Chapter 1

STRATEGIC MANAGEMENT

THE NATURE AND VALUE OF STRATEGIC MANAGEMENT

Strategic management is defined as the set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives. It comprises nine critical tasks:

      1.    Formulate the company’s mission, including broad statements about its purpose, philosophy, and goals.

      2.    Conduct an analysis that reflects the company’s internal conditions and capabilities.

      3.    Assess the company’s external environment, including both the competitive and general contextual factors.

      4.    Analyze the company’s options by matching its resources with the external environment.

      5.    Identify the most desirable options by evaluating each option in light of the company’s mission.

      6.    Select a set of long-term objectives and grand strategies that will achieve the most desirable options.

      7.    Develop annual objectives and short-term strategies that are compatible with the selected set of long-term objectives and grand strategies.

      8.    Implement the strategic choices by means of budgeted resource allocations in which the matching of tasks, people, structures, technologies, and reward systems is emphasized.

      9.    Evaluate the success of the strategic process as an input for future decision-making.

As these nine tasks indicate, strategic management involves the planning, directing, organizing, and controlling of a company’s strategy-related decisions and actions. By strategy, managers mean their large-scale, future-oriented plans for interacting with the competitive environment to achieve company objectives. A strategy is a company’s “game plan.” Although that plan does not precisely detail all future deployments (of people, finances, and material), it does provide a framework for managerial decisions.

DIMENSIONS OF STRATEGIC DECISIONS

·         Strategic issues require top-management decisions.

·         Strategic issues require large amounts of the firm’s resources. (Useful Web site: www.whirlpoolcorp.com)

·         Strategic issues often affect the firm’s long-term prosperity (see Exhibit 1-1).

·         Strategic issues are future oriented.

·         Strategic issues usually have multifunctional or multibusiness consequences.

·         Strategic issues require considering the firm’s external environment.

Three Levels of Strategy

The decision-making hierarchy of a firm typically contains three levels:

·         At the top of this hierarchy is the corporate level, composed principally of a board of directors and the chief executive and administrative officers. In a multibusiness firm, corporate-level executives determine the businesses in which the firm should be involved. Corporate-level strategic managers attempt to exploit their firm’s distinctive competences by adopting a portfolio approach to the management of its businesses and by developing long-term plans, typically for a five-year period.

·         In the middle of the decision-making hierarchy is the business level, composed principally of business and corporate managers. These managers must translate the statements of direction and intent generated at the corporate level into concrete objectives and strategies for individual business divisions or SBUs. They strive to identify and secure the most promising market segment within that arena.

·         At the bottom of the decision-making hierarchy is the functional level, composed principally of managers of product, geographic, and functional areas. Whereas corporate- and business-level managers center their attention on “doing the right things,” managers at the functional level center their attention on “doing things right.” Thus, they address such issues as the efficiency and effectiveness of production and marketing systems, the quality of customer service, and the success of particular products and services in increasing the firm’s market shares.

Exhibit 1–2 depicts the three levels of strategic management as structured in practice. In alternative 1, the firm is engaged in only one business and the corporate- and business-level responsibilities are concentrated in a single group of directors, officers, and managers. This is the organizational format of most small businesses. Alternative 2, the classical corporate structure, comprises three fully operative levels—the corporate level, the business level, and the functional level. The approach taken throughout this text assumes the use of alternative 2.

Characteristics of Strategic Management Decisions

The characteristics of strategic management decisions vary with the level of strategic activity considered. As shown in Exhibit 1–3, decisions at the corporate level tend to be more value oriented, more conceptual, and less concrete than decisions at the business or functional level.

·         Corporate-level decisions are often characterized by greater risk, cost, and profit potential; greater need for flexibility; and longer time horizons. Such decisions include the choice of businesses, dividend policies, sources of long-term financing, and priorities for growth.

·         Functional-level decisions implement the overall strategy formulated at the corporate and business levels. They involve action-oriented operational issues and are relatively short range and low risk. Functional-level decisions incur only modest costs because they are dependent on available resources.

·         Business-level decisions help bridge decisions at the corporate and functional levels. Such decisions are less costly, risky, and potentially profitable than corporate-level decisions, but they are more costly, risky, and potentially profitable than functional-level decisions. (Useful Web sites: www.alcoa.com (Alcoa); www.sears.com)

FORMALITY IN STRATEGIC MANAGEMENT

Formality refers to the degree to which participants, responsibilities, authority, and discretion in decision-making are specified. The size of the organization, its predominant management styles, the complexity of its environment, as production process, its problems, and the purpose of its planning system all play a part in determining the appropriate degree of formality.

Strategy Makers

The ideal strategic management team includes decision makers from all three company levels (the corporate, business, and functional levels)—for example, the chief executive officer (CEO), the product managers, and the heads of functional areas. In addition, the team obtains input from company planning staffs, when they exist, and from lower-level managers and supervisors.

Because strategic decisions have a tremendous impact on a company and require large commitments of company resources, top managers must give final approval for strategic action. Exhibit 1–3 aligns levels of strategic decision makers with the kinds of objectives and strategies for which they are typically responsible.

Planning departments, often headed by a corporate vice president for planning, are common in large corporations. Medium-sized firms often employ at least one full-time staff member to spearhead strategic data-collection efforts. Even in small firms or less progressive larger firms, strategic planning is often spearheaded by an officer or by a group of officers designated as a planning committee.

Top management shoulders broad responsibility for all the major elements of strategic planning and management. General managers at the business level typically have principal responsibilities for developing environmental analysis and forecasting, establishing business objectives, and developing business plans prepared by staff groups.

A firm’s president or CEO characteristically plays a dominant role in the strategic planning process. The CEO’s principal duty is often defined as giving long-term direction to the firm, and the CEO is ultimately responsible for the firm’s success.

In implementing a company’s strategy, the CEO must have an appreciation for the power and responsibility of the board, while retaining the power to lead the company with the guidance of informed directors.  Exhibit 1-4 presents descriptions of the changes that companies have made in an attempt to monitor the relationships between the role of the board and the role of the CEO.

Benefits of Strategic Management

      1.    Strategy formulation activities enhance the firm’s ability to prevent problems.

      2.    Group-based strategic decisions are likely to be drawn from the best available alternatives.

      3.    The involvement of employees in strategy formulation improves their understanding of the productivity-reward relationship in every strategic plan and thus heightens their motivation.

      4.    Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles.

      5.    Resistance to change is reduced.

STRATEGIC MANAGEMENT PROCESS

Useful Web sites: www.ibm.com; www.ge.com (General Electric)

Because of the similarity among the general models of the strategic management process, it is possible to develop an eclectic model representative of the foremost thought in the strategic management area. This model is shown in Exhibit 1–5. It serves three major functions.

·         First, it depicts the sequence and the relationships of the major components of the strategic management process.

·         Second, it is the outline for this book. This chapter provides a general overview of the strategic management process, and the major components of the model will be the principal theme of subsequent chapters.

·         Third, the model offers one approach for analyzing the case studies in this text and thus helps the analyst develop strategy formulation skills.

COMPONENTS OF THE STRATEGIC MANAGEMENT MODEL

Company Mission

The mission of a company is the unique purpose that sets it apart from other companies of its type and identifies the scope of its operations. In short, the mission describes the company’s product, market, and technological areas of emphasis in a way that reflects the values and priorities of the strategic decision makers.

Social responsibility is a critical consideration for a company’s strategic decision makers since the mission statement must express how the company intends to contribute to the societies that sustain it. A firm needs to set social responsibility aspirations for itself, just as it does in other areas of corporate performance.

Internal Analysis

The company analyzes the quantity and quality of the company’s financial, human, and physical resources. It also assesses the strengths and weaknesses of the company’s management and organizational structure. Finally, it contrasts the company’s past successes and traditional concerns with the company’s current capabilities in an attempt to identify the company’s future capabilities.

External Environment

A firm’s external environment consists of all the conditions and forces that affect its strategic options and define its competitive situation. The strategic management model shows the external environment as three interactive segments: the remote, industry, and operating environments.

Strategic Analysis and Choice

Simultaneous assessment of the external environment and the company profile enables a firm to identify a range of possibly attractive interactive opportunities. These opportunities are possible avenues for investment. However, they must be screened through the criterion of the company mission to generate a set of possible and desired opportunities. This screening process results in the selection of options from which a strategic choice is made.

Long-Term Objectives

The results that an organization seeks over a multiyear period are its long-term objectives. Such objectives typically involve some or all of the following areas: profitability, return on investment, competitive position, technological leadership, productivity, employee relations, public responsibility, and employee development.

Generic and Grand Strategies

Many businesses explicitly and all implicitly adopt one or more generic strategies characterizing their competitive orientation in the marketplace. Low cost, differentiation, or focus strategies define the three fundamental options. Enlightened managers seek to create ways their firm possesses both low cost and differentiation competitive advantages as part of their overall generic strategy. They usually combine these capabilities with a comprehensive, general plan of major actions through which their firm intends to achieve its long-term objectives in a dynamic environment.  Called the grand strategy, this statement of means indicates how the objectives are to be achieved.

Action Plans and Short-Term Objectives

Actions plans translate generic and grand strategies into “action” by incorporating four elements. First, they identify specific functional tactics and actions to be undertaken in the next week, month, or quarter as part of the business’s effort to build competitive advantage. The second element is a clear time frame for completion. Third, action plans create accountability by identifying who is responsible for each “action” in the plan. Fourth, each “action” in an action plan has one or more specific, immediate objectives that are identified as outcomes that action should generate.

Functional Tactics

Within the general framework created by the business’s generic and grand strategies, each business function needs to identify and undertake activities unique to their function that help build a sustainable competitive advantage. Managers in each business function develop tactics which delineate the functional activities undertaken in their part of the business and usually include them as a core part of their action plan. Functional tactics are detailed statements of the “means” or activities that will be used to achieve short-term objectives and establish competitive advantage.

Policies that Empower Action

Speed is a critical necessity for success in today’s competitive, global marketplace. One way to enhance speed and responsiveness is to force/allow decisions to be made whenever possible at the lowest level in organizations. Policies are broad, precedent-setting decisions that guide or substitute for repetitive or time-sensitive managerial decision making. Creating policies that guide and “preauthorize” the thinking, decisions, and actions of operating managers and their subordinates in implementing the business’s strategy is essential for establishing and controlling the ongoing operating process of the firm in a manner consistent with the firm’s strategic objectives.

Restructuring, Reengineering, and Refocusing the Organization

Until this point in the strategic management process, managers have maintained a decidedly market-oriented focus as they formulate strategies and begin implementation through action plans and functional tactics. Now the process takes an internal focus—getting the work of the business done efficiently and effectively so as to make the strategy successful. What is the best way to organize ourselves to accomplish the mission? Where should leadership come from? What values should guide our daily activates—what should the organization and its people be like? How can we shape rewards to encourage appropriate action? The intense competition in the global marketplace has made this traditional “internally focused” set of questions—how the activities within their business are conducted—recast itself with unprecedented attentiveness to the marketplace. Downsizing, restructuring, and reengineering are  terms that reflect the critical stage in strategy implementation wherein managers attempt to recast their organization.

Strategic Control and Continuous Improvement

Strategic control is concerned with tracking a strategy as it is being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments. In contrast to postaction control, strategic control seeks to guide action in behalf of the generic and grand strategies as they are taking place and when the end results are still several years away. The rapid, accelerating change of the global marketplace of the last 10 years has made continuous improvement another aspect of strategic control in many organizations. Continuous improvement provides a way for managers to provide a form of strategic control that allows their organization to respond more proactively and timely to rapid developments in hundreds of areas that influence a business’s success. Exhibit 1-6 describes how Yahoo’s e-commerce strategy was significantly undermined by its management’s failure to see fundamental shifts in its industry.

STRATEGIC MANAGEMENT AS A PROCESS

A process is the flow of information through interrelated stages of analysis toward the achievement of an aim. Thus, the strategic management model in Exhibit 1–5 depicts a process. Managers evaluate historical, current, and forecast data in light of the values and priorities of influential individuals and groups—often called stakeholders—that are vitally interested in the actions of the business. The interrelated stages of the process are the 11 components discussed in the last section. Finally, the aim of the process is the formulation and implementation of strategies that work, achieving the company’s long-term mission and near-term objectives.