WHAT IS STRATEGY AND STRATEGIC MANAGEMENT

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					  What is Strategy and
 Strategic Management


National Institute for Transport and
              Logistics




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           WHAT IS STRATEGY AND STRATEGIC MANAGEMENT?


1.     INTRODUCTION

The challenges that businesses face in their operation have changed vastly since the birth
of the business firm as a form of enterprise during the industrial revolution. Different
approaches to management have evolved as a result of these changes. A brief review of
the changes is given here. Following the industrial revolution, businesses focused on
developing and consolidating the industrial structure created during the industrial
revolution. There was a vast demand for standard products at a cheap price, and the firm
that could reduce costs to a minimum through automated production was the most
successful. Political and social controls over firms were at a minimum. This was known
as the mass production era.

As the demand for basic consumer goods became saturated, there was a shift of emphasis
from standard to differentiated products. Hence there was more interest in product
development through R&D, advertising, selling and promotions. This shift towards a
marketing orientation exposed management to uncertainty about the future and hence
they resisted acknowledgement of the emerging environment.

Over time, the acceleration of events and diversity of change became so rapid that change
could no longer be effectively dealt with by viewing it as a series of unpredictable
surprises that could be coped with as they arose. A number of factors contributed to this
as follows.

1      The emphasis on differentiated products enabled the populations of developed
       countries to experience a higher quality of life, stimulating demand for luxury
       products and services. Hence industries emerged catering for the affluent
       customer e.g. travel and recreation services and the 4emand for basic standard
       products went into decline.

2      A higher quality of life caused a realignment of social priorities. Moral and
       environmental concerns replace concern about basic needs e.g. job satisfaction
       and pollution. Hence businesses are subject to government regulation and public
       pressure to conform to social expectations.

3      The pressure on businesses to differentiate their products leads to high levels of
       investment in technology by some firms, causing a rapid rate of change.

4      Key resources are becoming increasingly scarce as demand increases at a faster
       rate than supply.

5      Communications are continually improving so that customers are more informed
       and international trade is facilitated, increasing competition.



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As the operating environment has evolved, the approach of management to dealing with
the future has evolved. When the operating environment was stable in the mass
production era, there was little need for long term planning. Performance was measured
and used as the basis for management. The perceived need for more formalized planning
and used as the basis for management. The perceived need for more formalized planning
arose from two sources. Firstly, the acceleration of change leading to uncertainty about
the future and hence risk of performing badly. Secondly, the growth in size to business
films creates the issue of coordinating of activities and communication. Managers
recognise formal planning as a means of harnessing multiple resources towards a
common goal. Initially, formalized planning took the form of long range planning where
the future is expected to be an extrapolation of the past. Goals are formulated through
extrapolating the past and elaborated into action programmes, budgets and profit plans. In
the 1960's the need for a planning system that recognised that the future is not an
extrapolation of the past was recognised in strategic planning.


2.     STRATEGIC PLANNING TO STRATEGIC MANAGEMENT

The purpose of strategic planning is to match the capabilities of the firm to the external
environment, so that opportunities may be exploited and problems avoided. The objective
is determined, the most probable future operating environment is diagnosed and matched
to the firm’s strengths and weaknesses. A strategy is selected that will give the firm the
best advantage in achieving its objective. The strategy pursued by a firm is sometimes
called its business policy and is the basis for decision-making about the business
activities. It defines the means by which the objective is to be achieved. Initially strategic
plans were formulated at the corporate level and then translated down into plans at the
divisional level. By adopting this approach, future uncertainty is reduced by anticipating
change and planning a response in advance.

Initially strategic planning involved a purely rational analysis of the current situation and
future developments to diagnose the optimal strategy. As strategic planning developed,
further issues were identified, extending strategic planning to strategic management
Strategic management incorporates analysis of cultural and political variables so that the
implementation of the strategies is considered as part of the planning process. Major
strategic change requires commitment from employees - how this will be achieved has to
be considered as part of the planning process. One area of particular interest at present is
that of performance measures. For example, if division managers are rewarded for
achieving high net profits these may be achieved at the detriment of quality. Hence
performance measures influence what strategies are actually followed, which may differ
from those identified in the strategic planning process.

Two further modifications to the theory are as follows. In the early 1970's, General
Electric was determined to supplement their decentralised management with a
comprehensive corporate planning system. This led to the implementation of strategic
business units (SBU's). The SBU is now used by many firms. They are appropriate in
centralised firms seeking a means of improving their strategic responsiveness. Each SBU


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serves a clearly defined product-market with a clearly defined strategy, formulated by the
SBU in accordance with corporate level strategy. SBU's may be designated according to
a number of criteria such as product area, geographical location and market; they are
generally most effective if they incorporate all organisational functions. The SBU
structure facilitates responsiveness to change, which is an important issue in large
multidivisional companies. The responsibility for identifying and responding to changes
is delegated with an overall framework so that the task is more manageable.

Finally, so far it has been assumed that one probable future is identified and planned for.
However as the diversity and rate of change increases, it becomes increasingly difficult to
identify the most probable future. Hence the approach is modified to introduce alternative
future scenarios. These are determined by posing 'what-if questions on the assumptions
underlying the most probable scenario to identify more optimistic and more pessimistic
scenarios. Contingency strategies are identified based upon the alternative scenarios,
which can be pulled into action if events take a different course to that anticipated.

National Home Loans provides an example of the need for contingency strategies. The
company receives deposits from institutions like banks, building societies, insurance
companies and also local authorities and lends the funds as mortgages. The company was
founded six years ago and has a mixed management record. It runs an inherent risk by
concentrating on a limited number of large investors. Following the collapse of BCCI,
local authorities are reexamining the quality of companies they invest funds in. NHL
made an anticipatory response by asking their bankers to arrange a £200m standby
facility to avert a possible liquidity crisis. In addition, customers who had committed to
mortgages with NHL have been offered a mortgage with Yorkshire Building Society as
an alternative.

3       SCOPE OF STRATEGIC MANAGEMENT

Whilst it may appear that strategic management is most appropriate in large profit-
making organisations with plenty of resources, its relevance in non-profit malting
organisations should not be underestimated. Similarly, smaller businesses are wise to
indulge in some form of strategic management7 albeit using rather less sophisticated
techniques than their larger counterparts i.e. more implicit than explicit. The factors that
have brought about changes in the operating environment are common to all
organisations; none can afford to ignore the realities with which they are faced. Strategic
issues are concerned with the long-term future of the business i.e. whether it thrives,
survives or dies. There have been numerous studies during the development of strategic
management theory that have attempted to prove that strategic management causes better
performance. Although these have generally been inconclusive due to methodological
problems, the majority of studies do reach the conclusion that there is a relationship
between better performance and formal planning. This leads to the hypothesis that
businesses, which perform formal strategic planning, have a higher probability of success
than those, which do not.




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4.     THE STRATEGIC MANAGEMENT PROCESS

The objective of the organisation and a forecast of achievement under its current strategy
are used to analyze the gap between desired and actual and hence determine the scope of
the strategic process. The latter comprises four stages. Firstly, the internal and external
environments are analysed to enhance understanding of the current strategic situation. For
example, the privatised UK electricity industry needs to reassess its internal organisation
and consider external environmental factors such as government regulation. The industry
is still subject to considerable regulation, but in the future this may be loosened to allow
greater competition. Secondly, alternative strategies are developed and evaluated in terms
of meeting the objectives. Thirdly, a strategic choice is made from the alternatives.

As an example of strategic choices, Banner Homes Group PLC anticipated a downturn in
the UK housing market in early 1988 and hence diversified into industrial property
investment. The company now believes that the housing market will expand again and is
increasing the number of units built over a wider geographical spread in the U.K. In the
longer term, European expansion is being considered.

The final stage is the formulation and execution of an implementation plan. This last
stage is fundamental to the success of a strategic plan. There are two important aspects of
implementation. Firstly, the allocation of resources and secondly the organisational
structure of the company. The operative strategy of a company as opposed to the planned
strategy is determined by resource allocation decisions, which are primarily made
through the budget process. The latter has to incorporate recognition of the need to link
employment of resources to activities needed to accomplish a strategy. Secondly, the
organisational structure refers to the means by which people are organised to achieve the
organisational objective. Organisational structure needs to be compatible with the
strategy that is to be implemented with the minimum amount of resistance.


5.   STRATEGIC MANAGEMENT IN PRACTICE

The above describes a top down sequential approach to a rational analysis of the strategic
situation. This represents the ideal situation and also aids theoretical understanding of the
strategic management process. However in practice, it is unlikely that the process will be
followed step by step due to the dynamics of the situation. Some stages of the process
overlap with each other. For example, implementation requires an appraisal of the
organisation structure to determine whether the structure is appropriate to the new
strategy. However the internal analysis stage also involves consideration of the
organisational structure as a strength or weakness of the organisation. Hence the
organisational structure will be examined at different stages of the process and there may
be overlap between the different stages. It is noted here that one of the criticisms of the
rational model is that it stifles creativity and entrepreneurism, which are fundamental to
the formulation of strategies. Hence although the rational model is still widely used
amongst theorists, its value is more as a tool to aid understanding and develop an
approach than as a tool to be applied religiously in the practice of strategic management.


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In a recent study by Peat Marwick-McLintock, of 150 UK companies studied over 66%
claim to rely on intuitive hunches to determine company strategy.




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             Appendix - CORPORATE MISSION, OBJECTIVES AND
                             STAKEHOLDERS


1.      INTRODUCTION
A key step in the strategic management process is the definition of mission and corporate
objectives. Notwithstanding its importance, many organisations overlook this step. Even
worse, they draft ill conceived, meaningless mission statements and foist them on an
unreceptive audience, thereby promoting cynicism and despair.

The complex modern business organisation is not "owned" exclusively by its
shareholders. Many other individuals and groups have a "stake" its future. Suppliers and
customers may both be involved in strategic alliances with the business. Also ,as Turner
has noted, whilst shareholders only give their money employees often give the whole of
their working lives.

When drafting a mission statement and framing objectives the interest of the various
stakeholders must be recognised.


2.      THE CORPORATE MISSION
The corporate mission is the fundamental reason for the existence of the company. The
ideal mission statement should be positive, visionary and motivating. It should make
crystal clear the long-term direction in which the company intends to head. It should not
be so broad or fuzzy that the business is not defined, nor so narrow that it acts as a
straight-jacket to strategic intent. At the same time it must steer entrepreneurial decisions
down a consistent path and provide a clear guide to decision-makers.

Companies can define their business in a number of different ways:

     The products or services being offered
     The principal ingredients being used
     The broad consumer group to be satisfied
     Specific products for specific markets
     The technologies being employed
     The consumer wants to be satisfied
     A diversity of related businesses
     A conglomerate of unrelated businesses.

On its own, any definition from the above list serves little purpose. According to Ansoff a
good mission statement has five characteristics:

It defines the future businesses that the company intends to he in
It contains a set of objectives that enable progress to be measured
It differentiates the company from its Competitors


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It is relevant to all the stakeholders
It is exciting and inspiring

Peter Drucker argues that management's failure to define the business is the single most
important cause of organisation frustration and failure. He emphasizes that business
definition must always have a customer focus.

        A business is not defined by the company's name, statutes, or articles of
        incorporation. It is defined by the want the customer satisfies when he buys a
        product or service. To satisfy the customer is the mission and purpose of every
        business. The question "What is our business?" can, therefore, be answered only
        by looking at the business from the outside, from the point of view of customer
        and market. What the customer sees, thinks, believes, and wants, at any gives
        time, must be accepted by management as an objective fact…..
       …..to the customer, no product or service, and certainly no company, is of much
       importance.... The customer only wants to know what the product or service will
       do for him tomorrow. All he is interested in are his own values, his own wants, his
       own reality. For this alone, any serious attempt to state "what our business is"
       must start with the customer, his realities, his situation, his behaviour, his
       expectations, and his values

Derek Abell expands upon the customer focus approach and advocates a three
dimensional concept of mission. Products offered and markets served are the results of
choices made by the company about whom to satisfy, what needs to satisfy, and how to
produce the satisfactions. It is this combination of factors that defines the business The
approach is useful as a powerful tool of analysis to explore potential future strategic
moves by the company. Also, by bringing in the technical dimension reflecting core skills
and competencies the company is kept alert to changes in both its market and its
technological environment.

Cambell and Goold from the Ashridge Management Centre have argued that a mission
statement should consist of four elements: purpose, strategy, values and behavioural
standards. Purpose and strategy alone are not sufficient to give meaningful direction to a
company. The successful implementation of a mission depends upon the people within
the organisation accepting the values of the organisation and conforming to the policies
set.

3.     CORPORATE OBJECTIVES
Corporate objectives relate to the overall business makeup of the corporation, the
revenues expected from different businesses, the competitive position ,and reputation.(1t
should be noted that in the management literature there is no consistency in definitions
and writers sometimes use the words "aims19 "goals" "objectives" interchangeably.}

Although it is not possible to define a complete list, a typical set of the areas in which
strategic objectives for a corporation might be set are given below;



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Market standing

Profitability

Productivity

Physical performance

Managerial performance

Employee performance

Innovation

Social responsibility

Technological superiority

Competitive strength

Quality


At the strategic level these are often expressed as guiding principles within which
strategy is framed.

4.      BUSINESS AND FUNCTIONAL OBJECTIVES
Within a corporation there are several businesses or strategic business units. SBU is
defined as part of a group or a division of a company serving a particular product/market
which (ideally) has primary responsibility and authority for managing its basic business
functions of marketing, manufacturing, engineering and distribution. Each SBU will have
its own mission and business objectives related to the corporate mission and corporate
objectives

A system of Management by Objectives (MBO) produces a cascade of objectives
whereby the strategic objectives are translated into shorter-term functional and
departmental objectives. At the corporate and business level objectives tend to be general.
At functional and departmental level they become increasingly more specific ending up
as precise operating targets for managers and employees.

5.     STAKEHOLDERS
It was indicated earlier that modern organisations are exceedingly complex and have
many stakeholders.

Stakeholders have been defined by Freeman as "any group or individual who can affect
or is affected by the performance of the organisation".


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A narrower definition would be "any individual, group, or organisation that has a
financial interest in the survival of an enterprise or who stands to participate in its
success".

Whilst it is impossible to specify a complete list of stakeholders that would be universally
applicable to all companies the following is a guide to stakeholder interests.

Shareholders
Managers
Employees
Trade unions
Pensioners
Consumers
Distributors
Suppliers
Financiers
Local government
National government
Community

Although the organisation should take account of stakeholder interests clearly the
objectives are not always consistent and frequently conflict. Investment in new
technology, which produces increased profit, may simultaneously cause unemployment
in any particular decision situation the power of each stakeholder group will vary. It will
be necessary management to establish priorities in order to effect a trade-off.

The justification for a system of MBO may be summarised thus:
     Objectives as targets set a specific direction
     Objectives provide a measuring rod for assessing alternative courses of action
     Objectives as performance targets for managers act as motivators
     Objectives at the implementation stage act as controls
     Objectives focus on the key requirements for success when there is a need to
       manage change.
     Objectives make people action oriented.

At functional and departmental level the characteristics of a good objective are worthy of
note. Good objectives:
     Should relate to a single topic
     Should relate to results not activities
     Should be measurable
     Should have a time limit for attainment
     Should be challenging but attainable
     Should be based upon participation

The alternatives to MBO leave much to be desired:


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MBE (Management by extrapolation)             Do as you always have done. if it is not
broken then do not try to fix it.
MBC (Management by crisis)             React to events as they occur instead of making
events happen.
MBS (Management by subjectives)               As there is no clear direction in the company
do whatever you think is best.
MBH (Management by hope)               Just hope and pray that everything will be OK and
that the catastrophe will never occur. Also called Ostrich Management.
MM (Mushroom Management)               Keep everyone in the dark to produce the best
results.

Given such alternatives MBO works out best.




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