Strategic management

Strategic management is the process of specifying an organization's objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans. It is the highest level of managerial activity, usually performed by the company's Chief Executive Officer (CEO) and executive team. It provides overall direction to the whole enterprise.

Overview

An organization’s strategy must be appropriate for its resources, environmental circumstances, and core objectives. The process involves matching the company's strategic advantages to the business environment the organization faces. One objective of an overall corporate strategy is to put the organization into a position to carry out its mission effectively and efficiently. A good corporate strategy should integrate an organization’s goals, policies, and action sequences (tactics) into a cohesive whole, and must be based on business realities. Business enterprises can fail despite 'excellent' strategy because the world changes in a way they failed to understand. Strategy must connect with vision, purpose and likely future trends. To see how strategic management relates to other issues, see management and futures studies.

Strategic management can be seen as a combination of strategy formulation and strategy implementation, but strategy must be closely aligned with purpose.

Strategy formulation involves:

Doing a situation analysis: both internal and external; both micro-environmental and macro-environmental.
Concurrent with this assessment, objectives are set. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.
These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.

This three-step strategy formulation process is sometimes referred to as determining where you are now, determining where you want to go, and then determining how to get there. These three questions are the essence of strategic planning. SWOT Analysis: I/O Economics for the external factors and RBV for the internal factors.

Strategy implementation involves:

Allocation of sufficient resources (financial, personnel, time, technology support)
Establishing a chain of command or some alternative structure (such as cross functional teams)
Assigning responsibility of specific tasks or processes to specific individuals or groups
It also involves managing the process. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.
When implementing specific programs, this involves acquiring the requisite resources, developing the process, training, process testing, documentation, and integration with (and/or conversion from) legacy processes.

Strategy formulation and implementation is an on-going, never-ending, integrated process requiring continuous reassessment and reformation. Strategic management is dynamic. See Strategy dynamics. It involves a complex pattern of actions and reactions. It is partially planned and partially unplanned. Strategy is both planned and emergent, dynamic, and interactive. Some people (such as Andy Grove at Intel) feel that there are critical points at which a strategy must take a new direction in order to be in step with a changing business environment. These critical points of change are called strategic inflection points.

Strategic management operates on several time scales. Short term strategies involve planning and managing for the present. Long term strategies involve preparing for and preempting the future. Marketing strategist Derek Abell (1993), has suggested that understanding this dual nature of strategic management is the least understood part of the process. He claims that balancing the temporal aspects of strategic planning requires the use of dual strategies simultaneously.

General approaches

In general terms, there are two main approaches, which are opposite but complement each other in some ways, to strategic management:

The Industrial Organization Approach
- based on economic theory — deals with issues like competitive rivalry, resource allocation, economies of scale
- assumptions — rationality, self discipline behaviour, profit maximization
The Sociological Approach
- deals primarily with human interactions
- assumptions — bounded rationality, satisfying behaviour, profit sub-optimality. An example of a company that currently operates this way is Google

Strategic management techniques can be viewed as bottom-up, top-down, or collaborative processes. In the bottom-up approach, employees submit proposals to their managers who, in turn, funnel the best ideas further up the organization. This is often accomplished by a capital budgeting process. Proposals are assessed using financial criteria such as return on investment or cost-benefit analysis. The proposals that are approved form the substance of a new strategy, all of which is done without a grand strategic design or a strategic architect. The top-down approach is the most common by far. In it, the CEO, possibly with the assistance of a strategic planning team, decides on the overall direction the company should take. Some organizations are starting to experiment with collaborative strategic planning techniques that recognize the emergent nature of strategic decisions.

The strategy hierarchy

In most (large) corporations there are several levels of strategy. Strategic management is the highest in the sense that it is the broadest, applying to all parts of the firm. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are often functional or business unit strategies.

Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, and information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department’s functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to organize activities so they have reengineered according to processes or strategic business units (called SBUs). A strategic business unit is a semi-autonomous unit within an organization. It is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters. Each SBU is responsible for developing its business strategies, strategies that must be in tune with broader corporate strategies.

The “lowest” level of strategy is operational strategy. It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategy was encouraged by Peter Drucker in his theory of management by objectives (MBO). Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies. Business strategy, which refers to the aggregated operational strategies of single business firm or that of an SBU in a diversified corporation refers to the way in which a firm competes in its chosen arenas.

Corporate strategy, then, refers to the overarching strategy of the diversified firm. Such corporate strategy answers the questions of "in which businesses should we compete?" and "how does being in one business add to the competitive advantage of another portfolio firm, as well as the competitive advantage of the corporation as a whole?"

Since the turn of the millennium, there has been a tendency in some firms to revert to a simpler strategic structure. This is being driven by information technology. It is felt that knowledge management systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process. Most recently, this notion of strategy has been captured under the rubric of dynamic strategy, popularized by the strategic management textbook authored by Carpenter and Sanders ^*. This work builds on that of Brown and Eisenhart as well as Christensen and portrays firm strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the seamless integration of strategy formulation and implementation. Such change and implementation are usually built into the strategy through the staging and pacing facets.

Reasons why strategic plans fail

There are many reasons why strategic plans fail, especially:

Failure to understand the customer
- Why do they buy
- Is there a real need for the product
- inadequate or incorrect marketing research
Inability to predict environmental reaction
- What will competitors do
  - Fighting brands
  - Price wars
- Will government intervene
Over-estimation of resource competence
- Can the staff, equipment, and processes handle the new strategy
- Failure to develop new employee and management skills
Failure to coordinate
- Reporting and control relationships not adequate
- Organizational structure not flexible enough
Failure to obtain senior management commitment
- Failure to get management involved right from the start
- Failure to obtain sufficient company resources to accomplish task
Failure to obtain employee commitment
- New strategy not well explained to employees
- No incentives given to workers to embrace the new strategy
Under-estimation of time requirements
- No critical path analysis done
Failure to follow the plan
- No follow through after initial planning
- No tracking of progress against plan
- No consequences for above
Failure to manage change
- Inadequate understanding of the internal resistance to change
- Lack of vision on the relationships between processes, technology and organization
Poor communications
- Insufficient information sharing among stakeholders
- Exclusion of stakeholders and delegates

Criticisms of strategic management

Although a sense of direction is important, it can also stifle creativity, especially if it is rigidly enforced. In an uncertain and ambiguous world, fluidity can be more important than a finely tuned strategic compass. When a strategy becomes internalized into a corporate culture, it can lead to group think. It can also cause an organization to define itself too narrowly. An example of this is marketing myopia.

Most theories of strategic management seem to have a lifespan less than that of the popularity of the latest teen music idol. Many critics claim that this is because most of them generally do not work. Keep in mind that this article describes only the 50 or so most successful theories, thus exhibiting survivorship bias (ironically, itself an area of research in strategic management). For every theory that gets incorporated into strategic management textbooks there are many that are quickly forgotten. Many theories tend either to be too narrow in focus to build a complete corporate strategy on, or too general and abstract to be applicable to specific situations. The low success rate is further fueled by the management lecture circuit in which hundreds of self-appointed gurus, many without serious academic credentials or substantial expertise, attempt to sell books and explain their “revolutionary” and “groundbreaking” theories to audiences of business executives for a sizable fee. While there are undoubtedly inspirational ideas contained in these seminars, the theories expounded therein have not, for the most part, been subjected to serious study. (See business philosophies and popular management theories for a more critical view of management theories.)

Some critics take the opposite approach claiming effectively that there are not enough theories, and when they arrive they are too late to help managers make any important decisions. These commentators remind us that the basic, everyday purpose of strategic management is to match a company's strategy with the business environment that the organization is in. Because the environment is constantly changing, effective strategic management requires a continuous flow of new theories suitable for the new circumstances. The problem with most theories is that they solve yesterday’s problems, similar to a business Maginot Line. Various approaches to solve this problem have emerged, however, including Mintzberg's ideas of 'emergent strategies' and use of ideas from complexity theory in what is often called complexity strategy.