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Strategic management is also called institutional management. It is the art and science of making, implementing and evaluating cross-functional decision making that helps an organization to achieve its long-term objectives. In this process the organization's mission, vision and objectives are discussed and developed. After these objectives are developed, the policies, plans, with respect to projects and programs, are designed, and then resources are allocated or budgeted to implement them and achieve the objectives. (wikipedia n.d.)
Strategic management consists of a set of activities that come under setting goals and over the process of putting together tactics to achieve these goals and objectives. How strategic management is carried out depends on the organizational structure of the company. The Board of Directors, the management team as well as other stake holders of the company can be involved in these activities that fall under strategic management.
Strategy can be defined as "unified, comprehensive and integrated plan that relates to the strategic advantages of the firm to the challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are achieved through the proper execution by the organization." (Jauch and Glueck 1988)
Formulating a strategy for achieving an objective or a set of objectives is a combines three main processes which are:
â€¢ By analyzing the situation, self-evaluation and competitor analysis: both internal and external, both micro-environmental and macro-environmental.
â€¢ After 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 creating vision statements (which is the long term view of a possible future), mission statements (which is 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.
â€¢ These objectives should be studied along with the results of the situation analysis and a strategic plan can be formulated. The plan provides the details of how to achieve these objectives.
Environmental analysis is a process that begins from identification of environmental factors, assessing their nature and impact, auditing them to find their impact to the business, and making various profiles for positioning.
All the decisions taken by the organization and the impact of these decisions depend on the organization's internal and external environmental factors. These environmental factors should be carefully analyzed before taking any decisions.
Environmental analysis is made up of the processes of scanning, monitoring, analyzing, and forecasting the business situations and variables of the environment. Scanning is done to get information from the environment. Monitoring is done to check the nature of the environmental factors. Analyzing requires data collection and the use of tools and techniques. Forecasting is a method to find the future possibilities based on the past results and present scenario. (Business Environment Analysis n.d.)
Different types of methods, tools, and techniques are used for environmental analysis. Some of the major methods of analysis are Scenario Building, Benchmarking, and Network methods.
Scenario building gives an overall picture of the total system with the factors which affect it. Benchmarking is to find the best standard in an industry and to compare the one's strengths and weakness with the standard.
Network method is to assess organizational systems and its outside environment to find the strength and weakness, opportunity and threats of an organization. Some of the techniques of primary information collection can be Delphi, Brainstorming, Survey, and Historical enquiry. Delphi technique collects independent information from the experts without mixing them. Brainstorming is information collection technique being open minded without criticizing others. Survey is to design questions and to ask them to the participants whereas the historical enquiry is a kind of case analysis of past period. Analysis tools can be statistical such general descriptive tools as mean, median, mode, frequency or tools can be inferential as ANOVA, correlation, regression, factor, cluster, and multiple regression analysis. (BADU 2002)
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). This is called SWOT analysis. (QuickMBA n.d.)
The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the environment in which it operates.
The SWOT Matrix
A matrix of these factors can be constructed. This matrix will be helpful in developing the strategies for the firm. The SWOT matrix (also known as a TOWS Matrix) is shown in the next page:
SWOT / TOWS Matrix
S-O strategies pursue opportunities that are a good fit to the company's strengths.
W-O strategies overcome weaknesses to pursue opportunities.
S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.
ENVIRONMENTAL ANALYSIS OR EXTERNAL AUDIT
The organizations should adapt themselves and their strategy to the external environment which is constantly changing. The external environment is also called macro environment. These forces of the external environment cannot be controlled and can be analyzed using a variety of tools and techniques such as Environmental Scanning and PEST analysis.
Environmental scanning is defined as the process that seeks information about events and relationships in a firm's environment, the knowledge of which help top management chart the firm's future.
In this process, the external environment is divided into sectors or areas such as political, economic, cultural, technological and further analysis such as Pest analysis can be done after scanning the environment. Information is collected by monitoring and forecasting any changes that occur to the variables of the environment that have been identified earlier. This collection of information helps the organizations to find out where they are lacking and what exactly they need which helps them in formulating the strategies. (Acar 1995) Environmental scanning is used to gather information from the environment.
A PEST analysis looks at the Political, Economic, Social and Technological drivers or the external forces that affect the organization. It is most useful when used together with other tools such as the SWOT analysis.
These factors may have direct or indirect impact on the organization's operation. Decisions made by the government may have an effect on the business. The political arena has a big influence on how organization operates.
Economic factors such as the market prices and market cycles affect the purchasing power and behavior of the consumers.
These factors include the demography, lifestyle, cultural aspects of the consumers. These factors have a big influence on the consumer needs and wants. Sociological factors also affect the size of potential markets.
Technological changes play an important role in shaping how organizations operate. Technological factor is very important to gain competitive advantage. Technological innovation can also improve the production efficiency, quality and speed. New technology is changing how organizations operate.
Porter's Five Forces Analysis
Porter identified the following five forces model of competitive strategy:
The threat of new entrants and the appearance of new competitors
The degree of rivalry among existing competitors in the market
The bargaining power of buyers
The bargaining power of suppliers
The threat of substitute products or services which could shrink the market
The strength of each of these forces varies from industry to industry, but taken together they determine long-term profitability. These five factors affect the strategy of the organization. It is important to analyze and study these five forces to be able to craft a successful strategy. To be successful, the organization must respond effectively to the pressures of these five forces.
INTERNAL ENVIRONMENTAL ANALYSIS
The resources, strengths, behaviors, weakness and distinctive competences are major components of the internal environment of an organization. An organization uses different types of resources which help them achieve their objectives and the way in which they utilize their resources can be the source of their strengths or weaknesses. This can also be defined as organizational capability which is used to develop the strategies and objectives which the organization can achieve and these should not unrealistic according to its capabilities.
Some of the components of the internal environment of an organization are:
These are all the tangible and intangible inputs used in the organization to create outputs in the firm of product or services through a transformation process.
The behavior of an organization demonstrates is the result of forces operating internally which will determine the ability or constraints in the usage of resources.
Competency of an organization is the ability to do what its competitors cannot do or the ability to do better than what they can do. This concept is used for strategy formulation.
It can be seen that the analysis of the environment is critical to the success of the decisions that managers have to make which have widespread impact on the functions and processes of the business.