What Is Strategic Management?
The corporate graveyard is littered with notable failures—Enron, Pan Am, Tyco, Arthur Andersen, Circuit City, and Adelphia to name a few—demonstrating that managing strategically is very dif- ficult to do year after year. And how does strategic management differ from just ordinary man- agement? If one were suddenly called in to manage a company that continued to do what it had been doing and all one had to do was make sure it was done well, we might say that would consti- tute “managing.” However, if one worried about external challenges—emerging low-cost foreign competition, changing customer tastes, impending legislation, rising material costs, and a slowing economy, to name a few—and began to look at how the company might have to change, what that change would cost, and where the money would come from for it to remain in business and be successful, then that would constitute “managing strategically.”
The Strategic Management Model Although strategic management is complex and difficult, it can be understood and learned. Just as you need a diagram and instructions and tools to assemble certain purchases in kit form, so too do you need a process or model for strategic management. Most writings on strategic manage- ment are based on a model, that is, a device for codifying a complex activity that is at once easy to explain, understand, and learn providing the reader with a “road map” as to how everything fits together. While the model enables the components of such a complex activity to be examined separately and in detail, it cannot begin to describe the difficulties that constantly arise in the real world as companies try to implement everything.
Figure 1.1 presents the strategic-management model on which this text is based. The model is aligned with the approach espoused by the Association for Strategic Planning (ASP), whose slogan is “Think—Plan—Act.” In other words, it prescribes strategic thinking, strategic planning, and stra- tegic implementation. This catchphrase is also the subtitle of this text, which you should look at again now that you know what it means.
Figure 1.1: The strategic-management model
Strategic Thinking (Chapter 3 & 4)
Scan and analyze the external environment
Explore alternative futures
Search for alternative business models and strategies, “blue oceans,” and monopolies
Internal Analysis—Strategic Planning
Assessing the company—SWOT analysis,core competence, value proposition, management,
vision, and mission statements (Chapter 5)
Leadership, governance, organization, values, and culture (Chapter 2)
Strategic Planning (cont.)
Choose the best strategy and make other strategic decisions (Chapter 7)
Implementation
Feedback and control, managing the strategic-planning process (Chapter 9)
Operational and budget planning (Chapter 8)
Determine key strategic issues
(Chapter 6)
Develop viable strategic alternatives
(Chapter 6)
CHAPTER 1Section 1.1 What Is Strategic Management?
Elements of Strategic Management To appreciate and understand the totality of strategic management, you have to understand all its elements and how they affect each other. By way of analogy, consider a system like the human body where each part affects and is affected by other parts. When you belong to the corporate world and experience what your company does every day and what it manages to achieve (or not), recall what you have learned from your study of strategic management and use that knowledge to get an edge on your own competitors, for example to win a promotion to a middle- or senior- management position. This training in strategic management and the real-world experience you obtain will help further your career, perhaps one day even to the position of chief executive offi- cer. It is at this level with a view of the entire organization and its environment that the responsi- bility for managing a company strategically lies.
Strategy Formulation Strategic management involves both strategy formulation and implementation. Strategy formula- tion, also known as strategic planning, is a complex process in its own right involving five discrete steps: (1) strategic thinking including external analysis, (2) internal analysis, (3) identifying key strategic issues, (4) developing viable strategic alternatives, and (5) choosing the best strategy using as criteria whatever the company defines as “success.”
Strategic thinking is a continual activity that seeks to find whether a better strategy and business model exist, and seeking a market space that is not currently served and has few competitors. This cannot be done without external analysis, which entails observing, analyzing, and understanding what is changing in a company’s external environment to anticipate what the future might hold.
Internal analysis means knowing, analyzing, and understanding everything about the company itself, especially what makes it a strong competitor or why it isn’t as strong as it could be. Does it have a core competence, an enabling culture, strong leadership, adequate financial resources, and a good understanding of its customers?
Key strategic issues are a synthesis of both the external and internal analyses that focus the man- agement’s attention on the most important issues the company faces. Viable strategic alterna- tives are bona fide strategic options or alternative futures from which a company can choose the best one. They consist of strategies, strategic intent, programs, and methods of financing.
Strategy Implementation Some experts suggest that strategy implementation comprises as much as 90% of strategic man- agement. It is all about successfully executing the strategies developed, thereby enabling the com- pany to achieve the vision and meet the objectives set by management. The first step is operational and budget planning to determine who will do what to implement the strategy and to ensure that the company has the resources—money, people, and know-how—to do these things. A consid- eration in this planning stage must be how progress will be measured. The actual performance of the myriad tasks involved in implementing the strategy is called operations. An information sys- tem to collect and analyze operational data must be devised and constructed. Actual performance must be measured at regular intervals and the data entered into the system to compare against planned estimates. When things don’t go according to plan or resources are being wasted, cor- rective action should be taken immediately. Lastly, the strategic-planning process itself must be managed and improved on an ongoing basis.
CHAPTER 1Section 1.1 What Is Strategic Management?
Figure 1.1 shows in which chapters the various parts of the process are presented. It also shows that the adjustments a company must make in response to challenges and changing conditions as it implements the strategy in turn affect the assessment of the company the following year. A strategically managed company is constantly updating its information and mental models to take into account the changes occurring both outside and inside the company.
People have their own ideas about things in the world around them. Sometimes they know very little about something and sometimes they know a lot. What we know or think we know about something forms our mental model of it. For example, our mental models about pollution may not be well formed. It’s a complex topic with many fac- ets, and our motivation for learning more about it and what needs to be done may be low. Most people were probably not aware that ships had for years been dumping plastic waste into the Pacific Ocean on the probable assumptions that, in the vastness of the ocean, this would go unnoticed and no harm done. Their mental model of marine pollution
was likely not based on personal observation but limited to what they might have occasionally read in newspapers. For many, that mental model must have been radically updated when a series of articles about ocean pollution revealed the existence of the Pacific Trash Vortex consisting of non- biodegradable plastics floating in the “western garbage patch” off the coast of Hawaii and the “eastern garbage patch” off the United States continental coast. The latter was estimated to be twice the size of Texas (Weiss, 2006). In another example, we are all familiar with newspapers and bookstores and no doubt think we have pretty good mental models of those businesses. But can you imagine a world without either of them, at least in their current form? There’s a good chance that might happen in the next few years. If that happens, we will have two more mental models to update (Olivarez-Giles, 2011).
Strategic planning and strategic management are best explained while examining a company that is in only one business. This approach is used in the first 10 chapters. Chapter 11 explains how diversified (multi-business) companies, international companies, and global companies oper- ate and why they are considerably more complex to plan for and to manage. Companies in very fast-moving industries, as with most high-tech businesses, are also difficult to manage because keeping abreast of rapid changes often requires a technology strategy in addition to a company strategy and requires a higher level of investment.
The coming sections in this introductory chapter explain the context of business, what is meant by “success,” the meaning of strategy and strategic planning (among the most misused and mis- understood words in business), what business models are and why every business has one, and the importance of stakeholders in business decision making. The remaining chapters in the book explore in greater detail each of the major elements of strategic management and clarify them. In the end, you will have a conceptual grasp of how everything fits and works together. To manage strategically well takes years of practice and accumulated experience, often people’s entire careers.
Chris Clinton/Digital Vision/Thinkstock
The Association for Strategic Planning has a strategic-management model, whose slogan is “Think—Plan—Act.”
CHAPTER 1Section 1.2 About Competition
1.2 About Competition In this section, we’ll begin to examine the different kinds of competition at various stages and levels of business.
Free Versus Regulated Markets Capitalism allows a free market to exist and promotes competition. The United States is a mixed economy, which means that some markets are freely competitive with almost no state intervention, and some are highly regulated, making competition very difficult. It is convenient to assume initially that a market is not regulated until the nature and degree of the regulation can be identified and understood. An example of a regulated market is public utilities, regarded as a public good and which require regulation to maintain high levels of accessibility, affordability, and safety that otherwise might be jeopardized in pursuit of profit. Other regulated markets include communications, energy, food production, trucking, workplace safety, and airlines, to name a few. All involve public-safety issues and the need to balance the public interest with what’s good just for a particular company.
Industries Versus Markets The terms market and industry are often used inter- changeably in everyday usage, but they have quite dis- tinct meanings. The collection of firms that provides similar products or services to the same customers is called an industry. The buyers for those products or services are collectively called the market. To an econo- mist, the industry is the “supply” side of the equation and the market is the “demand” side, which is illus- trated in Figure 1.2 below. When demand is greater than supply and people can’t get enough of what they want, they become willing to pay more. The price will go up until the point where demand again equals sup- ply and prices stabilize. Conversely, when companies can’t sell all that they have produced, supply is greater than demand. Producers will try to reduce accumu- lated inventories and the price will go down until sup- ply again equals demand and prices stabilize.
Gunnar Pippel/iStockphoto/Thinkstock
Market share is the percentage of a firm’s annual sales based on the annual sales of the entire industry.