CHAPTER ONE

The Nature of Strategic

Management

Asres Abitie (PhD)

 Definition of Strategy

 Came from the Greek term “strategos" meaning

the "art of being a general” or “the art of the
general”.

 Refers to an important plan to deploy the

available resources in a manner to defeat the
enemy.
 Definition of Strategy

 “Strategy is a unified, comprehensive and

integrated plan relating the strategic
advantages of the firm to the challenges of the
environment. It is designed to ensure that basic
objectives of the enterprise are achieved.” ( Guleck,
1980:9)
 Definition of Strategy

Goal-directed decisions and actions in which

capabilities and resources are matched with the
opportunities and threats in the environment.
Strategy Involves

 Organization’s goals
 Goal-directed decisions and actions
 Matching key internal strengths with
external opportunities and threats
 Definition of Strategic Management

 The art and science of formulating, implementing, and

evaluating cross-functional decisions that enable an
organization to achieve its objectives.
 Implies, focuses on integrating HR, marketing, finance,
operations, R&D, and information systems to achieve
organizational success.
 Peter Drucker says the prime task of strategic
management is thinking through the overall mission of
a business:
. . . that is, of asking the question, “What is our
business?” This leads to the setting of objectives, the
development of strategies, and the making of today’s
decisions for tomorrow’s results.
 Definition of Strategic Management

The process of analyzing the current situation,

developing appropriate strategies, putting those
strategies into action and evaluating, modifying,
or changing those strategies as needed.
Basic Model of Strategic Management

Four Basic Elements

Characteristics of Strategic Management

Interdisciplinary
Four aspects
that set apart External focus
Strategic Internal focus
Management
Future direction
 Strategic Management in Action

Analyzing Deciding Putting Evaluating and

Current on Strategies Changing
Situation Strategies in Action Strategies
Situation Strategy Strategy Strategy
Analysis Formulation Implementation Evaluation

Organizational External
Context Analysis
Functional Competitive

Internal
Analysis Corporate
 The Strategic Management
Process
Situation Analysis entails scanning and evaluating
 Organizational context
Industrial Organization View (I/O)
Resource-Based View (RBV)
 Externalenvironment
 Organizational environment
The Strategic Management Process
 The Strategic Management
Process
 Changing context of strategy formulation
Decline of smockstack manufacturing industries & the
growth of services
Rise in the proportion of women in the active work force
Increase in the proportion of knowledge workforce
Increase in the utilization of IT
Increasing globalization of markets
Protection of the environment
Levels of Strategies

Corporate
What direction are we going and what
business(es) are we in or do we want to be
in?

Competitive:
How are we going to compete in our chosen
business(es)?

Functional
What resources and capabilities do we have
to support the corporate and competitive
strategies?
The Strategic Management Process

Strategy Implementation
 Putting the organization’s various
strategies into action.

Strategy Evaluation
 Evaluating how the strategy has been
implemented as well as the outcomes
of the strategy.
The Strategic Management Process

 A continuous cycle of
 Situation analysis
 Strategy formulation
 Strategy implementation
 Strategy evaluation
Importance of Strategic Management

 Globalization: The survival for business

 E-Commerce: A business tool

 Earth environment has become a major

strategic issue
 Stages of Strategic Management

The strategic management process consists

of three stages:
 Strategy Formulation (strategy planning)
 Strategy Implementation
 Strategy Evaluation
 Strategy Formulation

 Strategy formulation includes:

 Developing vision and mission statements
 The conduct of SWOT analysis
Strategy Formulation

 The considerations for the best strategy

formulation should be as follows:
 Allocation of resources
 Business to enter or retain
 Business to divest or liquidate
 To get into Joint ventures or mergers
 Whether to expand or not
 Moving into foreign markets
 Trying to avoid takeover
 Strategy Implementation

 Requires a firm to establish annual objectives, devise policies,

motivating employees & allocate resources so that formulated
strategies can be executed.
 It includes:
 Developing strategy supportive culture, creating an effective
organizational structure, redirecting marketing efforts, preparing
budgets, developing and utilizing information system and linking
employee compensation to organizational performance.
 It is often considered to be most difficult stage of strategic
management. It requires personal discipline, commitment and
sacrifice.
 Strategy formulated but not implemented serve no useful purpose.
Strategy Implementation
 Strategy Evaluation

 It is the primary means for obtaining information

whether a given strategy is successful or not.
 Three fundamental strategy-evaluation
activities are:
(1) reviewing external and internal factors
that are the bases for current strategies,
(2) measuring performance, and
(3) taking corrective actions.
 It is needed because success today is no guarantee of
success tomorrow!
Environmental Context: Old Economy
and New Economy Comparisons
Key Terms in Strategic Management

 Competitive Advantage
 Strategists
 Vision & Mission Statements
 External Opportunities and Threats
 Internal Strengths and Weaknesses
 Long-Term Objectives
 Strategies
 Annual Objectives
 Policies
 Competitive Advantage

 “Anything that a firm does especially well

compared to rival firms.”

 When a firm can do something that rival

firms cannot do, or owns something that rival
firms desire, that can represent a competitive
advantage.
 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.
 “All strategists have to be chief learning officers. We
are in an extended period of change. If our leaders
aren’t highly adaptive and great models during this
period, then our companies won’t adapt either, because
ultimately leadership is about being a role model.”
“Jay Conger, professor of organizational behavior at the London
Business School and author of Building Leaders”
 Vision and Mission Statements
Vision Statement:
 Answers the question “What do we want to become?”
 Developing a vision statement is often considered the first step in strategic
planning, preceding even development of a mission statement.

Mission Statement:
 “Enduring statements of purpose that distinguish one business from other
similar firms. A mission statement identifies the scope of a firm’s
operations in product and market terms.”
 It addresses the basic question: “What is our business?”
 Describes the values and priorities of an organization.
 Compels strategists to think about the nature and scope of present operations
and to assess the potential attractiveness of future markets and activities.
 Vision and Mission Statements

 Broadly charts the future direction of an organization.

 A constant reminder to its employees of why the

organization exists and what the founders envisioned
when they put their fame and fortune at risk to breathe
life into their dreams.
 Opportunities and Threats

 Opportunities and 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.
 In a global economic recession, a few opportunities
and threats that face many firms are listed here:
 Availability of capital can no longer be taken for granted.
 Consumers expect green operations and products.
 Marketing is moving rapidly to the Internet.
 Consumers must see value in all that they consume.
 Global markets offer the highest growth in revenues.
 Opportunities and Threats

 As the price of oil is fluctuating, oil rich countries are focused on

supporting their own economies, rather than seeking out investments
in other countries.

 Too much debt can crush even the best firms.

 Layoffs are rampant among many firms as revenues and profits fall
and credit sources dry up.

 Demand for health services does not change much in a recession.

 Dramatic slowdowns in consumer spending are apparent in virtually
all sectors, except some discount retailers and restaurants.
 Opportunities and Threats

 Borrowers are faced with much bigger collateral requirements than in

years past.
 Equity lines of credit often now are not being extended (due to a
relatively weak global economy).
 Firms that have cash or access to credit have a competitive advantage
over debt-laden firms.
 Discretionary spending has fallen dramatically; consumers buy only
essential items; this has crippled many luxury and recreational
businesses such as boating and cycling.
 The double whammy of falling demand and intense price competition
is plaguing most firms, especially those with high fixed costs.
 The business world has moved from a credit-based economy to a
cash-based economy.
 There is reduced capital spending in response to reduced consumer
spending.
 Opportunities and Threats

 The passage of a law, the introduction of a new product by a

competitor, a national catastrophe, a competitor’s strength
could be a threat.

 Unrest in the Middle East, rising energy costs, or the war

against terrorism could represent an opportunity or a threat.

 Acts of terrorism in eastern Africa (by Alshabab), the

expansion of ISIS, the looming tension between Russia and
the West, the fight between Israel & Hamas, outbreak of
Ebola virus in Western Africa, Ethiopian government
continued effort to join WTO, the internal conflict in South
Sudan, etc.
 Strategic Plan

 There are three important questions to

answer in developing a strategic plan:

 Where are we now? (current position)

 Where do we want to go? (aspiration)
 How are we going to get there? (strategy)
 Internal Strengths and Weaknesses

 Strengths and weaknesses are determined relative

to competitors.

 Relative deficiency or superiority is important

information.

 Also, strengths and weaknesses can be determined

by elements of being than performance.
 Long-Term Objectives

 Objectives are essential for organizational success because:

 State direction
 Aid in evaluation
 Create synergy
 Reveal priorities
 Focus coordination, and
 Provide a basis for effective planning, organizing, motivating,
and controlling activities.
 Objectives should be challenging, measurable, consistent,
reasonable and clear.
 Strategies

 Strategies are potential actions that require top

management decisions and large amounts of the firm’s
resources.

 Strategies are the means by which long-term objectives

will be achieved.

 Business strategies may include geographic expansion,

diversification, acquisition, product development, market
penetration, retrenchment, divestiture, liquidation, and joint
ventures.
 Annual Objectives

 Annual objectives are short-term milestones that

organizations must achieve to reach long-term objectives.

 Annual objectives are especially important in strategy

implementation, whereas long-term objectives are
particularly important in strategy formulation.

 Annual objectives represent the basis for allocating

resources.
 Policies

 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 HRM,

marketing, finance, operations, R&D, and computer
information systems activities.
A Comprehensive Strategic
Management Model
A Comprehensive Strategic
Management Model
Benefits of Strategic Management
 Benefits of Strategic management
Major benefits
 Proactive in shaping firm’s future
 Initiate and influence actions
 Formulate better strategies (systematic, logical, rational
approach)
Financial benefits:
 Improved sales
 Improved profitability
Non-Financial benefits:
 Increased employee productivity
 Improved understanding of competitors’ strategies
 Greater awareness of external threats
 Understanding of performance-reward relationships
 Better problem-avoidance
 Lesser resistance to change
 Benefits of Strategic Management

Greenly stated that strategic management offers the

following benefits:
1. It allows for identification, prioritization, and exploitation of
opportunities.
2. It provides an objective view of management problems.
3. It represents a framework for improved coordination and
control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows major decisions to better support established
objectives.
6. It allows more effective allocation of time and resources to
identified opportunities.
 Benefits of Strategic Management

7. It allows fewer resources and less time to be devoted to correcting

erroneous or ad hoc decisions.
8. It creates a framework for internal communication among
personnel.
9. It helps integrate the behavior of individuals into a total effort.
10. It provides a basis for clarifying individual responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated, and enthusiastic approach
to tackling problems and opportunities.
13. It encourages a favorable attitude toward change.
14. It gives a degree of discipline and formality to the management
of a business.
 Excerpts from Sun Tzu’s The Art of War
Writings
1. War is a matter of vital importance to the state: a matter of life or death,
the road either to survival or ruin. Hence, it is imperative that it be studied
thoroughly.
2. Warfare is based on deception. When near the enemy, make it seem that
you are far away; when far away, make it seem that you are near. Hold
out baits to lure the enemy. Strike the enemy when he is in disorder. Avoid
the enemy when he is stronger.
3. If your opponent is of choleric temper, try to irritate him. If he is arrogant,
try to encourage his egotism. If enemy troops are well prepared after
reorganization, try to wear them down. If they are united, try to sow
dissension among them. Attack the enemy where he is unprepared, and
appear where you are not expected. These are the keys to victory for a
strategist. It is not possible to formulate them in detail beforehand.
4. A speedy victory is the main object in war. If this is long in coming,
weapons are blunted and morale depressed. When the army engages in
protracted campaigns, the resources of the state will fall short. Thus, while
we have heard of stupid haste in war, we have not yet seen a clever
operation that was prolonged.
5. Generally, in war the best policy is to take a state intact; to ruin it is
inferior to this. To capture the enemy’s entire army is better than to
destroy it; to take intact a regiment, a company, or a squad is better
than to destroy it. To win one hundred victories in one hundred battles
is not the acme of skill. To subdue the enemy without fighting is the
supreme excellence. Those skilled in war subdue the enemy’s army
without battle.
6. The art of using troops is this: When ten to the enemy’s one, surround
him. When five times his strength, attack him. If double his strength,
divide him. If equally matched, you may engage him with some good
plan. If weaker, be capable of withdrawing. And if in all respects
unequal, be capable of eluding him.
7. Know your enemy and know yourself, and in a hundred battles you
will never be defeated. When you are ignorant of the enemy but
know yourself, your chances of winning or losing are equal. If
ignorant both of your enemy and of yourself, you are sure to be
defeated in every battle.
8. He who occupies the field of battle first and awaits his enemy is at ease,
and he who comes later to the scene and rushes into the fight is weary.
And therefore, those skilled in war bring the enemy to the field of battle
and are not brought there by him. Thus, when the enemy is at ease, be
able to tire him; when well fed, be able to starve him; when at rest, be
able to make him move.

9. Analyze the enemy’s plans so that you will know his shortcomings as
well as his strong points. Agitate him to ascertain the pattern of his
movement. Lure him out to reveal his dispositions and to ascertain his
position. Launch a probing attack to learn where his strength is
abundant and where deficient. It is according to the situation that
plans are laid for victory, but the multitude does not comprehend this.
10. An army may be likened to water, for just as flowing water avoids the
heights and hastens to the lowlands, so an army should avoid strength
and strike weakness. And as water shapes its flow in accordance with
the ground, so an army manages its victory in accordance with the
situation of the enemy. And as water has no constant form, there are in
warfare no constant conditions.
11. Thus, one able to win the victory by modifying his tactics in accordance
with the enemy situation may be said to be divine.
12. If you decide to go into battle, do not announce your intentions or
plans. Project “business as usual.”
13. Unskilled leaders work out their conflicts in courtrooms and battlefields.
Brilliant strategists rarely go to battle or to court; they generally achieve
their objectives through tactical positioning well in advance of any
confrontation.
14. When you do decide to challenge another company (or army), much
calculating, estimating, analyzing, and positioning bring triumph. Little
computation brings defeat.
15. Skillful leaders do not let a strategy inhibit creative counter-movement.
Nor should commands from those at a distance interfere with
spontaneous maneuvering in the immediate situation.
16. When a decisive advantage is gained over a rival, skillful leaders do not
press on. They hold their position and give their rivals the opportunity to
surrender or merge. They do not allow their forces to be damaged by
those who have nothing to lose.
17. Brilliant strategists forge ahead with illusion, obscuring the area(s) of
major confrontation, so that opponents divide their forces in an attempt
to defend many areas. Create the appearance of confusion, fear, or
vulnerability so the opponent is helplessly drawn toward this illusion of
advantage.

Source: Based on The Art of War and from

www.ccs.neu.edu/home/thigpen/html/art_of_war.html
Who’s Involved with Strategic
Management?
 Board of Directors
 Elected representatives of stockholders
 Play significant role in corporate governance
 Top Management Team
 Ultimately responsible for every decision and
action of every organizational employee
 Act as strategic leaders
 Other Strategic Managers and Organizational
Employees
 Responsible for strategy implementation and
evaluation
Effective Strategic Leadership Involves
Determining
Organizational
Purpose or Vision

Establishing Exploiting and

Appropriately Maintaining
Balanced Controls Core Competencies
Effective
Strategic
Emphasizing Leadership
Ethical Decisions Developing
and Practices Human
Capital
Creating and
Sustaining Strong
Organizational Culture
Strategic Management in Today’s World

 Three important issues affecting strategic

management in today’s world
 Globalization
 Corporate governance
 E-business
Chapter One

Questions