A P E X
B U S I N E S S
A N D
M A N A G E M E N T
C O N S U L T A N T S
L T D
THE IMPORTANCE OF STRATEGIC MANAGEMENT GRACE BWALYA NEWCASTLE UPON TYNE, 2012
Keywords:
Strategic Management, Strategic Analysis, Strategic Choice, Strategic Implementation, Business Models, Organisation, Strategy, Objectives, Competitive Advantage, Contingency Planning, Service Disruption, Leadership, Stakeholders, Process, Globalisation, Corporate.
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Table of Contents
1.0
................................................................................................................................. ............................................................ 3 Introduction.....................................................................
2.0
Hierarchical Levels of Strategy ............................................................. ................................................................................................... ...................................... 4
3.0
.................................................................... ..... 5 How strategy is managed – managed – Strategic Strategic Management ...............................................................
3.1
Strategic Analysis .................................................................. ................................................................................................................... ................................................. 6
3.1.1
.................................................................................................................... ................................................. 7 PEST Analysis ...................................................................
3.1.2
SWOT Analysis ................................................................. .................................................................................................................. ................................................. 7
3.1.3
................................................................................................ ...................................... 7 Porters Five Forces analysis ..........................................................
3.1.4
Market Segmentation Segmentation ........................................................ .......................................................................................................... .................................................. 8
3.1.5
.................................................................................... ........................... 8 Directional Policy Matrix /GE Grid .........................................................
3.1.6
........................................................................................................... .................................................. 9 Competitor Analysis .........................................................
3.1.7
Value Chain Analysis........................................................ ........................................................................................................ ................................................ 10
3.1.8
..................................................................................... ......................... 10 Critical Success Factors Analysis ............................................................
3.2
Strategic Choice ..................................................................... .................................................................................................................... ............................................... 10
3.3
....................................................................................................... .................................... 11 Strategy Implementation Implementation ...................................................................
4.0
The benefits of strategic management .............................................................. ....................................................................................... ......................... 12
5.0
.................................................................................. ......................... 13 The Relevance of strategic Management .........................................................
5.1
Improvement in sales ............................................................ ............................................................................................................ ................................................ 13
5.2
................................................................................................. .................................... 14 Improvement Improvement in profitability.............................................................
5.3
Productivity improvement improvement................................................................. ..................................................................................................... .................................... 15
5.4
Improved understanding of Competitors strategies ........................................................... .............................................................. ... 17
5.5
........................................................................................... ......................... 18 Enhanced Awareness of Threats ..................................................................
5.6
Reduced Resistance to Change ................................................................... ............................................................................................ ......................... 19
5.7
........................................................................... .............. 20 Enhanced problem-prevention problem-prevention capabilities .............................................................
6.0
Conclusion ...................................................................... ................................................................................................................................ .......................................................... 20
............................................................................................................................... ................................................................................. .............. 23 References ............................................................
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1.0
Introduction
Strategic management has gained importance in recent years. During the last century, organizations focused on long-term planning which supposed that external and internal environments would remain stable for long periods of time and thus plans were made for long durations. However, managers and entrepreneurs are now alert to the fact that environments can change at any point of time and hence any plans made should follow a strategy that includes contingency planning too. 1
Organisations use contingency planning as overall
security plan to ensure the quickest return of information services in the event of experiencing a service disruption. Strategic management is an on-going process of formulating profitable strategies to the organization and creating harmony between the organization and its environment. The formulation of a sound strategy (not just a strategy) as part of the strategic management process is considered vital to the well-being of an organisation. Strategy formulation is viewed as both a leadership skill and a process that leaders use to position the firm in the echo system. In today’s turbulent and competitive business world, strategy is one of the most significant concepts to emerge in the field of management for a company to survive and to be successful. According to Johnson and Scholes (1993), strategy is the direction and scope of an organisation over the long-term; which achieves advantage for the organisation through its configuration
of resources within
a
challenging environment,
to
meet
the
needs
of markets and to fulfil stakeholder expectations. expectat ions. Over the past decade, the global business arena has seen the arrival of diversified multinationals from emerging markets. These organisations have not just taken on Western 1
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incumbents, snapped up western companies and launched new products. They have challenged some of the West’s most cherished notions of how companies ought to imbibe strategy in their corporate plans (The economist, 2011). A global perspective has become a matter of survival for businesses
2.0
Hierarchicall Levels of Strategy Hierarchica
Strategies exist at several levels in an organisation and can range from the overall business or group of businesses through to the individuals employees. According to Analoui and Karami (2003), strategies can be formulated and implemented at three different levels: i.
Corporate level strategy.
This is concerned with how a firm competes with other corporations within the same industry. Fundamentally, it is concerned with the selection of businesses in which the company competes and with the development and coordination of it s portfolio businesses. The firm’s activities include product, geographical, brand and vertical scope etc. to meet stakeholder expectations whilst considering a whole range of business opportunities available. ii.
Business Unit level Strategy Strategy
This is also known as competitive strategy. It is concerned with a firm’s competitive advantage it possesses within a particular industry drawing attention to how a firm develops and sustains value for goods and services that are produced. The strategic decisions are about the choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
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iii.
Functional or Operational level strategy. strategy.
This is the level of the operating divisions and depart ments. It is concerned with how each section of the business is organised to deliver the corporate and business-unit level strategic direction. Functional level strategies in, for instance, marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively. The strategic issues are related to business processes and the value chain.
While strategy is about competing and surviving as a corporation, one can argue that it is the products produced by the business units that compete and not corporations. However, the role of the corporation is to ensure that it manages its business units, products and services so that each can contribute to the corporate objectives and is competiti ve.
3.0
How strategy is managed – Strategic Management
In managing strategy, organisations continuously face the challenge of exercising choice among alternatives. Choice is an inalienable part of the decision-making process (Kazmi, 2006). Therefore, it becomes imperious that an organisation engages actively in the process of choosing from among the strategic alternatives as these affect key factors which determine the success of its strategy. In its broadest sense, strategic management is about taking strategic decisions.2 In the current economic climate, as the complexity and globalisation of businesses continue growing, an organisation needs a practical roadmap in order to navigate uncertainty. As such, due care must must be taken in the process of making strategic decisions and choosing from among strategic alternatives as they may have significant repercussions on the overall
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performance of the organisation. Any decisions made must address and provide a solution to the following questions:
What is the direction of the business in the long-term?
Which markets should the business operate /compete in and what kind of activities are involved in such markets?
How can the business attain and sustain a competitive advantage in those markets?
What resources are required in order to be able to compete (e.g. skills, finance, technical competence, human resource etc.)?
What external or environmental factors affect or can affect the ability of a business to compete effectively and efficiently? efficientl y?
What are the values and expectations from the stakeholders?
A thorough management process consists in getting practical answers to the above questions. From the above questions, Kew and Stredwick (2005) derive three elements of strategic management namely; strategic analysis, strategic choice and strategic implementation. 3.1
Strategic Analysis
Strategic analysis involves a thorough examination of the organisation with regards to its culture, structures and importantly its strengths and weaknesses in terms of systems, products, services and people. Equally important, strategic analysis takes into account an external environmental analysis which is a key step in strategic planning. Consequently, an appropriate business strategy is i s formulated. Factors outside the organisation can have significant influence on it hence strategic analysis helps to:
Anticipate what might happen
Evaluate how likely it is to happen
Prepare for its happening
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The process of strategic analysis can be assisted by a range of analytical methods or business models which include: 3.1.1
PEST Analysis
PESTEL is an acronym that stands for Political, Economical, Social, Technological, Environmental and Legal. It is used to describe an analysis that is used for determining the opportunities and risks of global expansion. Sometimes it is described as a PEST or PESTLE analysis. The model provides a strong framework used by global and multinational corporations to set the stage to develop specific tactics to mitigate the risks involved in executing their vision in unfamiliar environments. 3 3.1.2
SWOT Analysis
SWOT analysis looks at the strengths and weaknesses, and the opportunities and threats a business faces. By focusing on the key factors affecting the business, now and in the future, a SWOT analysis provides a clear basis for examining the business’ performance and prospects.4 3.1.3
Porters Five Forces analysis
Named after Michael E. Porter, this model identifies and analyses five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. i. ii.
4
The Potential of new entrants into industry.
iii.
The power of suppliers.
iv.
The power of customers.
v.
3
The competition in the industry.
The threat of substitute products
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The model is frequently used to identify an industry's structure in order to determine corporate strategy and can be applied to any segment of the economy to search for profitability and attractiveness.5 3.1.4
Market Segmentation
The process of splitting customers, or potential customers, in a market into different groups, or segments, within which customers share a similar level of interest in the same or comparable set of needs satisfied by a distinct marketing proposition. Marketing proposition refers to the 'tools' or means available to the organization to improve the match between benefits sought by customers and those offered by the organization so as to obtain a differential advantage. Often referred to as the four Ps, this is usually the appropriate mix of product features, price, promotion and place (service (s ervice and distribution). For the customer, cust omer, this manifests itself as benefits, cost, relevant image and convenience; in other words, a customer value proposition.6
3.1.5
Directional Policy Matrix /GE Grid
The Directional Policy Matrix (DPM) is a pivotal tool in strategic business planning. Most businesses have more than one product and operate in several markets. This results in the need to prioritise in which markets to focus resources, particularly in terms of sales and marketing activities. Often the ‘who shouts the loudest’ approach to management meetings wins, or else historical successes with specific clients, products or markets colour the judgement of decision-makers irrespective of current business performance. One effective approach to ensuring that objectivity has an input into such prioritisation is the directional
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policy matrix (DPM) or GE grid. The DPM can be used to evaluate the relative merits of individual products or product groups. Suggested worthwhile opportunities may be benchmarked against a company’s existing activities to judge the value of supporting the new ideas. It is useful to marketers as a means for identifying the relative merits of apparently attractive opportunities.7 3.1.6
Competitor Analysis
Competitor analysis is a driver of an organisation’s strategy and has effects on how firms act or react in their sectors. As organisations do not exist in a vacuum, they must operate within a competitive industry environment. Whilst formulating an organisation’s strategy, managers must consider the strategies of organisation’s competitors and this helps an organisation to discover its weaknesses, to identify opportunities for and threats to the organisation from the industrial environment.8 Competitors should be analysed along various dimensions such as their size, growth and profitability, reputation, objectives, culture, cost structure, strengths and weaknesses, business strategies, exit barriers, etc. The ultimate objective of competitor analysis is to know enough about a competitor so that the firm's competitive strategy can be formulated to take into account the competitors' likely li kely actions and responses. 9
To draw maximum benefits from conducting a competitor analysis, the strat egist must:
Estimate the nature and likely success of the potential strategy changes available to a competitor;
Pr edict edict each competitor’s probable responses to important strategic moves on the part of the other competitors; and
Understand competitors’ potential reactions to changes in key industry and
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environmental parameters. Companies, per se, se, do not compete with each other in the marketplace. Rather, their individual businesses compete with each other. 3.1.7
Value Chain Analysis
Value Chain is a high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers. Value-chain analysis looks at every step a business goes through, from raw materials to the eventual end-user. The goal is to deliver maximum value for the least possible total cost. 10 3.1.8
Critical Success Factors Analysis
Better decisions are made if decision makers understand the influences from the outside world to which they might have to respond in the future. Strategic analysis will lead to clearer more relevant goals, better quality decisions, and a more secure future as decision makers are better prepared for what will happen. 3.2
Strategic Choice
Given the findings of the strategic analysis, decision makers select the best choice of strategy from the various alternatives. This process involves understanding the nature of stakeholder expectations, identifying strategic options, and then evaluating and selecting strategic options. To make the most out of it, strategic choice will have to be closely related to the organisations:
Ability to generate customer value.
Sources of comparative or competitive advantage within the industry in which it operates.
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Understanding of its critical success factors as well as limiting factors.
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Understanding of its nature of constraints imposed by the relevant external and competitive environments.
Choice is at the centre of strategy formulation. If there are no choices to be made, there can be little value in thinking about strategy. The choice of strategy is implemented within the parameters identified by the process of strategic analysis.
3.3
Strategy Implementat Implementation ion
Once a strategy has been analysed and selected, the task is then to translate it into organisational action and this often is the hardest part. Strategic implementation put simply is the process that puts plans and strategies into action to attain the organisation’s goals.
Expectations and purposes
The environment
Resources and competencies The Strategic position
Corporatelevel Strategies
Strategic
Strategy
choices
into action
Organising
Business-level Enabling
Strategies Development,
Managing
directions and
People
methods
Figure 1: Summary Model: Elements of Strategic Management, Grace Bwalya
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The success of the elements of strategic management though requires several other variables to support it such as the enterprise’s: enterprise’s:
Capability and ability to generate value
Leadership success
Competitive or comparative advantage
Operational or financial performance
These in turn may all depend on the knowledge, the competence, the technology and the possible patterns of resource use available to the organisation. In addition, additio n, the effectiveness of the management of these key variables over the time horizons set by the organisation cannot be over emphasised.
4.0
The benefits of strategic management
Empirical studies show that both financial and non-financial benefits can be derived from a strategic management approach to decision making. According to Hunger & Wheelen (2010), organizations that engage in strategic management generally outperform those that do not and Fred (2011) (2011) states that
the basic benefit of strategic management is that it assists
organizations to formulate sound strategies as they are compelled to apply more systematic, logical and rational approach to strategic choice. Conversely, there is little value in thinking about strategy if there are no strategic choices to be made when confronted with situations that require particular sets of skills.
As already alluded to, Strategic management allows organisations to reap above all, various financial benefits whilst including the improvement of sales, profitability and productivity. In most cases, it also enhances productivity procedures coupled with a better understanding of
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solvency.11 It is without wonder that managers are constantly faced with challenges of how to run their businesses so that they can thrive and gain a beneficial market share. One of the cardinal steps that managers have to undertake is to draw up sound strategies that have organisational advancement in the area of achieving financial, market share and employee satisfaction whilst understanding that customer satisfaction is the eventual final goal.
5.0
The Relevance of strategic Management
From a business perspective, Strategic management helps top leadership to pursue long term revenue-generating ideas. Strategic management specifically helps create an occupational environment that allows senior management to constantly review the operating processes and making the necessary changes where appropriate. The following are the main areas that organisations find strategic management to be relevant rele vant to organisational goals: 5.1
Improvement Improveme nt in sales
Strategic management helps organisations in focusing the efforts of a sales team towards a common goal that creates value for the customer, the organization and the employee in the best way to optimise the activities of a sales team. Strategic management appreciates that time is a huge constraint on sales people's activities. Strategic management recognises that frequently, three main pitfalls dilute the activities of even experienced sales people:
i. ii.
Firstly, they simply do not do enough, and secondly, but equally important, sales people often are rarely clear about how to identify the prospects most likely to have a genuine need for t heir product or service.
iii.
Sales people lack a disciplined, future-oriented plan for generating new contacts and sales.
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That is where strategic management comes in by providing a clear focus on 'high-yield' activities that improve sales people’s productively, and reduce time spent on unimportant non-productive tasks. It is important to establish and measure performance against productivity-related KPI's (Key Performance Indicators) that will help to reinforce and sharpen sales people's focus on 'high-yield' sales activities. Strategic management Motivates sales people to increase their activity level that is productive when the extra activity is suitably focused.
5.2
Improvement Improveme nt in profitability
According to strategic management theories, there are five specific ways to improve profitability with a relationship summarised by the formula Equation: Profit = Revenue (Variable costs + Fixed (capacity) costs).
i.
Costs-Cost reduction is easier to achieve than price rise, it is better to approach profit
from costs perspective. Costs are predictable hence easier to control, an appropriate way to improve profit margins is to cut costs rather than to increase price. ii.
Price- If price is raised while costs remain constant or costs rise less than price
increase, profit margin is increased. It can nevertheless be tricky to convince customers to pay more as they may look for substitutes else where. iii.
Sales volume- generating a higher sales turnover from the same value of assets.
iv.
Reduce capital employed - It may be possible to reduce capital employed. If sales are
maintained from a smaller value of capital employed, then the more efficient utilisation of assets raises the asset turnover figure and directly contributes to a high profit percentage.
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v.
Controlling working capital - Time is the common feature of all items making up
working capital. The longer the inventory or stocks and/or work-in-progress are held and debtors remain outstanding, the more capital needs to be found to finance them.
Strategic management recognises that an effective working capital control should concentrate on minimising the time inventory or stocks are held, work-in-progress processed, debtors pay up, but on the other hand extending the time which creditors are paid. Inventory management helps to identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow.
5.3
Productivity Productiv ity improvement
The core purpose of employing strategic management is improving productivity. While cost reduction has been a pre-eminent business tactic for improved profitability and share market performance for the past decade, it is rapidly approaching its use by b y date as businesses find it increasingly harder to make substantial one-off gains. Improving productivity is now a complex process of manipulating business levers in concert. There are five key levers for every day productivity improvement that strategic management suggests:
i.
Cost structure - While businesses are used to identifying areas of high cost, it is
equally important to examine the structure of the cost base (balance between fixed and variable, labour vs IT, operations vs corporate overhead, etc.) and trends in this structure over time. ii.
Organisation of work - Organisational restructuring is an important strategic
management tool to realign the business with a new strategic direction or to improve
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productivity. Strategic management suggests that developing expertise in a particular part of the process may result in greater productivity and better service to customers. iii.
Business processes - This lever continues to be used effectively by businesses and
more rigorous approaches such as Six Sigma have gained new currency in recent years. However, with the increased availability of off the shelf technology solutions and enabling technology such as middleware and workflow management, the challenge for business is how to maximise the value-added from knowledge based activities as distinct from automation of more standardised, repeatable activities. This requires new ways of thinking regarding process, skills development and training of staff in order to achieve productivity improvement across the business. iv.
Knowledge management- This is a discipline and a process which is much talked
about but often relegated to the realms of information management which in some businesses is viewed as a step above records management. Every business now operates in a global, knowledge based economy. The lever to manipulate for improved performance is the ability to make knowledge an active ingredient in day to day operations. v.
Information Technology (IT)- IT continues to challenge business managers with its
big promises, big investment and big risk. In addition it seems to be increasing in complexity. Strategic management suggests that Business need to take charge of this situation and start to proactively integrate IT into its management processes rather than leaving it to one side for other organisations to take advantage of.
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5.4
Improved understandi understanding ng of Competitors strategies
Strategic management views competitive advantage as an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and services that justify higher prices.
Michael Porter has developed a framework in which he identifies four basic or "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of businesses’ of businesses’ activities are narrow versus broad and the extent to which a business seeks to differentiate its products as shown in the figure 2 below: 12
Lower Cost
Differentiation Differentiation
Cost Leadership
Differentiation Differentia tion
Cost Focus
Differentiation Differentia tion Focus
Broad Target
SCOPE
Narrow Target
Figure 2: Porter’s Generic Business Strategies, Grace Bwalya
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i.
Cost leadership strategy
This requires a serious commitment to reducing costs that, in turn, lowers the price of the items sold in a relatively broad array of market segments. Within this strategy, competitive advantage can be gained through:
Increasing profits by reducing costs, while charging industry-average prices.
Increasing market share through charging lower prices, while still making a reasonable profit on each sale as a result of reduced costs.
ii.
Differentiation strategy
This requires innovation and significant points of difference in product offerings, brand image, ima ge, higher hi gher quality, advanced technology, or superior service in a relatively broad array of market segments. This allows the firm to charge a price premium. iii.
Cost-focus strategy
This involves controlling expenses and, in turn, lowering prices, in a narrow range of market segments, for instance, retail chains targeting only a few market segments in a restricted group of products. iv.
Differentiation focus strategy
This utilizes significant points of difference to one or only a few market segments. 5.5
Enhanced Awareness of Threats
Considering that organisations today are faced with a host of issues, strategic management offers organisations enhanced awareness to both internal and external threats which may cripple their functionality or in some some extreme cases
render the organisation obsolete. obsolete.
Although these challenges are dependent on the nature of operations of the organisation, broadly speaking there are a re common challenges which are faced by majority of organisations and these include:
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Continuous change in the external environment creating an inevitable response for an organisation to adjust its internal environment according to its change.
Technological advancement and the challenges of globalisation.
Difficulties in determining unpredictable consumer behaviours.
Unstable economies and currencies causing constant volatility in the running of organisations as planned.
Frauds and cases of questionable business operations.
Strict legislation
Declining product/ service demand.
Resistance to change.
These factors both within and outside the organisations’ environments environment s are continually impacting negatively on the organisations’ success hence the need for more effort to be applied if organisations have to meet their objectives. Sound strategic management on the other hand can aid the organisation to avert or minimise these pitfalls by enabling organisations to embrace opportunities which include diversification, subsidies, liberal laws, cheap technology as a result of developed infrastructure and a constant lookout for good economic indicators. Strategic management is essential for an organisation that wants to be proactive than reactive in shaping its own future. In this way, senior management can avoid or minimise the negative impact which can arise from both the external and internal pressures. 5.6
Reduced Resistance to Change
In today's business environment, change has become an everyday part of organizational dynamics and any resistance from employees can cripple an organization. Zander (1950) defined resistance to change as: "Behaviour, which is intended to protect an individual from 19
the effects of real or imagined change". Another researcher Folger and Skarlicki (1999, p. 36) defined resistance as: "Employee behaviour that seeks to challenge, disrupt or invert prevailing assumptions, discourses and power relations". According to Dent and Goldberg (1999), employees are not really resisting the change, but rather they may be resisting the loss of status, pay, or comfort. Zander (1950) offered six primary reasons for resistance to surface if: i.
The nature of the change is not made clear to the people, who are going to be influenced by the change,
ii.
The change is open to a wide variety of interpretations,
iii.
Those influenced feel strong forces deterring them from changing,
iv.
The people influenced by the change have pressure put on them to make it instead of having a say in the nature or direction of the change,
v. vi. 5.7
The change is made on personal grounds, and The change ignores the already established institutions in t he group. Enhanced problem-prev problem-prevention ention capabilities
Global considerations have a way of impacting on the strategic operations of organizations. Through the establishment of a strategic management approach to planning, decision making and control, managers gain an understanding of global factors relating to competitors, suppliers, distributors, markets, prices, creditors, shareholders and customers worldwide. 13
6.0
Conclusion
Strategic management has gained importance in recent years. Given the many challenges and opportunities in the global marketplace, today’s managers must do more than just set long term strategies. They must be proactive, anticipate change, and continually refine and make 13
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significant changes to their strategies when necessary. Strategic management is a level of managerial activity that is an on-going process of formulating and implementing strategies that will help in aligning the organisation and its environment to achieve organisational goals. It also includes multiple stakeholders and its success generally dependent upon the organisational abilities of managers. Strategic management is viewed as a series of steps and as such the strategic management process can be b e applied using various vari ous business models like the SWOT analysis, Porter’s five forces, PEST analysis, market segmentation, Value Chain, critical success factors etc. It consists of the analysis, decisions and actions an organisation undertakes in order to create and sustain competitive advantage. The strategic management process encompasses three major processes namely; strategy analysis, analysis, strategy formulation and strategy and strategy implementation. implementation. 14The strategic analysis process is concerned with the analysis of the hierarchy of the strategic goals (vision, mission, and strategic objectives) along with the analysis of the internal and external environments of the organisation. Next, leaders must formulate strategic decisions which broadly address the type of industries the business must compete in and how it should compete. Lastly, the actions must then be taken as decisions make no impact unles s they are implemented. Many empirical studies show that both qualitative and quantitative benefits can be derived from a strategic management approach to decision making. According to Hunger & Wheelen (2010), organizations that engage in strategic management generally outperform those that do not. As such, firms must take necessary actions to ensure that strategies are appropriately implemented. The leaders must employ the necessary resources and design the organisation
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in a way that enables the initiation and implementation of activities that are inevitable to bringing the intended strategies to reality. The concept of strategic management is still involving and will continue to evolve in the business arena. Therefore, a good understanding and appreciation appreciat ion of the process of strategic s trategic management as an invaluable tool that enhances the bottom line can be helpful to practicing managers to achieve organisations’ objectives. Considering that strategic management is a corporate concern, the process must become both a process and a way of thinking throughout the organisation.
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References
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