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Chapter 1: Introduction
It is an evident fact that the corporate world is based upon competition and it is a necessity that every business has its own competitive strategy. The world has progressed in many unique ways and directions in the last three decades. It has developed technologically, economically and industrially. It is also richer in terms of human capabilities, facilities and quality of living. Improvements in education, communication, technology and markets have made the world a global village. People live longer today, are better informed, can communicate with one another across the world and therefore carry on economic, professional, educational, social and other activities with ease. These decades of development indicate the vast potential for creating a world of order, security and well-being. It is commonly accepted that the people working for a firm are one of its main assets and one of the factors in determining its progress alongwith the customers. Workers' qualities, attitudes and behavior in the workplace, together with other critical factors like their behavior with the customers, play an important role in determining a company's success or lack of it.
Chapter 2: Literature Review
Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of organizations in their external environments. It entails specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs. A balanced scorecard is often used to evaluate the overall performance of the business and its progress towards objectives. Recent studies and leading management theorists have advocated that strategy needs to start with stakeholders expectations and use a modified balanced scorecard which includes all stakeholders.
Strategic management is a level of managerial activity under setting goals and over Tactics Strategic management provides overall direction to the enterprise and is closely related to the field of Organization Studies. In the field of business administration it is useful to talk about "strategic alignment" between the organization and its environment or "strategic consistency." According to Arieu (2007), "there is strategic consistency when the actions of an organization are consistent with the expectations of management, and these in turn are with the market and the context." Strategic management includes not only the management team but can also include the Board of Directors and other stakeholders of the organization. It depends on the organizational structure.
"Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment." (Lamb, 1984:ix)
2.2 Strategic Formation
Strategic formation is a combination of three main processes which are as follows:
Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental.
Concurrent with this assessment, objectives are set. These objectives should be parallel to a time-line; some are in the short-term and others on the long-term. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.
These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.
2.3 The Strategic Hierarchy
In most (large) corporations there are several levels of management. Strategic management is the highest of these levels in the sense that it is the broadest - applying to all parts of the firm - while also incorporating the longest time horizon. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are typically business-level competitive strategies and functional unit strategies.
Corporate strategy refers to the overarching strategy of the diversified firm. Such a corporate strategy answers the questions of "which businesses should we be in?" and "how does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?" Business strategy refers to the aggregated strategies of single business firm or a strategic business unit (SBU) in a diversified corporation. According to Michael Porter, a firm must formulate a business strategy that incorporates either cost leadership, differentiation, or focus to achieve a sustainable competitive advantage and long-term success. Alternatively, according to W. Chan Kim and Renée Mauborgne, an organization can achieve high growth and profits by creating a Blue Ocean Strategy that breaks the previous value-cost trade off by simultaneously pursuing both differentiation and low cost.
Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department's functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies.
Many companies feel that a functional organizational structure is not an efficient way to organize activities so they have reengineered according to processes or SBUs. A strategic business unit is a semi-autonomous unit that is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters. A technology strategy, for example, although it is focused on technology as a means of achieving an organization's overall objective(s), may include dimensions that are beyond the scope of a single business unit, engineering organization or IT department.
An additional level of strategy called operational strategy was encouraged by Peter Drucker in his theory of management by objectives (MBO). It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies.
Since the turn of the millennium, some firms have reverted to a simpler strategic structure driven by advances in information technology. It is felt that knowledge management systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process. This notion of strategy has been captured under the rubric of dynamic strategy, popularized by Carpenter and Sanders's textbook. This work builds on that of Brown and Eisenhart as well as Christensen and portrays firm strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the seamless integration of strategy formulation and implementation. Such change and implementation are usually built into the strategy through the staging and pacing facets.
2.4 Nature of Strategic Management
The strategic-management process does not end when the firm decides what strategy or strategies to pursue. There must be a translation of strategic thought into strategic action. This translation is much easier if managers and employees of the firm understand the business, feel a part of the company, and through involvement in strategy-formulation activities have become committed to helping the organization succeed. Without understanding and commitment, strategy-implementation efforts face major problems. Implementing strategy affects an organization from top to bottom; it impacts all the functional and divisional areas of a business. It is beyond the purpose and scope of this text to examine all the business administration concepts and tools important in strategy implementation. Even the most technically perfect strategic plan will serve little purpose if it is not implemented. Many organizations tend to spend an inordinate amount of time, money, and effort on developing the strategic plan, treating the means and circumstances under which it will be implemented as afterthoughts! Change comes through implementation and evaluation, not through the plan. A technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is typed.
2.5 Prime task
Peter Drucker says: "The prime task is to think through the overall mission of a business". Strategic management tries to bring together qualitative and qualitative information. Intuition rests on:
Intuitions help in decision making where:
Little or no precedence exists
Highly interrelated variables exist
A choice from various possible alternatives is needed
Intuition and analytical judgment requires inputs from all managerial levels
Analytical thinking and intuitive thinking complement one another
Albert Einstein cited that "Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world."
2.6 Internal Strengths and Weaknesses/Internal assessments
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 computer information systems activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on internal strengths and improve on internal weaknesses. Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, strength may involve ownership of natural resources or an historic reputation for quality. Strengths and weaknesses may be determined relative to a firm's own objectives. For example, high levels of inventory turnover may not be strength to a firm that seeks never to stock-out. Internal factors can be determined in a number of ways that include computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.
2.7 Benefits of Strategic management
Following are the major benefits of Strategic management:
Proactive in shaping firm's future
Initiate and influence actions
Formulate better strategies (Systematic, logical, rational approach)
2.7.1 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. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with planning systems more closely resembling strategic management theory generally exhibit superior long-term financial performance relative to their industry. High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. On the other hand, firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. They typically underestimate their competitors' strengths and overestimate their own firm's strengths. They often attribute weak performance to uncontrollable factors such as poor economy, technological change, or foreign competition.
2.7.2 Non- financial Benefits
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 manager's at all divisional and functional levels. Interaction can enable firms to turn on their managers and employees by nurturing them, sharing organizational objectives with them, empowering them to help improve the product or service, and recognizing their contributions. In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic management may renew confidence in the current business strategy or point to the need for corrective actions. The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than a threat.
2.8 The Industry Business Cycle
Industries react in different ways to the business cycle fluctuations of the U.S. economy (Berman and Pfleeger, 1997). Some industries are very vulnerable to economic swings, while others are relatively immune to them. For those industries that are characterized as cyclical, the degree and timing of these fluctuations vary widely. The industries that experience only modest gains during expansionary periods may also suffer only mildly during contractions, and those that recover fastest from recessions may also feel the impact of a downturn earlier and more strongly than other industries. Churchill and Lewis (1984) examined how over 1000 small firms adapted to a
recession. Fay and Medoff (1985), through a small survey of 168 plant managers, examined the labor adjustment of firms in downturns and noted that firms retained more workers than were immediately needed. Mascarenhas and Aaker (1989) concluded that firms do indeed adjust their strategies systematically over cycle stages, and managers should try to maintain flexibility with respect to the strategy choices exhibiting changing relationships with profitability over the cycle, and exploit their contemporaneous, leading, or lagging effects.
2.9 Strategy Evaluation
Organizations are most vulnerable when they are at the peak of their success. R.T. Lenz "Strategy evaluation alerts management to potential or actual problems in a timely fashion."
It is Complex and sensitive undertaking
Overemphasis can be costly and counterproductive
Systematic Review, Evaluation & Control:
1. Strategies become obsolete
2. Internal environments are dynamic
3. External environments are dynamic
2.9.1 Michael Porter's five forces
Michael Porter's 1979 framework uses concepts developed in Industrial Organization (IO) economics to derive 5 forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. Five Forces Five forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:
A graphical representation of Porters Five Forces
The bargaining power of customers
Buyer concentration to firm concentration ratio
Buyer switching costs relative to firm switching costs
Buyer information availability
Ability to backward integrate
Availability of existing substitute products
Buyer price sensitivity
Price of total purchase
The bargaining power of suppliers
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Threat of forward integration by suppliers relative to the threat of backward integration by firms
Cost of inputs relative to selling price of the product
Importance of volume to supplier
The threat of new entrants
The existence of barriers to entry
Economies of product differences
Access to distribution
Absolute cost advantages
Learning curve advantages
The threat of substitute products
Buyer propensity to substitute
Relative price performance of substitutes
Buyer switching costs
Perceived level of product differentiation
The intensity of competitive rivalry
Power of buyers
Power of suppliers
Threat of new entrants
Threat of substitute products
Number of competitors
Rate of industry growth
Intermittent industry overcapacity
Diversity of competitors
Informational complexity and asymmetry
Fixed cost allocation per value added
Level of advertising expense
Some argue that a 6th force should be added to Porter's list to include a variety of stakeholder groups from the task environment. This force is referred to as "Relative Power of Other Stakeholders". Some examples of these stakeholders are governments, local communities, creditors, and shareholders. This 5 forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.