SRM Institute of Science and Technology
18PDH102T- Management Principles for Engineers
UNIT IV
Strategic management - Sustainable strategic competitiveness - Strategic management goals - The
strategic management process - Strategies used by organisations - Strategy formulation - Strategy
implementation.
TEXT BOOKS:
● Schermerhorn, J.R., Introduction to Management, 13th Edition. Wiley; 2017
● Harold Koontz and Heinz Weihrich, Essentials of management: An International &
Leadership Perspective, 10th edition, Tata McGraw -Hill Education, 2015.
REFERENCES:
● Stephen Robbins and Mary Coulter, Fundamentals of Management , 9th edition , Pearson
Education India; 2016
● Samuel C. Certo and Tervis Certo, Modern management: concepts and skills, Pearson
education, 12th edition, 2012.
● Charles W. L. Hill and Steven Mcshane, Principles of Management McGraw Hill Education;
Special Indian Edition, 2017
Strategy formulation is an important part of all senior managers’ work.
Strategic management, includes being aware of how environmental trends interact with each other to provide new opportunities for the business. Not every company who is aware of these trends can turn the opportunity into profit. The company must be able to harness its own resources and in some cases change itself to turn opportunity into profit. This is the essence of strategic management, and this unit will explore how each manager can be an effective part of the strategic management process.
Sustainable strategic competitiveness
LEARNING OBJECTIVE 1
What are the foundations of strategic competitiveness?
Competitive advantage allows a firm to stay in business with a loyal or committed customer base that buys goods and services year after year.
Competitive advantage arises when an organisation acquires or develops an attribute or combination of attributes that allows it to outperform its competitors in its target market segment.
Sustainable competitive advantage is the hallmark of successful companies such as Facebook, Sony and IKEA. In all these companies, technological and design leadership has been central to the strategy of sustainable competitive advantage and has been driven by senior management with almost crusading zeal and passion.
Achieving and sustaining competitive advantage is a challenging task for even the largest organisations, all of which are very aware that new technologies, changes in the global economy or world geopolitics, and sudden shifts in consumer demand could lead to their demise.
What is organisational strategy?
Canadian management researcher Henry Mintzberg describes organisational strategy as ‘a pattern in a stream of decisions’. This decision‐based concept of strategy has two important implications. First, strategy is not just one decision. It must be viewed in the context of several decisions and the consistency among the decisions. Second, the organisation must be aware of alternatives in all of its decisions. A deliberate strategy can be contained in a formal document that identifies long‐term goals and outlines resource use to accomplish them. These are useful in focusing attention on the competitive environment and indicating how corporate objectives can be secured even as conditions alter.
Strategic management
Devising strategy can be described in simple terms. Find out what customers want, then develop or use the appropriate production or product technologies to deliver it to them at an affordable price and with the best service. In practice this task is made much more complex because of the uncertainties and unpredictability of global markets. Every strategist must remember that competitors are also always attempting to gain competitive advantage,.
Strategic management is the process of formulating and implementing strategies to accomplish long‐term goals and sustain competitive advantage. The essence of strategic management is looking ahead, understanding the environment and the organisation, and effectively positioning the organisation for competitive advantage in changing times. Chief executives must think strategically as they try to position their organisations for contemporary markets. They must think strategically in deciding how to use new technologies to maximum advantage. They have to analyse the conditions in the global economy, and the business cycle, the economic downturns and upturns. And they must think strategically where it really counts — in respect of what customers and clients really want.
Strategic management goals
Michael Porter, a strategy academic and consultant, says that ‘sound strategy starts with having the right goal’. He argues that the ultimate goal for any business should be superior profitability. This creates value for investors in the form of above‐average returns, returns that exceed what an investor could earn by investing in alternative opportunities of equivalent risk.
An understanding of the organisation’s markets is crucial for setting strategic management goals. Good economic analysis is therefore essential. Indeed, the business strategist Michael Porter has long recognised that the roots of the structural and market analysis within strategic management lie within economics.
The strategic management process
LEARNING OBJECTIVE 2
What is strategic management?
Strategic management is successful when organisations, even those operating in environments of hypercompetition, achieve sustainable competitive advantage and earn above‐average returns. Successful strategies are crafted from insightful understandings of the competitive environment as well as intimate knowledge of the organisation. And they are implemented with commitment and resolution.
The first strategic management responsibility is strategy formulation, the process of creating strategy. This involves assessing existing strategies, the organisation and your environment to develop new strategies and strategic plans capable of delivering future competitive advantage. Peter Drucker associates this process with a set of five strategic questions: What is our business mission? Who are our customers? What do our customers consider value? What have been our results? What is our plan?
The second strategic management responsibility is strategy implementation, the process of allocating resources and putting strategies into action. Once strategies are created, they must be successfully acted on to achieve the desired results. As Drucker says: ‘The future will not just happen if one wishes hard enough. It requires decision and action — now. It demands allocation of resources, and above all, of human resources — now. It requires work — now.’ This is the responsibility for putting strategies and strategic plans into action. Every organisational and management system must be mobilised to support and reinforce the accomplishment of strategies. Scarce resources must be used for maximum impact on performance. Resource productivity, or the maximum output possible from each resource and or a combination of resources is evaluated and improved by industrial engineers for engineering systems.
Analysis of mission, values and objectives
The strategic management process begins with a careful assessment and clarification of the organisational mission, values and objectives. A clear sense of mission and objectives sets the stage for assessing the organisation’s resources and capabilities as well as competitive opportunities and threats in the external environment.
Mission
The mission or purpose of an organisation may be described as its reason for existence in society. Strategy consultant Michael Hammer believes that a mission should represent what the strategy or underlying business model is trying to accomplish. He suggests asking: ‘What are we moving to? What is our dream? What kind of a difference do we want to make in the world?’
A good mission statement identifies the domain in which the organisation intends to operate — including the customers it intends to serve, the products and/or services it intends to provide, and the location in which it intends to operate. The mission statement should also communicate the underlyingphilosophy that will guide employees in these operations. Consider the mission statement for Merck, one of the world’s leading pharmaceutical companies: ‘To discover, develop and provide innovative products and services that save and improve lives around the world’.
Core values
Behaviour in and by organisations will always be affected in part by values, which are broad beliefs about what is or is not appropriate. Organisational culture is defined as the predominant value system of the organisation as a whole. Through organisational cultures, the values of managers and other members are shaped and pointed in common directions. In strategic management, the presence of strong core values for an organisation helps build institutional identity. It gives character to an organisation in the eyes of its employees and external stakeholders, and it backs up the mission statement. Shared values also help guide the behaviour of organisation members in meaningful and consistent ways.
Objectives
Whereas a mission statement sets forth an official purpose for the organisation and the core values describe appropriate standards of behaviour for its accomplishment, operating objectives direct activities towards specific performance results. These objectives are longer and shorter term targets against which actual performance results can be measured as indicators of progress and continuous improvement. Any and all operating objectives should have clear means–ends links to the mission and purpose. Any and all strategies should, in turn, offer clear and demonstrable opportunities to accomplish operating objectives.
According to Peter Drucker, the operating objectives of a business might include:
1. profitability — producing at a profit in business
2. market share — gaining and holding a specific market share
3. human talent — recruiting and maintaining a high‐quality workforce
4. financial health — acquiring capital; earning positive returns
5. cost efficiency — using resources well to operate at low cost
6. product quality — producing high‐quality goods or services
7. innovation — developing new products and/or processes
8. social responsibility — making a positive contribution to society.
Analysis of organisational resources and capabilities
Two important steps in the strategic management process are analysis of the organisation and analysis of its environment. They may be approached by a technique known as SWOT analysis — the internal analysis of organisational Strengths and Weaknesses as well as the external analysis of environmental Opportunities and Threats.
3 Strategies used by organisations
LEARNING OBJECTIVE 3
What types of strategies are used by organisations?
The strategic management process encompasses the three levels of strategy. Strategies are formulated and implemented at the organisational or corporate level, business level and functional level. All should be integrated to accomplish objectives and create sustainable competitive advantage.
Levels of strategy
The level of corporate strategy directs the organisation as a whole towards sustainable competitive
advantage. For a business it describes the scope of operations by answering the following question: In what industries (basically products) and markets should we compete? The purpose of corporate strategy is to set direction and guide resource allocations for the entire enterprise. In large, complex organisations like General Electric (GE), corporate strategy identifies the different areas of business in which a company intends to compete. The organisation presently pursues business interests in aviation, home and businesses solutions, financial (capital) services, healthcare, energy and transportation, for example.
Typical strategic decisions at the corporate level relate to the allocation of resources for acquisitions, new business development, divestitures and so on across the business portfolio. Increasingly, corporate strategies for many businesses include an important role for global operations such as international joint ventures and strategic alliances.
Business strategy
Business strategy is the strategy for a single business unit or product line. It describes intent to compete within a specific industry or market. Large conglomerates such as GE are composed of many businesses, with many differences among them in product lines and even industries. The term strategic business unit (SBU) is often used to describe a single business or a component that operates with a separate mission within a larger enterprise. The selection of strategy at the business level involves answering the question: How are we going to compete for customers in
this industry and market? Typical business strategy decisions include choices about product/service mix, target markets, the location of facilities and new technologies. In single‐business enterprises, business strategy is the corporate strategy.
Functional strategy
Functional strategy guides the use of organisational resources to implement business strategy.
This level of strategy focuses on activities within a specific functional area of operations. For the standard business functions of marketing, manufacturing, human resources, and research and development, this level of strategy has to be developed. The question to be answered in selecting functional strategies becomes: How can we best use resources to implement our business strategy? Answers to this question typically involve the choice of progressive management and organisational practices that improve operating efficiency, product or service quality, customer service or innovativeness.
4 Strategy formulation
LEARNING OBJECTIVE 4
How are strategies formulated?
With a good strategy in place, the resources of the entire organisation can be focused on the overall goal — superior profitability or above‐average returns. Whether one is talking about building e‐business strategies for the new economy or crafting strategies for more traditional operations, it is always important to remember this goal and the need for sustainable competitive advantage. The major opportunities for competitive advantage are found in the following areas, which should always be
considered in the strategy formulation process:
1. cost and quality — where strategy drives an emphasis on operating efficiency and/or product or service quality
2. knowledge and speed — where strategy drives an emphasis on innovation and speed of delivery to market for new ideas
3. barriers to entry — where strategy drives an emphasis on creating a market stronghold that is protected from entry by others
4. financial resources — where strategy drives an emphasis on investments and/or loss sustainment that competitors can’t match.
Importantly, any advantage gained in today’s global and information‐age economy of intense competition must always be considered temporary, at best. Things change too fast. Any advantage of the moment will sooner or later be eroded as new market demands, copycat strategies and innovations by rivals take their competitive toll over time. The challenge of achieving sustainable competitive advantage is thus a dynamic one. Strategies must be continually revisited, modified and changed if the organisation is to keep pace with changing circumstances. Formulating strategy to provide overall direction for the organisation thus becomes an on‐going leadership responsibility.
Fortunately, a number of strategic planning models or approaches are available to help executives in the strategy formulation process. At the business level, one should understand Porter’s generic strategies model and product lifecycle planning. At the corporate level, it is helpful to understand portfolio planning, adaptive strategies and incrementalism and emergent strategies
The following models and tools are useful in strategy formulation
Porter’s generic strategies
1. differentiation — where the organisation’s resources and attention are directed towards distinguishingits products from those of the competition (e.g. BMW, Volvo)
2. cost leadership — where the organisation’s resources and attention are directed towards minimisingcosts to operate more efficiently than the competition (e.g. Hyundai, KIA)
3. focused differentiation — where the organisation concentrates on one special market segment and tries to offer customers in that segment a unique product (e.g. Land Rover, Subaru)
4. focused cost leadership — where the organisation concentrates on one special market segment and tries in that segment to be the provider with lowest costs (e.g. Suzuki).
Product life cycle planning
Another way to consider the dynamic nature of business strategy formulation is in terms of product life cycle. This is a series of stages a product or service goes through in the ‘life’ of its marketability. In terms of planning, different business strategies are needed to support products in the lifecycle stages of new product development, introduction, growth, maturity and decline.
Portfolio planning
In a single‐product or single‐business organisation the strategic context is one industry. Corporate strategy and business strategy are the same, and resources are allocated on that basis. When organisations move into different industries, resulting in multiple product or service offerings, they become internally more
complex and often larger in size. This makes resource allocation a more challenging strategic management task, since the mix of businesses must be well managed. The strategy problem is similar to that faced by an individual with limited money who must choose between alternative shares, bonds and real estate in a personal investment portfolio. In multi‐business situations, strategy formulation also involves portfolio planning to allocate scarce resources among competing uses.
BCG matrix
Boston Consulting Group developed the BCG matrix. This framework ties strategy formulation to an analysis of business opportunities according to industry or market growth rate and market share.67 This comparison results in the following four possible business conditions, with each being associated with a strategic implication: stars —high market share, high‐growth businesses; cash cows — high market share, low‐growth businesses; question marks — low market share, high‐growth businesses; and dogs — low market share, low‐growth businesses
General Electric (GE) Business Screen
The appeal of portfolio planning is its ability to help managers focus attention on the comparative strengths and weaknesses of multiple businesses and/or products. Although the BCG matrix is easy to understand and use, it is criticised for limiting attention to only market share and business growth. Business situations are more complex than that. At GE, for example, corporate strategy must achieve the best allocation of resources among the mix of some 150‐plus businesses owned by the conglomerate at any point in time. The businesses operate in very different environments, use different business models, and have different competitive advantages. What is known as the GE Business Screen, was developed as an alternative portfolio planning framework. In fact, GE became famous under the leadership of former CEO Jack Welch for following a rigorous decision rule in strategic planning — either a business is or has the potential to be number 1 or number 2 in its industry, or it is removed from the GE portfolio.
Adaptive Strategies
The Miles and Snow adaptive model of strategy formulation suggests that organisations should pursue product/market strategies congruent with their external environments.
Incrementalism and Emergent Strategy
Not all strategies are clearly formulated at one point in time and then implemented step by step. Not all strategies are created in systematic and deliberate fashion and then implemented as dramatic changes in direction. Instead, strategies sometimes take shape, change and develop over time as modest adjustments to past patterns. James Brian Quinn calls this a process of incrementalism, whereby modest and incremental changes in strategy occur as managers learn from experience and make adjustments.70
5 Strategy Implementation
LEARNING OBJECTIVE 5
What are current issues in strategy implementation?
No strategy, no matter how well formulated, can achieve longer term success if it is not properly implemented. This includes the willingness to exercise control and make modifications as required to meet the needs of changing conditions. More specifically, current issues in strategy implementation include re‐emphasis on excellence in all management systems and practices, the responsibilities of corporate governance, and the importance of strategic leadership.
Management practices and systems
The rest of Management is all about strategy implementation. In order to successfully put strategies into action the entire organisation and all its resources must be mobilised in support of them. This, in effect, involves the complete management process from planning and controlling through organising and leading. No matter how well or elegantly selected, a strategy requires supporting structures, the right technology, a good allocation of tasks and workflow designs, and the right people to staff all aspects of operations. The strategy needs to be enthusiastically supported by leaders who are capable of motivating everyone, building individual performance commitments, and using teams and teamwork to best advantage. And the strategy needs to be well and continually communicated to all relevant persons and parties. Only with such total systems support can strategies succeed in today’s environments of change and innovation.
Strategic leadership
Strategic management is a leadership responsibility. Effective strategy implementation and control depends on the full commitment of all managers to supporting and leading strategic initiatives within their areas of supervisory responsibility. To successfully put strategies into action, the entire organisation
and all its resources must be mobilised in support of them. In our dynamic and often uncertain environment, the premium is on strategic leadership — the capability to enthuse people to successfully engage in a process of continuous change, performance enhancement and implementation of organisational strategies.
SUMMARY
1 What are the foundations of strategic competitiveness?
• Competitive advantage is achieved by operating in ways that are difficult for competitors to imitate.
• A strategy is a comprehensive plan that sets long‐term direction and guides resource allocation to
achieve sustainable competitive advantage.
• The strategic goals of a business should include superior profitability and the generation of above‐
average returns for investors.
• Strategic thinking requires the ability to understand the different challenges of monopoly, oligopoly
and hypercompetition environments.
2 What is strategic management?
• Strategic management is the process of formulating and implementing strategies that achieve
organisational goals in a competitive environment.
• The strategic management process begins with analysis of mission, clarification of core values and
identification of objectives.
• A SWOT analysis systematically assesses organisational resources and capabilities and industry/
environmental opportunities and threats.
• Porter’s five forces model analyses industry attractiveness in terms of competitors, new entrants,
substitute products and the bargaining power of suppliers and buyers.
3 What types of strategies are used by organisations?
• Corporate strategy sets direction for an entire organisation; business strategy sets direction for a
business division or product/service line; functional strategy sets direction for the operational support
of business and corporate strategies.
• The grand or master strategies used by organisations include growth — pursuing expansion;
retrenchment — pursuing ways to scale back operations; stability — pursuing ways to maintain the
status quo; and combination — pursuing the strategies in combination.
4 How are strategies formulated?
• The three options in Porter’s model of competitive strategy are: differentiation — distinguishing your
products from the competition; cost leadership — minimising costs relative to the competition; and
focus — concentrating on a special market segment.
• The product lifecycle model focuses on different strategic needs at the introduction, growth, maturity
and decline stages of a product’s life.
• The BCG matrix is a portfolio planning approach that classifies businesses or product lines as ‘stars’,
‘cash cows’, ‘question marks’ or ‘dogs’.
• The adaptive model focuses on the congruence of prospector, defender, analyser or reactor strategies
with demands of the external environment.
• The incremental or emergent model recognises that many strategies are formulated and implemented
incrementally over time.
5 What are current issues in strategy implementation?
• Management practices and systems — including the functions of planning, organising, resourcing, leading and controlling — must be mobilised to support strategy implementation.
• Among the pitfalls that inhibit strategy implementation are failures of substance, such as poor analysis
of the environment, and failures of process, such as lack of participation in the planning process.
• Corporate governance, involving the role of boards of directors in the performance monitoring of
organisations, is an important element in strategic management today.
• Strategic leadership involves the ability to manage trade‐offs in resource allocations, maintain a sense
of urgency in strategy implementation, and effectively communicate the strategy to key constituencies.
• Increasingly, organisations use top management teams to energise and direct the strategic management
process.
To know more detail about each topic.
Section A: Introduction and Overview
Chapter 1: What Is Strategy and Why Is It Important? Key Points of the Chapter
The Strategic Management Process - Review Notes
Chapter 2: Charting a Company’s Direction: Vision and Mission, Objectives, and Strategy - Key Points of the Chapter
Section B: Core Concepts and Analytical Tools
Chapter 3: Evaluating a Company’s External Environment - Key Points of the Chapter
Chapter 4: Evaluating a Company’s Resources, Capabilities, and Competitiveness - Key Points of the Chapter
Section C: Crafting a Strategy
Chapter 5: The Five Generic Competitive Strategies: Which One to Employ? - Key Points of the Chapter
Chapter 6: Strategy Choice Beyond Generic Product and Market Choices
Chapter 8: Strategies for Competing in International Markets - Key Points of the Chapter
Chapter 9: Corporate Strategy: Diversification and the Multibusiness Company - Key Points of the Chapter
Chapter 10: Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy - Key Points of the Chapter
Section D: Executing the Strategy
Chapter 11: Building an Organization Capable of Good Strategy Execution: People, Capabilities, and Structure - Key Points of the Chapter
Chapter 12: Managing Internal Operations: Actions That Promote Good Strategy Execution - Key Points of the Chapter
Chapter 13: Corporate Culture and Leadership: Keys to Good Strategy Execution - Key Points of the Chapter
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