What is Strategic Management? Characteristics, Risk, Benefits

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Topic Covered: What is strategic management, Introduction, Definition, Meaning, Characteristics, Dimension, Need, Benefits, Risks of Strategic Management.

Introduction to Strategic Management

Strategic Management is exciting and challenging. It makes fundamental decisions about the future direction of a firm – its purpose, its resources and how it interacts with the environment in which it operates.

Every aspect of the organisation plays a role in strategy – its people, its finances, its production methods, its customers and so on.

What is Strategic Management?

Strategic management can be described as the identification of the purpose of the organisation and the plans and actions to achieve that purpose. It is that set of managerial decisions and actions that determine the long-term performance of a business enterprise.

It involves formulating and implementing strategies that will help in aligning the organisation and its environment to achieve organisational goals.


Strategic Management Definition

Different authors have given different definition but the essence is the same. Below are the strategic management definition by authors.

Strategic management is concerned with the determination of the basic long-term goals and the objectives of an enterprise and the adoption of courses of action and allocation of resources necessary for carrying out these goals.

Alfred Chandler, 1962

Strategic management is the set of decisions and actions resulting in the formulation and implementation of plans designed to achieve a company’s objectives.

Pearce and Robinson, 1988

Strategic management consists of the analysis, decisions, and actions organisation undertakes in order to create and sustain competitive advantages.

Dess, Lumpkin & Taylor, 2005

Taken together, these definitions capture three main elements that go to the heart of strategic management.

The three on-going processes are strategic analysis, strategic formulation and strategic implementation. These three components parallel the processes of analysis, decisions and actions.

That is, strategic management is basically concerned with:

  1. Analysis of strategic goals (vision, mission and objectives) along with the analysis of the external and internal environment of the organisation.

2. Decisions about two basic questions:

(a) What businesses should we compete in?
(b) How should we compete in those businesses to implement strategies?

3. Actions to implement strategies: This requires leaders to allocate the necessary resources and to design the organisation to bring the intended strategies to reality. This also involves evaluation and control to ensure that the strategies are effectively implemented.


Characteristics of Strategic Management

The Characteristics of Strategic Management are as follows:

Top management involvement

Strategic management relates to several areas of a firm’s operations. So, it requires top management’s involvement.

Generally, only the top management has the perspective needed to understand the broad implications of its decisions and the power to authorise the necessary resource allocations.

Requirement of large amounts of resources

 Strategic management requires the commitment of the firm to actions over an extended period of time. So, they require substantial resources, such as physical assets, 20manpower etc.

Example: Decisions to expand geographically would have significant financial implications in terms of the need to build and support a new customer base.

Affect the firms long-term prosperity

Once a firm has committed itself to a particular strategy, its image and competitive advantage are tied to that strategy; its prosperity is dependent upon such a strategy for a long time.

Future-oriented

Strategic management encompasses forecasts, what is anticipated by the managers. In such decisions, the emphasis is on the development of projections that will enable the firm to select the most promising strategic options.

In the turbulent environment, a firm will succeed only if it takes a proactive stance towards change.

Multi-functional or multi-business consequences

Strategic management has complex implications for most areas of the firm. They impact various strategic business units especially in areas relating to customer-mix, competitive focus, organisational structure etc.

All these areas will be affected by allocations or reallocations of responsibilities and resources that result from these decisions.

Non-self-generative decisions

While strategic management may involve making decisions relatively infrequently, the organisation must have the preparedness to make strategic decisions at any point of time. That is why Ansoff calls them “non-self-generative decisions.

Read: What is Strategic Management Process? Models, Steps, Importance


Need for Strategic Management

Strategic management provides the route map for the firm. It makes it possible for the firm to take decisions concerning the future with a greater awareness of their implications. It provides direction to the company; it indicates how growth could be achieved.

Firms are using strategic management for the following needs:

  1. It helps the firm to be more proactive than reactive in shaping its own future.
  2. It provides the roadmap for the firm. It helps the firm utilize its resources in the best
  3. possible manner.
  4. It allows the firm to anticipate change and be prepared to manage it.
  5. It helps the firm to respond to environmental changes in a better way.
  6. It minimizes the chances of mistakes and unpleasant surprises.
  7. It provides clear objectives and direction for employees.

Benefits of Strategic Management

Today’s enterprises need strategic management to reap the benefits of business opportunities, overcome the threats and stay ahead in the race.

The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; while long-term planning, in contrast, tries to optimize for tomorrow the trends of today.

Strategic management has thus both financial and non-financial benefits:

1. Financial Benefits: Research indicates that organisations that engage in strategic management are more profitable and successful than those that do not.

Businesses that followed strategic management concepts have shown significant improvements in sales, profitability and productivity compared to firms without systematic planning activities.

  • Improvement in sales
  • Improvement in profitability
  • Improvement in productivity

2. Non-financial benefits: Besides financial benefits, strategic management offers other intangible benefits to a firm. They are;

  • Enhanced awareness of external threats
  • Improved understanding of competitors’ strategies
  • Reduced resistance to change
  • A clearer understanding of the performance-reward relationship
  • Enhanced problem-prevention capabilities of an organisation
  • Increased interaction among managers at all divisional and functional levels
  • Increased order and discipline

Read: What is Value Chain Analysis? Definition, Model, Example


Limitations & Risks of Strategic Management

Strategic management is an intricate and complex process that takes an organisation into unchartered territory. It does not provide a ready-to-use prescription for success. Instead, it takes the organisation through a journey and offers a framework for addressing questions and solving problems.

Strategic management is not, therefore, a guarantee for success; it can be dysfunctional if conducted haphazardly. The following are limitations of strategic management:

  1. Limitation of Assumption: Strategic management is based on certain assumptions, if that assumption remains good then the plans will be implemented otherwise there be no use of strategic management.

  2. Problem in Analyzing Environment: the success of strategic management depends on the correct analysis of internal as well as external environment. Here especially the external environment scanning is important to grab opportunities which many times does not proved.

  3. Unrealistic Mission and Objectives: if the mission and objectives are not realistic then the strategic management can’t be successful.

  4. Problem of Setting Target: sometimes it happens that the strategists may be very enthusiastic so they may set unrealistic a goal which will be difficult to accomplish.

  5. Problem in Implementation: implementation of a strategy is important if it is not implemented well then there may be the problem, the strategy may not give the desired result.

  6. Lack of Commitment of Lower Level: generally the strategies are framed by top-level management and at the time of framing if top-level management has not consulted with lower then lower-level management may not be that much committed.

    In other words they being unaware of the plans may not give desired performance. Their dedication may not be there up to the expected level.

  7. Problem of Resistance: there may be resistance on the part of employees to accept the set target of the top management.

  8. More theoretical in Nature: as per experts opinion strategic management is more theoretical. In practice there are different so it remains unsuccessful.

  9. Problem of Internal Politics: in organizations, there are differences among or between departments. So as there is no good relation, proper coordination, strategies became unsuccessful.

  10. Problem of Traditional Management: traditional management has a narrow approach towards development. Its philosophy is not progressive; they want to run their business with the same fashion. So the strategies are not fruitful in this case.

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