Strategic management is the process of decision making and planning which leads to the development of an effective strategy to help achieve organizational objectives.
In this process, the strategists determine objectives and make strategic decisions.
Strategic Management can be defined as a decision-making process that leads to the development of the strategic position i.e. which helps to determine the future sustainability and the profitability of the organization, simultaneous with the integration of managerial capabilities, responsibilities, motivation and reward system.
It synergizes the strategic and operational orientation and provides an overall framework for resource allocation among different units and time horizons. It can be regarded as the architecture of integrative decision making. It results in the articulation of the corporate strategy followed by competitive and functional strategy (what it is and outcomes).”
What is Strategy?
To comprehend what is strategic management, we need to know what Strategy means.
The word ‘strategy’ is adopted from military administration. In the military, most often strategy refers to ‘deployment’ of troops – that means maneuvering of troops into position before the enemy is engaged.
In. business, we can substitute ‘resources’ for troops. Business people deploy resources of various types to achieve objectives.
A strategy is considered as a long-term plan that relates the strategic advantages of an organization to the challenges of the environment.
It involves the determination of the long-term objectives of the organization and the adoption of courses of action. It also involves the allocation of resources necessary to achieve the objectives. When defined this way, objectives are considered as part of strategy formulation.
According to the definition provided by Thompson and Strickland, a strategy is the means used to achieve the ends.
Here ‘means’ refer to ways or actions and ‘ends’ refer to objectives. Strategy expresses the intention of Management about the way to achieve objectives of the organization.
According to Michael Porter, the undisputed guru of competitive strategy, “strategy is about the competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors.”
In his book, he defines competitive strategy as “a combination of the ends for which the firm is striving and how it is seeking to get there.”
In their book of 1980, Thompson and Strickland defined strategy as “the pattern of organizational moves and managerial approaches used to achieve organizational objectives and to pursue the organization’s mission.
What is Strategic Management and Strategic Management Process?
The strategic management process is initiated to enable the organization’s top managers to make those decisions that affect the longterm profitability and sustainability of the organizations.
It involves large-scale mobilization of resources across the organization to develop competencies and capabilities for the future while taking care of the risk such long term decisions entail.
This post presents the context of longterm decisions, discusses, in brief, the changing nature of the external context and how organizations respond to the ever-changing external context by adopting strategic management.
It familiarises the student with the terms that are associated with strategic management and is used extensively in the post later.
Strategic management is the process of strategic analysis of an organization, strategy-focused objective-setting, strategy formulation, strategy implementation, and strategic evaluation and control.
Strategic analysis is involved with analyzing the industry in which the organization is operating its business and analysis of both the external and internal environmental factors.
Strategy-focused objectivesetting is concerned with establishing long-range objectives for the organization to achieve the vision and mission.
Strategy formulation entails making decisions about selecting the strategy to achieve the long-range objectives. Strategy implementation is concerned with putting the formulated-strategy into action.
It is materialization or execution of strategy through deployment of necessary resources and aligning the organizational structure, systems (e.g., reward systems, support systems) and processes with the selected strategy.
This element is also involved with making decisions regarding setting short-range objectives, developing budgets and formulating functional/supporting strategies to achieve the ‘main strategy’.
The last element of the strategic management process – strategic evaluation and control – aims at establishing standards of performance, monitoring progress in the implementation of strategy, and initiating corrective adjustments in the strategy (if anything goes wrong).
Strategic management is the process through which managers undertake efforts to ensure long-term adaptation of their organization to its environment. Strategic management is not a simple process; it is complex.
Its complexity may be attributed mainly to 3 reasons:
- Strategic management involves making decisions about the future. The future is uncertain. A manager can’t be sure about the future. Therefore, strategic management involves a high degree of uncertainty.
- Managers in different departments in an organization have different priorities. They must reach an agreement to ensure an. integrated approach. Strategic management needs an integrated approach, which is difficult to achieve.
- Strategic management involves major multifarious changes in the organization. It heeds changes in organizational culture,
leadership, organization structure, reward system, etc. All this makes strategic management complex.
The strategic management process developed over the years from the erstwhile planning approaches such as corporate and strategic planning. It was a process that developed upon the merits of formal planning systems.
The strategic management process differs from the erstwhile approaches to planning such as corporate planning and strategic planning because:
- It deems formulation and implementation to be equally critical.
- Strategies that are the major outcome of the process are intended, but if they are altered due to uncontrollable factors than the emergent strategy is accepted with due changes in support resources.
- Resource allocation to and balance between the ongoing operations and strategic prospects is considered a primary task. Resource allocations are not tight budget limitations but also prone to change.
- The process is driven by key managers. Consultant support can be sought on different aspects such as a quality program if needed.
- Changes in administrative processes, structure, people processes are not incremental and sequential but driven by strategy imperatives.
Strategic management results in the articulation of strategic intent, corporate strategy, business-level strategy, and functional strategy.
These are then used to draw up functional plans, programs, and budgets.
Organizations exercise operational control as well as strategic control. In the strategic management process, managerial attention is concentrated on the integration of formulation and implementation.
Organizations gradually take up the entire spectrum of the strategic management process. Once established within an organization it becomes the philosophy of the organization.
Need and Rationale for the Strategic Management Process
The foregoing discussion makes it clear that in contemporary organizations managers face the challenge of ensuring sustainability and profitability amid many unpredictable and novel circumstances emanating from the external environment. In the 1950s, 60s, and 70s the conditions for business were more benign.
The demand for products and services was escalating.
At that time businesses were required to focus on raising productivity, setting up multiple plants and strengthening channels of distribution to serve largely homogenous markets governed by similar regulations.
The functioning of business was impacted more by concern for meeting escalating demand in the developed world.
Business organizations could meet those challenges posed by the demands of the external environment by initiating forecast-based planning and command and control-based internal processes.
The complexity in the external domain of business has increased and forecast-based planning may no longer be feasible or reliable.
Disruptive technologies, changing geopolitical situations, the emergence of Japan as a manufacturing powerhouse followed by China as a factory to the world, depletion of natural resources/fossil fuels/contamination of aquifers/land as result of businesses’ activity and consumption, disenchantment with bad governance, and emergence of the global village assisted by the ICT technologies and with shifts in economic power structure (BRIC countries Brazil, Russia, India, and China emerging as a dominant economic force) compel managers to develop such systems for decision making that enable them to capture the uncertainties to the extent possible in their decision process.
Not only do they need to factor in major unpredictable changes in decision making they also have to change the way people’s commitment to their organization is sought.
Instead of controlling, empowerment has to be practiced and collaborations and partnerships between departments developed.
Many organizations flounder because they make errors in anticipating the impact of the environment or because they do not have the requisite resources to make good of opportunities and by the time they create resources competition overtakes them or because the mindsets do not allow them to step out of the existing comfort zone.
These are but a few reasons for organizations either failing or for showing sub-par performance.
What contemporary organizations and managers need is a process that:
- Facilitates strategic thinking enabling the exploration of environment opportunities and analysis of threats in a holistic manner.
- Enables the initiation of strategic change (such as changes that affect an organization’s culture, structure, mindsets, or processes).
- Provides for the integration across different managerial processes, business units, and functions.
- Delineates, yet links the operational with the strategic among process systems and managers of organizations.
- Allows cross over from the strategic to the operational orientation in specific situations.
- Facilitates pragmatic resource allocation among competing segments of the organization such as SBU’s, divisions, functions, and new businesses and reduces conflict that is inherent in resource allocation among competing entities.
- Integrates administrative processes, decision making, leadership and motivation along with rigorous analysis.
History and Evolution of Strategic Management
Business organizations are now facing great challenges due to uncertainty in the business environment. Most changes are unpredictable. And so uncertainty creeps up. In the face of changes, many excellent new ideas may become obsolete.
Changes are continually occurring in demographics, economic conditions of the country where a business is located, trade practices due to deregulation/ liberalization, diversity of workers such as entering more and more female workers in the workplace, technology, and globalization trends.
Not only in these external issues, but changes are also taking place.
Changes are also occurring in the internal affairs of the business organizations in terms of the high turnover of employees, the loss of highly trained and skilled technical people, etc.
All these threatening changes cause several internal problems for an organization. These changes lead to uncertainty and complexity in the business functioning.
The strategy provides a way to deal with changes and their accompanying uncertainty both inside and outside the organization.
When the environment changes, managers must do something unique to ensure a ‘prospective future’. If they continue doing what they have been doing, they might end up with having a future even worse than the past.
Thus, managers involve themselves in the strategic management process. Managers develop and implement a strategy to conquer the market and survive.
Organizations of any size can adopt a strategic management process, and the process applies to private, public, not-for-profit (NGO) and religious organizations.
Since managers have to be involved in strategic management, they need to understand the concepts, issues, and processes related to strategic management.
The history of the evolution of strategic management can be traced back to 400 BC when the term ‘strategia’ was used in the Greek army to imply science, art, and quality of being efficient army general.
Subsequently, this term was taken as a synonym of the present-day term ‘strategy. The concepts and techniques of strategic management have evolved over the years beginning in the 1970s in a lukewarm way.
Strategic management is not a very old phenomenon in the corporate world. The concepts and techniques have evolved over the years beginning in the 1970s in a lukewarm way.
Initially, the concept of long-range planning was used in a few large companies in the USA. The two most admired companies that began using long-range planning are General Electric Company and Boston Consulting Group (a consulting firm). General Electric Company led the transition from ‘strategic planning’ to ‘strategic management’ during the 1980s.
The concept of strategic management got worldwide attention in the 1990s. It may be pertinent to mention here that ‘strategic planning’ seeks increased responsiveness to markets and competition by trying to think strategically.
On the other hand, strategic management seeks competitive advantage and sustainable market growth by effectively managing all resources of the organization.
The strategic management process entails several pertinent issues that need clarification for better understanding.
Concept of Strategy
A strategy is considered as a long-term plan that relates the strategic advantages of an organization to the challenges of the environment.
It involves the determination of the long-term objectives of the organization and the adoption of courses of action. It also involves the allocation of resources necessary to achieve the objectives.
When defined this way, objectives are considered as part of strategy formulation. According to the definition provided by Thompson and Strickland, the strategy is the means used to achieve the ends.
Here ‘means’ refer to ways or actions and ‘ends’ refer to objectives. Strategy expresses the intention of management about the way to achieve objectives of the organization.
Strategic Decision Context
Organizations operate in a dynamic environment. Social, political, economic and technology-driven events that are external to the organization have a bearing on the products, market and technology-related choices the organization makes.
The organization’s responses to the changes that take place in the external environment are at multiple levels.
The response spans the domains of marketing, finance, operations, human relations, technology and innovation, leadership, motivation, organization, culture, design, and systems. The organization’s response is based on the analysis of the trends of the external environment and the organization’s capabilities.
The changes in the external environment may be revolutionary or evolutionary for example technology that enables the convergence of music and the Internet on one device has been far more revolutionary than the technological changes that have taken place in steel manufacturing technology during the same period.
Changes can impact the entire industry. Let us consider the case of cars.
The Model T manufactured by Ford Motor Company is different from today’s motor car but it was also made with a different perspective altogether – a perspective that placed the manufacturer at the center and not the customer! When Ford was a dominant manufacturer the demand for the cars could be estimated and extrapolated, the market was homogenous, a regulation was limited, and manufacturing was localized.
Ford developed the assembly line for production.
The long-term decisions entailed capacity expansion, monitoring of production and organization of selling to a larger customer base. The environment in which Henry Ford set up the automobile empire demanded less from the manufacturer in terms of differentiation and regulatory compliance.
This is certainly not true for today’s car manufacturers who have to incorporate the customers’ expectations of design, performance, and features along with more ecologically acceptable fuel options in their cars.
Markets and manufacturing are global, customers demanding, regulation is tough, there is an emphasis on customized production and the assembly line is on the wane.
In the last decade in the Asian markets, the dominance of Detroit has been replaced by the dominance of Japanese car manufacturers in the 1980s.
Today (2012) in Asian markets the market dominance of Japanese cars (such as Honda) is being challenged by Korean (Hyundai) and German (Volkswagen) manufacturers.
Countries as vast as India in terms of a market also have their home-based car manufacturers (for example, Tata Motors, Maruti and Mahindra) that vie for a market place with Volkswagen and Hyundai. The relationship between the environment and the organization is dynamic.
Change in one affects the other and vice versa. In the transformation of the car industry, external factors have played as important a role as have the changes within the industry itself.
Modern organizations like Dell Computers, Apple, Infosys, and Singapore Airlines, have been more successful than their counterparts because their response to the environmental opportunities and threats steered them towards success.
Proactively, they changed many contours of their industry.
Considering the external conditions are, by and large, the same within an industry, what explains the difference between successful and unsuccessful organizations?
There is no simple answer to this question, nor is there a magic formula for success. To identify the differences between successful and unsuccessful organizations it is pertinent to ask a few questions about:
- The extent of challenges posed by the external environment and the extent to which the system appraises the environment.
- The process by which the organization responds to the environment. Is the response ad-hoc or systemic?
- The adequacy of the top management vision and strategic thinking in meeting the environmental challenges to the benefit of the organization.
- The risk-bearing capacity of the organization’s managers.
- The capacity within the organization to implement and follow through decisions.
From the above we can infer that the external environment is changing continuously, organizations have to adapt to those changes and in doing so the role of top management is critical.
Strategy versus Policy
We should not confuse strategy with policy. Policies are general statements or understandings that guide managers’ thinking in decision making.
Policy guides a manager’s thinking in decision making; strategy implies the commitment of resources in a given direction. Two may, however, be essentially the same.
One company may have a ‘policy of growth through the acquisition of other firms’ while another company may have a ‘policy of growing only by expanding present markets and products.’
While these are policies, they are also essential elements of major strategies.
Benefits of Strategic Approach to Managing
Today’s world is globalized.
Competition has become very fierce in most industries. Because of the liberalization of trade and financial services, companies are becoming more and more globalized. This has further enhanced competition.
Competition, thus, makes it obligatory for managers to think strategically about the company’s position. They must also think strategically about the impact of changing conditions.
They need to monitor the external situations closely to determine when to initiate changes in the existing strategy of the organization.
The advantages of strategic management in an organization, especially in a business organization, include:
- Providing better guidance to the entire organization.
- Making managers more alert to the winds of change, new opportunities and threatening developments in the organization’s external environment.
- Providing managers with a rationale for evaluating competing budget requests for investment capital and new employees.
- Helping to unify the numerous strategy-related decisions by managers across the organization.
- Creating a more proactive management posture.
Relation of Strategy and Strategic Plan
A strategic plan is prepared to cope with several issues, such as the industry and competitive conditions, expected actions of the key actors in the industry, and any obstacles to the success of the organization.
It incorporates industry conditions, competitive situations as well as the vision, mission, objectives, and strategy.
Strategic plans aim at achieving strategic goals. These plans are set by the senior-most managers (directors in the company’s board and the CEO plus other senior-level people).
Most successful companies have been found to have a strategic plan in the form of a written document.
This document contains a description of the industry’s economic aspects, key success factors, drivers of change, and a strategic plan that describes the company’s internal and external environment.
Some companies have the policy of not disclosing a strategic plan to all but selective managers, while some others make only vague general statements for the reasons of competitive sensitivity.
Traditionally, the strategic plan covers more than one year.
But nowadays, because of the high speed of change in many industries, strategic plans are made even for quarterly use.
The time-span of the strategic plan needs to be shorter, sometimes measured in months, in the organizations involved in e-business (especially in e-retailing).
Phases of the Strategic Management Process
The strategic management process has 3 distinct phases: planning, implementation, and evaluation.
The three phases are distinct in theory and in practice they overlap and iterate. The assumptions and forecasts on which decisions are based can be checked and if needed corrected.
3 phases of the strategic management process;
- Formulation phase.
- Implementation phase.
- Evaluation phase.
The formulation phase is the cognitive phase of the strategic management process.
It is during this phase that deliberations and decisions about the broad scope of business (intent), the key areas of business (corporate strategy), and key drivers of business (core values and commitments) are taken.
The decisions are based on a reasoned analysis of SWOT factors, assessment of managerial aspirations and acknowledgment of society’s expectations. The formulation begins with asking very fundamental questions:
- Who are we? (answered by the intent/mission), and
- What can we be and how can we be? (Answered by corporate strategy).
The information asymmetry, while formulating corporate strategy, makes the moderating role of strategic thinking important. Strategic thinking implies thinking beyond the boundaries of one’s assigned domain such as a function or a division.
It is the capacity to see interrelationships in the web of disjointed information.
This is the action phase of the strategic management process. The formulation phase has laid down the general direction through intent and strategy.
If formulation was talking about things within the realm of the possible, implementation is pushing plans to the realm of attainable. Implementation is organization-wide.
In the implementation phase, the resource allocation decisions are strategic managers allocate resources among current and future activities.
A balance between the two is important.
Some of the tools used in resource allocation are BCG matrix, GE Matrix, and Experience curve.
In the implementation phase, the organization also accomplishes strategic change since the structural configuration of the organization, leadership, and culture may undergo an intended or inadvertent change.
The soft skills are equally important to steer the implementation. The managerial responsibility for implementation spans the different line functions and verticals.
Effective implementation is as much a reflection on managerial capabilities as is the formulation. Strategy implementation requires:
- Developing an “execution” mind-set. Managers tend to be enamored of the formulation phase whereas results come from execution – implementation. Such a mindset requires that management time is apportioned to identifying key tasks, setting standards of performance and designing reward/motivation systems.
- Integration among different units’ processes and functions. The purpose of strategic management is to develop an integrative perspective across the organization. Leveraging cross-functional and divisional competencies is done during implementation.
- Creation of a sense of ownership among managers for the decisions which systemically would be changing the organization. Those who implement must feel a sense of ownership for those decisions that they implement otherwise the efforts would be half-hearted. Strong measures for employee engagement are recommended, more so if radical changes in “doing” things are needed for increasing efficiency.
- Implementation requires different skills, attitudes, knowledge, and abilities. There is a possibility of dissent as new changes are brought in, resource allocations are revised, and organization design is reconfigured. Implementation requires “manmanagement” skills.
- Facilitating new learning. Implementation brings about changes in almost every aspect of the business. The use of better technology means learning new things, being more responsive to customers also means learning more things, so does the installation of Enterprise Resource Planning. Organization-wide learning is initiated if the organization is adapting to global-level changes. If the organization does not anticipate the learning requirements and leaves people to be on their own, implementation runs into serious problems.
- Preparation for implementation precedes implementation, with the groundwork done well before. Even though the managers responsible for implementation may be different from those responsible for formulation in large diversified organizations, ongoing consultation between the two to probe, discuss and decide the plan of action is important to lend the phase a push.
- Communicating clearly and effectively is important. Resource allocation, organization, design change, and technology adoption almost churn an organization. To enable a smooth passage through this, communication plays a vital role.
- Designing an appropriate arrangement that fits the organization’s new or emerging plans and activities would also require developing new key managers. If an organization is diversifying and adding a new SBU, it has to identify, equip and train key managers for that SBU.
Evaluation Phase: Strategic evaluation and control
The objective of the evaluation phase is to check if there is any fundamental flaw in the strategy that can be corrected.
For example, many Indian business houses had a strategy to enter the organized retail segment in 2005-2006 but the high price of retail space made the foray unprofitable.
It was pertinent to ask two basic questions:
- Was our strategy based on a sound analysis of opportunities and threats? The strategy was based on pragmatic analysis that showed there were indeed good opportunities in the organized sector.
- Did the strategy entail an acceptable level of risk? The answer to this question was that the risk owing to the astronomical escalation in the price of prime real estate was too high. Future profitability at those rents was not an attractive proposition.
The answer to the two questions reconciled the internal inconsistency among the key assumptions on which the strategy was based. Withdrawal from retail before any significant losses was reported was done.
This shows how evaluation helps in avoiding suicidal mistakes and how flexibility can be built in strategic decisions. The other objective is to judge performance through operating results.
The deviation in results compared to the desired outcome can imply that either the standards need revision or resource allocation has to be reconfigured or employee skills have to be upgraded. The course correction is made possible sooner.
Broad qualitative criteria can be the guidelines to develop quantitative criteria for evaluation. These are more objective and measurable.
Issues in Strategic Management
The strategic management process entails several concepts and issues that need clarification for your better understanding. Every manager must have a clear understanding of the relevant concepts as well as the basic issues of strategic management.
Basic concepts and issues such in Strategic Management are;
- organizational philosophy,
- organizational policy,
- functional strategy and competitive strategy,
- environmental scanning,
- core competency,
- code of ethics,
- levels of strategy-making,
- value chain, and
- competitive advantage.
Organizational philosophy establishes the relationship between the organization and its stakeholders.
It establishes the values and beliefs of the organization about what is important in both life and business, how business should be conducted, its view of humanity, its role in society, the way the world works, and what is to be held inviolate.
In most organizations, the guiding philosophy is formulated by the owner or founder of the Chief Executive Officer (CEO).
Their beliefs about, for example, the importance of employees as individuals, of formality in communication, and belief in superior quality and service are reflected in the philosophy.
A policy is a broad guideline for decision making. A policy is a standing plan in the sense that it lasts relatively for a longer period.
It specifies the organization’s response to a designated problem or situation. It is a general guide for action and that is why it is the most general form of standing plan.
Some examples of policy are given below:
- To answer all written complaints of consumers in writing. (policy of a manufacturing company)
- To require a minimum down payment of 10% of the purchase price (policy of real estate company).
- To appoint those firms as dealers for selling accounting software who do not carry software of other software companies (policy of a software development company).
- Not to grant a franchise to an individual who already owns another fast-food restaurant (policy of an international fast-food chain).
- Admission will be granted only to students who secure a minimum of 60% marks in the admission test (admission policy of a university).
Organizations use policies to provide uniform guidelines to all employees regarding certain issues/activities so that they can make decisions and take actions uniformly on those issues.
Policies are formulated to ensure clear guidance to managers and other employees throughout the organization.
Competitive Strategy and Functional Strategy
Strategic management primarily deals with competitive strategy, although the functional strategy is not ignored.
Competitive strategy refers to a strategy that incorporates the impact of the external environment along with the integrative concerns of the internal environment of an organization.
The competitive strategy aims at gaining a competitive advantage in the marketplace against competitors.
And competitive advantage comes from strategies that lead to some uniqueness in the marketplace and high perceived value in the eyes of customers.
Winning competitive strategies are grounded in sustainable competitive advantage. Examples of the competitive strategies include differentiation strategy, low-cost strategy, and focus or market-niche strategy.
On the other hand, functional strategy refers to a strategy that emphasizes a particular functional area of an organization.
It is formulated to achieve some objectives of a business unit by maximizing resource productivity. Sometimes functional strategy is called departmental strategy since each business-function is usually vested with a department.
Examples of the functional strategy include product strategy, marketing strategy, human resource strategy, and financial strategy.
The functional strategy is concerned with developing a distinctive competence to provide a business unit with a competitive advantage.
Each business unit or company has its own set of departments, and every department has a functional strategy. Functional strategies are adopted to support a competitive strategy.
For example, a company following a low-cost competitive strategy needs a production strategy that emphasizes reducing the cost of operations and also a human resource strategy that emphasizes retaining the lowest possible number of employees who are highly qualified to work for the organization.
Other functional strategies such as marketing strategy, advertising strategy, and financial strategies are also to be formulated appropriately to support the business-level competitive strategy.
Levels of Strategy-Making
In a diversified company (a company having different single-line of businesses under one umbrella), strategies are initiated at four levels.
The strategies at each level of the organization are known by the name of the level:
|#||Levels of Organization||Names of Strategy|
|1||Corporate level||Corporate strategy|
|2||Business level||Business strategy|
|3||Functional level||Functional strategy|
|4||Operating level||Operating strategy|
In a single-business enterprise, three-level strategies are formulated:
|#||Levels of Organization||Names of Strategy|
|1||Business level||Business strategy|
|2||Functional level||Functional strategy|
|3||Operating level||Operating strategy|
Corporate strategy is formulated at the top level of a diversified company (in our country, a diversified company is popularly known as ‘group of companies’ or ‘group of industries.’
Such a strategy describes the company’s overall direction in terms of its various businesses and product lines. Corporate strategy generally affects all the business-units under its umbrella.
Corporate strategy, for example, of Uniliver may be acquiring the major tissue paper companies in India to become the unquestionable market leader.
Business strategy is formulated at the business-unit level or product level. This strategy emphasizes the strengthening of a company’s competitive position of products or services. Business strategies are composed of competitive and cooperative strategies.
The functional strategy has already been discussed and therefore we avoid repetition here.
Operating strategy is formulated at the operating units of an organization. A company may develop an operating strategy for its sales territories.
Environmental scanning is often used interchangeably with ‘strategic analysis’ which is the first element of strategic management.
Hunger and Wheelen define environmental scanning as ‘monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation.’
The core competency of an organization is its core skill. It is a central valuecreating capability of the organization. Core competencies emerge from a company’s experience, learning skills, and focused efforts on performing one or more related value chain components.
Also called distinctive competencies, core competencies are activities of the company where its position is superior to its competitors.
For example, Toyota Motor Company of Japan is believed to have core competencies in the design and manufacturing of cars using just-in-time philosophy.
When we say that a company has a core competency in an area of business activity, we mean that the company can do that activity especially well in comparison to its competitors.
Examples of core competencies include:
- Manufacturing excellence
- Exceptional quality control
- Ability to provide better service
- Superior design capability
- Innovativeness in developing new products
- Mastery of an important technology
- A strong understanding of customer needs and tastes
- Company’s ability to create and commercialize new products.
It is easier to build competitive advantage when a firm has a core competence in an area important to market success. It becomes much easier when competitors do not have offsetting competences. Core competencies are thus valuable competitive assets.
They enhance a firm’s competitiveness.
Code of Ethics
Ethics refers to principles of conduct that govern the decision making and behavior of people. Ethics play an important role in developing organizational philosophies.
Ethics of people in the organization either as individuals or groups who are involved in developing the future direction of the organization has important implications for the stakeholders.
Managers need to understand clearly why ethics are important in their organizations.
The following are some of the ethical questions in business:
- Is the sale of cigarettes by a company ethical?
- Is giving advertising for the promotion of cigarettes or wine or spurious drugs ethical?
- Is the export of a product banned in home country ethical practice for a multinational company?
- What are the ethical implications of forbidding a company’s purchasing agents from accepting gifts from vendors while encouraging sales agents to give gifts to prospective buyers?
Nowadays it is widely believed that organizations should develop a written code of ethics to guide the employees in taking care of ethics in their activities.
A code of ethics is a written document that contains principles of conduct to be used in decision making. A code of ethics heightens an organization’s reputation in society.
Organizations should, therefore, build ethics into their cultures.
The existence of a code of ethics or code of conduct makes an environment in organizations where all people try to make ethical conduct a way of life.
Thompson and Strickland have prepared a list of topics that organizations usually cover in codes of ethics:
- Honesty and observance of the law.
- Conflicts of interest.
- Acquiring and using information about others.
- Political activities.
- Use of company assets, resources, and property.
- Protection of proprietary information.
- Pricing, contracting, and billing.
- Fairness in selling and marketing practices.
- Using inside information and securities trading.
- Suppliers relationships and procurement practices.
- Payments to obtain business.
Organizations should develop procedures for enforcing ethical standards. They need to ensure that all employees comply with the code of ethics in every unit of the organization and at every level.
Employees should be given training about how to comply with ethical standards. Managers must inform the employees of how ethical standards apply in various areas in which employees are working.
They can show by examples – they must practice ethical standards. Practicing ethical standards must be a continuous exercise.
Ethical standards must be integrated into organizational policies and all actions of the organization.
Value Chain of Company
The value chain of a company consists of the company’s primary and support activities. The primary activities are involved with the physical creation of a product, it’s distribution and marketing, and the after-sales service related to the product.
Specifically, we can say that the primary activities of a manufacturing company include inbound logistics, operations/production, outbound logistics, marketing, and service.
The support activities are necessary for supporting the primary activities to take place. They include the company’s infrastructure, human resource management, technological development, procurement, finance, inventory, etc.
Collectively, all these primary and support activities constitute the value chain. It shows how a product moves from the stage of raw materials to the final customers.
Competitive advantage is the special edge that allows an organization to deal with market and environmental forces better than its competitors.
It comes from strategies that lead to some uniqueness in the market place. It indicates a company’s competitive position that allows it to achieve higher profitability than the industry’s average.
To develop a competitive advantage, a company should develop distinctive competencies and then use them to creatively competes in its markets.
A company has a competitive advantage whenever it has an edge over the competitors in attracting customers and defending against competitive forces. There are many sources of competitive advantages:
- Having the best-made product on the market.
- Delivering superior customer service.
- Achieving a lower cost than competitors.
- Being in a more convenient geographical location.
- Proprietary technology.
- Providing buyers more value for money,
- Features and styling with more buyer appeal.
- Shorter lead times in developing and testing new products.
- A well-known brand name and reputation.
Managers need to recognize these winning business strategies are grounded in sustainable competitive advantage.
Strategic Management in Organization – Who Perform the Tasks of Strategic Management?
Since a competitive strategy is more than an idea and also it is about making that idea work, the CEO must play a significant role in strategy formulation.
The CEO must perform in many roles, requiring an almost holographic capability – as a change agent, communicator, the public face of the company; as a decider, facilitator, teacher, and mentor as well as a leader.
The senior managers assist the CEO in articulating and assimilating strategy-related information and ideas. The mid-level managers play supporting roles and do some or most of the strategy-making for their units.
The lower-level managers and employees assist in formulating and implementing a strategy in the work-areas they are directly involved with.
You can ask a pertinent question: Is strategic management the sole prerogative or responsibility of the senior managers?
The straight-forward answer is ‘No.’
There is a wrong notion among some people that strategy-making and strategy implementation are the prerogatives of senior managers only, especially the Chief Executive Officer (CEO).
The primary responsibility of corporate or business-level strategy making rests mainly with the CEO, the board of directors and other senior-level managers.
However, in reality, all managers at all levels need to participate in the process of strategic management.
Also, the relevant employees need to be involved in the effective formulation and implementation of the strategy. In our view, all kind of personnel should be involved in performing the tasks of strategic management:
- The CEO (most important strategy manager)
- Other senior managers (usually involved in proposing key elements of the overall company strategy)
- Divisional and departmental managers (play supporting role/do some or most of the strategy-making for the units).
- Other lower-level managers (strategy markers and implementers for the areas they supervise).
Strategic Management is an Ongoing Process, Not a One-Time Shot
Managers are responsible for detecting when new developments within or outside the company require a strategic response and when they don’t.
Their job is to track progress, spot problems and issues clearly, monitor the winds of market and customer change and initiate adjustments as needed.
This is why the task of evaluating performance and initiating corrective adjustments is both the end and the beginning of the strategic management cycle.
Strategies Help Managers to Make Decisions
Strategies Help Managers to plan properly by guiding them to make operational decisions. The basic principle of the strategy and policy framework is as follows;
The more strategies and policies are clearly understood and implemented in practice, the more consistent and effective will be the framework for enterprise plans.
if a company has a major policy of developing only new products that fit its marketing organization, it will avoid wasting energy and resources on new products that do not meet this test.
Strategies and policies, to be effective, must be put into practice utilizing detailed plans embodying minutest of ingredients necessary for operation.
These detailed plans, also called tactics, are the action plans through which strategies are pursued and implemented. Hence strategies must be supported by effective tactics.
Dunham and Pierce have defined strategic planning as the top management’s active and conscious effort to design a plan to place an organization within its external environment.
A strategic plan outlines a long-term perspective for the organization. It specifically states the organization’s reason for existence, its strategic objectives, and its operational strategies.
A strategic plan of an organization, therefore, answers a set of fundamental questions;
- What business is it doing or does it want to do in the future?
- What kind of organization is it or does it like to be? How is it going to conduct itself to achieve this strategic position?
The strategic planning process is a comprehensive framework that guides the decisions that determine the nature and direction of organizational activities and undertakings.
For a broader and better understanding of strategic planning, the following three concepts need to be appreciated,
- Organizational Mission
- Strategic Objectives, and
- Operational Strategies.
Let’s know briefly about them;
An organizational mission is a statement specifying the kind of business it wants to undertake.
It puts forward the vision of management based on internal and external environments, capabilities, and the nature of customers of the organization.
Particular mission statement, however, does not necessarily state-specific strategic objectives or operational strategies or tactics.
A strategic objective provides statements of definable and measurable achievements. The realization of such achievements marks the fulfillment of an organization’s mission statement.
Operational strategies specify the actions that are to be taken to attain objectives.
Operational strategies or tactics mean the same things which are action plans designed to execute or implement strategies.
Final Words: Strategic Management Process Plays a Dynamic Role in Organization
Strategic management plays a dynamic role in achieving success in today’s business world. Strategic management is a stream of decisions and actions, which leads to the development of an effective strategy to help achieve organizational objectives.