What do you understand by strategic management? Comment on the critical stages of analysis, choice and implementation. Use examples from your experience or the press to illustrate your answer.
Assessment in "Principles and Functions of Management"
Question 3: What do you understand by "strategic management"? Comment on the critical stages of analysis, choice and implementation. Use examples from your experience or the press to illustrate your answer.
What is Strategic Management?
Well, the better question would be why some firms perform so much better than others. The answer, in great part, is in their strategies. Strategic management consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. It gives the organization a sense of its objectives and a sense of how it will achieve these objectives. For Michael Porter, one of the leading strategy gurus, strategy is about achieving competitive advantage through being different. This means offering buyers a unique value, to increase their number and keep them as customers. For example, Southwest Airlines, and Ikea have developed unique, internally consistent, and difficult to imitate systems that have provided them with sustained competitive advantage. The following graphic makes the importance of strategy clearer.
(Visionary companies)
According to Collins and Porras:
"Visionary" companies have a twelve times higher return than comparable companies
(Comparable companies)
To get a better comprehension of the process, how visions or strategies are realized, I use the controversial analysis, choice and implementation approach (a/c/i). Why this approach is often disputed, will be answered at the end.
Analysis
When the firm has specified its objectives, it starts to analyse its situation to create a strategic plan to reach those objectives. An environmental scan is done to identify the available opportunities. Changes in the external environment often present new opportunities and new ways to reach the objectives. The firm also must know its own capabilities and borders in order to choose the opportunities that it can pursue with a higher probability of success. The situation analysis therefore involves an analysis of both the external and internal environment.
The external environment has two aspects: the macro-environment that affects all firms and a micro-environment that affects only the firms in a particular industry.
The usually utilized macro-environment analysis is called PESTEL:
P
political
(e.g. Government stability/ Taxation policy/ Trade regulation)
E
economic
(e.g. GNP trends/ Interest rates/ Inflation/ Unemployment)
S
social
(e.g. Population demographics/ Lifestyle changes/ Attitude)
T
technological
(e.g. Investment in research/ New discoveries - development)
E
environmental
(e.g. environmental protection laws/ Energy consumption)
L
legal
(e.g. Monopolies legislation/ Employment law)
It is important to identify particularly those issues that are likely to have a large impact on the organization. Moreover ...
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The usually utilized macro-environment analysis is called PESTEL:
P
political
(e.g. Government stability/ Taxation policy/ Trade regulation)
E
economic
(e.g. GNP trends/ Interest rates/ Inflation/ Unemployment)
S
social
(e.g. Population demographics/ Lifestyle changes/ Attitude)
T
technological
(e.g. Investment in research/ New discoveries - development)
E
environmental
(e.g. environmental protection laws/ Energy consumption)
L
legal
(e.g. Monopolies legislation/ Employment law)
It is important to identify particularly those issues that are likely to have a large impact on the organization. Moreover these PESTEL factors help to identify structural drivers of change, which are forces that change the structure of an industry, sector or market, for example, the globalization of an industry because of increasing convergence of demand.
An important aspect of the micro-environmental analysis is the industry in which the firm operates or is considering operating. A helpful instrument to clarify the scope of competitiveness and identify barriers is Michael Porter's Five Competitive Forces model:
The success of strategy also depends on the capability of an organization to perform at the required level. To measure this performance, is the function of internal analysis. Here, the firm's intangible assets have to be analysed. These are: patents, brands, employees` skills, information and technical systems, access to natural resources, market share and leadership and organizational culture. Besides, a firm's core competencies, advantages which competitors can't copy, have to be identified. Focusing on these creates unique systems that reinforce fit among a firm's diverse production and technology skills. Honda's core competencies, for example, are motors, and in every business they are in, their products are connected with quality and durability.
Finally the results of the external and internal environment are observed in a common context and to make the information more manageable the SWOT analysis is worked out:
Internal
External
Positive
Strength
(Market leader)
Opportunity
(New markets/products)
Negative
Weaknesses
(Mature markets)
Threat
(Exchange rate fluctuation)
To understand the economical context and to get an overall view of the steady changing environment of an organization is a difficult task for managers. Firstly, there are many factors which exert influence, secondly, the speed of change increases and thirdly, the complexity of economic operations is very high. Strategies often fail because they are based on wrong information, as the responsible people who analyse are also just human beings, hence make mistakes and can't be 100% objective. But nevertheless managers have to cope with it and do the analysis very carefully, as it is the foundation of any succeeding strategy.
Choice
In this phase, organizations have to choose their strategy and the actions to be taken to achieve their objectives. The results of the analysis are necessary here, to clarify the kind, direction and scope of the strategy. Though different firms have different alternatives depending on their situations, there also exist generic strategies that can be applied on most firms.
Due to Michael Porter, the three generic strategies are:
- price based - like ASTA´s "cheap, but high value" - strategy
- differentiation strategies, e.g. to compete in terms of quality or service, like Ford does in the car industry
- focus, i.e. to use a market niche. Porsche, for example, claims only 2% of the car market to sell their quality sports cars.
The graphic of the Strategy Clock illustrates this a little more precisely:
These three strategies should no be combined, it is better to pursue only one of them.
Furthermore there are three directions a company can take, either develop internally, or acquire/sell new business units, or enter into joint developments/alliances.
. Retrenchment, which means, for example, the reduction of labour or the withdrawal of products, can result from a decline in demand or changes in competition. It is usually used to save the company from insolvency and to secure its position in the market through concentrating on its core competencies.
2. Stability, often chosen after rapid growth periods or also in terms of bad market conditions, is used to strengthen an organization's position and its products in the market.
3. The growth strategy is chosen to extent its position in the market, or to expand in new markets. Growth in terms of products and services can be achieved through fostering market penetration, product/market development or diversification. To explain diversification, the company Honda serves as a good example. The firm diversified forward when they started with producing motorbikes besides their Otto engines, in 1947. In 1963, when Honda started to produce cars additionally, it diversified horizontally. If the firm now started to produce tyres for their vehicles, it would be a backward diversification. In case they started to produce sweets, it would be an unrelated diversification.
The Matrix designed by Igor Ansoff is helpful to decide upon growth strategies:
When the kind and direction of a strategy are clear, this information and its scope have to be clarified. Internally it is done through SMART objectives:
Specific:
clearly and precisely expressed
Measurable:
so that there is a confirmation of whether or not they are achieved
Agreed:
with those responsible for achieving them
Realistic:
so that they can be achieved
Timed:
with a deadline for achievement
Externally it is clarified through the mission statement, which doesn't intend to make objectives measurable, but is more visionary and broad. It provides stakeholders with an organization's reason of existence and core ideology, e.g. 3M: "The innovative solution of unsolved problems".
Managers have to be very careful with the choice of the strategy: it must be feasible and achievable. Often unrealistic strategies are chosen because planners often lack knowledge of the "front line work" with customers. Therefore communication and a close cooperation between these two groups are crucial for a succeeding strategy.
Implementation
This is the most important phase as no plan will succeed unless it is converted into work. Consequent-ly the strategy must be divided into more detailed policies, which the functional level of the organization can implement. There are three steps involved in corporate implementation. The first is to develop action plans and functional tactics. Action plans guide strategic implementation by specifying a firm's given tasks for a particular period, while functional tactics are short-term activities that a firm undertakes to implement its strategies. For example, allocating resources where they are needed. The second step is to integrate the strategies into the organization, especially internal marketing. Strategy is not just convincing the customer, but also to convince every employee. The last step is made up of strategic control and continuous improvement. Continuous improvement allows firms to respond to a rapidly changing business climate in time, e.g. when new ways of producing, delivering or distributing emerge. Strategic control helps to: track how strategies are implemented, detect potential problems or changes, and make the necessary adjustments. To measure if intangible assets align with the strategy, the Balance Scorecard is used. It determines how strongly intangible assets enhance the processes - creating, producing , and delivering valuable offerings to customers - that generate the revenue needed to meet long-term financial goals. Its sense is to unleash those intangible assets´ full powers.
Weaknesses of the a/c/i approach
The analysis/choice/implementation process is only one approach to strategic management. It is widely criticised and considered to be obsolete because it was found in times where a stable and known environment was given. It builds on existing competencies, capabilities, products and markets and requires stability and certainty.
However, this is not given anymore. Market conditions have changed and with the steady progressing globalization this stability and certainty vanishes. Flexibility and speed of response are crucial nowadays, so alternative solutions have to be found to cope with these demands.
References:
Books: Tim Hannagan, "Management Concepts and Practices" (2002)
Johnson and Scholes, "Exploring Corporate Strategy" (2002)
Collins and Porras, "Built to Last: Successful Habits of Visionary Companies" (2002)
David Jobber, "Principles and Practice of Marketing" (1998)
Internet: http://www.marketingteacher.com/Lessons/lesson_generic_strategies.htm
http://www.hondacorporate.com/history/timeline.html
SID: 0411344
