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 organisation. An organisation 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 organisational 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 organisational 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 organisations as even the smallest organisation faces competition and, by formulating and implementing appropriate strategies, they can attain sustainable competitive advantage.
Strategic management 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 organisation. It helps us to identify the direction in which an organisation is moving.
Strategic management is a continuous process that evaluates and controls the business and the industries in which an organisation is involved; evaluates its competitors and sets goals and strategies to meet all existing and potential competitors; and then revaluates strategies on a regular basis to determine how these have been implemented and whether these were successful or require replacement.
Strategic management gives a broader perspective to the employees of an organisation and they can better understand how their job fits into the entire organisational plan and how it is correlated to other organisational 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 correlate themselves well with each organisational task. They can understand the reaction of environmental changes on the organisation and the probable response of the organisation 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.
The strategic management process defines the organization’s strategy. It is also the process which helps managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved, its competitors; and fixes goals to meet all the present and future potential competitors and then reassesses each strategy.
Strategic management process has following five steps:
Step # 1. Mission and Goals:
The first step in the strategic management begins with senior managers evaluating their position in relation to the organization’s current mission and goals. The mission describes the organization’s values and aspirations; and indicates the direction in which senior management is going. Goals are the desired ends sought through the actual operating procedures of the organization. It typically describe short-term measurable outcomes.
Step # 2. Environmental Scanning:
Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes and helps in analyzing the internal and external factors influencing an organization. After executing the process, management should evaluate it on a continuous basis and strive to improve it.
Step # 3. Strategy Formulation:
Strategy formulation is the process of deciding best course of action for achieving organizational objectives. After conducting environment scanning process, managers formulate corporate, business and functional strategies.
Step # 4. Strategy Implementation:
Strategy implementation implies putting the organization’s chosen strategy in to action and making it work as intended. Strategy implementation includes designing the organization’s structure, distributing resources, developing decision making process, and effectively managing human resources.
Step # 5. Strategy Evaluation:
Strategy evaluation which is the final step of strategy management process involves- appraising internal and external factors, measuring performance, and taking remedial/corrective actions. Evaluation assure the management that the organizational strategy as well as its implementation meets the organizational objectives.
These steps are carried by the businesses, 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.
Strategic Management Process
Strategic management involves certain functions or activities. The systematic way of doing these functions or activities is described as strategic management process.
It consists of:
- Strategy formulation,
- Evaluation & control
Process # 1. Strategy Formulation:
Strategy formulation is the first phase in the strategic management process. It is concerned with devising a suitable plan of action after studying the external business environment, analysing the industry and assessing the internal capabilities of the business concern. It involves six important steps.
- Defining the company mission,
- Analysis of the external business environment,
iii. Industry analysis,
- Internal analysis of the firm,
- Strategic alternatives, and
- Strategic choice.
The steps to be followed for the formulation of a strategy are explained below:
Defining the Company Mission:
The first step in the formulation of a strategy is a clear definition of the mission of the company. This is necessary to formulate an ideal strategy. Otherwise, the strategy will not produce the desired results. An ideal strategy is one which reflects the mission of the company. A mission is the long-term vision of what an organisation wants to be and to whom it wants to serve and what impact on the society. The mission is, thus, the basic, unique purpose that differentiates a business from others.
Analysis of the External Business Environment:
The second step in the formulation of a strategy is an analysis of the external business environment. It is concerned with studying or observing what is prevailing in the external business environment and what changes have taken place. Such an assessment is necessary because every incident or change will have either positive or negative impact on the business.
It involves – (a) analysis of remote environment and (b) analysis of operating environment. The external business environment thus provides opportunities or threats to the business concerns. The business concern must formulate a suitable strategy to exploit the opportunities or manage threats depending up on its strengths or weaknesses.
Analysis of the Industry:
The third step in the formulation of a strategy is an analysis of the industry. It involves the examination of certain forces operating in an industry to understand the nature and the degree of competition in that industry. The level of competition in an industry depends on five basic forces which determine the profit potential of an industry. They are (a) the threat of new entrants, (b) The bargaining power of buyers, (c) The bargaining power of suppliers, (d) The threat of substitute products, and (e) Rivalry among the existing firms.
The study of these forces indicates the trend of industry, the strength and weakness of the company in the industry. Such a study will be useful to formulate a suitable strategy to utilise the opportunities or threats.
Internal Analysis of the Firm:
The fourth step in the formulation a strategy is a thorough internal analysis of the firm. It is concerned with a systematic appraisal or examination of the internal capabilities of a firm. Such an appraisal is necessary to know the strengths and weaknesses of the firm in the areas of finance, production, marketing, technology, research and development, and human resource management.
A systematic internal analysis of the firm involves (a) identification of strategic internal factors and (b) evaluation of the strategic internal factors to identify the key strategic strength and weakness. A factor is considered a strength only when a firm has a distinct competency in it than the competitors in the industry.
A factor is considered a weakness only when a firm performs it poorly than the competitors in the industry. A new strategy therefore has been formulated after considering the internal strategic strengths and weaknesses of the firm to utilise the external opportunities or minimise its activities to overcome threats.
The fifth step in the formulation of a strategy is developing strategic alternatives. They are concerned with identifying other possible ways of achieving the same strategy formulated to utilise external business opportunities or minimise the firm’s activities to overcome threats.
For example, growth strategy may be achieved by intensive growth strategy of market penetration, market development, and product development or integrative growth strategy of horizontal integration and vertical integration or diversification strategy depending upon the internal strengths and weaknesses provided the external business environment is favorable.
Strategic Analysis and Choice:
The last step in the formulation of a strategy is strategic analysis and choice. Strategic analysis involves a systematic evaluation of strategic alternatives with reference to certain criteria. Each alternative has its own merits and demerits but all alternatives cannot be equally appropriate.
Each alternative should be examined to determine its:
- Feasibility and
Relevancy of a strategy refers to the examination of the appropriateness of a strategy with reference to certain aspects. So, the strategists should examine whether –
(i) The strategy is relevant to the mission of the company or not
(ii) The strategy is helpful to accomplish the long-term objectives or not
(iii) The strategy is fit to the strategic strengths and weaknesses of the company or not
(iv) The strategy exploits the external business opportunities or minimises its activities to overcome the threats or not.
Feasibility of a strategy refers to the possibility of achieving the strategy. For testing the feasibility of a strategy, the strategists should examine before the selection of a strategy whether –
(i) The availability of resources are sufficient or not
(ii) The availability of the technology is appropriate or not
(iii) The availability of inputs are sufficient or not
(iv) The organisation’s structure is suitable or not.
Acceptability of a strategy refers to the examination of the agreeableness of a strategy to certain interested parties in an organisation. So, the strategists should examine whether:
(i) The strategy satisfies the criterion of ROI to the management or not
(ii) The strategy is acceptable to the shareholders or not
(iii) The strategy will affect the present employees or not
(iv) The strategy will affect the relationship with the existing customers and suppliers or not
Strategic Choice is concerned with the selection of the best strategy among alternatives. The process of strategy formulation, thus, comes to an end with the choice of an appropriate strategy.
Process # 2. Strategy Implementation:
Strategy implementation is the second phase in the strategic management process. It is concerned with putting the strategy into operation or translating the strategy into strategic action. It necessitates three interrelated activities of (i) Determination of annul objectives, (ii) Development of specific functional strategies, and (iii) Development of policies. For the successful implementation, the strategy must be also institutionalised through structure, leadership, and culture.
Process # 3. Strategy Evaluation and Control:
Strategy evaluation and control is the last phase in the strategic management process. Strategy evaluation is concerned with examining whether the strategy implemented is working or producing results or accomplishing its objectives or not. Strategic control is concerned with continuous monitoring and tracking the strategy putting the strategy in the right path or direction.