UNIT-01

Definition and Nature of Strategic Management

Introduction

Strategic Management is exciting and challenging. It makes fundamental decisions about the future direction of a firm – its purpose, its resources and how it interacts with the environment in which it operates.

Every aspect of the organization plays a role in strategy – its people, its finances, its production methods, and its customers and so on.

What Is Strategic Management? Strategic Management can be described as the identification of the purpose of the

organization and the plans and actions to achieve that purpose. It is that set of managerial decisions and actions that determine the long term

performance of a business enterprise. Strategic management involves those management processes in organizations through

which future impact of change is determined and current decisions are taken to reach a desired future.

In short, strategic management is about envisioning the future and realizing it. Strategic Management and Operational Management

Strategic Management Operational Management

1. Long range planning 2. Time frame (3 or more years)3. Top management responsibility 4. Decisions are taken in ambiguous,

uncertain and complex conditions5. Organization wide implications6. The issues are long-term, abstract

and may be unfamiliar 7. Examples are:

Diversification, mergers, joint ventures, differentiation etc.

1. Short range planning 2. Time frame (1 year or less)3. Middle and Lower level

responsibility4. Mostly routine decisions 5. Implications at functional or work

unit level 6. The issues are immediate, concrete

and familiar 7. Examples are:

Production planning, sales planning, etc. Definition of Strategic Management

1. “Strategic management is concerned with the determination of the basic long-term goals and the objectives of an enterprise, and the adoption of courses of action and allocation of resources necessary for carrying out these goals” – Alfred Chandler, 1962

2. “Strategic management is a stream of decisions and actions which lead to the development of an effective strategy or strategies to help achieve corporate objectives”– Glueck and Jauch, 1984

3. “Strategic management is a process of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objective”.– Fed R David, 1997

Nature of Strategic Management

The following are the fundamental characteristics of strategic management. Readers may note that some of these characteristics may overlap with the characteristics of “strategic decisions” and “strategic approach” as these is all related concepts.

Long-term Direction Recognizes Change Oriented Towards the Future External Emphasis Concerned with Scope of the Organization

PROCESS OF STRATEGIC MANAGEMENT

Strategic Management Model

The strategic management process can be better understood by using a model as shown in the figure.

Agreement on and initiation of the Strategic management process The organization determines vision, mission, goals and objectives. The organization analyzes both external and internal environment. The organization establishes long-term goals and objectives The organization chooses from alternative courses of action. The organization implements the choices to achieve strategic fit The organization monitors the implementation activity.

F e e d b a c k

Develop vision and mission

Analyse External Environment

Establish long-term objectives Implement Strategies

Analyse Internal Environment

Generate, Analyze and Select Strategies Evaluate and Contr

ol Strategies

Importance of Strategic Management

1. It helps the firm to be more proactive than reactive in shaping its own future. 2. It provides the roadmap for the firm. It helps the firm utilize its resources in the best

possible manner.3. It allows the firm to anticipate change and be prepared to manage it.4. It helps the firm to respond to environmental changes in a better way.5. It minimizes the chances of mistakes and unpleasant surprises.6. It provides clear objectives and direction for employees

Benefits of Strategic Management1. It reduces uncertainty: Planning forces managers to look ahead anticipate change and

develop appropriate responses. It also encourages managers to consider the risks associated with alternative responses or options.

2. It provides a link between long and short terms: Planning establishes a means of coordination between strategic objectives and the operational activities that support the objectives.

3. It facilitates control: By setting out the organization’s overall strategic objectives and ensuring that these are replicated at operational level, planning helps departments to move in the same direction towards the same set of goals.

It facilitates measurement: By setting out objectives and standards, planning provides a basis for measuring actual performance

Limitations of Strategic Management1. It is a costly exercise in terms of the time that needs to be devoted to it by managers. The

negative effect of managers spending time away from their normal tasks may be quite serious

2. A negative effect may arise due to the non-fulfillment of the expectations of the participating managers, leading to frustration and disappointment.

3. Another negative effect of strategic management may arise if those associated with the formulation of strategy are not intimately involved in the implementation of strategies. The participants in formulation of the policy may shirk their responsibility for the decisions taken.

Concept of Strategy The concept of strategy is central to the understanding of strategic management. Strategy

is basically the long-term direction of an organization. The term ‘strategy’ is derived from the Greek word “strategos”, which means “the art of the general” or “to command an army”. In other words, strategy involves the general who commands the army, and his or her art of winning in the battlefield (Clausewitz).

Strategy and Tactics

Strategy Tactics

1 Comprehensive plan developed by top management to achieve organizational purposes and long-range objectives

Sub-strategies developed by lower levels of management to achieve short-range objectives

2 Generally, the focus is on

long-term gains

The focus is on short–term gains

3 Uncertainty level is quite high Decisions are more certain and are taken within the framework of strategies

4 Affects various parts of the organization in a significant way

The effect is limited to specific departments of the organization

Definition of Strategy

Chandler: Strategy is the determination of the basic long-term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals (1962).

William F. Glueck: Strategy is a unified, comprehensive and integrated plan designed to assure that the basic objectives of the enterprise are achieved (1972).

Henry Mintzberb: Strategy is a consistent stream of decisions and actions to deal with the environment (1987).

Prahlad and Hamel: Strategy is more than just fit and allocation of resources. It is stretch and leveraging of resources (1993).

Michael Porter: Strategy means developing and communicating the company’s unique position, making trade-off and forging fit among activities. (1996).

Nature of Strategy

Strategy is complex in nature this is especially so in organizations with wide geographical scope (MNCs) or wide range of products or services.

Strategy may have to be developed in situations of uncertainty. It involves taking decisions for future about which it is impossible for managers to be sure.

Strategy demands an integrated approach to managing the organization. Unlike functional problems, there is no one area of expertise or one perspective that can resolve the problems. Managers, therefore, have to cross functional and operational boundaries to deal with strategic problems.

Strategy requires managing and perhaps changing relationships and networks, for example, with suppliers, distributors and customers.

Strategy very often involves change in organization which may prove difficult because of the heritage of resources and culture.

Business Vision, Mission, goal and Objectives

Introduction

The first task in the process of strategic management is to formulate the organization’s vision and mission statements. These statements define the organizational purpose of a firm. Together with objectives, they form a “hierarchy of goals.”

Hierarchy of Goals

Vision

Vision can be defined as “a mental image of a possible and desirable future state of the orgnisation” (Bennis and Nanus). It is “a vividly descriptive image of what a company wants to become in future”.

“The critical point is that a vision articulates a view of a realistic, credible attractive future for the organization, a condition that is better in some important ways than what now exists.”

PlansObjectives

GoalsMissionVision

Vision, therefore, not only serves as a backdrop for the development of the purpose and strategy of a firm, but also motivates the firm’s employees to achieve it.

Definitions of Vision

• Johnson: Vision is “clear mental picture of a future goal created jointly by a group for the benefit of other people, which is capable of inspiring and motivating those whose support is necessary for its achievement”.

• Kirkpatrick: Vision is “an ideal that represents or reflects the shared values to which the organization should aspire”.

• Thornberry: Vision is “a picture or view of the future. Something not yet real, but imagined. What the organization could and should look like. Part analytical and part emotional”.

• Shoemaker: Vision is “the shared understanding of what the firm should be and how it must change”.

• Kanter et al: Vision is “a picture of a destination aspired to, an end state to be achieved via the change. It reflects the larger goal needed to keep in mind while concentrating on concrete daily activities”.

• Stace and Dunphy: Vision is “an ambition about the future, articulated today, it is a process of managing the present from a stretching view of the future”.

Characteristics of Vision Statements

1. Possibility means the vision should entail innovative possibilities for dramatic organizational improvements.

2. Desirability means the extent to which it draws upon shared organizational norms and values about the way things should be done.

3. Actionability means the ability of people to see in the vision; actions that they can take that are relevant to them.

4. Articulation means that the vision has imagery that is powerfulAdvantages of Vision

Good vision fosters long-term thinking. It creates a common identity and a shared sense of purpose. It is inspiring and exhilarating. It represents a discontinuity, a step function and a jump ahead so that the company

knows what it is to be. It fosters risk-taking and experimentation. A good vision is competitive, original and unique. It makes sense in the market place. A good vision represents integrity. It is truly genuine and can be used for the benefit of

people.

Vision Failure: A vision may fail when it is:

Too specific (fails to contain a degree of uncertainty) Too vague (fails to act as a landmark) Too inadequate (only partially addresses the problem) Too unrealistic (perceived as unachievable)

Mission“A mission statement is an enduring statement of purpose”. A clear mission statement is essential for effectively establishing objectives and formulating strategies.

Defining Mission

Thompson defines mission as “The essential purpose of the organization, concerning particularly why it is in existence, the nature of the business it is in, and the customers it seeks to serve and satisfy”. Hunger and Wheelen simply call the mission as the “purpose or reason for the organization’s existence”.

Importance of Mission Statement

1. It helps to ensure unanimity of purpose within the organization.2. It provides a basis or standard for allocating organizational resources.3. It establishes a general tone or organizational climate.4. It serves as a focal point for individuals to identify with the organization’s

purpose and direction.5. It facilitates the translation of objectives into tasks assigned to responsible people

within the organization.6. It specifies organizational purpose and then helps to translate this purpose into

objectives in such a way that cost, time and performance parameters can be assessed and controlled.

Characteristics of a Mission Statement

A good mission statement should be short, clear and easy to understand. It should therefore possess the following characteristics:

Not lengthy Clearly articulated Broad, but not too general Inspiring It should arouse positive feelings and emotions Reflect the firm’s worth Relevant and Current Unique, Enduring and Dynamic Basis for guidance Customer orientation A declaration of social policy

Values, beliefs and philosophyGoals and ObjectivesGoals: The terms “goals and objectives” are used in a variety of ways, sometimes in a conflicting sense. The term “goal” is often used interchangeably with the term “Objective”. But some authors prefer to differentiate the two terms.

Goals Objectives

1. General Specific

2. Qualitative Quantitative, measurable

3. Broad organization–wide target Narrow targets set by operating divisions

4. Long term results Immediate, short term resultsObjectives

Objectives are the results or outcomes an organization wants to achieve in pursuing its basic mission. The basic purpose of setting objectives is to convert the strategic vision and mission into specific performance targets.

Characteristics of Objectives

Well – stated objectives should be:

Specific Quantifiable Measurable Clear Consistent Reasonable Challenging Contain a deadline for achievement Communicated, throughout the organizationRole of ObjectivesObjectives play an important role in strategic management. They are essential for strategy formulation and implementation because:

They provide legitimacy They state direction They aid in evaluation They create synergy They reveal priorities

They focus coordination They provide basis for resource allocation They act as benchmarks for monitoring progress They provide motivation

Environmental Analysis Environmental analysis or scanning is the process of monitoring the events and

evaluating trends in the external environment, to identify both present and future opportunities and threats that may influence the firm’s ability to reach its goals.

Strategists need to analyze a variety of different components of the external environment, identify “Key Players” within those domains, and be very cognizant of both threats and opportunities within the environment.

The main purpose of environmental scanning is therefore to find out the correct “fit” between the firm and its environment, so that managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats.

The environment in which an organization operates consists of two parts.

External environment consists of the totality of all factors that affect a firm from outside its organizational boundaries. It is the “aggregate of all conditions, events and influences that surround and affect it” (Davis).

Internal environment consists of the structure, culture, resources, skills etc. within the organization.

Components of External Environment

From the perspective of strategic management, we have to identify opportunities and threats present in the environment. For this purpose, the total environment is generally examined in three segments. We may call these segments as:

1. Macro or Mega environment2. Operating or relevant environment3. Industry or competitive or micro environment

Components of Macro Environment

Legal TechnologicalPolitical Economic

The MegaEnvironment

Socio-cultural

Operating Environment

The operating environment can be classified into different components. We have divided it into nine components as shown in the figure below.

Competitive Analysis

Introduction

In addition to the general and operating environment as well as the industry environment, managers should also analyze the competitive environment because the nature of competition in an industry as well as its profit potential are directly influenced by the competitive forces operating in that industry.

Competition means rivalry between two or more parties to achieve a similar goal. In business, competition generally refers to the fight for market share which serves the same basic customer needs.

How competitive forces shape strategy

The degree of competition in an industry is influenced by a number of forces. To establish a strategic agenda for dealing with these forces and grow despite them, a firm must understand:

1. How these forces work in an industry?2. How they affect the firm in its particular situation?

The essence of strategy formulation is coping with competition. Intense competition in an industry is neither a coincidence nor a bad luck. It is rooted in its underlying economics. There are two theories of economics – theory of monopoly and theory of perfect competition.

MarketingIntermediaries

Suppliers

FinancialInstitutions

RegulatoryProvisions

THE MICROENVIRONMENT

IndustrialRelationsClimate

Markets:Types andDemand Competition

E-commerce

Skill Level ofWorkforce

According to Porter, “each industry’s attractiveness or profitability potential is a direct function of the interactions of various environmental forces that determine the nature of competition”.

Analytical Models: The analytical techniques that managers generally use to assess their competitive environment are:

Porter’s five-force Model

1. Threat of new entrants2. Intensity of rivalry among industry competitors3. Bargaining power of buyers4. Bargaining power of suppliers5. Threat of substitute products and services

The Value Net; Branderburger and Nalebuff (1996) recently introduced the concept of value net as illustrated in exhibit which is an extension to the five – forces analysis

Industry Life Cycle Analysis

A useful tool for analyzing competitive forces is the industry life cycle model. Like firms, industries develop and evolve over time. Not only the group of competitors within a firm’s industry might change constantly, but also the nature and structure of the industry can also change as it matures and its markets become better defined. An industry’s developmental stage influences the nature of competition and profitability among competitors (Hofer, 1975).

The Value Net

For a business strategy in a workable time frame, we need to have a closer look on the immediate competitors. This calls for knowledge of competitive behavior of each competitor. This can be done by examining the following aspects:

1. Competitors’ strategy2. Competitors’ performance3. Competitors’ strengths and weaknesses4. Competitors’ reaction

Mintzberg's 5 Ps for Strategy

The word "strategy" has been used implicitly in different ways even if it has traditionally been defined in only one. Explicit recognition of multiple definitions can help people to manoeuvre through this difficult field. Mintzberg provides five definitions of strategy:

Plan Ploy Pattern Position Perspective.

Plan: Strategy is a plan - some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation. By this definition strategies have two essential characteristics: they are made in advance of the actions to which they apply, and they are developed consciously and purposefully.

Ploy: As plan, a strategy can be a ploy too; really just a specific manoeuvre intended to outwit an opponent or competitor.

Pattern : If strategies can be intended (whether as general plans or specific ploys), they can also be realized. In other words, defining strategy as plan is not sufficient; we also need a definition

In theory, each industry passes through four distinct phases of an industry life cycle. (See Exhibit )

Embryonic

Growth/Shakeout

Mature

Decline

The ‘shakeout’ stage

is generally considered

a part of growth stage.

that encompasses the resulting behavior: Strategy is a pattern - specifically, a pattern in a stream of actions. Strategy is consistency in behaviour, whether or not intended. The definitions of strategy as plan and pattern can be quite independent of one another: plans may go unrealised, while patterns may appear without preconception.

Plans are intended strategy, whereas patterns are realised strategy; from this we can distinguish deliberate strategies, where intentions that existed previously were realised, and emergent strategies where patterns developed in the absence of intentions, or despite them.

Position: Strategy is a position - specifically a means of locating an organisation in an "environment". By this definition strategy becomes the mediating force, or "match", between organisation and environment, that is, between the internal and the external context.

Perspective: Strategy is a perspective - its content consisting not just of a chosen position, but of an ingrained way of perceiving the world. Strategy in this respect is to the organisation what personality is to the individual. What is of key importance is that strategy is a perspective shared by members of an organisation, through their intentions and / or by their actions. In effect, when we talk of strategy in this context, we are entering the realm of the collective mind - individuals united by common thinking and / or behaviour.

Corporate GovernanceIntroduction

Corporate governance has become an issue of worldwide importance. The corporation has a vital role to play in promoting economic development and social progress.

It is the engine of growth internationally, and increasingly responsible for providing employment, public and private services, goods and infrastructure.

Corporate governance basically addresses the need for a company’s shareholders (the owners) and their elected representatives (the board of directors) to ensure that the firm’s executives (the management team) strive to maximize long-term shareholder value.

It is basically about fair management, transparency, disclosure, responsibility and accountability in governing the affairs of the corporation.

What Exactly Is Corporate Governance?

The term “governance” refers to the manner in which power is exercised in the management of corporate resources for sustainable development of the corporation.

It is a vital ingredient in the maintenance of a dynamic balance between managerial motives and the interests of shareholders and the society at large.

Economic theory holds that when a sole proprietor manages a firm, profits and value will tend to be maximized because they are directly linked to the owner-manager’s self interest.

Shareholders and other investors of a company need assurances that their investments will be protected and used as intended for the agreed corporate objectives.

Corporate governance is a framework that aims at ensuring such a protection to the shareholders and investors.

Definition

Corporate governance is defined as “the relationship among various participants in determining the direction and performance of corporations” (Monk and Minnows). The primary participants are (1) the shareholder (2) the management and (3) the board of directors.

Thus, narrowly defined, corporate governance concern the relationship between corporate managers, directors and the shareholders. It can also encompass the relationship of the corporation to stakeholders and society.

More broadly defined, corporate governance can encompass the combination of laws, regulations, voluntary corporate practices that enable the corporation to:

i. Attract capitalii. Perform efficiently

iii. Achieve the corporate objective iv. Meet both legal obligations and general societal expectations

Importance of Corporate Governance Promotes the efficient use of resources both within the company and the larger

economy• Assists companies (and economies) in attracting low-cost investment by

improving investor confidence by way of independent monitoring of managers.• Transparency as to corporate performance, ownership and control.• Participate in certain fundamental decisions by shareholders.

Assists in making sure that the company is in compliance with the laws, regulations and expectations of society.

Provides managers with oversight of their use of corporate assets. Reduces corruption in business dealings.

Benefits of good Corporate Governance Good corporate governance plays an effective role in the investment decisions of major

institutions, and a premium is often reflected in the price of shares of companies that

practice it. Evidence suggests that good governance also offers competitive advantage to firms.

The Corporate Governance premium is larger for firms with sound corporate governance practices compared to firms with weaker corporate governance standards.

In addition, there is a strong link between corporate governance and superior financial performance. Effective corporate governance thus affects a firm’s bottom line.

Need For Corporate GovernanceGood corporate governance is necessary in order to:

Attract investors – both local and foreign by assuring them that their investments will be secure and effectively managed, and in a transparent and accountable process.

Create competitive and efficient companies and business enterprises. Enhance accountability and performance of those entrusted to manage corporations. Promote efficient and effective use of limited resources.

Pillars of Good GovernanceThe four pillars on which good governance is built are:

Fairness Transparency Accountability, and Responsibility

Governance MechanismsTo minimize the potential for managers to act in their own self-interest or “opportunistically” the owners can implement some governance mechanisms, which are discussed under two heads, internal and external mechanisms.

Internal Mechanisms: The internal mechanizations include: Committed Board of Directors Shareholder activism Managerial compensation

External Governance Mechanisms: Internal governance mechanisms are not always enough to encourage good governance. It requires some external control mechanisms too. We discuss here several external control mechanisms that have developed in most modern economies.

Threats of Takeover Auditors Banks and Analysts Regulatory bodies Media and Public Activists.

Revision 01

SHORT Q&A

State true or false1. Macro environment includes stock holders, competitors and regulatory

agencies2. Strategy planning typically spans the period of one or less year3. A vision statement is determined for the long term and should not be

changed.4. A mission statement is practical and should be closely tied to immediate

and concrete goals5. Goals are more specific than objectives.6. Objectives should be particular and measureable.7. The purpose of environmental scanning is to make predictions about

future changes and to monitor current situations.8. Market share is a measure of competitive power9. Macro environment factors are general in nature.10. The fewer buyers there are the great the barraging power of supplier.

Revision 02 Tick the correct one;

1. Company A maintains a high level of focus on its strategic management process. The company believes this type of intense focus will assist in ensuring its continued successful operation within the industry. Of the following, which one would not be considered a critical task associated with Company A’s strategic management process? A. Company A conducts an analysis of its internal capabilities.B. Company A establishes a set of long-term objectives, which offer the most desirable outcomes.C. Company A constantly monitors its external environment.D. Company A develops short-term strategies that prove to be incompatible with many of its long-term objectives.

2. The Brant Corporation is a business that is based within the energy industry. It has an established document that is identified as its mission statement. Of the following, which statement is least likely to be represented in the Brant Corporation’s mission statement?

A. The Brant Corporation is in business to perpetuate itself while engaging in the energy business.

B. The Brant Corporation will provide energy to customers through its intricate pipe-line system.

C. The Brant Corporation shall conduct its operations within the boundaries of the mid-western states of the United States.

D. The Brant Corporation shall hire its top-level executives from its competing firms.

3. The Wynn Company (WC) places a high value on its stakeholders. It readily acknowledges the legitimate claims each group has on the company. Which one of the following statements would be incorrect when discussing the stakeholders of this organization?

A. The competing firms of WC seek WCs existence to improve the quality of life overall. B. The stockholders of WC expect appropriate returns on their investments. C. Governmental agencies expect adherence to prescribed legislation from WC. D. The local communities surrounding WC expect the organization to act as a responsible

citizen. 4. The Bronson Inc. is in the process of choosing a specific business direction to take in

order to advance within the manufactured housing industry. It is also evaluating what actions it should engage in to better assist its achievement of desired goals. The company is not without being influenced by factors external to its immediate environment. Which one of the following is least likely to be considered an external factor or influence to the Bronson Inc.?

A. The economy has slowed down and is expected to enter into a recession soon. B. The Hispanic population of the surrounding four states is expected to triple within the

next five years. C. The organization’s CEO expects to retire in two years. D Governmental agencies are planning to issue new pricing policies and minimum wage legislation next year.

5. The Brant Corporation is decidedly experiencing problems due to the agency relationship between its stockholders and corporate executives. Which one of the following statements is least likely to be a type of problem the Brant Corporation may be experiencing?

A. The executives and the managers of the Brant Corporation maintain open lines of communication between them.

B. The executives of the Brant Corporation strive for growth in organizational size rather than in earnings.

C. The managers of the Brant Corporation focus mainly on optimizing their own personal payoffs.

D. .The executives of the Brant Corporation strive to continue doing more of that in which they are proficient and knowledgeable

6. The Sturm Corporation is a competitor of the Bronson Firm. All of the following except _______ would be considered a competitive force the Sturm Corporation must be aware of in order to remain strong within the industry?

A. buyer powerB. new entrants into the industryC. power of suppliersD. .literacy level