Strategic Management Framework
Strategic management processes and activities
Strategic management involves the formulation and implementation of the major goals and initiatives taken by a company’s top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes. Strategy is defined as “the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” Strategies are established to set direction, focus effort, define or clarify the organization, and provide consistency or guidance in response to the environment.
Strategic management involves the related concepts of strategic planning and strategic thinking. Strategic planning is analytical in nature and refers to formalized procedures to produce the data and analyses used as inputs for strategic thinking, which synthesizes the data resulting in the strategy. Strategic planning may also refer to control mechanisms used to implement the strategy once it is determined. In other words, strategic planning happens around the strategic thinking or strategy making activity.
Strategic management is often described as involving two major processes: formulation and implementation of strategy. While described sequentially below, in practice the two processes are iterative and each provides input for the other.
Formulation of strategy involves analyzing the environment in which the organization operates, then making a series of strategic decisions about how the organization will compete. Formulation ends with a series of goals or objectives and measures for the organization to pursue.
Environmental analysis includes the:
• Remote external environment, including the political, economic, social, technological, legal and environmental landscape (PESTLE);
• Industry environment, such as the competitive behavior of rival organizations, the bargaining power of buyers/customers and suppliers, threats from new entrants to the industry, and the ability of buyers to substitute products;
• Internal environment, regarding the strengths and weaknesses of the organization’s resources (i.e., its people, processes and IT systems).
Strategic decisions are based on insight from the environmental assessment and are responses to strategic questions about how the organization will compete, such as:
• What is the organization’s business?
• Who is the target customer for the organization’s products and services?
• Where are the customers and how do they buy? What is considered “value” to the customer?
• Which businesses, products and services should be included or excluded from the portfolio of offerings?
• What is the geographic scope of the business?
• What differentiates the company from its competitors in the eyes of customers and other stakeholders?
• Which skills and capabilities should be developed within the firm?
• What are the important opportunities and risks for the organization?
• How can the firm grow, through both its base business and new business?
• How can the firm generate more value for investors?
The answers to these and many other strategic questions result in the organization’s strategy and a series of specific short-term and long-term goals or objectives and related measures.
The second major process of strategic management is implementation, which involves decisions regarding how the organization’s resources (i.e., people, process and IT systems) will be aligned and mobilized towards the objectives. Implementation results in how the organization’s resources are structured (such as by product or service or geography), leadership arrangements, communication, incentives, and monitoring mechanisms to track progress towards objectives, among others.
Running the day-to-day operations of the business is often referred to as “operations management” or specific terms for key departments or functions, such as “logistics management” or “marketing management,” which take over once strategic management decisions are implemented.
Strategy has been practiced whenever an advantage was gained by planning the sequence and timing of the deployment of resources while simultaneously taking into account the probable capabilities and behavior of competition.
Strategic thinking involves the generation and application of unique business insights to opportunities intended to create competitive advantage for a firm or organization. It involves challenging the assumptions underlying the organization’s strategy and value proposition. It is about “capturing what the manager learns from all sources (both the soft insights from his or her personal experiences and the experiences of others throughout the organization and the hard data from market research and the like) and then synthesizing that learning into a vision of the direction that the business should pursue.” Strategic thinking is the critical part of formulating strategy, more so than strategic planning exercises.
Strategic planning is a means of administering the formulation and implementation of strategy. Strategic planning is analytical in nature and refers to formalized procedures to produce the data and analyses used as inputs for strategic thinking, which synthesizes the data resulting in the strategy. Strategic planning may also refer to control mechanisms used to implement the strategy once it is determined. In other words, strategic planning happens around the strategy formation process.
The formulation of competitive strategy includes consideration of key elements:
1. Company strengths and weaknesses;
2. Personal values of the key implementers (i.e., management and the board)
3. Broader societal expectations.
The first two elements relate to factors internal to the company (i.e., the internal environment), while the last one relate to factors external to the company (i.e., the external environment).
There are many analytical frameworks which attempt to organize the strategic planning process.
• Relationship of internal and external environment: SWOT analysis is one of the most basic and widely used frameworks, which examines both internal elements of the organization — Strengths and Weaknesses — and external elements — Opportunities and Threats. It helps examine the organization’s resources in the context of its environment.
Scenario planning: Measuring and controlling implementation.
Once the strategy is determined, various goals and measures may be established to chart a course for the organization, measure performance and control implementation of the strategy. Tools such as the balanced scorecard and strategy maps help crystallize the strategy, by relating key measures of success and performance to the strategy. These tools measure financial, marketing, production, organizational development, and innovation measures to achieve a ‘balanced’ perspective. Advances in information technology and data availability enable the gathering of more information about performance, allowing managers to take a much more analytical view of their business than before.
Strategy may also be organized as a series of “initiatives” or “programs”, each of which comprises one or more projects. Various monitoring and feedback mechanisms may also be established, such as regular meetings between divisional and corporate management to control implementation.
Various strategic approaches used across industries (themes) have arisen over the years. These include the shift from product-driven demand to customer- or marketing-driven demand, the increased use of self-service approaches to lower cost, changes in the value chain or corporate structure due to globalization (e.g., off-shoring of production and assembly), and the internet.
One theme in strategic competition has been the trend towards self-service, often enabled by technology, where the customer takes on a role previously performed by a worker to lower the price.
• Automated teller machine (ATM) to obtain cash rather via a bank teller;
• Self-service at the gas pump rather than with help from an attendant;
• Retail internet orders input by the customer rather than a retail clerk, such as online book sales;
• Mass-produced ready-to-assemble furniture transported by the customer;
• Self-checkout at the grocery store; and
• Online banking and bill payment.
Globalization and the virtual firm
One definition of globalization refers to the integration of economies due to technology and supply chain process innovation. Companies are no longer required to be vertically integrated (i.e., designing, producing, assembling, and selling their products). In other words, the value chain for a company’s product may no longer be entirely within one firm; several entities comprising a virtual firm may exist to fulfill the customer requirement. For example, some companies have chosen to outsource production to third parties, retaining only design and sales functions inside their organization.
Alchemy Strategic Management outsourcing, is a key element of this modern business approach.
Internet and information availability
The internet has dramatically empowered consumers and enabled buyers and sellers to come together with drastically reduced transaction and intermediary costs, creating much more robust marketplaces for the purchase and sale of goods and services. Examples include online auction sites, internet dating services, and internet book sellers. In many industries, the internet has dramatically altered the competitive landscape. Services that used to be provided within one entity (e.g., a car dealership providing financing and pricing information) are now provided by third parties. Further, compared to traditional media like television, the internet has caused a major shift in viewing habits through on demand content which has led to an increasingly fragmented audience, but also increasing the demand of cheaper high level contents to match the audience interests.
Networks are challenging traditional hierarchies. Value chains may also be breaking up (“deconstructing”) where information aspects can be separated from functional activity. Data that is readily available for free or very low cost makes it harder for information-based, vertically integrated businesses to remain intact. The basic story here is that what used to be vertically integrated, oligopolistic competition among essentially similar kinds of competitors is evolving, by one means or another, from a vertical structure to a horizontal one. Why is that happening• It’s happening because transaction costs are plummeting and because scale is polarizing. The plummeting of transaction costs weakens the glue that holds value chains together, and allows them to separate. Wikipedia is an example of a network that has challenged the traditional encyclopedia business model. The emergence of a new form of industrial organization called a “stack”, analogous to a technology stack, in which competitors rely on a common platform of inputs (services or information), essentially layering the remaining competing parts of their value chains on top of this common platform.
Alchemy platform service is another key element of this modern business approach.
Other perspectives on strategy
Strategy as problem solving.
Strategy as a type of problem solving, the good strategy has an underlying structure called a kernel. The kernel has three parts: 1) A diagnosis that defines or explains the nature of the challenge; 2) A guiding policy for dealing with the challenge; and 3) Coherent actions designed to carry out the guiding policy.
Active strategic management required active information gathering and active problem solving.
Creative vs analytic approaches
In 2010 has been made a study summarizing three conclusions of 1500 CEOs around the world:
1)complexity is escalating, 2) enterprises are not equipped to cope with this complexity, and 3) creativity is now the single most important leadership competency.
To resolve this COMPLEXITY problem, it is needed all aspects of leadership, including strategic thinking and planning.
Information- and technology-driven strategy
Many industries with a high information component are being transformed. For example, Encarta demolished Encyclopedia Britannica (whose sales have plummeted 80% since their peak of $650 million in 1990) before it was in turn, eclipsed by collaborative encyclopedias like Wikipedia. The music industry was similarly disrupted. The technology sector has provided some strategies directly. For example, from the software development industry agile software development provides a model for shared development processes.
Maturity of planning process
Describe the sophistication of planning processes, with strategic management ranked the highest. The four stages include:
1. Financial planning, which is primarily about annual budgets and a functional focus, with limited regard for the environment;
2. Forecast-based planning, which includes multi-year budgets and more robust capital allocation across business units;
3. Externally oriented planning, where a thorough situation analysis and competitive assessment is performed;
4. Strategic management, where widespread strategic thinking occurs and a well-defined strategic framework is used.
The long-term PIMS strategy understand the Profit Impact of Marketing Strategies), particularly the effect of market share. The greater a company’s market share, the greater their rate of profit. Market share provides economies of scale. It also provides experience curve advantages. The combined effect is increased profits.
The benefits of high market share naturally led to an interest in growth strategies. The relative advantages of horizontal integration, vertical integration, diversification, franchises, mergers and acquisitions, joint ventures and organic growth were discussed. Other research indicated that a low market share strategy could still be very profitable.
Military business strategy
Business strategists realized that there was a vast knowledge base stretching back thousands of years that they had barely examined. They turned to military strategy for guidance. Military strategy books such as The Art of War by Sun Tzu, On War by von Clausewitz, and The Red Book by Mao Zedong became business classics. From Sun Tzu, they learned the tactical side of military strategy and specific tactical prescriptions. From von Clausewitz, they learned the dynamic and unpredictable nature of military action. From Mao, they learned the principles of guerrilla warfare.
The four types of business warfare theories are:
• Offensive marketing warfare strategies
• Defensive marketing warfare strategies
• Flanking marketing warfare strategies
• Guerrilla marketing warfare strategies
The marketing warfare literature also examined leadership and motivation, intelligence gathering, types of marketing weapons, logistics and communications.