Chapter II

Strategic Management
2.1. The Nature of Strategic Management

The top management of an organization is concerned

with selection of a course of action from among
different alternatives to meet the organizational
objectives.
The process by which objectives are formulated and
achieved is known as a strategic management and
strategy acts as the means to achieve the objective.
2.2. What Is Strategic Management About?

 Understanding how firms create, capture, and

sustain competitive advantage.

Analyzing strategic business situations and

formulating strategic plans.

Implementing strategy and organizing the firm

for strategic success.
Strategic management defined
Strategic management has been defined in many ways
by different authors and authorities. There is no
absolute consensus on the definition of strategic
management.
Strategic management defined
Strategic management is that set of managerial decisions
and actions that determines the long-run performance of
a corporation. It includes environmental scanning,
strategy formulation, strategy implementation and
evaluation. (Wikipedia, The Free Encyclopedia On-line).

 Strategic management focuses on integrating

management, human resource, marketing,
finance/accounting, production/operations, research and
development, and computer information systems to
achieve organizational successes.
Strategic Management is all about identification and
description of the strategies that managers can carry
so as to achieve better performance and a
competitive advantage for their organization.
An organization is said to have competitive advantage
if its profitability is higher than the average
profitability for all companies in its industry.
Summarized Definition --
From all these, Strategic management can be
defined as the art and science of formulating,
implementing, and evaluating cross-functional
decisions that enable an organization to achieve its
objectives (David, F.R. 2011).
 Other concepts in management that are used
sometime or interchangeably with strategic
management are strategic planning, business
policy and long-range planning.
Sometimes the term strategic management is
used to refer to strategy formulation,
implementation, and evaluation, with strategic
planning referring only to strategy formulation.
2.3. Strategic management process

Strategic management process (SMP) can be defined

as the way the strategists determine corporate
objectives and make strategic decisions.
Strategic management process consists of three
stages namely strategy formulations, strategy
implementation and strategy evaluation.
 However, some schools of though see Strategic
management process (SMP) as consisting of two sub-
processes which are strategic planning (SP) and
strategic implementation (SI). In this, the SP process is
broken down into analysis/diagnosis and choice while
the SI sub-process is broken down into implementation
and evaluation.
This gives rise to the formula:
SMP = SP + SI
= Analysis/Diagnosis + Choice +Implementation +
Evaluation
Another scholars consider as the analysis, decisions,
and actions an organization undertakes in order to
create and sustain competitive advantages (Dess,
Lumpkin, & Eisner, Strategic Management: Creating
Competitive Advantage, 3rd Ed., p. 9).
What Is Strategic Management About?-
cont
Analysis
Strategic goals (vision, mission, strategic objectives)
Internal and external environment of the firm
Decisions
What industries should we compete in?
How should we compete in those industries?
Actions
Allocate necessary resources
Design the organization to bring intended strategies to
reality
Basic Building block of Strategic management

The basic building blocks of strategic management are

concerned with answering four age-old questions:
- Where are you now?
- Where do you want to be?
- How will you get there?
- How will you know you are getting there?
Where are you now?
 What is the current standing of your business? How
are you performing?
 What are your internal strengths and weaknesses as a
business?
 What are the opportunities and threats out there on
the horizon?
How well are you equipped to meet them?
 What are the trends in your key markets?
 What’s the economic outlook?
 How does the competitive environment look?
Where do you want to be?
 What is your ultimate goal for your business?
What type of business do you want to become?
 What is the current gap from the ideal and why?
How will you get there?
 What strategic goals will guide all your efforts?
 What is the best strategy or strategies to achieve those
goals?
 What do you need to do to implement your strategy?
 What should you focus upon in the short and
medium term to move you in the right direction?
How will you know you are getting there?
 Is your strategy working?
 Are the actions that you have taken producing the
desired impact?
How do you know?
Key Terms in Strategic Management
In formulating strategies, there are basic components or
elements that we usually consider
 Competitive advantage,
Strategists,
Vision and mission statements,
External opportunities and threats,
Internal strengths and weaknesses,
 long-term objectives,
 Strategies,
Annual objectives,
and policies.
Key Terms in Strategic Management
Competitive Advantage:- “anything that a firm does
especially well compared to rival firms.” When a firm can
do something that rival firms cannot do, or owns
something that rival firms desire, that can represent a
competitive advantage.
A firm must strive to achieve sustained competitive
advantage by
(1) continually adapting to changes in external trends and
events and internal capabilities, competencies, and
resources; and by
(2) effectively formulating, implementing, and evaluating
strategies that capitalize upon those factors.
Competitive Advantage
Strategic management is all about gaining and
maintaining competitive advantage.
 Normally, a firm can sustain a competitive
advantage for only a certain period due to rival
firms imitating and undermining that advantage.
Thus it is not adequate to simply obtain
competitive advantage.
Strategists:- are the individuals who are most responsible
for the success or failure of an organization. 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.
Vision and Mission Statements
 Vision Statements:- Many organizations today develop a
vision statement that answers the question “What do we want
to become?”
The Vision statement is the owner’s view of where the
enterprise should be in the future.

 Mission statements
- are “enduring statements of purpose that distinguish one
business from other similar firms.
- A mission statement identifies the scope of a firm’s operations
in product and market terms.”
- It addresses the basic question that faces all strategists: “What
is our business?” A clear mission statement describes the values
and priorities of an organization.
External Opportunities and Threats
External opportunities and external threats refer
to economic, social, cultural, demographic,
environmental, political, legal, governmental,
technological, and competitive trends and events
that could significantly benefit or harm an
organization in the future.
Opportunities and threats are largely beyond the
control of a single organization—thus the word
external.
Internal Strengths and Weaknesses
Internal strengths and internal weaknesses are an
organization’s controllable activities that are
performed especially well or poorly. They arise in
the management, marketing, finance/accounting,
production/operations, research and
development, and management information
systems activities of a business.
Long-Term Objectives
 Objectives can be defined as specific results that an
organization seeks to achieve in pursuing its basic
mission. Long-term means more than one year.
Objectives are essential for organizational success
because they state direction; aid in evaluation; create
synergy; reveal priorities; focus coordination; and
provide a basis for effective planning, organizing,
motivating, and controlling activities. Objectives
should be challenging, measurable, consistent,
reasonable, and clear.
Annual Objectives:- Annual objectives are short-term
milestones that organizations must achieve to reach
long term objectives. Like long-term objectives, annual
objectives should be measurable, quantitative,
challenging, realistic, consistent, and prioritized.
They should be established at the corporate, divisional,
and functional levels in a large organization. Annual
objectives should be stated in terms of management,
marketing, finance/accounting, production/operations,
research and development, and management
information systems (MIS) accomplishments.
Policies:- Policies are the means by which annual
objectives will be achieved. Policies include
guidelines, rules, and procedures established to
support efforts to achieve stated objectives.
Policies are guides to decision making and address
repetitive or recurring situations.
2.4. FUNCTIONS OF STRATEGIC MANAGEMENT

It provides a dual approach to problem solving.

- Firstly, it exploits the most effective means to
overcome difficulties and face competition.
- Secondly, it assists ill the deployment of scarce
resources among critical activities.

Peter Drucker says the prime task of strategic management
is thinking through the overall mission of a business:

. . . that is, of asking the question, “What is our business?”

This leads to the setting of objectives, the development of
strategies, and the making of today’s decisions for
tomorrow’s results. This clearly must be done by a part of
the organization that can see the entire business; that can
balance objectives and the needs of today against the
needs of tomorrow; and that can allocate resources of men
and money to key results.
The strategic-management process is based on the
belief that organizations should continually monitor
internal and external events and trends so that timely
changes can be made as needed. The rate and
magnitude of changes that affect organizations are
increasing dramatically.
The need to adapt to change leads organizations to
key strategic-management questions, such as
- “What kind of business should we become?”
- “Are we in the right field(s)?”
- “Should we reshape our business?”
- “What new competitors are entering our industry?”
- “What strategies should we pursue?”
- “How are our customers changing?”
- “Are new technologies being developed that could put
us out of business?”
2.5. Strategic management and
Competitive Advantage
Strategic management is all about gaining and
maintaining competitive advantage.
Competitive advantage can be defined as “anything
that a firm does especially well compared to rival
firms.”
When a firm can do something that rival firms cannot
do, or owns something that rival firms desire, that can
represent a competitive advantage.
Strategic competitiveness achieved when a firms
successfully formulates and implements a value
creating strategy. It is the ability to create more
economic value than competitors

Competitive advantage: when a firms implement a

strategy that creates a supervisor value for customers ;
competitors are unable to duplicate it or find too costly
to imitate it.
Competitive Advantage
Two Types of Difference
1) Preference for the firm’s output
people choose the firm’s output over others’
people are willing to pay a premium
2) Cost advantage vis-à-vis competitors
lower costs of production/distribution
Normally, a firm can sustain a competitive advantage
for only a certain period due to rival firms imitating
and undermining that advantage.
Thus it is not adequate to simply obtain competitive
advantage. A firm must strive to achieve sustained
competitive advantage by:
- (1) continually adapting to changes in external trends
and events and internal capabilities, competencies,
and resources; and by
- (2) effectively formulating, implementing, and
evaluating strategies that capitalize upon those factors
2.6. Benefits of strategic management
Research has revealed that organizations that engage in
strategic management generally outperform those
that do not.
Historically, the principal benefit of strategic
management has been to help organizations
formulate better strategies through the use of a
more systematic, logical, and rational approach to
strategic choice
Benefits of strategic management
1. Financial Benefits:- Research indicates that
organizations using strategic-management concepts are
more profitable and successful than those that do not
Businesses using strategic-management concepts
show significant improvement in sales, profitability,
and productivity compared to firms without
systematic planning activities.
Benefits of strategic management
Besides helping firms avoid financial demise, strategic
management offers other tangible benefits, such as an
enhanced awareness of external threats, an improved
understanding of competitors’ strategies, increased
employee productivity, reduced resistance to change,
and a clearer understanding of performance–reward
relationships.
Strategic management enhances the problem-
prevention capabilities of organizations because it
promotes interaction among managers at all divisional
and functional levels.
Benefits of strategic management
Greenley stated (as Cited by David, 2011) that
strategic management offers the following benefits:
1. It allows for identification, prioritization, and
exploitation of opportunities.
2. It provides an objective view of management
problems.
3. It represents a framework for improved
coordination and control of activities.
4. It minimizes the effects of adverse conditions and
changes
5. It allows major decisions to better support established
objectives.
6. It allows more effective allocation of time and
resources to identified opportunities.
7. It allows fewer resources and less time to be devoted to
correcting erroneous or adhoc decisions.
8. It creates a framework for internal communication
among personnel.
9. It helps integrate the behavior of individuals into a
total effort.
10. It provides a basis for clarifying individual
responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated, and enthusiastic
approach to tackling problems and opportunities.
13. It encourages a favourable attitude toward change.
14. It gives a degree of discipline and formality to the
management of a business
Source David, F.R, 2011
2.7. Basic model of the strategic
management process
The strategic-management process can best be
studied and applied using a model.
Every model represents some kind of process.
Strategic Management Model
Strategic management consists of three basic
elements/models/stages
 Strategy Formulation
Where are we now?
Where do we want to be?
Strategy Implementation
How do we get there?
Measurement/Performance/evaluation
How do we measure our progress?
When we see management function planning,
organizing, staffing, directing, controlling: it seems
Planning is important in strategy formulation stage
Organizing, staffing and directing in strategy
implementation stage
Controlling in strategy evaluation stage
 Comprehensive strategic management model

Perform
External
Audit

Develop Vision
Establish Generate,
& Measure &
Long-Term Evaluate, Implement
Mission Evaluate
Objectives Select Strategies:
Statement Performance
Strategies

Perform
Internal
Audit

Source: Fred R. David,“ strategic management, 2011

Basic Elements of the Strategic Management Process