Strategic Management (Encyclopedia of Business and Finance)
Strategic management is the process of developing and executing a series of competitive moves to enhance the success of the organization both in the present and in the future. These competitive moves are derived from the demands of the external environment in which the firm operates as well as the internal capabilities which it has developed or can reasonably hope to build or acquire. While managers may follow somewhat different strategic management routines, a sound process should include an analysis of the current business situation, the formulation of objectives and strategies based on that analysis, and an implementation and evaluation procedure that ensures progress toward each strategy and objective. This article focuses on the formulation of appropriate strategic objectives based on a sound understanding of the internal and external environments faced by the firm. A brief discussion of implementation is included though this topic is covered in greater detail in other entries.
In order to create appropriate strategic objectives, organizations work to understand their internal capabilities as well as the environment in which they operate. Further, they also seek to clarify their purpose or mission. The situation analysis firmly focuses management's attention on these issues, allowing it to create a fit between its resources and the demands of the competitive situation.
The steps to be taken in a situational analysis are largely agreed upon, though there does exist some debate as to whether one starts with a mission statement or with an analysis of the state of the organization. Those who believe that a mission statement is the logical starting point argue that management must first think carefully and creatively about the future direction of the company if they are to create and implement effective objectives (Thompson and Strickland, 1998). In this way, managers can choose their own vision of what the company ought to be rather than be unduly affected by company history or industry exigencies. On the other hand, managers may want to have a keen understanding of the history and current performance of a company as well as important industry factors so as to craft a strategic vision that is attainable in terms of organizational competencies and industry dynamics. While both sides have merit, this article discusses the state of the organization first.
STATE OF THE ORGANIZATION
In analyzing the state of the organization, managers take a candid measure of its recent performance. Typically, they consider such issues as profitability, stock price performance, market share, revenue growth, customer satisfaction, product innovation, and so forth. These measures can vary from industry to industry. Product innovation, for example, is important to the pharmaceutical industry, while the number of new distributors signed may be a more important measure in the multilevel marketing industry.
In addition to this performance review, managers typically examine a company's (s)trengths, (w)eaknesses, (o)pportunities, and (t)hreats by conducting a (SWOT) analysis. Strengths consist of those things that a company does particularly well relative to its competition and that provide it with some competitive advantage. Strengths can be found in many different areas, including people, such as a particularly competent sales force; systems, such as Federal Express's information systems; locations, like that occupied by a restaurant with sweeping ocean views; and intangible assets, such as a strong brand name. These strengths provide the competitive advantage needed to succeed in the marketplace.
Weaknesses, on the other hand, diminish the competitiveness of a company. They, too, can be found in many different areas, including outdated equipment, a poor understanding of customers, or a high cost structure.
Strengths and weaknesses are typically internal to a company and, therefore, largely under a company's control. Opportunities and threats, on the other hand, are usually derived from the external market situation and require some response from a company if it is to perform well. Opportunities can arise in many areas, including geographical expansion, new technologies, and changing customer preferences and tastes. Only when a firm has (or can hope to acquire) the specific skills needed to seize upon some option does it become an opportunity for the company.
While opportunities are chances to be seized, threats can be thought of as concerns that are largely outside of the organization's control but have the potential to disrupt its operations. Probably the biggest threat to many companies is their competition. Other sources of threats include foreign economic crises such as the "Asian flu" that began in the latter part of the 1990s, government regulations, natural disasters, and so forth. In creating strategic objectives, management prepares contingency plans to minimize the impact of its most serious threats.
In addition to conducting a SWOT analysis and candid performance review, the executive team may use several other tools to acquire a better understanding of its current situation. They may, for example, identify those forces in the industry that are causing the nature of competition to change for all competitors. One example would be the publicizing of the link between cholesterol and heart disease that made many consumers more aware of the amount of fat in foods. This change made it important for many food manufacturers to either lower the amount of fat in their products or to introduce fat-free or low-fat versions of those products. These forces that change the nature the way companies compete in an industry are known as driving forces.
Another tool used by managers in conducting a state-of-the-organization review is an analysis of key success factors. In this analysis managers examine those things that all companies within a given industry must do well if they are to survive. These might include rapid service for the fast-food industry, producing large numbers of vehicles so as to offset the high cost of specialized equipment in the automotive industry, or having skilled designers in the fashion industry. By understanding such factors, managers are in a position to better allocate resources so as to perform well in the future.
In addition to these tools, managers may also conduct other types of analyses, including ones focused on customers, economic characteristics of the industry, supplier relationships, and so forth. These analyses constitute a first step in the strategic management process as organizational leaders attempt to understand the organization's current situation so as to later be able to identify those strategic objectives most likely to improve performance.
Having thoroughly understood an organization's internal and external environment, managers establish a mission statement to create a five-to ten-year vision of the company. A mission statement documents the service or product the company provides to the marketplace and the unique way in which it distinguishes itself from other companies. It also indicates the target group of customers that the company serves.
An example of this type of mission statement is provided by Courtyard by Marriott. It indicates that Courtyard by Marriott is serving economy-and quality-minded frequent business travelers with a premier, moderate-priced lodging facility that is consistently perceived as clean, comfortable, well maintained, attractive, and staffed by friendly, attentive, and efficient people. This mission statement indicates the product and service provided to the target customers and the way in which it will be done.
Mission statements serve several purposes in strategic management. First, they provide direction for the organization. As a firm engages in its strategic planning process it compares its objectives with the path it has set for itself. If any of the goals suggest a deviation from the purpose of the organization, managers must decide if the goal is sufficiently important to warrant a change in the mission statement. Otherwise, the objective might be dropped. With this in mind managers are typically careful to write mission statements that are broad enough to encourage growth but specific enough to give direction.
A second purpose of mission statements is to create a shared sense of purpose and inspiration among employees. In some organizations, employees are required to memorize the mission statement so that they will understand what is appropriate behavior and what is not. For this reason, most mission statements are relatively short so that the purpose of the company remains clearly in the minds of its employees. Further, many companies seek the input of their employees in creating a mission statement so as to create a document that is owned by all.
Finally, mission statements are also external documents. They communicate to the outside world the values and goals of the organization. Unfortunately, some companies create mission statements as a marketing document and then fail to live up to that vision of themselves. For a mission statement to be effective, it must be a living document that motivates behavior.
EXTERNAL ENVIRONMENT REVIEW
Once a company has carefully and frankly understood its situation and has spent time considering the appropriateness of its mission statement, it may choose to do a more thorough review of the external environment. This environment consists of industry, government, competitive, economic, political, and other factors that the organization cannot control but which may have an important impact on the company. For example, the dietary supplements industry in the United States spends large amounts of money to keep abreast of the latest regulations issued by the Food and Drug Administration.
Much of this analysis may be done within the State of the Organization report, but some companies choose to address it as a third step in the strategic planning process so as to assure that they are not caught off guard by these important factors. While the organization cannot control these forces, it can formulate responses that will minimize the potential damage or even put the firm in a better competitive position should the eventuality actually occur.
KEY OBJECTIVES AND STRATEGIES
Having conducted the previous three steps, managers have sufficient information to choose objectives that are most likely to match the internal capabilities of the firm with the exigencies of the external environment. Thompson and Strickland (1998) state that "objectives represent a managerial commitment to achieving specific performance targets within a specific time frame" (p. 36). While drawing heavily on the previous three steps in the process, objectives rely even more particularly on the SWOT analysis in enhancing certain strengths, overcoming specific weak nesses, capitalizing on opportunities, and ad dressing the threats. By creating such a fit between the demands of the industry and the skills and competencies of the organization, a firm in creases its ability to compete successfully in the marketplace.
Firms may set specific objectives including such things as increasing market share, decreasing customer complaints, cutting costs by 10 per cent, or creating a more effective food preparation facility. These broad objectives are then broken down into specific strategies that may, in turn, be broken down into even more specific action steps. It is important that objectives be written in a way that clearly indicates the nature of what is to be achieved, the single individual responsible for the objective, a committee to work on the project, funding assigned, and date to be completed. Based on these requirements, an objective for a rural hospital might take the following form:
Objective 2: Increase revenues from visiting physicians by $500,000.
Person Responsible: Virginia Moody (CEO)
Committee Members: Virginia Moody, Dr. Etta, Erika Boerk (PR director), Sean Ortiz (Facilities Coordinator), and Tristan Roberts (Marketing)
Date Due: June 1, 20XX
- Develop relationship with Dr. Yang (podiatrist).
- Refurbish existing office space to accommodate visiting physicians.
- Contract with local newspaper to advertise visits.
- Find a dermatologist
In addition, each of the strategies could also be broken down in similar fashion to include the person(s) responsible, funds required, and due dates.
Having created detailed objectives and strategies, an organization may find that some internal adjustments in the way a firm is organized or in the competencies of its workers are required to achieve those objectives. These adjustments may be as simple as sending an employee to a seminar to better understand a new information process software or as complex as creating a new international division to take advantage of overseas opportunities. This process requires the identification of those individual and organization competencies needed to facilitate the accomplishment of the stated objectives.
In addition to serving as a guide to the form of the organization, the objectives also serve as the basis of the year's budgets and performance standards. Having set the funding requirements for each objective, these monies are added to the normal operating budget for each division so that they can fulfill these goals. Further, these objectives and strategies are added to the existing performance standards for each division or department and become an integral part of the performance evaluation of the individuals assigned to each task. In this way the progress of each objective is tracked throughout the year and a specific and agreed-upon measuring stick exists for each employee's performance.
Finally, it should be mentioned that in any strategic management process, but particularly in those taking place in dynamic environments, situations change and strategic plans require modification. While five-year plans may remain relatively unchanged in some industries, other industries may make major modifications monthly. For this reason, most firms consider strategic management to be an ongoing process characterized by periodic progress evaluations and major plan analysis on a yearly basis. Such updates allow a firm to continually reconfigure its internal process and capabilities to create a better fit with the demands of the competitive situation.
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