Misplaced Pages

Revision as of 19:37, 28 July 2004

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. An organization’s strategy must be appropriate for an organizations resources, circumstances, and objectives. The process involves matching the companies' 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.

Strategy formulation and implementation

Strategic management can be seen as a combination of strategy formulation and strategy implementation. 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), mission statements (medium term), 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 obtain these goals.
• This three-step strategy formation 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.

Strategy implementation involves:

• Allocation of sufficient resources (financial, personnel, time, computer system 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 formation 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.

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.

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.

Historical development of strategic management

Birth of strategic management

Strategic management as a discipline originated in the 1950s and 60s. Although there were numerious early contributors to the literature, the three most influencial pioneers were Alfred Chandler, Igor Ansoff, and Peter Drucker.

Chandler recognized the importance of coordinating the various aspects of management under one all-encompassing strategy. Prior to this time the various functions of management were separate with little overall coordination or strategy. Interactions between functions or between departments were typically handled by a boundary position, that is there were one or two managers that relayed information back and forth between two departments. Chandler also stressed the importance of taking a future looking long term perspective. In his groundbreaking work Strategy and Structure (1962), Chandler showed that a long term coordinated strategy was necessary to give a company structure, direction, and focus. He says it concisely, "structure follows strategy". Today we recognize that this is only half the story: strategy also follows from structure (see Tom Peters Liberation Management)

Ansoff built on Chandlers work by adding a range of strategic concepts and inventing a whole new vocabulary. He developed a strategy grid that compared market penetration strategies, product development strategies, market development strategies and horizontal and vertical integration and diversification strategies. He felt that management could use these strategies to systematicly prepare for future opportunities and challenges. In his classic Corporate strategy (1965) he developed the "gap analysis" still used today in which we must understand the gap between where we are currenty and where we would like to be, then develop what he called "gap reducing actions".

Drucker was a prolific strategy theorist, author of dozens of management books, with a career spanning five decades. His contributions to strategic management were many but two are most important. Firstly, he stressed the importance of objectives. An organization without clear objectives is like a ship without a rudder. As early as 1954 he was developing a theory of management based on objectives. This evolved into his theory of "management by objectives" (MBO). According to Drucker, the procedure of setting objectives and monitoring your progress towards them should permiate the entire organization, top to bottom. His other seminal contribution was in predicting the importance of what today we would call intellectual capital. He predicted the rise of what he called the "knowledge worker" and explained the consequences of this for management. He said that knowledge work is nonhierarchical. Work would be carried out in teams with the person most knowledgable in the task at hand being the temporary leader.

Portfolio theory

In the 1970s much of strategic management dealt with portfolio theory. In the previous decade Harry Markowitz and other financial theorists developed the theory of portfolio analysis. It was concluded that a broad portfolio of financial assets could reduce systemic risk. In the 1970s marketers extended the theory to product portfolio decisions and managerial strategists extended it to operating division portfolios. Each of a companies operating divisions were seen as an element in the corporate portfolio. Each operating division (also called strategic business units) was treated as a semi-independent profit center with its own revenues , costs, objectives, and strategies. Several techniques were developed to analyze the relationships between elements in a portfolio. B.C.G. Analysis, for example, was developed by the Boston Consulting Group in the early 1970's. Shortly after that the G.E. Multi factoral model was developed by General Electric. Companies continued to diversify until the 1980s when it was realized that in many cases a portfolio of operating divisions was worth more as separate completely independent companies.

The Japanese challenge, vision, and competitive advantage

1980s Tom Peters Michael Porter Richard Pascale Kenichi Ohmae Collins

The military theorists

In the 1980s some business strategists realized that there was a vast knowledge base stretching back thousands of years that they had barely examined. They turned to military strategy for guidance. Military strategy books like “The Art of War” by Sun Tzu, “On War” by von Clausewitz, and “The Red Book” by Mao Tse Tung became instant business classics. From Sun Tzu they learned the tactical side of military strategy and specific tactical proscriptions. From Von Clausewitz they learned the dynamic and unpredictable nature of military strategy. From Mao Tse Tung they learned the principles of guerrilla warfare. The main marketing warfare books were:

• Business War Games by Barrie James, 1984
• Marketing Warfare by Al Ries and Jack Trout, 1986
• Leadership Secrets of Attila the Hun by A Weiss, 1987

Philip Kotler was a well known proponent of marketing warfare strategy. By the turn of the century marketing warfare strategies had gone out of favour. It was felt that they were limiting. There were many situations in which non-confrontational approaches were more appropriate. The “Strategy of the Dolphin” was developed in the mid 1990s to give guidance as to when to use aggressive strategies and when to use passive strategies. The marketing warfare literature also examined leadership and motivation, intelligence gathering, types of marketing weapons, logistics, and communications.

Change and technology driven strategy

1980s 90s and 00s; J. Carlos Jarillo (Strategic networks / Strategic Logic); Gilbert J. Probst (Change Management / Knowledge Management); Tofler (The third wave); S Zuboff (In the age of the smart machine); Regis McKenna (real time pricing); Noel Tichy (Manageing Strategic change); Charles Handy (Strategic drift); Richard Pascale (managing on the Edge); Peter Senge (The fifth Discipline); Peter Schwartz (Long view)

Also see

• strategic planning
• marketing strategies
• business model
• business plan
• marketing plan
• value migration
• management
• marketing

Finding related topics

• list of management topics
• list of marketing topics
• list of human resource management topics
• list of economics topics
• list of finance topics
• list of accounting topics
• list of information technology management topics
• list of production topics
• list of business law topics
• list of business ethics, political economy, and philosophy of business topics
• list of business theorists
• list of economists
• list of corporate leaders
• list of companies

External sources

• Abell, D. (1993) Managing with dual strategies, The Free Press (Macmillan Inc.), New York, 1993, ISBN 0-02-900145-5

• Ansoff, I. (1957) Strategies for diversification, Harvard Business Review, Boston, 1957

• Ansoff, I. (1962) Corporate Strategy McGraw Hill, New York, 1962

• Ansoff, I. Declerck, R. and Hayes, R. (1976) From Strategic Planning to Strategic Management, John Wiley, New York, 1976

• Chandler, A. (1962) Strategy and structure: Chapters in the history of industrial enterprise, Doubleday, New York

• Drucker, P. (1954) The Practice of Management, Harper and Row, New York, 1954

• Drucker, P. (1969) The Age of Discontinuity, Heinemann, London, 1969

• Jarillo, J.-C. (1993) Strategic Networks: Creating borderless organizations, Butterworth-Heinemann, Oxford, 1993

• Jarillo, J.-C. (2003) Strategic Logic, Palgrave McMillan, New York, 2003 (Exist also in other languages)

• Leibold, M. Probst, G. and Gibbert, M. (2001) Strategic Management in the Knowledge Economy, Wiley, Erlangen 2001

• Probst, G. Raub, S. and Romhardt K. (1999) Managing Knowledge, Wiley, London, 1999 (Exists also in other languages)