RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
SESSION NO. / WEEK NO. 1
Basic Concepts of Strategic Management
Learning Outcomes
1-1. Discuss the benefits of strategic management
1-2. Explain how globalization, innovation, and environmental sustainability
influence strategic management
1-3. Discuss the differences between the theories of organizations
1-4. Discuss the Activities where learning organizations excel
1-5. Describe the basic model of strategic management and its components
1-6. Identify some common triggering events that act as stimuli for strategic
change
1-7. Explain strategic decision-making modes
1-8. Use the strategic audit as a method of analyzing corporate functions and
activities
Topic Presentation
The Study of Strategic Management
Strategic management is a set of managerial decisions and actions that help
determine the long-term performance of an organization. It includes
environmental scanning (both external and internal), strategy formulation
(strategic or long-range planning), strategy implementation, and evaluation and
control. Originally called business policy, strategic management has advanced
substantially with the concentrated efforts of researchers and practitioners.
Today, we recognize both a science and an art to the application of strategic
management technique.
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RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
PHASES OF STRATEGIC MANAGEMENT
Phase 1—Basic financial planning: Managers initiate serious planning when
they are requested to propose the following year’s budget. Projects are
proposed on the basis of very little analysis, with most information coming from
within the firm. The sales force usually provides the small amount of
environmental information used in this effort. Such simplistic operational
planning only pretends to be strategic management, yet it is quite time
consuming. Normal company activities are often suspended for weeks while
managers try to cram ideas into the proposed budget. The time horizon is
usually one year.
Phase 2—Forecast-based planning: As annual budgets become less useful
at stimulating long-term planning, managers attempt to propose five-year plans.
At this point, they consider projects that may take more than one year. In
addition to internal information, managers gather any available environmental
data—usually on an ad hoc basis—and extrapolate current trends. This phase
is also time consuming, often involving a full month or more of managerial
activity to make sure all the proposed budgets fit together. The process gets
very political as managers compete for larger shares of limited funds.
Seemingly endless meetings take place to evaluate proposals and justify
assumptions. The time horizon is usually three to five years.
Phase 3—Externally oriented (strategic) planning: Frustrated with highly
political yet ineffectual five-year plans, top management takes control of the
planning process by initiating a formal strategic planning system. The company
seeks to increase its responsiveness to changing markets and competition by
thinking and acting strategically. Planning is taken out of the hands of lower-
level managers and concentrated in a planning staff whose task is to develop
strategic plans for the corporation. Consultants often provide the sophisticated
and innovative techniques that the planning staff uses to gather information and
forecast future trends.
Phase 4—Strategic management: Realizing that even the best strategic plans
are worthless without the input and commitment of lower-level managers, top
management forms planning groups of managers and key employees at many
levels, from various departments and workgroups. They develop and integrate
a series of plans focused on emphasizing the company’s true competitive
advantages. Strategic plans at this point detail the implementation, evaluation,
and control issues. Rather than attempting to perfectly forecast the future, the
plans emphasize probable scenarios and contingency strategies. The
sophisticated annual five-year strategic plan is replaced with strategic thinking
at all levels of the organization throughout the year. Strategic information,
previously available only centrally to top management, is used by people
throughout the organization. Instead of a large centralized planning staff,
internal and external planning consultants are available to help guide group
strategy discussions. Although top management may still initiate the strategic
planning process, the resulting strategies may come from anywhere in the
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RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
organization. Planning is typically interactive across levels and is no longer
strictly top down. People at all levels are now involved.
BENEFITS OF STRATEGIC MANAGEMENT
■■ A clearer sense of strategic vision for the firm
■■ A sharper focus on what is strategically important.
■■ An improved understanding of a rapidly changing environment.
Impact of Innovation
Innovation, as the term is used in business, is meant to describe new products,
services, methods, and organizational approaches that allow the business to
achieve extraordinary returns. Boston Consulting Group (BCG) found that
innovation is a top 3 priority for three-quarters of the companies in the 2014
BCG global innovation survey.
They also found that:
■■ 61% were spending more money on innovation in 2014 than in 2013
■■ 75% of respondents reported that innovation investment was primarily
aimed at long-term advantage and current competitive advantage
■■ The top five most innovative companies were Apple, Google, Samsung,
Microsoft, and IBM
■■ 70% of executives felt their own companies’ innovation capabilities were
only average and 13% felt they were weak.
Impact of Sustainability
Sustainability refers to the use of business practices to manage the triple
bottom line as was discussed earlier. That triple bottom line involves (1) the
management of traditional profit/loss; (2) the management of the company’s
social responsibility; and (3) the management of its environmental
responsibility. The company has a relatively obvious long-term responsibility to
the shareholders of the organization. That means that the company has to be
able to thrive despite changes in the industry, society, and the physical
environment. This is the focus of much of this textbook and the focus of strategy
in business. The company that pursues a sustainable approach to business has
a responsibility to its employees, its customers, and the community in which it
operates.
Creating a Learning Organization
Strategic flexibility demands a long-term commitment to the development and
nurturing of critical resources and capabilities. It also demands that the
company become a learning organization—an organization skilled at creating,
acquiring, and transferring knowledge and at modifying its behavior to reflect
new knowledge and insights. Organizational learning is a critical component of
competitiveness in a dynamic environment.
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RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
Learning organizations are skilled at four main activities:
■■ Solving problems systematically
■■ Experimenting with new approaches
■■ Learning from their own experiences and past history as well as from the
experiences of others
■■ Transferring knowledge quickly and efficiently throughout the organization.
Basic Model of Strategic Management
Strategic management consists of four basic elements:
■■ Environmental scanning
■■ Strategy formulation
■■ Strategy implementation
■■ Evaluation and control.
Environmental Scanning
Environmental scanning is the monitoring, evaluating, and disseminating of
information from the external and internal environments to key people within
the corporation. Its purpose is to identify strategic factors—those external and
internal elements that will assist in the analysis of the strategic decisions of the
corporation. The simplest way to represent the outcomes of environmental
scanning is through a SWOT approach. SWOT is an acronym used to describe
the particular Strengths, Weaknesses, Opportunities, and Threats that appear
to be strategic factors for a specific company. The external environment
consists of variables (opportunities and threats) that are outside the
organization and not typically within the short-run control of top management.
These variables form the context within which the corporation exists.
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SOURCE: T. L. Wheelen, “Strategic Management Model,” adapted from
“Concepts of Management,” presented to Society for Advancement of
Management (SAM), International Meeting, Richmond, VA, 1981. Kathryn E.
Wheelen solely owns all of (Dr.) Thomas L. Wheelen’s copyright materials.
Kathryn E. Wheelen requires written reprint permission for each book that this
material is to be printed in. Copyright © 1981 by T. L. Wheelen and SAM.
Copyright © 1982, 1985, 1988, and 2005 by T. L. Wheelen and J. D. Hunger.
Revised 1989, 1995, 1998, 2000, 2005, 2009, and 2013. Reprinted by
permission of the copyright holders.
Strategy Formulation
Strategy formulation is the process of investigation, analysis, and decision
making that provides the company with the criteria for attaining a competitive
advantage. It includes defining the competitive advantages of the business,
identifying weaknesses that are impacting the company’s ability to grow,
crafting the corporate mission, specifying achievable objectives, and setting
policy guidelines.
Mission: Stating Purpose
An organization’s mission is the purpose or reason for the organization’s
existence. It announces what the company is providing to society—either a
service such as consulting, a set of products such as automobile tires, or a
combination of the two such as tablets and their associated Apps. A well-
conceived mission statement defines the fundamental, unique purpose that
sets a company apart from other firms of its type. Research reveals that firms
with mission statements containing explicit descriptions of their competitive
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advantages have significantly higher growth than firms without such
statements.
Objectives: Listing Expected Results
Objectives are the end results of planned activity. They should be stated as
action verbs and tell employees what is to be accomplished and when, with
appropriate metrics. The achievement of corporate objectives should result in
the fulfillment of a corporation’s mission. Some of the areas in which a
corporation might establish its goals and objectives are:
■■ Profitability (net profits)
■■ Efficiency (low costs, etc.)
■■ Growth (increase in total assets, sales, etc.)
■■ Shareholder wealth (dividends plus stock price appreciation)
■■ Utilization of resources (Return on Equity (ROE) or Return on Investment
(ROI)
Objectives: Listing Expected Results
■■ Reputation (being considered a “top” firm)
■■ Contributions to employees (employment security, wages, diversity)
■■ Contributions to society (taxes paid, participation in charities, providing a
needed product or service)
■■ Market leadership (market share)
■■ Technological leadership (innovations, creativity)
■■ Survival (avoiding bankruptcy)
■■ Personal needs of top management (using the firm for personal purposes,
such as providing jobs for relatives)
Strategy: Defining the Competitive Advantages
An organization must examine the external environment in order to determine
who constitutes the perfect customer for the business as it exists today, who
the most direct competitors are for that customer, what the company does that
is necessary to compete, and what the company does that truly sets it apart
from its competitors. These elements can be rephrased into the strengths of the
business, the understanding of its weaknesses relative to its competitors, what
opportunities would be most prudent, and what threats might affect the
business’s primary competitive advantages.
A strategy of a business forms a comprehensive master approach that states
how the business will achieve its mission and objectives. It maximizes
competitive advantage and minimizes competitive disadvantage.
The typical larger business addresses three types of strategy: corporate,
business, and functional.
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RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
■■ Corporate strategy describes a company’s overall direction in terms of
growth and the management of its various businesses. Corporate strategies
generally fit within the three main categories of stability, growth, and
retrenchment.
■■ Business strategy usually occurs at the business unit or product level, and
it emphasizes improvement of the competitive position of a corporation’s
products or services in the specific industry or market segment served by that
business unit. Business strategies may fit within the two overall categories:
competitive and cooperative strategies.
■■ Functional strategy is the approach taken by a functional area to achieve
corporate and business unit objectives and strategies by maximizing resource
productivity. It is concerned with developing and nurturing a distinctive
competence to provide a company or business unit with a competitive
advantage.
Policies: Setting Guidelines
A policy is a broad guideline for decision making that links the formulation of a
strategy with its implementation. Companies use policies to make sure that
employees throughout the firm make decisions and take actions that support
the corporation’s mission, objectives, and strategies.
For example, when Cisco decided on a strategy of growth through acquisitions,
it established a policy to consider only companies with no more than
75 employees, 75% of whom were engineers.47 Consider the following
company policies:
Hierarchy of Strategy
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Strategy Implementation
Strategy implementation is a process by which strategies and policies are put
into action through the development of programs, budgets, and procedures.
This process might involve changes within the overall culture, structure, and/or
management system of the entire organization. Except when such drastic
corporatewide changes are needed, however, the implementation of strategy is
typically conducted by middle- and lower-level managers, with review by top
management. Sometimes referred to as operational planning, strategy
implementation often involves day-to-day decisions in resource allocation.
Programs and Tactics: Defining Actions
A program or a tactic is a statement of the activities or steps needed to support
a strategy. The terms are interchangeable. In practice, a program is a collection
of tactics where a tactic is the individual action taken by the organization as an
element of the effort to accomplish a plan. A program or tactic makes a strategy
action-oriented. It may involve restructuring the corporation, changing the
company’s internal culture, or beginning a new research effort.
To significantly cut costs, management decided to implement a series of tactics:
■■ Outsource approximately 70% of manufacturing.
■■ Reduce final assembly time to three days (compared to 20 for its 737 plane)
by having suppliers build completed plane sections.
■■ Use new, lightweight composite materials in place of aluminum to reduce
inspection time.
■■ Resolve poor relations with labor unions caused by downsizing and
outsourcing
Budgets: Costing Programs
A budget is a statement of a corporation’s programs in terms of dollars. Used
in planning and control, a budget lists the detailed cost of each program. Many
corporations demand a certain percentage return on investment, often called a
“hurdle rate,” before management will approve a new program. This is done so
that the new program has the potential to significantly add to the corporation’s
profit performance and thus build shareholder value. The budget not only
serves as a detailed plan of the new strategy in action, it also specifies through
proforma financial statements the expected impact on the firm’s financial future.
Procedures: Detailing Activities
Procedures, sometimes termed Standard Operating Procedures (SOP), are a
system of sequential steps or techniques that describe in detail how a particular
task or job is to be done. They typically detail the various activities that must be
carried out in order to complete the corporation’s program.
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RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
Evaluation and Control
Evaluation and control
is a process in which corporate activities and performance results are monitored
so that actual performance can be compared with desired performance.
Managers at all levels use the resulting information to take corrective action
and resolve problems. Although evaluation and control is the final major
element of strategic management, it can also pinpoint weaknesses in previously
implemented strategic plans and thus stimulates the entire process to begin
again.
Performance
is the end result of activities. It includes the actual outcomes of the strategic
management process. The practice of strategic management is justified in
terms of its ability to improve an organization’s performance, typically measured
in terms of profits and return on investment. For evaluation and control to be
effective, managers must obtain clear, prompt, and unbiased information from
the people below them in the corporation’s hierarchy. Using this information,
managers compare what is actually happening with what was originally planned
in the formulation stage.
Initiation of Strategy: Triggering Events
A triggering event is something that acts as a stimulus for a change in strategy.
Some possible triggering events are.
■■ New CEO: By asking a series of embarrassing questions, a new CEO cuts
through the veil of complacency and forces people to question the very reason
for the corporation’s existence.
■■ External intervention: A firm’s bank suddenly refuses to approve a new loan
or suddenly demands payment in full on an old one. A key customer complains
about a serious product defect.
■■ Threat of a change in ownership: Another firm may initiate a takeover by
buying a company’s common stock.
■■ Performance gap: A performance gap exists when performance does not
meet expectations. Sales and profits either are no longer increasing or may
even be falling.
Strategic Decision Making
A distinguishing characteristic of strategic management is its emphasis on
strategic decision making. As organizations grow larger and more complex, with
more uncertain environments, decisions become increasingly complicated and
difficult to make. In agreement with the strategic choice perspective mentioned
earlier, this book proposes a strategic decision-making framework that can help
people make these decisions regardless of their level and function in the
corporation.
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MINTZBERG’S MODES OF STRATEGIC DECISION MAKING
■■ Entrepreneurial mode: Strategy is made by one powerful individual. The
focus is on opportunities; problems are secondary. Strategy is guided by the
founder’s own vision of direction and is exemplified by large, bold decisions.
The dominant goal is growth of the corporation. Amazon.com, founded by Jeff
Bezos, is an example of this mode of strategic decision making. The company
reflects Bezos’ vision of using the Internet to market everything that can be
bought.
■■ Adaptive mode: Sometimes referred to as “muddling through,” this decision-
making mode is characterized by reactive solutions to existing problems, rather
than a proactive search for new opportunities. Much bargaining goes on
concerning the priority of objectives. Strategy is fragmented and is developed
to move a corporation forward incrementally.
■■ Planning mode: This decision-making mode involves the systematic
gathering of appropriate information for situation analysis, the generation of
feasible alternative strategies, and the rational selection of the most appropriate
strategy. It includes both the proactive search for new opportunities and the
reactive solution of existing problems.
■■ Entrepreneurial mode: Strategy is made by one powerful individual. The
focus is on opportunities; problems are secondary. Strategy is guided by the
founder’s own vision of direction and is exemplified by large, bold decisions.
The dominant goal is growth of the corporation. Amazon.com, founded by Jeff
Bezos, is an example of this mode of strategic decision making. The company
reflects Bezos’ vision of using the Internet to market everything that can be
bought.
■■ Adaptive mode: Sometimes referred to as “muddling through,” this decision-
making mode is characterized by reactive solutions to existing problems, rather
than a proactive search for new opportunities. Much bargaining goes on
concerning the priority of objectives. Strategy is fragmented and is developed
to move a corporation forward incrementally.
■■ Planning mode: This decision-making mode involves the systematic
gathering of appropriate information for situation analysis, the generation of
feasible alternative strategies, and the rational selection of the most appropriate
strategy. It includes both the proactive search for new opportunities and the
reactive solution of existing problems.
■■ Logical incrementalism: A fourth decision-making mode can be viewed as a
synthesis of the planning, adaptive, and, to a lesser extent, the entrepreneurial
modes. In this mode, top management has a reasonably clear idea of the
corporation’s mission and objectives, but, in its development of strategies, it
chooses to use “an interactive process in which the organization probes the
future, experiments, and learns from a series of partial (incremental)
commitments rather than through global formulations of total strategies.
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STRATEGIC DECISION-MAKING PROCESS: AID TO BETTER DECISIONS
■■ Evaluate current performance results in terms of (a) return on investment,
profitability, and so forth, and (b) the current mission, objectives, strategies, and
policies.
■■ Review corporate governance—that is, the performance of the firm’s board
of directors and top management.
■■ Scan and assess the external environment to determine the strategic factors
that pose opportunities and threats.
■■ Scan and assess the internal corporate environment to determine the
strategic factors that are strengths (especially core competencies) and
weaknesses.
■■ Analyze strategic factors to (a) pinpoint problem areas and (b) review and
revise the corporate mission and objectives, as necessary.
STRATEGIC DECISION-MAKING PROCESS: AID TO BETTER DECISIONS
■■ Generate, evaluate, and select the best alternative strategies in light of the
analysis conducted in the previous step.
■■ Implement selected strategies via programs, budgets, and procedures.
■■ Evaluate implemented strategies via feedback systems, and the control of
activities to ensure their minimum deviation from plans.
Strategic Decision Making Process
Strategic Decision Making Process
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References
Strategic Management A Competitive Advantage, Approach and
Concepts (Fred David and Forest David) 2017
Strategic Management (Frank Rothaermel) 2017
Strategic Management and Business Policy “Globalization, Innovation
and Sustainability” (Thomas Wheelen and J. David Hunger) 2018
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