introduction to strategic...

Introduction to Strategic Management

Tomasz Domański 2 (17)

Strategic Management is the art of analytical thinking and making business decisions aimed at optimum utilization of a company’s resources for achieving success on the market and building its sustainable competitive advantage. It is an art that can have a critical meaning during times of downturn and necessity to drastically reduce the cost of operations. This article is an introduction to the extensive training available in the field of Strategic Management.



The field of Strategic Management The origin of the word "strategy" goes back to ancient Greece. It lays down rules for the conduct of the war, the military way of setting objectives, deployment of troops and military equipment, as well as the military campaigns. Today, the word "strategy" has also become very popular in the business sphere. Without going into a detailed analysis of the definitions cited by various dictionaries, we may say that “strategy” means reasonable planning and resource allocation, which:

focuses on the most important issues, sets measurable goals and well defined action plans, improves quality and efficiency of management, builds sustainable competitive advantages for the company, is flexible – easy changeable over the time.

The key question, which focuses on strategic management issues is:

How do we use the limited resources available to the company to deliver quality products or services to the customer, and thus achieve all financial and non-financial objectives of the company?

Obviously, the most important strategic goal for the company is to maintain its sustainable development in the long term. We can say that the "strategy" is a kind of "road map" or "game plan" in the competitive business environment, in which the highest reward is the role of market leader. The basic elements of that game are:

field of competitive struggle: the sector, the industry and the market, customer needs, upon which the company should constantly focus their attention, manufactured products and services that should be the best to meet customers’ needs.

Strategic planning is a task of the top-level executive. Typical questions that arise in the preparation of the strategic plan are:

What are the products and how much should they be prepared to accurately hit the demand? How and where to locate production and what are the actual results of production? What resources do we need?

Graphic 1: Basic levels of the field of general management

Tactical planning primarily addresses how to efficiently schedulematerial and labor within the constraints of previously made strategicdecisions. Issues on which OM concentrates on this level includethese:

How many workers do we need? When do we need them? Should we work overtime or put on a second shift? When should we have material delivered? Should we have a finished goods inventory?

These tactical decisions, in turn, become the operating constraints under which

operational planning and controldecision are made.

The strategic issues are usually broad, addressing such questions as these:

How will we make the product? Where do we locate the facility or facilities? How much capacity do we need? When should we add more capacity?

Thus, by necessity, the time frame for strategic decisions is typically long-usually several years or more, depending on the specific industry.

STRATEGIC PLANNING

TACTICS

OPERATIONAL MANAGEMENT

Operational planning and control are narrowand short term by comparison. Issues at this level

include these:What jobs do we work on today or this week? Whom do we assign to what tasks?

What jobs have priority?



The answers to these and the other similar questions define the scope of strategic planning, the time horizon of strategy, and the nature and rate of the changes taking place in the industry. The tactical management level is the level at which the higher and middle managers develop action plans necessary to achieve the strategic goals of the company. This is the level of project planning and budgeting tasks. Tactical decisions are the basis for making specific decisions at the operational level. Operational decisions are decisions taken in the perspective of the day or the next week. They are related to the distribution of tasks and procedures of setting priorities for their implementation.

Graphic 1: Major stages of Strategic Management process

The strategic management process consists of three basic phases: (1) the analytical phase, (2) the strategic planning phase, and (3) the phase of implementation and monitoring of the strategy. The beginning of this process is the step of defining or updating the mission and vision of the company’s future development. The next step is to formulate strategic goals based on the results of the analysis of the external and internal environment. The next steps are: designing strategic action plans, allocating resources, implementing action plans, and the ongoing monitoring of the effects of the adopted strategy. In large corporations, strategic management is carried out on three basic levels: (1) at the corporate level, (2) at the level of each business unit, and (3) the functional (organizational) level .

Approaching the strategic planning process, many organizations are asking themselves whether to do it on their own or with help of the external consultants. Each of the options has its advantages and disadvantages. Preparing a good strategy requires methodological knowledge and time, that is those attributes that are often lacking in the company due to the dominance of operational tasks over the strategic projects.

Strategy prepared by external consultants may be characterized by objectivity and professionalism, but there is a risk that it may has a limited practical utility because of a lack of ideas, and reflection on the role of top management. The best solution is to build a strategy with a strong involvement of the company’s managers, supported by external consultants. This approach offers the best chance to develop a realistic strategic plan of action and is the cheapest. Another synergistic effect of the adoption of this approach is improvement of the internal communication and skills in the field of strategy planning and implementation. It requires time, however, committed leadership, and managerial skills from leaders at all levels of management.



Graphic 2: Major levels of Strategic Management

Defining the business model The first question to be asked upon entering into strategic planning is the meaning of a company:

Why do we need to establish or operate a company? Who is it for?

What is the most important: to make money for the owners of the company or to deliver products for customers?

Obviously both, but the existence of the company has a much broader impact on the group of many individuals and institutions that are called stakeholders of the company. The company's stakeholders can be divided into two main groups: (1) the internal claimants – the owners and employees of the company, and (2) the external claimants – the customers and all other external parties for whose existence of the company has a relevance. Expectations of the stakeholders (sometimes conflicting) are of fundamental importance in the context of strategic planning.

Reflecting on the business model of the company, or in other words – the formula of its operation – we must ask ourselves the following three major questions:

What kind of need does the business satisfy? Consequently, what sector and what market does it operate in?

Whose needs the company meets? So, what is the portfolio of its products and customer groups, which are delivered?

How to meet the needs of customers? So, what skills, knowledge and technology should we have?

The question about the company’s business model is in fact a question about the formula of so-called "Value Chain". The Michael Porter’s Value Chain concept identifies two main groups of activities within a company operations: the chain of core activities and the chain of support activities. This concept has a fundamental meaning for the analysis of a company's growth conditions.



Graphic 3: The three most important words in business: demand, product, supply

The basic relationship between the company and its customers is determined by the law of supply and demand. Customers are grouped into various market segments generating demand for the material goods or services. In response to the demand, the company offers a certain number of products or services, which are grouped in the so-called product portfolios.

Sometimes the variety of products bear distinctive brands or sub-brand names, such as a portfolio of services offered by mobile operators. By contrast, in the financial sector we talk about operating segments instead of market segments. In any case, the basis for separation of the “portfolio of services” and an “operating segment” is accepted by the segmentation of the market, based on the specific needs and the specific attributes of the particular group of customers.

Business processes management Business process (sometimes referred to as the “transformation process”, or “workflow process”) is an activity that converts (transforms) input value into output value. The business model of each company – the formula of its operation – specifies a number of interrelated business processes and sub-processes.

Business processes may have a differentiated character. Depending on the company’s business model, the operational activities may involve: physical transformations, change of location, trade transactions, storing of things, physiological processes or transmitting information. According to the structure of the company's value chain, we may distinguish the core and supporting business processes. Moreover, we may also distinguish guiding and enabling business processes that allow the company to operate in various areas of its business model.

Core business processes are linked directly to external customers and require knowledge to deliver optimum value. Guiding business processes provide better direction, rules and practices by developing and documenting knowledge and information. Enabling business processes provide facilities, tools and access mechanisms to embedded knowledge and information and deliver more knowledgeable human resources to the core and guiding processes.

ADMINISTRATION / ORGANIZATION / HRM

LEGAL / LOBBYING / INT. AUDIT / INFORMATION FLOW / ANALYSIS

BUDGETING / ACCOUNTING / CONTROLLING / TREASURY

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VALUE CHAIN

BUSINESSDEFINITION

VALUE FOR A CUSTOMER

( PRODUCT or SERVICE )

CUSTOMER GROUPSMARKET SEGMENTS2

Who is being satisfied?

CUSTOMER NEEDSMARKET1

What is being satisfied?

How customer needs are being satisfied?

DISTINCTIVE COMPETENCESTECHNOLOGY / ORGANIZATION3

What is our business? What will it be? What should it be?

DEMANDPRODUCT | SERVICE

SUPPLY



Graphic 4: Core and support business processes

All business processes, regardless of their nature, have four main features: (1) the input and (2) the output, (3) the guiding value for the transformation process, and (4) the enabling process according to certain rules. Key business processes that make up the basic formula of the company, which in the average company should be about ten, are divided into sub-processes, activities and tasks.

Graphic 5: Modeling a business process

The mapping of business processes is being able to make an elementary graphical representation of the process. In the example below a flow diagram is used to illustrate the process of the internal order. The basic features that should properly describe the business process are: (1) identify the owner of the process, (2) register supplier of input and output values, (3) prepare documentation of the process, (4) set the control points of the process, (5 ) fix the problem areas, (6) fixed measurement of the effectiveness and efficiency of the process, (6) and set the feedback mechanisms.



Graphic 6: Flowcharting technique

Formulating strategic objectives Setting strategic goals starts at the stage of formulating or updating the vision and mission statement development – the content, which determines the main lines of action, market objectives, distinctive qualities and measures of success. The mission and vision statement is a description of "the company’s dream of the future", and the way it has to go to make the dream come true.

Graphic 7: Vision and mission of a company

A clear mission statement – referring to the company’s tradition, its corporate culture and values, as well as presenting a clear marketing strategy – presents the company Mercedes-Benz. An interesting example of a carefully developed mission and vision statement is also a declaration of the international financial corporation Allianz. In addition to the business focus of the company, it also points to the values outside of its business, such as corporate social responsibility and concern for the environment.

The main strategic objectives of the company should be derived from the demands and values expressed in the statements of vision and mission. The main objectives should then be translated into the operational objectives and scored for the relevant strategic action plans.

The below presented example illustrates the structure of the strategic plan. The declaration of vision and mission is the basis for the five main strategic objectives, which in turn describe the relevant action plans formulated at the corporate level, business level and functional business.

T I M EYESTERDAY TODAY

BA C

PAST PRESENCE „FUTURE DREAM”

MISSION



Graphic 8: A strategy structure

Regardless of the size of the company and the sector in which it operates, the structure of the key strategic objective is to satisfy owners of the company. To achieve this, the management of the company must take care about the highest rates of return on long-term investments made by the company from the operating profit. On the other hand, to achieve the greatest possible profit from operations, it is necessary to have great concern for customers' needs.

Graphic 9: The basic strategic goals of a company

In formulating strategic objectives it should be kept in mind to meet the requirements of the SMART principle. The strategic goals must be: simple, measurable, achievable, realistic, and precisely oriented in time. If the goals are not substantiated and accompanied by appropriate measures – so called Key Performance Indicators (KPIs) – it will be difficult to assess whether they are executed.

PRIMARY GOALS

Maximizing EBITDA

Satisfying customers

needs

Maximizing long-turn on investment

Maximizing shareholders’

wealth

Innovations

HR development

Rising performance

Social responsibility

Increasing market share

Increasing productivity

Rising resources

SECONDARY GOALS

Basic beliefs

Basic values

Aspirations

Ethics


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Key Performance Indicators Effective management of the company is not possible without the continuous monitoring of a specific set of indicators to monitor the effects of operations. What cannot be measured, cannot be managed! Therefore, it is important to describe the company's strategic goals by a set of measures. Well-designed system of operational metrics (KPIs) set standards to measure the quality and effectiveness of the company and allows for comparisons to other similar companies in the same industry.

One of the most popular financial measures, showing the level of operating efficiency of the company is EBITDA ratio. This ratio indicates the level of operating profit earned before taxes, depreciation, amortization, and loan installments. It can be expressed in a monetary value or as a percentage of the total revenues earned by the company in a given period of time.

Graphic 10: EBITDA ratio

A set of various operating measures can be compared to a number of indicators that must be continuously monitored by a pilot to keep him on course. Similarly, the company's management must continually monitor various operational indicators to successfully grow its business, increasing its competitive position in an ever higher level.

Operating indicators can be divided into three major groups: (1) primary indicators – measure a company performance against its competitors; (2) secondary indicators – measure internal effectiveness and efficiency of operations of a company; and (3) market trends indicators – measure status of the market and indicate trends.


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Formulating strategic action plans Strategic action plans can be divided into two basic groups: (1) plans for one-off measures, and (2) recurring action plans. According to the agreed strategic objective these may for example take the form of a repetitive, standard operating procedure or a project.

The project is a form of activity, in which the most can be made of effective strategic action plans - even when the result will be regulations or standard operating procedure. The three basic dimensions that characterize each project are: the scope of work (goals, project products), the time of execution, and the resources needed. It is worth pointing out that increasing the scope of the project automatically forces the increase in resources and time that will be required for its implementation.

The project teams can be organized by function (functional project teams) - when the sponsor, the project manager and the project team made up of employees of one organizational division or department, or in a matrix system. A project in a matrix system (a matrix project team) is one that involves employees of several organizational units or departments. Projects in the matrix teams are typical for projects of a strategic nature, including procedures to develop new products.

Graphic 11: Triple constraint in a project

The proper organization of the project team is very important to the success of a project. The structure of each of the project team should include representatives of the three major parties: (1) the owner of the project, (2) those monitoring the effects of the project, and (3) the supplier of the product, which is a result of the project. Proper selection of people, the size of the team and a well-prepared project plan are a basic preconditions for the success of such a venture.

The most popular in the field of business and public administration are two model solutions for project management methodology. The first model is the American methodology developed by the Project Management Institute called Book of Knowledge (PMI-BOK). The second is the methodology developed by the British government under the name Project In Controlled Environment, today known as PRINCE2.

The main stages of the project in both methodologies are similar. These are: the phases of initiating, planning, execution and closure of the project. But there is a different methodological approach. PMI-BOK methodology focuses more broadly on how to design tasks such as counting the critical path tasks, while PRINCE2 focuses on the issues of procedures to be followed in the project. The various tasks of the project manager in this methodology are described in detail for each phase of the project.

TIME• Starting date• Split into stages• End date• Flexible schedule

SCOPE / PRODUCT• Stakeholders expectations• Goals and objectives • Output (deliverables; effects)

RESOURCES• People • Tools • Money (costs)• Methods (know-how)

Extention of scope(more products)extends time and costs(calls for additional resources).


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Graphic 12: Lifecycle of project

Strategic analysis Just like in the wild, so in a business environment: most likely to survive are those companies that can best adapt to changing environmental conditions. The ability of the company to determine the correct strategy depends primarily on the ability to recognize ongoing changes in its environment, and the ability to conduct a variety of strategic analysis.

Changes in the competitive environment for companies can have different dynamics, depending on the industry, the regulators, and the pace of technological change. An example of a stable business environment can be the sector of food producers, and changes of turbulent intensity can be observed for example in the fast-growing sector of modern communication technologies.

In any business environment, we can distinguish two basic circles. The first is the macro-economic environment, which is distinguished by factors of a politico-legal, economic, social and technological nature. The second circle is a competitive business environment. Here one can distinguish five main groups of factors associated with the forces of the tender customers, suppliers, substitute products, new players in the industry, and the intensity of competition between firms operating for a long time.


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Graphic 13: Macro-environment of a company

For the strategic analysis designed to identify changes in macro-environment of the company, the most commonly used is the PEST Analysis. It consists of calculations of ratios for selected macroeconomic factors. The other classic methodology to study a company’s competitive environment conditions is the Five Forces Analysis Model developed by Michael Porter. Both of these classic analyses use the technique known as Gap Analysis.

The other proven analytical techniques for strategic analysis are: financial analysis, key success factors analysis, portfolio analysis, value chain analysis, GE-McKinsey Business Screen Matrix and SWOT Analysis, which summarizes the results of previously conducted studies.

Formulating strategic objectives would not have been possible without one analysis - Analysis of Cause and Effect, which provides recommendations on the strategic objectives and action plans. Obviously, in addition to those listed here, there are many other analytical methods and techniques used in the strategic planning in business.

Strategies at the corporate level, business and functional The theory and practice of strategic management indicates that most companies can distinguish two basic types of strategic plans - strategies formulated at the corporate level and strategies formulated at the level of the business units. A separate, third group consists of the strategies formulated at the functional level of the company. The corporate strategy establishes action plans whose primary objective is to provide long-term growth. The strategies formulated at the business unit level are measures aimed at ensuring the advantage of the company over its competitors.

The basic concept used in the formulation of strategies at the corporate and business level is the concept of Product Life Cycle or Industry Life Cycle – whose rules apply by analogy to product or strategic business unit lifecycle management. Each strategic business unit or product has four basic stages of his life - the stage of market entry, growth, maturity and the stage of descent from the market (decline).


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Graphic 14: Product Life Cycle or Industry Life Cycle

The strategy formulated at the corporate level is primarily a decision to consolidate or diversify activities, and the creation or liquidation of the company. These decisions relate to expansion into new markets or new business areas, and also build horizontal or vertical groups.

Rysunek 15: Mergers and acquisitions – results of strategic decisions made on corporate level

An example of the corporate strategy of expansion into new markets may be a group of T-Mobile, which in recent years has expanded its operations in Central Europe through acquisitions, taking control over the local mobile operators. Another example is making order in the ownership structure of

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the Allianz Group, as a result of implementation of the relevant strategic objectives at the management level of the Group.

Strategies for the business unit level are basically two directions: (1) strategy of domination in quality of product, and (2) the strategy of domination in pricing. In the first case, the company focuses on offering the highest possible quality of products for the discerning and affluent customers. In the second, it is seeking to sell as many as possible cheap products that has a minimum acceptable level of quality. In practice, it is common to use mixed models of those strategic actions.

Strategies at the functional level are actions aimed at increasing the efficiency of the company, increase product quality, implementation of innovative technologies and achieving the highest level of interest from customers (customer responsiveness).

Strategic control systems Strategic control systems are formalized management systems for defining strategic objectives, describing their respective measures and ongoing monitoring of the level of their implementation. An effective strategic control system should provide timely and relevant information required to make daily decisions on various levels of management, as well as flexibility to undergo modifications – according to the changing strategic directions of the company's activities.

One of the most popular tools for monitoring the implementation of the strategy are the strategy map and accompanying balanced scorecard. The strategy map is a graphical tool used to illustrate the causal link between the strategic objectives in the four major perspectives: financial perspective, customer experience perspective, internal business processes perspective and the perspective of learning and growth of the organization.

Graphic 16: A strategy map and the related balanced score-card

The Balanced Scorecard (BSC) is a tool that is used to describe the strategic objectives of the relevant measures indicating the relevant action plans, and the ongoing monitoring of the degree of implementation of strategic plans. As for strategy maps, strategic objectives are described in the same four perspectives. Strategy maps and balanced scorecards play a very important role in the management of the company.

PERSPECTIVES CAUSE-EFFECT LINKAGE MID-TERM STRAT. GOALS MEASURES TAGETS ACTIONS

FINANCIAL Mid-term goal KPIs description Value of the KPI Action plan

Mid-term goal KPI description Value of the KPI Action plan

CUSTOMERMid-term goal KPIs description Value of the KPI Action plan


INTERNAL PROCESSES

Mid-term goal KPIs description Value of the KPI Action plan


LEARNING & GROWTH

Mid-term goal KPIs description Value of the KPI Action plan


Mid-term goalsin f inancial perspective

Mid-term goals

Mid-term goals

Mid-term goals

Mid-term goals

Mid-term goals

Mid-term goals

THE STRATEGY MAP

Mid-term goals

MAIN STRATEGIC GOAL IS CASCADED INTO

Mid-term goals

THE BALANCED SCORE CARD


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They:

allow the formulation of a realistic vision and a mission statement reaching its proper understanding, consistent interpretation, and acceptance on the part of top management;

facilitate internal communication, explaining the company's strategy into objectives and operational tasks;

are committed to the work of multiple organizational units;

and the most importantly:

allow for ongoing monitoring of the implementation of the strategy and its current update.

Change Management The content of a new strategy may require introduction of various changes in the ways of functioning of the company. These may be changes in the location of the company, the underlying technologies, partnerships, internal policies, and organizational changes. The organizational changes are usually accompanied by a very high priority for their implementation.

Building and transforming the organizational structure refers to the grouping of tasks, functions and creation of the appropriate organizational units. Limits, within which we can reasonably change the formation of the organization shall appoint two main parameters: (1) the maximum span of control, and (2) the minimum chain of command. They determine opportunities of flattening the organizational structure of a company.

Graphic 17: The principles of building organizational structures

The organization of the company on an international scale determines the basic formula of its operation, namely the organization of supply, production, distribution, marketing, research and the implementation of a number of other tasks. These are decisions made in the field of functional strategies, implemented at the corporate level.

Grouping tasks into functionsand allocating

authorities

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Increasing level of coordination

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CEO

ExecutivemanagerDM Executive

managerDP ExecutivemanagerDF Executive

managerDA

First levelmanagersDP1

Employee

Employee

Employee

Task 1

Task 2

Task 3

The organizational structure depends on strategy. Not vice versa!Different organizational structures support different corporate strategies.

Steps: 1. Assign the management and organizational roles2. Define the goals and objectives3. Assign action plans for every part of the structure4. Setup or optimize the processes5. Design rewards to support strategy implementation


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Making changes is always a natural cause of anxiety for employees about their employment. The typical psychological response that accompanies the introduction of changes can be divided into five main phases: (1) phase of anger, (2) denial, (3) bargaining, (4) depression and (5) acceptance of the new situation. The length and the course of this psychological cycle is different in each individual situation.

Graphic 18: A typical emotional response to change

Effective change management requires the involvement of responsible leaders, dissemination of readable information, training and motivation, as well as direct involvement of employees in change. Communication is one of the most important tools of management, which is of paramount importance both in the context of the implementation of strategic changes and the development of appropriate corporate culture in the company. The most important elements of communication are: the content and structure of the message, distribution channels, and frequency of distribution.

Time

CHANGE Denial

Shock

Arguments / Debates

Frustration

Refusal fear Adaptation

Beliefs

New performance

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