What is Strategic Management Process?
The strategic management process is a method by which managers conceive of and implement a strategy that can lead to sustainable competitive advantage. It is the process of managing, planning, and analyzing in order to reach all organizational goals.
Table of Content
- 1 What is Strategic Management Process?
- 2 Strategic Management Process Model
- 3 Different Models of Strategic Management Process
- 4 Purposes of Strategic Management Process
- 5 Importance of Strategic Management Process
- 6 Limitations of Strategic Management Process
- 7 Strategy Formulation
- 8 Constraints and Strategic Choice
- 9 Strategy Implementation
- 10 Strategic Control and Assessment
Strategic Management Process Model
Developing an organisational strategy involves five main elements – strategic analysis, environmental analysis, strategic choice, strategy implementation and strategy evaluation and control.
Each of these contains further steps, corresponding to a series of decisions and actions, that form the basis of the strategic management process.
The foundation of the strategy is a definition of organisational purpose. This defines the business of an organisation and what type of organisation it wants to be. Many organisations develop broad statements of purpose, in the form of vision and mission statements.
These form the springboards for the development of more specific objectives and the choice of strategies to achieve them.
Assessing both the external and internal environments is the next step in the strategy process. Managers need to assess the opportunities and threats of the external environment in the light of the organisation’s strengths and weaknesses keeping in view the expectations of the stakeholders.
This analysis allows the organisation to set more specific goals or objectives which might specify where people are expected to focus their efforts. With a more specific set of objectives in hand, managers can then plan how to achieve them.
The analysis stage provides the basis for strategic choice. It allows managers to consider what the organisation could do given the mission, environment and capabilities – a choice which also reflects the values of managers and other stakeholders. These choices are about the overall scope and direction of the business.
Since managers usually face several strategic options, they often need to analyze these in terms of their feasibility, suitability and acceptability before finally deciding on their direction.
Implementation depends on ensuring that the organisation has a suitable structure, the right resources and competencies (skills, finance, technology etc.), right leadership and culture. Strategy implementation depends on operational factors being put into place.
Strategy Evaluation and Control
Organisations set up appropriate monitoring and control systems, develop standards and targets to judge performance.
Different Models of Strategic Management Process
There are different models of strategic management process. The one, which was described in this article, is just one more version of so many models that are established by other authors.
In this section, we will study other well-known frameworks of Strategic Management Process.
David Model of Strategic Management Process
Three-Stage Strategic Management Process
- Strategy Formulation
- Strategy Implementation
- Strategy Evaluation
Steps in strategic management process
- Develop Vision and Mission Statements
- Perform External Audit
- Perform Internal Audit
- Establish Long-Term Objectives
- Generate, Evaluate, and Select Strategies
- Implement Strategies—Management, Marketing, Finance, R&D Issues
- Measure and Evaluate Performance
Thompson and Martin Strategic Management Process
Steps in strategic management process
- Where are we?
- Where are we going?
- How are we getting there?
- How are we doing?
Steps of Strategic Management Process
- Situation appraisal: a review of corporate objectives
- Situation assessment
- Clarification of objectives
- Corporate and competitive strategies
- Strategic decisions
- Monitor progress
Purposes of Strategic Management Process
Strategic management basically aims at formulating and implementing effective strategies.
Strategies necessarily change over time to suit environmental changes but, to remain competitive, organisations develop strategies that focus on core competence, develop synergy and create value for customers.
An organisation’s core competence is something it does exceptionally well in comparison to its competitors. It reflects a distinct competitive advantage (like superior research and development, mastery of a technology, distribution channel, manufacturing efficiency or customer service) that provides the firm (a) access to variety of products/ markets (b) contributes greatly to customer benefits in the end products and (c) is an exclusive and inimitable preserve of the firm that is long-lasting and cannot be easily copied by competitors.
When organisational parts interact to produce a joint effort that is greater than the sum of the parts acting alone, synergy occurs. Some call this the 1 + 1 = 3 effect. In strategic management, managers are urged to achieve as much market, cost, technology and management synergy as possible when arriving at strategic decisions (such as mergers, acquisitions, new products, new technology etc.). When one product or service strengthens the sales of one or more other products or services, market synergy occurs. Wal-Mart’s new Supercentres and Super K marts that put a discount store and a grocery store under one huge roof (Crossroads, Mumbai; Spencer’s in Chennai) are a good example of market synergy in action.
Cost synergy can occur in almost every dimension of organised effort. When two or more products can be designed by the same engineers, produced in the same facilities, distributed through the same channels, or sold by the same sales persons, overall costs will be lower than if each product received separate treatment.
In Europe, today, banks and insurance companies are linking up in an effort to market a wide array of financial products that each would have trouble selling on its own (Wall Street Journal). Technology synergy involves transferring technology from one application to another, thus opening up new markets.
In management synergy also a similar kind of technology transfer is needed. Management synergy would be achieved, for example, if a software product company with weak roots in training and education line hires a new CEO with strong academic and training credentials. Ideally the new CEO would transfer his technical skills to good effect.
Exploiting core competencies and achieving synergy help organisations create value for their customers.
Importance of Strategic Management Process
The strategic management process helps the organization to plan ahead through proper steps to gain an advantage with respect to competitors. The process gives the organization to deal with internal and external factors.
The Strategic Management process can differ for the various organization depending on their size, domain, focus and core competency but the importance of strategic management process remains the same.
Limitations of Strategic Management Process
It is difficult for the company to follow the process from the first to the last step. Producing a quality strategic plan requires time, during which many external and even internal conditions may change.
This results in the flawed strategic plan which has to be revised, hence requiring even more time to finish. Strategic Management process is not a one-time process which would yield the expected results in the first attempt.
Corporate Level Strategy Formulation
Corporate-level strategy pertains to the organization as a whole and the combination of business units and product lines that make up the corporate entity. It addresses the overall strategy that an organization will follow. The process generally involves selecting a grand strategy and using portfolio strategy approaches to determine the types of businesses in which the organization should be engaged.
Grand strategy is the general plan of major action by which a firm intends to achieve its long-term goals. It provides basic direction for the strategic actions of a firm. Grand strategies fall into four general categories: growth/expansion, stability, retrenchment, and combination.
- Growth/Expansion Strategy: Organisations generally seek growth in sales, market share, or some other measure as a primary objective. When growth becomes a passion and organizations try to seek sizeable growth (as against slow and steady growth), it takes the shape of an expansion strategy.
The firm tries to redefine the business, enter new businesses that are related or unrelated or look at its product portfolio more intensely. The firm can have as many alternatives as it wants by changing the mix of products, markets, and functions. Thus, growth opportunities may come internally or externally. Internal growth possibilities may be exploited through intensification or diversification. External growth options include mergers, takeovers, and joint ventures.
- Stability Strategy: A stability strategy involves maintaining the status quo or growing in a methodical, but slow, manner. The firm follows a safety-oriented, status-quo-type strategy without affecting any major changes in its present operations. The resources are put into existing operations to achieve moderate, incremental growth. As such, the primary focus is on current products, markets, and functions, maintaining the same level of effort as at present.
- Retrenchment Strategy: It is a corporate-level, defensive strategy followed by a firm when its performance is disappointing or when its survival is at stake. When a firm is confronted with a precipitous drop in demand for its products and services, it is forced to effect across-the-board cuts in personnel and expenditures. Retrenchment strategy, as such, is adopted out of necessity, not by deliberate choice.
- Combination Strategies: Large, diversified organizations generally use a mixture of stability, expansion, or retrenchment strategies either simultaneously (at the same time in various businesses) or sequentially (at different times in the same business). For example, growth could be achieved by an organization through the acquisition of new businesses or divesting itself of unprofitable ventures. Depending on situational demands, therefore, an organization can employ various strategies to survive, grow and remain profitable.
Business Level Strategy Formulation
Business-level strategy deals with how a particular business competes. The principal focus is on meeting competition, protecting market share, and earning profit at the business unit level. The strategies of growth, stability, and retrenchment, discussed above, apply at the business level as well as the corporate level, but they are accomplished through competitive actions rather than by the acquisition or divestment of other businesses.
Functional Level Strategy Formulation
Functional strategies are formulated by specialists in each area of a business such as marketing, production, finance, human resources, and research and development. Functional strategies outline the action plans that must be put into practice to execute business-level strategy. Business level and functional specialists must coordinate their activities to ensure that the strategies pursued by them are consistent and lead to the achievement of overall goals.
- Research and Development Strategy: Businesses cannot grow and survive without new products. It is the role of R&D specialists to generate new product ideas, nurture them carefully and develop them fully into commercially viable propositions. Where innovation proves to be a costly exercise, imitation could also be tried as a fruitful option. Many Japanese electronics companies were quite successful in copying American technology and by avoiding R&D costs, improved their competitive strength significantly.
- Operations Strategy: This strategy outlines steps to keep costs under check and improve operational efficiency. The focus is on arriving at decisions regarding plant layout, plant capacity, production processes, inventory management, etc.
- Financial Strategy: It deals with financial planning, evaluating investment proposals, securing funds for various investments, and controlling financial resources. Thus raising funds, acquiring assets, allocating funds to operations, using funds efficiently, etc are all part of this strategy.
- Marketing Strategy: It deals with strategies relating to product, pricing, distribution, and promotion of a company’s offerings. Important issues here cover what type of products, at what prices, through which distribution channel, and by the use of which promotional tool and sales force, etc.
- Human Resource Strategy: HR strategy deals with hiring, training, assessing, developing, rewarding, motivating, and retaining the number and types of employees required to run the business effectively. Internal (union contracts, productivity indices, labor turnover, absenteeism, accidents, etc.) and external factors (labor laws, sons of the soil, reservation, equal employment opportunity, employment of children and women, etc.) need to be carefully evaluated formulation of HR strategies.
Constraints and Strategic Choice
Viewed collectively, the R&D strategy should encourage innovation; marketing should stress brand loyalty and reliable distribution channels; production should maintain long production runs, cost reduction, and routinization; finance should focus on cash flows and positive returns and the HR department should develop strategies for retaining and developing a stable workforce.
Of course, organizations do come across constraints while formulating functional-level strategies in several forms; how to finance the proposals, what kind of risk to be taken, how to combine the strong production skills of the company with its own weak marketing skills, how to keep suppliers and channel partners happy, how to encounter competitive retaliation, etc.
In any case, while selecting appropriate strategies at corporate, business, and functional levels, the following criteria should be kept in mind (David Aaker).
Strategy Selection Criteria
- They are responsive to the external environment.
- They offer a sustainable competitive advantage.
- They are consistent with other strategies in the organization.
- They provide adequate flexibility for the business and the organization.
- They conform to the organization’s mission and long-term objectives.
- They are organisationally feasible.
Strategy implementation is the process of translating of strategies and policies into action through the development of programs, budgets, and procedures. It is typically conducted by middle and lower-level management but is reviewed by top management. However, programs and procedures are simply more detailed plans for the eventual implementation of the strategy.
Unless the corporation is appropriately organized, programs are adequately staffed and activities are properly directed, these operational plans fail to deliver the goods. To be effective, a strategy must be implemented through the right organizational structure and appropriate management practices. In addition, management must also ensure that there is progress towards objectives according to plan by instituting a rigorous process of control over important activities.
In a classic study of large American Corporations (Du Pont, General Motors, Sears Roebuck, Standard Oil), Chandler concluded that structure follows strategy (Strategy and Structure, MIT Press 1962). Changes in corporate strategy have invariably led to changes in corporate structure. Chandler found that most corporations begin with a centralized organizational structure.
As they add new product lines and create independent distribution networks, the centralized structure is discarded by the organizations in favor of a decentralized structure which permits the creation of semi-autonomous product divisions. Burns and Stalker also found that mechanistic structures (centralized decision-making and bureaucratic rules) seem to be appropriate to organizations operating in stable environments.
However, organic structures, in contrast (decentralization and flexible procedures), seem to be appropriate to organizations operating in a constantly changing environment. The research conducted later on also supports Chandler’s proposal that an appropriate organizational structure is necessary to meet changes in corporate strategy. The firm should, therefore, work to make its structure congruent with its strategy.
Effective strategy implementation calls for the utilization of human resources fully. For implementing growth strategies, new people should be recruited and given requisite training. Retrenchment strategies call for a sound basis for firing people, i.e., seniority, performance, absenteeism, etc. In order to translate the strategy into action, the services of capable and committed people are necessary.
To this end, management should institute proper performance appraisal systems which permit people to compare their performance with others and find out where they are. These systems also help the management to identify ‘star’ performers easily and reward them adequately. Perspiration does not go far without a little bit of inspiration.
People should be motivated to implement a new strategy in desired ways. It is not sufficient merely to have people who can do the job; it is also necessary to have people who want to do the job the way you need it done. In addition to traditional motivational techniques, managers should also make use of modern techniques in order to inspire people to peak performance.
The traditional motivational techniques are based on reward-punishment psychology and involve the use of performance appraisals and performance-based incentive programs. These approaches, including MBO (Management by Objectives, termed by Peter Drucker which states that it is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization in order to attain them), indicate that specific results are best achieved by clearly outlining realistic goals and then suitably rewarding those managers who achieve them.
They are overly reliant on money as the primary motivator while overlooking other factors that might be truly motivating to many managers. According to Morse and Martin, motivating the organization to implement a strategy requires:
The successful implementation of strategy must take into account the history of an organization and the dominant values or culture which exists. The corporate culture is a system of shared beliefs and values that the people within the corporation hold. Some of the critical dimensions of culture are:
- Clarity of direction: How well the company’s goals and plans for achieving them are known, understood, and found to be motivated throughout the organization.
- Decision-making structure and processes: Whether the culture is decision-oriented or decision-avoidant and whether decisions are made on the basis of sound information or ‘seat of the pant’s intuition.
- Management style: Whether too little or too much participation in making decisions exists at each level of the company.
- Integration of effort: Whether teamwork, sharing, and smooth meshing of activities – or the opposite – accurately describes the culture.
- Performance orientation: Whether managers feel accountable for end results and whether rewards are related to performance or not.
- Compensation: Whether it is equitably fairly administered and motivational, or not.
- Human resource development: How much this characterizes the culture.
- Organizational vitality: That drive to perform – that sense of urgency and desire to be a winner – which some organizations have and others do not.
- Risk-taking: Whether it is encouraged or punished, and
- Competitive image: Whether the company views itself as faster, sharper, and better than the competitor, or vice versa.
Every company should try to measure these dimensions of culture and determine what kind of culture and what kind of subcultures will best support the company’s strategy. Senior executives should determine the desired culture taking the short-term requirements of the company.
Short-term Motivational Environment
Whereas a company’s culture affects strategy implementation over the long haul, the short-term motivational environment affects strategy implementation today. The short-term environment reflects the immediate mood of the company’s employees and contributes to the way they face immediate problems. Building such an environment involves actions very similar to public relations activities
- Communication programs
- Morale-building conferences
- Visibility of charismatic leaders
- Use of awards, language, symbols, gestures, etc.
The traditional motivators (MBO, performance appraisal, etc.) should be logically and firmly linked to what is called an integrated performance management process. To this end, detailed budgets and programs should be drawn. Individuals should also know exactly what piece of the organization structure they are accountable for and what goals and objectives they must attain this year to stay on plan.
In addition to the traditional motivating techniques, the organization should also provide individual motivators for achieving results competently. Over-reliance on bonuses and incentives may not fully motivate individual managers in today’s world. Top management should, therefore, fully understand individual differences and devise an appropriate motivational strategy. Though it is difficult to categorize individual motivators, some of the important ones may be stated thus:
- Mastery: The act of mastering a new skill or gaining control over a challenging problem is most motivating to many individuals.
- Approval: Lack of approval can hamper and constrict the performance of talented and bright managers.
- Risk and Adventure: High visibility positions having risk and adventure are mostly preferred by managers possessing entrepreneurial talents.
- Security: In order to perform effectively and efficiently, managers need to feel that there is little risk with respect to their careers.
- Power and Influence: Organisational positions that enable managers to gain power and control over human as well as non-human resources are highly motivating.
Strategic Control and Assessment
Strategic control, the last step of the strategic management process, is monitoring and evaluating the strategic management process as a whole in order to make sure that it is operating properly. The focus is clearly on activities involved in environmental analysis, organizational direction, strategy formulation, and strategy implementation – ensuring that all steps of the strategy management process are appropriate, compatible, and functioning properly. There are three basic steps to the strategic control process (Roush et al).
Strategic audits are used to find what is actually happening in the organization. Both qualitative and quantitative tools are employed for this purpose. According to S Tilles, the qualitative measurement looks into five questions:
- Is the strategy internally consistent?
- Is it consistent with its environment?
- Is it appropriate given organizational resources?
- Is it too risky?
- Is the time horizon of the strategy appropriate?
Quantitative tools like return on investment (the relationship between the amount of income generated and the number of assets required to operate the organization); z score (an analysis that numerically weighs and sums five measures – working capital\total assets; retained earnings\total assets; earning before interest and taxes\total assets; the market value of equity\book value of total liabilities and sales\ total assets – to find whether the company in question is likely to go sick and become bankrupt) and shareholders’ audit, etc. are used to measure organizational performance.
Compare Performance to Goals and Standards
Here management builds a case for concluding whether the performance is according to the predetermined standards in respect of certain key areas. At General Electric, the following eight types of standards are set for comparing performance at a later stage; profitability, market position, productivity, product leadership, personnel growth, employee attitude, social responsibility, and standards reflecting the balance between short-range and long-range goals.
If the actual performance is not in line with predetermined standards set for the purpose, corrective action is necessary. In such a case, every attempt is made to modify the enterprise’s strategies and their implementation so that the organization’s ability to accomplish its goals will be improved.