worse during recessions, while others perform better. There are three major
diversification strategies: (1) concentric diversification, where the new business produces
products that are technically similar to the company’s current product but that appeal to a new
consumer group; (2) horizontal diversification, where the new business produces products that
are totally unrelated to the company’s current product but that appeal to the same consumer
group; and (3) conglomerate diversification, where the new business produces products that are
totally unrelated to the company’s current product and that appeal to an entirely new consumer
group.
Whereas corporate strategy looks at an organization as a portfolio of things, business strategy
focuses on how a given business needs to compete to be effective. Again, all organizations need
strategies to survive and thrive. A neighborhood church, for instance, probably wants to serve
existing members, build new membership, and, at the same time, raise surplus monies to help
it with outreach activities. Its strategy would answer questions surrounding the accomplishment
of these key objectives. In a for-profit company such as McDonald’s, its business strategy would
help it keep existing customers, expanding its business by moving into new markets, and taking
customers from competitors like Taco Bell and Burger King, all while maintaining a profit level
demanded by the stock market.

Strategic Inputs

So what are the inputs into strategizing? At the most basic level, you will need to gather
information and conduct analysis about the internal characteristics of the organization and the
 external market conditions. This means both an internal and an external appraisal. On the
internal side, you will want to gain a sense of the organization’s strengths and weaknesses; on the
external side, develop a sense of the organization’s opportunities and threats. Together, these four
inputs into strategizing (strengths, weaknesses, opportunities, and threats) are referred to as
SWOT analysis. It doesn’t matter if you start this appraisal internally or externally, but you will
quickly see the two perspectives need to mesh eventually.

Example 1.3 Sustainable Advantage

Walmart’s supply chain management strategy has given them multiple sustainable competitive advantages that include lower product
costs, reduced inventory carrying costs, competitive pricing and a large variety in store products. All of these advantages are hard to
duplicate at the scale Walmart is currently at as well as provide a favorable long term position over their competitors.
Source: TradeGecko, Walmart’s successful supply chain management, 2018Fa

Strengths and Weaknesses

A good starting point for strategizing is an assessment of what an organization does well and
what it doesn’t do well. In general good strategies take advantage of strengths and minimize the
disadvantages posed by any weaknesses. Michael Jordan, for instance, is an excellent all-around
athlete; he excels in baseball and golf, but his athletic skills show best in basketball. As with
Jordan, when you can identify certain strengths that set an organization well apart from actual
and potential competitors, that strength is considered a source of competitive advantage. The
hardest thing for an organization to do is to develop its competitive advantage into a sustainable
competitive advantage. This means the organization’s strengths cannot be easily duplicated or
imitated by other firms, nor made redundant or less valuable by changes in the external
environment.

Opportunities and Threats

On the basis of what you just learned about competitive advantage and sustainable competitive
advantage, you can see why some understanding of the external environment is a critical input
into strategy. Opportunities assess the external attractive factors that represent the reason for a
business to exist and prosper. These are external to the business. What opportunities exist in its
market, or in the environment, from which managers might hope the organization will benefit?
 Threats include factors beyond your control that could place the strategy, or the business, at risk.
These are also external—managers typically have no control over them, but may benefit by having
contingency plans to address them if they occur.
In a nutshell, SWOT analysis helps you identify strategic alternatives that address the following
questions:

1. Strengths and Opportunities (SO)—How can you use your strengths to take advantage of the
opportunities?
2. Strengths and Threats (ST)—How can you take advantage of your strengths to avoid real
and potential threats?
3. Weaknesses and Opportunities (WO)—How can you use your opportunities to overcome the
weaknesses you are experiencing?
4. Weaknesses and Threats (WT)—How can you minimize your weaknesses and avoid threats?

Most importantly, a SWOT analysis needs to both draw a set of concrete conclusions from the
firm’s specific situation and identify a set of strategic actions to address each. The ultimate goal is
to match the company’s resource strengths and market opportunities, correct important
weaknesses, and defend against external threats.

Internal Analysis Tools

While SWOT helps you identify an organization’s strengths and weaknesses, there are other tools
available for internal analysis too; notably value chain and VRIO analysis. In effect, value chain
analysis asks you to take the organization apart and identify its important constituent parts.
Sometimes these parts take the form of functions, like marketing or manufacturing.

Example 1.4 – Value Chain Analysis

For instance, Disney is really good at developing and making money from its branded products, such as Cinderella or Pirates of the
Caribbean. This is a marketing function (it is also a design function, which is another Disney strength).
Earn credit, add your own example!

Value chain functions are also called capabilities. This is where VRIO comes in. VRIO stands
for valuable, rare, inimitable, and organization—basically, the VRIO framework suggests that a
capability, or a resource, such as a patent or great location, is likely to yield a competitive
advantage to an organization when it can be shown that it is valuable, rare, difficult to imitate,
 and supported by the organization (and, yes, this is the same organization that you find in P-O- L-
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C). Essentially, where the value chain might suggest internal areas of strength, VRIO helps you
understand whether those strengths will give it a competitive advantage.

Example 1.5 – VRIO Analysis

Going back to our Disney example, for instance, strong marketing and design capabilities are valuable, rare, and very difficult to imitate,
and Disney is organized to take full advantage of them.
Earn credit, add your own example!

External Analysis Tools

While there are probably hundreds of different ways for you to study an organization’s external
environment, the two primary tools are PESTEL and industry analysis. PESTEL, as you probably
guessed, is simply an acronym. It stands for political, economic, sociocultural, technological,
environmental, and legal environments. Simply, the PESTEL framework directs you to collect
information about, and analyze, each environmental dimension to identify the broad range of
threats and opportunities facing the organization. Industry analysis, in contrast, asks you to map
out the different relationships that the organization might have with suppliers, customers, and
competitors. PESTEL provides you with a good sense of the broader macro-environment, whereas
industry analysis should tell you about the organization’s competitive environment and the key
industry-level factors that seem to influence performance.

Example 1.6 – PESTEL Analysis

Earn credit, add your own example!

4. Don’t be confused, another internal analysis model we will use in this course (value chain analysis)
will use similar terms to describe a core competency—valuable, rare, costly to imitate, and non-
substitutable.
 Intended and Realized Strategies
The best-laid plans of mice and men often go awry.

~Robert Burns, “To a Mouse,”

1785 This quote from English poet Robert Burns is especially applicable to strategy. While we
have been discussing strategy and strategizing as if they were the outcome of a rational,
predictable, analytical process, your own experience should tell you that a fine plan does not
guarantee a fine outcome. Many things can happen between the development of the plan and
its realization, including (but not limited to): (1) the plan is poorly constructed, (2) competitors
undermine the advantages envisioned by the plan, or (3) the plan was good but poorly executed.
You can probably imagine a number of other factors that might undermine a strategic plan
and the results that
follow.

The ways in which organizations make strategy has emerged as an area of intense debate
within the strategy field. Henry Mintzberg and his colleagues at McGill University distinguish
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intended, deliberate, realized, and emergent strategies. These four different aspects of strategy

1. Mintzberg, H. (1987, July–August). Crafting strategy. Harvard Business Review, pp. 66–75; Mintzberg,
H. (1996). The entrepreneurial organization. In H. Mintzberg & J. B. Quinn (Eds.),The strategy process
(3rd ed.). Englewood Cliffs, NJ: Prentice-Hall; Mintzberg, H., & Waters, J. A. (1985). Of strategies,
deliberate and emergent. Strategic Management Journal, 6, 257–272.
 are summarized in Figure 1.4. Intended strategy is strategy as conceived by the top management
team. Even here, rationality is limited and the intended strategy is the result of a process of
negotiation, bargaining, and compromise, involving many individuals and groups within the
organization. However, realized strategy—the actual strategy that is implemented—is only partly
related to that which was intended (Mintzberg suggests only 10%–30% of intended strategy is
realized).

Example 1.7 – Realized Strategy

Analysis of Honda’s successful entry into the U.S. motorcycle market has provided a battleground for the debate between those who
view strategy making as primarily a rational, analytical process of deliberate planning (the design school) and those that envisage
strategy as emerging from a complex process of organizational decision making (the emergence or learning school).
Earn credit, add your own example!

The primary determinant of realized strategy is what Mintzberg terms emergent strategy—the
decisions that emerge from the complex processes in which individual managers interpret the
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intended strategy and adapt to changing external circumstances. Thus, the realized strategy is a
consequence of deliberate and emerging factors.
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Although the debate between the two schools continues, we hope that it is apparent that the
central issue is not, “Which school is right?” but, “How can the two views complement one
another to give us a richer understanding of strategy making?” Let us explore these
complementarities in relation to the factual question of how strategies are made and the
normative question of how strategies should be made.

2. See Mintzberg, H. Patterns in strategy formulation. (1978). Management Science, 24, 934–948; Mintzberg, H.,
& Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6, 257–272.
(1985); and Mintzberg, H. (1988). Mintzberg on management: Inside our strange world of organizations. New
York: Free Press.
3. For further debate of the Honda case, see Mintzberg, H., Pascale, R. T., Goold, M., & Rumelt, Richard
P. (1996, Summer). The Honda effect revisited. California Management Review, 38, 78–117.
The Making of Strategy

How Is Strategy Made?

Robert Grant, author of Contemporary Strategy Analysis, shares his view on how strategy is
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made as follows. For most organizations, strategy making combines design and emergence. The
deliberate design of strategy (through formal processes such as board meetings and strategic
planning) has been characterized as a primarily top-down process. Emergence has been viewed
as the result of multiple decisions at many levels, particularly within middle management, and
has been viewed as a bottom-up process. These processes may interact in interesting ways.

Example 1.8 – Emergent Strategy

At Intel, the key historic decision to abandon memory chips and concentrate on microprocessors was the result of a host of
decentralized decisions taken at divisional and plant level that were subsequently acknowledged by top management and promulgated
as strategy.
Earn credit, add your own example!

In practice, both design and emergence occur at all levels of the organization. The strategic
planning systems of large companies involve top management passing directives and guidelines
down the organization and the businesses passing their draft plans up to corporate. Similarly,
emergence occurs throughout the organization—opportunism by CEOs is probably the single
most important reason why realized strategies deviate from intended strategies. What we can say
for sure is that the role of emergence relative to design increases as the business environment
becomes increasingly volatile and unpredictable.
Organizations that inhabit relatively stable environments—the Roman Catholic Church and
national postal services—can plan their strategies in some detail. Organizations whose
environments cannot be forecasted with any degree of certainty—a gang of car thieves or a
construction company located in the Gaza Strip—can establish only a few strategic principles and
guidelines; the rest must emerge as circumstances unfold.

4. Grant, R. M. (2002). Contemporary strategy analysis (4th ed., pp. 25–26). New York: Blackwell. 12. [6]
Burgelman, R. A., & Grove, A. (1996, Winter). Strategic dissonance. California Management Review, 38,
8–28.
What’s the Best Way to Make Strategy?

Mintzberg’s advocacy of strategy making as an iterative process involving experimentation and

feedback is not necessarily an argument against the rational, systematic design of strategy. The critical
issues are, first, determining the balance of design and emergence and, second, how to guide the process
of emergence. The strategic planning systems of most companies involve a combination of design and
emergence. Thus, headquarters sets guidelines in the form of vision and mission statements, business
principles, performance targets, and capital expenditure budgets. However, within the strategic plans
that are decided, divisional and business unit managers have considerable freedom to adjust, adapt, and
experiment.

KEY TAKEAWAY
You learned about the processes surrounding strategy development. Specifically, you saw the
difference between intended and realized strategy, where intended strategy is essentially the
desired strategy, and realized strategy is what is actually put in place. You also learned how
strategy is ultimately made. In the end, the best strategies come about when managers are able to
balance the needs for design (planning) with being flexible enough to capitalize on the benefits of
emergence.
Strategy formulation is an essential component of planning; it forms the bridge that enables the
organization to progress from vision and mission to goals and objectives. In terms of the P-O- L-
C framework, strategy formulation is the P (planning) and strategy implementation is realized by
O-L-C. Corporate strategy answers questions about which businesses to compete with; while
business strategy answers questions about how any one of these businesses should do so. The best
strategies are based on a thorough analysis of both internal and external factors—that is, a
strategy that capitalizes on an organization’s strengths, weaknesses, opportunities, and threats.