The aim of this term paper is to provide an overview of the nature of strategic management. It establishes the origin of Strategic management, defines the terms, activities, model, operations and its importance to Organizational success and survival. It enables the managers to make wise economical decisions by exploiting and creating new opportunities for tomorrow. The concept of strategic management enhances a systematic approach to strategy formulation and conditions by which an organization will determine the success of its actions.
Strategic management entails both the strategy and operations thus requiring managers to make choices on efficiency, effectivess, short term and long term goals of the organization on behalf of its owners. This is achieved through formulation, execution and evaluation of strategies to achieve corporate success. Strategic management is an important element that firms must put together through strategic thinking and strategic planning (Nag, R., Hambrick & Chen, 2007). The understanding of organization’s strategy position, choices and strategy in action helps managers to achieve sustainable competitive advantage and overall organization’s performance.
It is a multi-disciplinary field of study that has contributions from other areas like Psychology, Economics, Marketing and Sociology. “Strategy is the direction and scope of an Organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations”. Johnson Scholes & Whittington, 2008.
Strategic management is traced back to 1950s as a formal strategic planning in the United States of America thus relatively a new science compared to other sciences. This resulted from industrial revolution and globalization which in turn affected business environment. Business organizations started to perform poor and emerged a need to match organization activities with environmental challenges by way of strategy. Alfred Chandler is reputed as the father of strategic management growing from his seminal work on strategy and structure, 1962. A good strategy was needed to cross cut the organizational capabilities (strengths and weaknesses) and environmental factors (opportunities and threats).
Disenchantment by 1973-1980 with a high dissatisfaction with strategic planning due to lack of business ventures and widespread environmental change.
Rediscovery and recasting happened as Michael Porter in the 1970s realized the need to rediscover the strategies. Mintzberg realized that strategy was the outcome of deliberate and emergent strategy.
Finally by the late 1990s to date patterns have impacted corporate strategy. The trends include open market system, rise of Asia- Pacific, global economies and high employees’ empowerment.
Organizations are now developing strategies for achieving win-win and long term relationships with the key suppliers in order to create value for all the participants in the value chain. Partnering with the right suppliers is strategically important. It enhances contribution to inventions, cost containment, high quality and acquiring competitive advantage for the organization. Supplier relationship management is incorporated for organizations to thrive well in business. For example, in 2000 when Mr. Carles Ghosn was chief executive officer of Nissan motor company, he reduced the number of suppliers by half and cut purchasing costs in order to revive plan to return Nissan to profitability.
Organizational strategy covers the following areas:
Business domain. It focuses on the scope of organization’s activities, products and market size and penetration. Long term direction of an organization. Outlines where the organization is going through its vision.
Organizational purpose. It explains the responsibilities, goals, objectives and priorities of the organization.
Strategic fit. Entails matching the organizations activities and capabilities with the surrounding environment.
Competitive advantage. Focus on how an organization can attract potential customers while maintaining the existing ones. This can be achieved through Michael Porter’s generic competitive strategies. They include cost leadership by attaining lower production costs that translate to lower cost of goods and services compared to the competitors. Differentiation strategy by offering a variety of products and services, modifying and improving on the existing products. Focus strategy by an organization concentrating on a narrow market for their goods and services enabling customization of products.
Strategy has levels that make an organization respond well to customer needs, grow its business, compete with rivals, develop requisite capabilities and achieve organizational objectives. These levels are: Corporate level strategy; that contain the board of directors, chief executive and administrative officers who make the top most decisions like the overall purpose and the scope of an organization. Business level strategy; they aim at determining how to compete favorably in specific markets and merge decisions made at corporate and functional level. Functional level strategy; the role is to execute strategies and decisions from both corporate and business levels.
Theories of strategic management
Resource dependency theory. The theory suggests that all organizations need to interact with each other and various individuals beyond their boundaries for the purposes of resources and capabilities that are significant for their survival and success. Organizations are dependent on the environment that they operate in thus affected by any environmental change in form of new opportunities and threats. Organizations have an open system that they interact in, with the environment.
Organization process is the integration of activities that are designed to transform inputs into outputs. If any disturbance stops flow of inputs and outputs in the system, the organization can collapse meaning that managers must strategize quickly by placing some adaptable measures. Ansoff & Mcdonell (1991) term these dynamism as environmental turbulence representing combined measure of changeability and predictability of the firm’s environment. It is therefore good for managers to equip themselves with strategies that fit their organizations.
In 1979, Michael Porter developed Porter’s Five Forces of Competitive Position Analysis to assess and evaluate the competitive strength and profitability of a business organization. The strongest force rules and should be the focal point of any organization analysis and resulting competitive advantage. Porter’s five forces include:
Threat of New Entrant. New entrants in an industry brings with them new capacity, technology and the desire to gain market share and substantial resources. The extent of this threat depends on the existence of barriers to entry coupled with reaction that the entrant can expect from the existing competitors. According to Porter the barriers include economies of scale, product differentiation, capital requirements, switching costs and government regulations.
Threat of substitute products. Threat of substitute exists when a product demand is affected by price change of those products that appear different but can perform the same function. The availability of substitutes give customers an opportunity to compare prices, product quality and performance. If the level of substitution is high, profitability decreases and vice versa.
Bargaining power of customers. Buyers will normally compete with the industry by bargaining for lower prices, higher quality products or more services and playing competitors against each other at the expense of the industry profitability. The buyer power is high when the volume of purchases of the buyer is high, there are alternative source of supply, cost of switching supplier is low, there is threat of backward integration or where the buyer has full information about demand, actual market prices and supplier costs.
Bargaining power of suppliers. Powerful suppliers can lower the profitability in an industry by threatening to raise prices or reduce quality of purchased goods and services. Suppliers are powerful if the industry is dominated by few suppliers, high switching costs, high possibility of forward integration, the industry is not an important customer of supplier or supplier’s product or service is an important input in the buyer’s business.
Rivalry among competitors. This force describes the intensity of competition between existing players in the industry. Firms will use tactics such as price competition, advertising battles, increased customer service or warranties. Rivalry intensifies as the number of competitors increase and as they become more equal in size and capabilities. The firms compete for the same customers and resources and the fight for the market share becomes fierce.
Strategic management is very crucial to all the Organizations because of environmental turbulence where Organizations operate in, calling for adaptability strategies. It is thus beneficial to organizations since it also; helps organization to acquire competitive advantage, practice effective and efficient resource allocation and provide direction through vision and mission.
Organizations must frequently assess, restructure and adjust to ever changing environment if they want to remain competitive in domestic and global market place. The dynamic environment results into constantly changing customer requirements pushing Organizations to improve quality, lower costs, improve responsiveness and customize their products and services.