MODULE 1: BASIC CONCEPTS OF STRATEGIC MANAGEMENT

Chapter Objectives
1. Describe the strategic-management process.
2. Explain the need for integrating analysis and intuition in strategic management.
3. Define and give examples of key terms in strategic management.
4. Discuss the nature of strategy formulation, implementation, and evaluation activities.
5. Describe the benefits of good strategic management.
6. Discuss the relevance of Sun Tzu’s The Art of War to strategic management.
7. Discuss how a firm may achieve sustained competitive advantage.

Strategic management – is the art and science of formulating, implementing, and evaluating cross-
functional decisions that enable an organization to achieve its objectives.

 Strategic management is used synonymously with the term strategic planning.

 Sometimes the term strategic management is used to refer to strategy formulation,
implementation, and evaluation, with strategic planning referring only to strategy formulation.

 A strategic plan is a company’s game plan.

 A strategic plan results from tough managerial choices among numerous good alternatives,
and it signals commitment to specific markets, policies, procedures, and operations.

STAGES OF STRATEGIC MANAGEMENT

1. Strategy formulation - includes developing a vision and mission, identifying an organization’s

external opportunities and threats, determining internal strengths and weaknesses,
establishing long-term objectives, generating alternative strategies, and choosing particular
strategies to pursue.

 Deciding what new businesses to enter,

 What businesses to abandon,
 How to allocate resources,
 Whether to expand operations or diversify,
 Whether to enter international markets,
 Whether to merge or form a joint venture,
 How to avoid a hostile takeover.
2. Strategy implementation
 requires a firm to establish annual objectives, devise policies, motivate employees, and
allocate resources so that formulated strategies can be executed
 often called the action stage

3. Strategy evaluation - reviewing external and internal factors that are the bases for current
strategies, measuring performance, and taking corrective actions.
  Strategy formulation, implementation, and evaluation activities occur at three hierarchical
levels in a large organization: corporate, divisional or strategic business unit, and functional
 Strategic management helps a firm function as a competitive team

INTEGRATING INTUITION AND ANALYSIS

 Most organizations can benefit from strategic management, which is based upon integrating
intuition and analysis in decision making.
 Intuition is particularly useful for making decisions in situations of great uncertainty or little
precedent

Key Terms in Strategic Management

1. Competitive advantage - anything that a firm does especially well compared to rival firms.

2. Strategists - the individuals who are most responsible for the success or failure of an
organization.

3. Vision statement - answers the question ―What do we want to become?‖ It is often considered
the first step in strategic planning.

4. Mission statements - enduring statements of purpose that distinguish one business from
other similar firms. It identifies the scope of a firm’s operations in product and market terms. It
addresses the basic question that faces all strategists: ―What is our business?‖

5. 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

Some Opportunities and Threats

 Computer hacker problems are increasing.
 Intense price competition is plaguing most firms.
 Unemployment and underemployment rates remain high.
 Interest rates are rising.
 Product life cycles are becoming shorter.
 State and local governments are financially weak.

6. Internal strengths and internal weaknesses - an organization’s controllable activities that

are performed especially well or poorly; determined relative to competitors.

7. Objectives - specific results that an organization seeks to achieve in pursuing its basic
mission. ; long-term means more than one year; should be challenging, measurable,
consistent, reasonable, and clear.
 8. Strategies - the means by which long-term objectives will be achieved; may include
geographic expansion, diversification, acquisition, product development, market penetration,
retrenchment, divestiture, liquidation, and joint ventures.

9. Annual objectives - short-term milestones that organizations must achieve to reach long-term
objectives; should be measurable, quantitative, challenging, realistic, consistent, and
prioritized; should be established at the corporate, divisional, and functional levels in a large
organization

10. Policies - the means by which annual objectives will be achieved; include guidelines, rules,
and procedures established to support efforts to achieve stated objectives; guides to decision
making and address repetitive or recurring situations.

The Strategic-Management Model

• Where are we now?

• Where do we want to go?
• How are we going to get there?

COMPREHENSIVE STRATEGIC MANAGEMENT MODEL

The framework illustrated in Figure 1-1 is a widely accepted, comprehensive model of the strategic-
management process.
This model does not guarantee success, but it does represent a clear and practical approach for
formulating, implementing, and evaluating strategies.
Relationships among major components of the strategic-management process are shown in the
model, which appears in all subsequent chapters with appropriate areas shaped to show the
particular focus of each chapter.

Benefits of Strategic Management

 Historically, the principal benefit of strategic management has been to help organizations
formulate better strategies through the use of a more systematic, logical, and rational approach
to strategic choice.
 Communication is a key to successful strategic management
 Through dialogue and participation, managers and employees become committed to
supporting the organization

Benefits to a Firm That Does Strategic Planning

Figure 1-2 illustrates this intrinsic benefit of a firm engaging in strategic planning. Note that all firms
need all employees on a mission to help the firm succeed.

Enhanced Communication
 Dialogue
 Participation

Deeper/Improved Understanding
 Of other’s views
 Of what the firm is doing/planning and why
Greater Commitment
 To achieve objectives
 To implement strategies
 To work hard

The Result
 All managers and employees on a mission to help the firm succeed.

Financial Benefits
 Businesses using strategic-management concepts show significant improvement in sales,
profitability, and productivity compared to firms without systematic planning activities
 High-performing firms seem to make more informed decisions with good anticipation of both
short- and long-term consequences.

Nonfinancial Benefits
 It allows for identification, prioritization, and exploitation of opportunities.
 It provides an objective view of management problems.
 It represents a framework for improved coordination and control of activities.
 It minimizes the effects of adverse conditions and changes.
 It allows major decisions to better support established objectives.
 It allows more effective allocation of time and resources to identified opportunities.
 It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc
decisions.
 It creates a framework for internal communication among personnel.

Why Some Firms Do No Strategic Planning?

 Lack of knowledge in strategic planning  Fear of failure
 Poor reward structures  Overconfidence
 Firefighting  Prior bad experience
 Waste of time  Self-interest
 Too expensive  Fear of the unknown
 Laziness  Honest difference of opinion
 Content with success  Suspicion

1. Lack of knowledge or experience in strategic planning —No training in strategic planning.

2. Poor reward structures— When an organization assumes success, it often fails to reward
success. When failure occurs, then the firm may punish.
3. Firefighting— An organization can be so deeply embroiled in resolving crises and firefighting
that it reserves no time for planning.
 4. Waste of time—Some firms see planning as a waste of time because no marketable product
is produced. Time spent on planning is an investment.
5. Too expensive—Some organizations see planning as too expensive in time and money.

6. Laziness—People may not want to put forth the effort needed to formulate a plan.

7. Content with success—Particularly if a firm is successful, individuals may feel there is no

need to plan because things are fine as they stand. But success today does not guarantee
success tomorrow.

8. Fear of failure—By not taking action, there is little risk of failure unless a problem is urgent
and pressing. Whenever something worthwhile is attempted, there is some risk of failure.

9. Overconfidence—As managers amass experience, they may rely less on formalized

planning. Rarely, however, is this appropriate. Being overconfident or overestimating
experience can bring demise. Forethought is rarely wasted and is often the mark of
professionalism.

10. Prior bad experience—People may have had a previous bad experience with planning, that
is, cases in which plans have been long, cumbersome, impractical, or inflexible. Planning, like
anything else, can be done badly.

11. Self-interest—When someone has achieved status, privilege, or self-esteem through

effectively using an old system, he or she often sees a new plan as a threat.

12. Fear of the unknown—People may be uncertain of their abilities to learn new skills, of their
aptitude with new systems, or of their ability to take on new roles.

13. Honest difference of opinion—People may sincerely believe the plan is wrong. They may
view the situation from a different viewpoint, or they may have aspirations for themselves or
the organization that are different from the plan. Different people in different jobs have different
perceptions of a situation.

14. Suspicion—Employees may not trust management

Pitfalls in Strategic Planning

 Using strategic planning to gain control over decisions and resources

 Doing strategic planning only to satisfy accreditation or regulatory requirements
 Too hastily moving from mission development to strategy formulation
 Failing to communicate the plan to employees, who continue working in the dark
 Top managers making many intuitive decisions that conflict with the formal plan
 Top managers not actively supporting the strategic-planning process
 Failing to use plans as a standard for measuring performance
 Delegating planning to a ―planner‖ rather than involving all managers
 Failing to involve key employees in all phases of planning
 Failing to create a collaborative climate supportive of change
Guidelines for Effective Strategic Management
1. It should be a people process more than a paper process.
2. It should be a learning process for managers and employees.
3. It should be words supported by numbers rather than number supported by words.
4. It should be simple and nonroutine
5. It should vary assignments, team membership, meeting formats, and even the planning
calendar.
6. It should challenge the assumptions underlying the current corporate strategy.
7. It should welcome bad news.
8. It should welcome open-mindedness and a spirit of inquiry in learning.
9. It should not be a bureaucratic mechanism.
10. It should not become ritualistic, stilted, or orchestrated.
11. It should not be too formal, predictable, or rigid.
12. It should not contain jargon or arcane planning language.
13. It should not be a formal system of control
14. It should not disregard qualitative information.
15. It should not be controlled by ―technicians‖.
16. Do not pursue too many strategies at once.
17. Continually strengthen the ―good ethics is good business‖ policy.

Comparing Business and Military Strategy

 A fundamental difference between military and business strategy is that business strategy is
formulated, implemented, and evaluated with an assumption of competition, whereas military
strategy is based on an assumption of conflict.
 Both business and military organizations must adapt to change and constantly improve to be
successful.

Excerpts from Sun Tzu’s The Art of War Writings

 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.
 Know your enemy and know yourself, and in a hundred battles you will never be defeated.
 Skillful leaders do not let a strategy inhibit creative counter-movement.