MODULE-1-THE-NATURE-OF-STRATEGIC-MANAGEMENT.pdf

MGT 406: Strategic Management Module 1: The Nature of Strategic Management MODULE 1 The Nature of Strategic Management Introduction This module aims to analyze the fundamental concepts and principles of the strategi...

MGT 406: Strategic Management Module 1: The Nature of Strategic Management MODULE 1 The Nature of Strategic Management Introduction This module aims to analyze the fundamental concepts and principles of the strategic management that guide organizations in formulating and implementing effective strategies to achieve their long-term goals and objectives. Strategic management is a crucial aspect of every successful business and plays a pivotal role in shaping the future of an organization. It involves making critical decisions that steer the company in the right direction, adapt to the dynamic business environment, and create a sustainable competitive advantage. LEARNING OBJECTIVES After studying this module, you should be able to: 1. Define Strategic Management; 2. Explain and identify the stages of strategic management; 3. State the purposes and benefits of strategic management; 4. Discuss the strategic management process P a g e 1|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management LEARNING CONTENT 1.0 Introduction to Strategic Management Situation No. 1: "TechPro Inc." (fictional company) Company Background: TechPro Inc. is a technology company that specializes in developing cutting-edge software and hardware solutions for various industries. They have been in the market for over a decade and have enjoyed significant success with their innovative products. However, with increased competition and rapid technological advancements, the company is facing challenges to maintain its market leadership. Situation: Over the past few years, TechPro Inc. has experienced a decline in market share due to aggressive competition from new startups and established players. Customer preferences have shifted towards cloud- based services and mobile applications, which the company was slow to adapt to. Additionally, their product development process has become somewhat stagnant, resulting in longer development cycles and delayed product launches. Strategic Management Scenario: Environmental Analysis: TechPro Inc. needs to conduct a thorough environmental analysis to understand the changes in the market, technological trends, customer needs, and competitor strategies. This analysis will provide insights into the external factors impacting the company's performance. Internal Analysis: The company must also evaluate its internal strengths and weaknesses. This involves assessing their existing technological capabilities, workforce skills, and financial resources. Identifying internal areas for improvement will help TechPro Inc. leverage its strengths effectively. Strategy Formulation: Based on the environmental and internal analyses, TechPro Inc. needs to develop a comprehensive strategy to address their challenges. This could involve a shift towards cloud-based services and mobile applications, streamlining the product development process, and investing in research and development to create innovative solutions. Strategy Implementation: The formulated strategy needs to be translated into action. TechPro Inc. will establish cross-functional teams to focus on specific objectives, allocate resources appropriately, and set measurable targets. The implementation process will require effective communication and coordination throughout the organization. Strategic Control: To ensure the strategy's effectiveness, TechPro Inc. will continuously monitor and evaluate their progress. Regular performance reviews, feedback from customers and stakeholders, and key performance indicators (KPIs) will be used to assess whether the company is on track with its strategic goals. Strategic Adaptation: The strategic management process also involves being flexible and adaptable. If the initial strategy faces unforeseen challenges or the market dynamics change, TechPro Inc. must be ready to adjust its approach accordingly. Potential Outcome: With a well-defined strategic management process, TechPro Inc. can revitalize its competitive position. By embracing cloud-based services and mobile applications, they can cater to evolving customer demands. Streamlining their product development process will lead to faster time-to- market, enabling them to stay ahead of the competition. Continuous monitoring and feedback will help identify any shortcomings and allow for timely corrective actions. Ultimately, TechPro Inc. could regain its market share, strengthen its position in the industry, and set itself on a path of sustainable growth and success. Please note that this is a simplified fictional example for illustrative purposes. In reality, strategic management involves a more in-depth and complex approach that requires detailed analysis, planning, and execution. P a g e 2|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management 1.1 Definition of Strategic Management Defining strategy is not simple. Strategy is a complex concept that involves many different processes and activities within an organization. It involves goals and objectives that an organization needs to achieve to be successful in the marketplace. The development of these goals, however, requires a strategic management process to be done correctly and thoroughly. A strategy is typically a higher level, broad goal, without a lot of specifics. It is long-term in nature. It provides the direction that an organization wants to move toward to be more successful. New or revised strategies may be developed as a result of changes in the business environment, such as what happened during the COVID-19 pandemic. Firms also routinely revise or create new strategies, often annually, by assessing and reacting to external and competitive forces and to maximize organizational performance. By identifying their resources and capabilities, firms attempt to deploy these through strategies that will give them a competitive advantage, so consumers will buy their product or service instead of a competitor’s. 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 organisation plays a role in strategy – its people, its finances, its production methods, its customers and so on. Strategic Management can be described as the identification of the purpose of the organisation 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. It involves formulating and implementing strategies that will help in aligning the organisation and its environment to achieve organisational goals. Strategic management does not replace the traditional management activities such as planning, organising, leading or controlling. Rather, it integrates them into a broader context taking into account the external environment and internal capabilities and the organisation’s overall purpose and direction. Thus, strategic management involves those management processes in organisations 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. 1.2 Nature of Strategic Management Strategic Management is considered the capstone course of all management and business subjects. The bedrock of strategic management is made up of various business courses such as the principles of management, managerial economics, human behavior in an organization, strategic marketing, organizational management, strategic human resource management, managerial accounting, financial management, and quantitative management. Figure 1.1 illustrates this relationship or the interrelatedness of the subjects. Figure 1.1 Strategic Management and other business courses Strategic Management can be defined as the art & science of formulating, implementing, and evaluating, cross-functional decisions that enable an organisation to achieve its objectives. Strategic management is different in nature from other aspects of management. An individual manager is most often required to deal with problems of operational nature. He generally focuses on day-to-day problems such as the efficient P a g e 3|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management production of goods, the management of a sales force, the monitoring of financial performance or the design of some new system that will improve the level of customer service. Strategists Strategists are the individuals who are most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.” Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last five years, the position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of many organizations, including Sun Microsystems, Network Associates, Clarus, Lante, Marimba, Sapient, Commerce One BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Elsevier. This new corporate officer title represents recognition of the growing importance of strategic planning in the business world. Strategists differ as much as organizations themselves, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style. The founder of Hershey Foods, Milton Hershey, built the company to manage an orphanage. From corporate profits, Hershey Foods today cares for over a thousand boys and girls in its School for Orphans. A manager performs several functions such as planning, organizing, staffing, directing, and controlling with equal importance. However, strategic management gives preferential attention to planning. Strategic managers spend more time and effort on planning as compared to other managerial functions. A managerial position can be at the top, middle, or lower levels. These three levels entail performing all managerial functions and making economic decisions of varying degrees of importance to a company. The concern, however, of strategic management is to address roles and needs to a top-level manager with substantial input and participation of managers at the middle and lower levels as shown in Figure 1.2. Planning starts and ends at the top level. The top-level management sets and defines the overall direction of a company. The leadership styles and practices of managers at this level show how strategic management is applied in a business. In a similar manner, the middle- and lower-level managers define their plans and directions according to the overall direction of the top-level management. Figure 1.2 Focus of Strategic Management P a g e 4|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management 1.3 Need for Strategic Management No business firm can afford to travel in a haphazard manner. It has to travel with the support of some route map. Strategic management provides the route map for the firm. It makes it possible for the firm to take decisions concerning the future with a greater awareness of their implications. It provides direction to the company; it indicates how growth could be achieved. The external environment influences the management practices within any organisation. Strategy links the organisation to this external world. Changes in these external forces create both opportunities and threats to an organisation’s position – but above all, they create uncertainty. Strategic planning offers a systematic means of coping with uncertainty and adapting to change. It enables managers to consider how to grasp opportunities and avoid problems, to establish and coordinate appropriate courses of action and to set targets for achievement. Thirdly, strategic management helps to formulate better strategies through the use of a more systematic, logical and rational approach. Through involvement in the process, managers and employees become committed to supporting the organisation. The process is a learning, helping, educating and supporting activity. An increasing number of firms are using strategic management Notes for the following reasons: 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. 1.4 Stages of Strategic Management The strategic-management process consists of three stages: 1. Strategy formulation, 2. Strategy implementation, and 3. Strategy evaluation. 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. Strategy-formulation issues include 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, and how to avoid a hostile takeover. Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation. Analysis and intuition provide a basis for making strategy-formulation decisions. Many of these strategies will likely have been proposed by managers and employees participating in the strategy analysis and choice activity. Any additional strategies resulting from the matching analyses could be discussed and added to the list of feasible alternative options. Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensation to organizational performance. P a g e 5|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges upon managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose. Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions, such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives. Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise. Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities. 1.5 Evolutionary Phases of Strategic Management Strategic Management had undergone the following evolutionary phases: 1. Short-term financial planning phase 2. Medium-term planning phase 3. Strategic Planning Phase 4. Strategic Management Phase Short-term financial planning phase. During this early phase, top-level managers simply require different departments and functional areas to prepare budgets and targets based on information generated within the company. A simple one-year period analysis should be conducted. The financial plans, targets, and analyses of the different departments (e.g., marketing, operation, and technology) guide the top management in meeting the overall goal of the company. Medium-term planning phase. During the second phase, the top-level management merely extends the time period od the planning process from one year to five years. Information and data used in setting projections by various functional units and departments are still coming from within the company. As departments compete for the bigger chunk in resource allocation, more time is spent on meetings and project justifications. The projections, based on historical trends and simple analyses, assist the top management in directing the company toward its goals and objectives. Strategic planning phase. Given the disadvantages of the first two phases, for example, the system becomes highly political as units compete for bigger budgets, and more meetings are spent for proper justifications, the planning process is assigned to selected staff to devise a strategic plan with little participation and input from the lower levels. Strategic management phase. For strategic plans to be effective, the various inputs and participation from different levels of management, units, and departments should be considered. In short, planning has to be decentralized. Information from within and outside the company is collected and used in formulating strategies, plans, objectives, and goals. P a g e 6|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management 1.6 Purposes of Strategic Management The critical role that strategic management plays in the success of the company can inevitably be disregarded; however, a business with a well-defines strategic management process will be able to do the following: 1. Exploit business opportunities from a changing environment 2. Identify priorities requiring financial assistance 3. Assist in reducing business risks 4. Continuously define and redefine direction 5. Build competitive advantage 1.7 Benefits of Strategic Management The benefits that a company can obtain from adopting strategic management practices are largely considerable. Studies reveal that a company that implements strategic management practices has the following characteristics: 1. A clearer sense of strategic vision for the company 2. A sharper focus on what is strategically important 3. An improved understanding of a rapidly changing environment 4. Readily aligned resources for optimal results 5. Easier implementation of risk control measures to minimize uncertainty 1.8 The Strategic Management Process Developing an organisational strategy involves four main elements – strategic analysis, strategic choice, strategy implementation and strategy evaluation and control. Each of these contains further steps, corresponding to a series of decisions and actions, that form the basis of strategic management process. 1. Strategic Analysis: The foundation of strategy is a definition of organisational purpose. This defines the business of an organisation and what type of organisation it wants to be. Many organisations develop broad statements of purpose, in the form of vision and mission statements. These form the spring – boards for the development of more specific objectives and the choice of strategies to achieve them. Environmental analysis – assessing both the external and internal environments is the next step in the strategy process. Managers need to assess the opportunities and threats of the external environment in the light of the organisation’s strengths and weaknesses keeping in view the expectations of the stakeholders. This analysis allows the organisation to set more specific goals or objectives which might specify where people are expected to focus their efforts. With a more specific set of objectives in hand, managers can then plan how to achieve them. 2. Strategic Choice: The analysis stage provides the basis for strategic choice. It allows managers to consider what the organisation could do given the mission, environment and capabilities – a choice which also reflects the values of managers and other stakeholders. (Dobson et al. 2004). These choices are about the overall scope and direction of the business. Since managers usually face several strategic options, they often need to analyze these in terms of their feasibility, suitability and acceptability before finally deciding on their direction. 3. Strategy Implementation: Implementation depends on ensuring that the organisation has a suitable structure, the right resources and competencies (skills, finance, technology etc.), right leadership and culture. Strategy implementation depends on operational factors being put into place. 4. Strategy Evaluation and Control: Organisations set up appropriate monitoring and control systems, develop standards and targets to judge performance. P a g e 7|8 MGT 406: Strategic Management Module 1: The Nature of Strategic Management Table 1.1 summarizes the steps involved in each of the above elements of strategic management. P a g e 8|8