Chapter -1

Basic Concepts of
Strategic Management

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Introduction
What is strategy?
 Strategy is the pattern of activities followed by an organization in pursuit
of its long-term purposes.
 Strategy is critical to the relative success of an organization in its
business over time
 Strategy is the art of war, especially the planning of movements of troops
and ships etc, into favorable positions.
 Strategies are actions those determine whether an organization survives,
prospers, or dies.

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Con’t…
What is Business policy?
 A policy is a broad guideline for decision making that links the formulation of
a strategy with its implementation.
 A business policy is a set of rules defined by the owner or leadership of the
company. Some policies are defined by regulations, such as federal privacy
laws, while others are designed by corporate leadership to make sure that
things are done by certain standards.
 Business policies are generally found in the operations manual or in the
employee handbook. Although different businesses may have different
policies, any business policy has the same seven features.
 A business policy must be specific, clear, uniform, appropriate, simple,
inclusive and stable.

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1.1 The Study of Strategic Management

 Strategic management is a set of managerial decisions and actions

that help determine the long-term performance of an organization.
 It includes environmental scanning (both external and internal),
strategy formulation (strategic or long-range planning), strategy
implementation, and evaluation and control.
 The purpose of strategic management is to exploit and create new
and different opportunities for tomorrow; and to optimize for
tomorrow the trends of today.

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Benefits of Strategic Management

1. A clearer sense of strategic vision for the firm.

2. A sharper focus on what is strategically important.
3. An improved understanding of a rapidly changing
environment
4. Exploit and create new and different opportunities for
tomorrow

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 1.2 Globalization, Innovation, and
Sustainability: Challenges to Strategic
Management
 Today, everything has changed. Globalization, the integrated
internationalization of markets and corporations, has changed
the way modern corporations do business.
 Strategic management is becoming an increasingly important
way to keep track of international developments and position a
company for long-term competitive advantage

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Con’t…
 Innovation is meant to describe new products, services,
methods, and organizational approaches that allow the
business to achieve extraordinary returns
 Innovation is the machine that generates business
opportunities in the market; however, it is the implementation
of potential innovations that truly drives businesses to be
remarkable.

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Con’t…
 Sustainability refers to the use of business practices to manage the triple
bottom line
 That triple bottom line involves
1. the management of traditional profit/loss;
2. the management of the company’s social responsibility; and
3. the management of its environmental responsibility
 The company that pursues a sustainable approach to business has a
responsibility to its employees, its customers, and the community in which
it operates

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1.3 Theories of Organizational Adaptation

 Globalization, innovation, and sustainability present real

challenges to the strategic management of businesses.
 How can any one company keep track of all the changing
technological, economic, political–legal, and socio-cultural
trends around the world in order to make the necessary
adjustments? This is not an easy task.
 Various theories have been proposed to account for how
organizations obtain fit with their environment

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a. The theory of population ecology

 The theory of population ecology suggests that once an organization

is successfully established in a particular environmental niche, it is
unable to adapt to changing conditions. Inertia prevents the
organization from changing in any significant manner.
 The company is thus replaced (is bought out or goes bankrupt) by
other organizations more suited to the new environment.
 Although it is a popular theory in sociology, research fails to support
the arguments of population ecology.

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b. Institution theory

 Institution theory, in contrast, proposes that organizations can

and do adapt to changing conditions by imitating other
successful organizations.
 Many examples can be found of companies that have adapted to
changing circumstances by imitating an admired firm’s
strategies and management techniques.
 The theory does not, however, explain how or by whom
successful new strategies are developed in the first place.

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C. The strategic choice perspective
 The strategic choice perspective goes a significant step further
by proposing that not only do organizations adapt to a
changing environment, but they also have the opportunity and
power to reshape their environment.
 This perspective is supported by research indicating that the
decisions of a firm’s management have at least as great an
impact on firm performance as overall industry factors.
 Because of its emphasis on managers making rational
strategic decisions, the strategic choice perspective is the
dominant one taken in strategic management

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d. Organizational learning theory

 Organizational learning theory, which says that an

organization adjusts defensively to a changing environment
and uses knowledge offensively to improve the fit between
itself and its environment.
 This perspective expands the strategic choice perspective to
include people at all levels becoming involved in providing
input into strategic decisions

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1.4 Creating a Learning Organization

 Organizational learning is a critical component of competitiveness in a

dynamic environment. It is particularly important to innovation and new
product Development
 Learning organizations are skilled at four main activities:
 Solving problems systematically
 Experimenting with new approaches
 Learning from their own experiences and past history as well as from the
experiences of others
 Transferring knowledge quickly and efficiently throughout the organization.

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1.5 Basic Model of Strategic Management

 Strategic management consists of four basic elements:

1. Environmental scanning
2. Strategy formulation
3. Strategy implementation
4. Evaluation and control.

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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 factors—those external and
internal elements that will assist in the analysis of the strategic
decisions of the corporation.
-SWOT & PESTE analysis

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2. Strategy formulation

 Strategy formulation is the process of investigation, analysis,

and decision making that provides the company with the
criteria for attaining a competitive advantage.
 It includes defining the competitive advantages of the business,
identifying weaknesses that are impacting the company’s
ability to grow, crafting the corporate mission, specifying
achievable objectives, and setting policy guidelines.

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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.

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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 stimulates the entire process to
begin again.

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1.6 Initiation of Strategy: Triggering Events

 A triggering event is something that acts as a stimulus for a

change in strategy. Some possible triggering events are:
 New CEO: By asking a series of embarrassing questions, a new
CEO cuts through the veil of complacency and forces people to
question the very reason for the corporation’s existence.
 External intervention: A firm’s bank suddenly refuses to approve
a new loan or suddenly demands payment in full on an old one.
A key customer complains about a serious product defect

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Con’t…

 Threat of a change in ownership: Another firm may initiate a takeover

by buying a company’s common stock.
 Performance gap: A performance gap exists when performance does
not meet expectations. Sales and profits either are no longer increasing
or may even be falling.
 Strategic inflection point: is what happens to a business when a major
change takes place due to the introduction of new technologies, a
different regulatory environment, a change in customers’ values, or a
change in what customers prefer.

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1.7 Strategic Decision Making

 Strategic decisions deal with the long-term 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

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Con’t…
 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):

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a. Entrepreneurial mode

 Strategy is made by one powerful individual. The focus is on

opportunities; problems are secondary. Strategy is guided by
the founder’s own vision of direction and is exemplified by
large, bold decisions.
 The dominant goal is growth of the corporation. E.g
Amazon.com,

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b. Adaptive mode

 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 the priority of objectives.
 Strategy is fragmented and is developed to move a corporation forward
incrementally.
 This mode is typical of most universities, many large hospitals, a large
number of governmental agencies, and a surprising number of large
corporations

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C. Planning 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.

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D. Logical incrementalism:

 In this mode, top management has a reasonably clear idea of

the corporation’s 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.”

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Con’t…
 Thus, although the mission and objectives are set, the strategy
is allowed to emerge out of debate, discussion, and
experimentation.
 This approach appears to be useful when the environment is
changing rapidly and when it is important to build consensus
and develop needed resources before committing an entire
corporation to a specific strategy

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 Strategic Decision-Making Process:
Aid to Better Decisions
 There are eight steps strategic decision-making process to improve the
making of strategic decisions
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 governance—that is, the performance of the firm’s
board of directors and top management.
3. Scan and assess the external environment to determine the strategic
factors that pose opportunities and threats

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Con’t…
4. Scan and assess the internal corporate environment to
determine the strategic factors that are strengths (especially
core competencies) and weaknesses.
5. Analyze strategic 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 strategies
in light of the analysis conducted in the previous step.
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.
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 Thank you
Questions and Comments

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