UNIT I: BASIC CONCEPTS OF STRATEGIC

MANAGEMENT

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.

Strategic management can also be defined as a bundle of decisions and acts

which a manager undertakes and which decides the result of the firm’s
performance. The manager must have a thorough knowledge and analysis of
the general and competitive organizational environment so as to take right
decisions. They should conduct a SWOT Analysis (Strengths, Weaknesses,
Opportunities, and Threats), i.e., they should make best possible utilization
of strengths, minimize the organizational weaknesses, make use of arising
opportunities from the business environment and shouldn’t ignore the
threats.

Strategic management is nothing but planning for both predictable as well as

unfeasible contingencies. It is applicable to both small as well as large
organizations as even the smallest organization face competition and, by
formulating and implementing appropriate strategies, they can attain
sustainable competitive advantage. It is a way in which strategists set the
objectives and proceed about attaining them. It deals with making and
implementing decisions about future direction of an organization. It helps us
to identify the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls

the business and the industries in which an organization is involved;
evaluates its competitors and sets goals and strategies to meet all existing
and potential competitors; and then reevaluates strategies on a regular basis
to determine how it has been implemented and whether it was successful or
does it needs replacement.

Strategic Management gives a broader perspective to the

employees of an organization and they can better understand how
their job fits into the entire organizational plan and how it is co-
related to other organizational members. It is nothing but the art of
managing employees in a manner which maximizes the ability of achieving
business objectives. The employees become more trustworthy, more
committed and more satisfied as they can co-relate themselves very well
with each organizational task. They can understand the reaction of
environmental changes on the organization and the probable response of the
organization with the help of strategic management. Thus the employees
can judge the impact of such changes on their own job and can effectively
face the changes. The managers and employees must do appropriate things
in appropriate manner. They need to be both effective as well as efficient.

One of the major role of strategic management is to incorporate various

functional areas of the organization completely, as well as, to ensure these
functional areas harmonize and get together well. Another role of strategic
management is to keep a continuous eye on the goals and objectives of the
organization.

Strategy - Definition and Features

The word “strategy” is derived from the Greek word “stratçgos”; stratus
(meaning army) and “ago” (meaning leading/moving).

Strategy is an action that managers take to attain one or more of the

organization’s goals. Strategy can also be defined as “A general direction set
for the company and its various components to achieve a desired state in the
future. Strategy results from the detailed strategic planning process”.
A strategy is all about integrating organizational activities and utilizing and
allocating the scarce resources within the organizational environment so as
to meet the present objectives. While planning a strategy it is essential to
consider that decisions are not taken in a vaccum and that any act taken by
a firm is likely to be met by a reaction from those affected, competitors,
customers, employees or suppliers. Strategy can also be defined as
knowledge of the goals, the uncertainty of events and the need to take into
consideration the likely or actual behavior of others. Strategy is the blueprint
of decisions in an organization that shows its objectives and goals, reduces
the key policies, and plans for achieving these goals, and defines the
business the company is to carry on, the type of economic and human
organization it wants to be, and the contribution it plans to make to its
shareholders, customers and society at large.

Features of Strategy
1. Strategy is Significant because it is not possible to foresee the future.
Without a perfect foresight, the firms must be ready to deal with the
uncertain events which constitute the business environment.
2. Strategy deals with long term developments rather than routine
operations, i.e. it deals with probability of innovations or new products,
new methods of productions, or new markets to be developed in
future.
3. Strategy is created to take into account the probable behavior of
customers and competitors. Strategies dealing with employees will
predict the employee behavior.

Strategy is a well defined roadmap of an organization. It defines the

overall mission, vision and direction of an organization. The objective of a
strategy is to maximize an organization’s strengths and to minimize the
strengths of the competitors. Thus, Strategy, in short, bridges the gap
between “where we are” and “where we want to be”.
1.1 PHASES OF STRATEGIC MANAGEMENT
Many companies have mission statements that explain why they are in
business, what their products are and the consumer market they target.
Strategic management is an ongoing process organizations apply to analyze
internal processes and resources that deliver these products. There are four
main phases that must be applied with each strategy, and decision-makers
must understand the purpose of each phase.

Formulating a Plan
Formulation is the process of choosing the most profitable course of action
for success. This is the phase for setting objectives and identifying the ways
and means of achieving them. An analysis of corporate strengths,
weaknesses, opportunities and threats reveals critical areas surrounding the
products and services that need attention. Take, for example, a company's
objective to expand sales into the internet market. If research shows that
competitors in that market are not seeing a return on their investment,
company decision-makers may explore other alternatives. By contrast, if
competitors are seeing increased sales, the business may decide to launch
its online store and start a social media marketing campaign to drive traffic
to the website.

Implementation Phase
Implementation is the execution of the necessary strategies to meet the
objectives that have been set. To ensure success, all employees should
understand their roles and responsibilities. Appropriate activity measures
provide necessary feedback with facts that identify positive impacts and
areas for change. In this phase, companies pay attention to details and
monitor processes to implement quick changes as required. For example, if a
common customer complaint is that products take too long to arrive, an
analysis of the shipping process may reveal ways to expedite delivery, such
as using pre-printed shipping levels to streamline packaging and carrier
pickup of shipments at the store.

Evaluating Results
Evaluating strategies used in the implementation phase serve as
performance feedback. Some companies use a gap analysis to compare how
the company performed to set goals. Analyzing present state compared to
desired future state identifies the need for new products or additions to
existing products. One example is a company comparing its anticipated
consumer purchase response with the actual number of sales or comparing
old shipping times to the delivery timeframe after new procedures were
implemented.

Modification and Amplification

The modification phase is essential in correcting any weaknesses or failures
found during evaluation. Strengths identified can lead to implementation in
other areas. One example is a strategy to sell a selected number of products
on the internet and sales data shows a significant profit. A decision to add
more products and refine the process can result in a new lucrative endeavor.
An amplified marketing plan including search engine ads may also be
examined in an effort to draw additional customers to the website.

1.2 GLOBALIZATION
Globalization represents the global integration of international trade,
investment, information technology and cultures. Government policies
designed to open economies domestically and internationally to
boost development in poorer countries and raise standards of living for their
people are what drive globalization. However, these policies have created an
international free market that has mainly benefited multinational
corporations in the Western world to the detriment of smaller businesses,
cultures and common people.

Through globalization, corporations can gain a competitive advantage from

lower operating costs, and access to new raw materials and additional
markets. In addition, multinational corporations can manufacture, buy and
sell goods worldwide. For example, a Japan-based car manufacturer can
manufacture auto parts in several developing countries, ship the parts to
another country for assembly and sell the finished cars to any nation.

Globalization is not a new concept. In ancient times, traders traveled vast

distances to buy rare commodities such as salt, spices and gold, which they
would then sell in their home countries. The 19th century Industrial
Revolution brought advances in communication and transportation that have
removed borders and increased cross-border trade. In the last few decades,
globalization has occurred at an unprecedented pace.

Public policy and technology are the two main driving factors behind the
current globalization boom. Over the past 20 years, governments worldwide
have integrated a free market economic system through fiscal policies and
trade agreements. This evolution of economic systems has increased
industrialization and financial opportunities abroad. Governments now focus
on removing barriers to trade and promoting international commerce.

Technology is a major contributor to globalization. Advancements in IT and

the flow of information across borders have increased awareness among
populations of economic trends and investment opportunities. Technological
advancement such as digitalization has simplified and accelerated
the transfer of financial assets between countries.

The Broader Meaning of Globalization

Globalization is also a social, cultural, political and legal phenomenon. In
social terms, globalization represents greater interconnectedness among
global populations. Culturally, globalization represents the exchange of ideas
and values among cultures, and even a trend toward the development of a
single world culture. Politically, globalization has shifted countries' political
activities to the global level through intergovernmental organizations like the
United Nations and the World Trade Organization. With regard to law,
globalization has altered how international law is created and enforced.

The Globalization Controversy

Proponents of globalization believe it allows developing countries to catch up
to industrialized nations through increased manufacturing, diversification,
economic expansion and improvements in standards of living. China is a
good example of a national economy that has benefited immensely from
globalization. Outsourcing by companies brings jobs and technology to
developing countries. Trade initiatives increase cross-border trading by
removing supply-side and trade-related constraints. The North American Free
Trade Agreement, for example, encouraged U.S. car manufacturers to
relocate operations to Mexico where labor costs are lower, and many U.S.
companies have outsourced call centers to India.

Globalization has advanced social justice on an international scale,

and globalization advocates report that it has drawn attention to human
rights worldwide. In addition, some feel the spread of pop culture across
borders will advance the exchange of ideas, art, language and music.

Disadvantages of Globalization
Economic downturns in one country can affect other countries' economies
through a domino effect. For example, when Greece experienced a debt
crisis in 2010, the all of Europe felt the impact. In addition, globalization may
have disproportionately benefited Western corporations and
enhanced wealth disparity. Free trade implies a greater risk of failure for
small, private or family-owned companies competing in a global market.
There is also a digital divide because not all populations have internet
access. Some suggest that globalization has created a concentration of
information and power in the hands of a small elite, and certain groups have
acquired resources and power that exceed those of any single nation, posing
new threats to human rights on an international scale.

Standards of living have risen overall as more third-world countries

experience industrialization. However, some politicians argue that
globalization is detrimental to the middle class, and is causing increasing
economic and political polarization in the United States. Outsourcing,
where U.S. companies transfer their facilities abroad to lower labor costs and
avoid negotiating with unions, means workers in the United States must now
compete internationally for jobs.

Globalization has contributed to global warming, climate change and the

overuse of natural resources. An increase in the demand for goods has
boosted manufacturing and industrialization. Globalization has also increased
homogenization in countries. For example, international chains, such as
Starbucks, Nike and The Gap, dominate commercial space in every U.S. town
and many towns in other nations. Cultural exchange has been largely one-
sided because U.S. goods and culture have influenced other countries more
than those of any other nation.

1.3 BASIC MODEL OF STRATEGIC MANAGEMENT

Strategic management process has following four steps:
1. Environmental Scanning- Environmental scanning refers to a
process of collecting, scrutinizing and providing information for
strategic purposes. It helps in analyzing the internal and external
factors influencing an organization. After executing the environmental
 analysis process, management should evaluate it on a continuous
basis and strive to improve it.
2. Strategy Formulation- Strategy formulation is the process of
deciding best course of action for accomplishing organizational
objectives and hence achieving organizational purpose. After
conducting environment scanning, managers formulate corporate,
business and functional strategies.
3. Strategy Implementation- Strategy implementation implies making
the strategy work as intended or putting the organization’s chosen
strategy into action. Strategy implementation includes designing the
organization’s structure, distributing resources, developing decision
making process, and managing human resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy
management process. The key strategy evaluation activities are:
appraising internal and external factors that are the root of present
strategies, measuring performance, and taking remedial / corrective
actions. Evaluation makes sure that the organizational strategy as well
as it’s implementation meets the organizational objectives.

These components are steps that are carried, in chronological order, when
creating a new strategic management plan. Present businesses that have
already created a strategic management plan will revert to these steps as
per the situation’s requirement, so as to make essential changes.

Figure 1.1: Basic Model: Components of Strategic Management

Process
Strategic management is an ongoing process. Therefore, it must be realized
that each component interacts with the other components and that this
interaction often happens in chorus.

Stages of the Strategic Management Process

The strategic management process is more than just a set of rules to follow.
It is a philosophical approach to business. Upper management must think
strategically first, then apply that thought to a process. The strategic
management process is best implemented when everyone within the
business understands the strategy. The five stages of the process are goal-
setting, analysis, strategy formation, strategy implementation and strategy
monitoring.

Clarify Your Vision

The purpose of goal-setting is to clarify the vision for your business. This
stage consists of identifying three key facets: First, define both short- and
long-term objectives. Second, identify the process of how to accomplish your
objective. Finally, customize the process for your staff; give each person a
task with which he can succeed. Keep in mind during this process your goals
to be detailed, realistic and match the values of your vision. Typically, the
final step in this stage is to write a mission statement that succinctly
communicates your goals to both your shareholders and your staff.

Gather and Analyze Information

Analysis is a key stage because the information gained in this stage will
shape the next two stages. In this stage, gather as much information and
data relevant to accomplishing your vision. The focus of the analysis should
be on understanding the needs of the business as a sustainable entity, its
strategic direction and identifying initiatives that will help your business
grow. Examine any external or internal issues that can affect your goals and
objectives. Make sure to identify both the strengths and weaknesses of your
organization as well as any threats and opportunities that may arise along
the path.

Formulate a Strategy
The first step in forming a strategy is to review the information gleaned from
completing the analysis. Determine what resources the business currently
has that can help reach the defined goals and objectives. Identify any areas
of which the business must seek external resources. The issues facing the
company should be prioritized by their importance to your success. Once
prioritized, begin formulating the strategy. Because business and economic
situations are fluid, it is critical in this stage to develop alternative
approaches that target each step of the plan.

Implement Your Strategy

Successful strategy implementation is critical to the success of the business
venture. This is the action stage of the strategic management process. If the
overall strategy does not work with the business' current structure, a new
structure should be installed at the beginning of this stage. Everyone within
the organization must be made clear of their responsibilities and duties, and
how that fits in with the overall goal. Additionally, any resources or funding
for the venture must be secured at this point. Once the funding is in place
and the employees are ready, execute the plan.

Evaluate and Control

Strategy evaluation and control actions include performance measurements,
consistent review of internal and external issues and making corrective
actions when necessary. Any successful evaluation of the strategy begins
with defining the parameters to be measured. These parameters should
mirror the goals set in Stage 1. Determine your progress by measuring the
actual results versus the plan. Monitoring internal and external issues will
also enable you to react to any substantial change in your business
environment. If you determine that the strategy is not moving the company
toward its goal, take corrective actions. If those actions are not successful,
then repeat the strategic management process. Because internal and
external issues are constantly evolving, any data gained in this stage should
be retained to help with any future strategies.
1.4 STRATEGIC DECISION MAKING
Strategic decision-making is the process of charting a course based on long-
term goals and a longer term vision. By clarifying your company's big picture
aims, you'll have the opportunity to align your shorter term plans with this
deeper, broader mission -- giving your operations clarity and consistency.

Mission and Vision

Strategic decision-making should start with a clear idea of your company's
mission and vision -- the reasons you exist as a business. Your business may
be dedicated to providing environmental solutions, or you may simply want
to make as much money as possible. Either way, if you know what you want
over the long term, you'll be better positioned to infuse these aims and
principles into your daily decisions. Start by writing your mission and your
vision. This statement can be as simple or complex as you wish, depending
on the degree of formality you use in your everyday business decisions as
you run your company. Even if your mission is only one sentence -- the act of
thinking about and articulating this sentence will help you develop a better
idea of what you want. Having this written statement will also enable you to
communicate your long-term vision to your employees and to other
stakeholders, to get them on board with the strategic decisions you make.

Long-Term Goals
Long-term goals are the concrete embodiment of your mission and vision. A
vision is an idea, and long-term goals are expressions of how these ideas
play out -- with milestones and real-world objectives. These goals are critical
to the strategic decision-making process, because they guide your choices,
and provide measurable and quantifiable ways to assess whether you are
successfully aligning your company's direction with the values you've
articulated to guide your business. If your business designs environmentally
friendly technologies, you might create a long-term goal of wanting to be
carbon-neutral within five years. With this goal in mind, you'll then make
strategic decisions aimed at reducing your carbon footprint during that time.

Short-Term Goals
It's easy to lose sight of the strategic decision-making process when you're
focusing on short-term goals and decisions that concern day-to-day activities
and issues. Short-term goals and decisions usually relate to immediate
needs, such as improving cash flow so that you can cover outstanding bills.
Despite the immediacy and urgency of these goals, your strategic decision-
making process should still enable you to precede with an eye toward both
your vision and your longer term objectives. If your values are centered on
sustainability, and your company's official company car dies, it would be
more consistent with your mission to finance a fuel-efficient replacement
than to buy a cheap gas guzzler.

Decision-Making Tools & Techniques for Strategic Planning

One of the most fundamental aspects of starting and managing a business is
formulating the company's overall mission and goals. Strategic planning is
the process of creating a mission, objectives and then creating and
implementing strategies to fulfill the mission and work toward objectives.
Business managers often use a variety of management tools and techniques
to aid in making strategic planning decisions.
Market Research
Market research is the process of gathering information about a certain
market, such as the preferences of potential customers, the presence of
competitors and the current state of the market. Market research is an
essential strategic planning tool because insight into the needs of customers
can help managers create a mission, goals and strategies that better fulfill
those needs.

Cost-Benefit Analysis
A cost-benefit analysis is a common type of strategic decision-making tool
that consists of assessing the costs and potential benefits associated with
different courses of action and choosing the course of action that result in
the greatest net benefit. For example, if managers expect that a certain
project would cost $100,000 and result in a $110,000 benefit while a second
project would cost $90,000 and result in a $105,000 benefit, managers
would pursue the second project, as it is expected to produce a net benefit
that is $5,000 greater than the other project.

SWOT Analysis
A SWOT analysis is a strategic planning tool that consists of assessing the
strengths and weaknesses of a business and the threats and opportunities a
business faces. A SWOT analysis can help managers take advantage of
company strengths and implement strategies to reduce weaknesses or turn
them into strengths. Assessing external threats and opportunities can aid in
the strategic decision-making process, as it allows managers to plan for
things like the presence of new competitors or the impact of new
government regulations.

Feasibility Study
A feasibility study or feasibility analysis is a business-planning tool that
involves assessing whether a certain project or goal can actually be created
or achieved and whether the project can make a profit. A feasibility analysis
can help entrepreneurs in the beginning planning stages of launching a
company decide whether to pursue a certain opportunity or not. For
example, if an inventor creates a new type of television display technology
that is expensive to produce and does not provide significant benefits over
existing technologies, a feasibility study might reveal that products that use
the technology would be too expensive to attract customers, making a
business based on selling the product unfeasible.

Steps of the Decision Making Process

The following are the seven key steps of the decision making process.
 Identify the decision. The first step in making the right decision is
recognizing the problem or opportunity and deciding to address it.
Determine why this decision will make a difference to your customers
or fellow employees.

 Gather information. Next, it’s time to gather information so that you

can make a decision based on facts and data. This requires making a
value judgment, determining what information is relevant to the
decision at hand, along with how you can get it. Ask yourself what you
need to know in order to make the right decision, and then actively
seek out anyone who needs to be involved.

 Identify alternatives. Once you have a clear understanding of the

issue, it’s time to identify the various solutions at your disposal. It’s
likely that you have many different options when it comes to making
your decision, so it is important to come up with a range of options.
 This helps you determine which course of action is the best way to
achieve your objective.

 Weigh the evidence. In this step, you’ll need to “evaluate for

feasibility, acceptability and desirability” to know which alternative is
best, according to management experts Phil Higson and Anthony
Sturgess. Managers need to be able to weigh pros and cons, and then
select the option that has the highest chances of success. It may be
helpful to seek out a trusted second opinion to gain a new perspective
on the issue at hand.

 Choose among alternatives. When it’s time to make your decision,

be sure that you understand the risks involved with your chosen route.
You may also choose a combination of alternatives now that you fully
grasp all relevant information and potential risks.

 Take action. Next, you’ll need to create a plan for implementation.

This involves identifying what resources are required and gaining
support from employees and stakeholders. Getting others onboard with
your decision is a key component of executing your plan effectively, so
be prepared to address any questions or concerns that may arise.

 Review your decision. An often-overlooked but important step in the

decision making process is evaluating your decision for effectiveness.
Ask yourself what you did well and what can be improved next time.

Common Challenges of Decision Making

Although following the steps outlined above will help you make more
effective decisions, there are some pitfalls to look out for. Here are common
challenges you may face, along with best practices to help you avoid them.
  Having too much or not enough information. Gathering
relevant information is key when approaching the decision making
process, but it’s important to identify how much background
information is truly required. “An overload of information can leave
you confused and misguided, and prevents you from following your
intuition,” according to Corporate Wellness Magazine. In addition,
relying on one single source of information can lead to bias and
misinformation, which can have disastrous effects down the line.

 Misidentifying the problem. In many cases, the issues

surrounding your decision will be obvious. However, there will be
times when the decision is complex and you aren’t sure where the
main issue lies. Conduct thorough research and speak with internal
experts who experience the problem firsthand in order to mitigate
this.

 Overconfidence in the outcome. Even if you follow the steps of

the decision making process, there is still a chance that the
outcome won’t be exactly what you had in mind. That’s why it’s so
important to identify a valid option that is plausible and achievable.
Being overconfident in an unlikely outcome can lead to adverse
results.

Decision making is thus a vital skill in the business workplace, particularly for
managers and those in leadership positions. Following a logical procedure
like the one outlined here, along with being aware of common challenges,
can help ensure both thoughtful decision making and positive results.