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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. To see how strategic management relates to other forms of managment, see management.

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.

Alfred 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)

Igor 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".

Peter 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

By the late 70s people had started to notice how sucessful Japanese industry had become. In industry after industry, including steel, watches, ship building, cameras, autos, and electronics, the Japanese were supassing American and European companies. Westerners wanted to know why. Numerous theories proported to expain the Japanese sussess including:

• Higher employee morale, dedication, and loyalty;
• Lower cost structure, including wages;
• Effective government industrial policy;
• Modernization after WWII leading to high capital intensity and productivity;
• Economies of scale associated with increased exporting;
• Relatively low value of the Yen leading to low interest rates and capital costs, low dividend expectations, and inexpensive exports;
• Superior quality control techniques such as Total Quality Management and other systems introduced by W. Edwards Demings in the 1950s and 60s. (This is detailed in Schonberger R. (1982).)

Although there was some truth to all these potential explanations, there was clearly something missing. In fact by 1980 the Japanese cost structure was higher than the American. And post WWII reconstruction was nearly 40 years in the past. The first management theorist to suggest an explanation was Richard Pascale.

In 1981 Richard Pascale and Anthony Athos in The Art of Japanese Management claimed that the main reason for Japanese sucess was their superior management techniques. They divided management into 7 aspects : Strategy, Structure, Systems, Skills, Staff, Style, and Subordinate goals (which we would now call shared values). The first of the 7 S's were called hard factors and this is where American companies excelled. The remaining four factors (skills, staff, style, and shared values) were called soft factors and were not well understood by American businesses of the time. (For details on the role of soft and hard factors see Wickens P.D. (1995).) Americans had not yet understood the role of corporate culture, shared values and beliefs, and social cohesion in the workplace. In Japan the task of management was seen as managing the whole complex of human needs, economic, social, psychological, and spiritual. In America work was seen as somthing that was separate from the rest of ones life. It was quite common for Americans to exhibit a very different personality at work compared to the rest of their lives. Pascale also highlited the difference between decision making styles; hierarchical in America, and consencous in Japan. He also claimed that American business lacked long term vision, prefering instead to apply management fads and theories in a piecemeal fashion.

One year later The Mind of the Strategist was released in America by Kenichi Ohmae. (It was originally published in Japan in 1975.) He claimed that strategy in America was too analytical. Strategy should be a creative art: It is a frame of mind that requires intuition and intellectual flexibility. He claimed that Americans constrained their strategic options by thinking in terms of analytical techniques, rote formula, and step-by-step processes. He compared the culture of Japan in which vagueness, ambiguity, and tentitive decisions were acceptable, to American culture that valued fast decisions.

Also in 1982 Tom Peters and Robert Waterman released a study that would respond to the Japanese challence head on. Peters and Waterman, who had several years earlier colaberated with Pascale and Athos at McKinsey & Co. asked "What makes an excellent company?". They looked at 62 companies that they thought were fairly successful. Each was subject to six performance criteria. To be classified as an excellent company, it had to be above the 50th percentile in 4 of the 6 performance metrics for 20 consecutive years. Forty three companies passed the test. They then studied these sucessful companies and interviewed key executives. They concluded in In Search of Excellence that there were 8 keys to excellence that were shared by all 43 firms. They are:

• A bias for action - Do it. Try it. Dont waste time studying it with multiple reports and commitees.
• Customer focus - Get close to the customer. Know your customer.
• Entrepreneurship - Even big companies act and think small by giving people the authority to take initiatives.
• Productivity through people - Treat your people with respect and they will reward you with productivity.
• Value oriented CEOs - The CEO should actively propogate corporate values throughout the organization.
• Stick to the knitting - Do what you know well.
• Keep things simple and lean - Complexity encourages waste and confusion.
• Simultaneously centralized and decentralized - Have tight centralized control while also allowing maximum individual autonomy.

Gaining competitive advantage

Michael Porter 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; (strategic widows) 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)

Criticisms of strategic managment

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

• Ohmae, K. (1982) The Mind of the Strategist McGraw Hill, New York, 1982.

• Pascale, R. and Athos, A. (1981) The Art of Japanese Management, Penguin, London, 1981, ISBN 0-446-30784-x

• Peters, T. and Waterman, R. (1982) In Search of Excellence, Harper Colllins, New york, 1982.

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

• Rehfeld, J. E. (1994) Alchemy of a Leader: Combining Western and Japanese Management skills to transform your company, John Whily & Sons, New York, 1994, ISBN 0-471-00836-2

• Schonberger, R. (1982) Japanese Manufacturing Techniques, The Free Press, 1982, New York.

• Wickens, P.D. (1995) The Ascendant Organization, MacMillan Press, 1995, London, ISBN 0-333-73580-3