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 techniques.
PHASES OF STRATEGIC MANAGEMENT:
Many of the concepts and techniques that deal with strategic management have been developed and used successfully by the largest business organizations in
the world as well as the newest startups. Over time, business practitioners and academic researchers have expanded and refined these concepts. One of the most
critical drivers of business success is a leader’s ability to design and implement a strategy for the company. Increasing risks of error, costly mistakes, and even economic ruin are causing today’s professional managers in all organizations to take strategic management seriously in order to keep their companies competitive in an increasingly volatile environment.As managers attempt to better deal with their changing world, a firm generally evolves through the following four 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. Organizations start competitive intelligence units. Upper-level managers meet once a year at a resort “retreat” led by key members of the planning staff to evaluate and update the current strategic plan. Such top-down planning emphasizes formal strategy formulation and leaves the implementation
issues to lower-management levels. Top management typically develops long-term plans with help from consultants but minimal input from lower levels.
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 organization. Planning is typically interactive across levels and is no longer strictly top down. People at all levels are now involved.
General Electric, one of the pioneers of strategic planning, led the transition from strategic planning to strategic management during the 1980s. By the 1990s, most other corporations around the world had also begun the conversion to strategic management.
Benefits of Strategic Management
Benefits of Strategic Management
Strategic management emphasizes long-term performance. Many companies can manage short-term bursts of high performance, but only a few can sustain it over a longer period of time. Since the release of the original Fortune 500 companies listing in 1955, more than 1,800 companies have made the list. In 2015, 18 new companies joined the list for the first time meaning that 18 others fell from the list. To be successful in the long-run, companies must not only be able to execute current activities to satisfy an existing market, but they must also adapt those activities to satisfy new and changing markets. Research reveals that organizations that engage in strategic management generally outperform those that do not. The attainment of an appropriate match, or “fit,” between an organization’s environment and its strategy, structure, and processes has positive effects on the organization’s performance. Strategic planning becomes increasingly important as the environment becomes more unstable. For example, in an environment where the average expectancy rate of Fortune 500 companies has reduced from 75 years in the 1950s to around 15 years, many Indian companies are going strong for the past 100 years. This list includes Bennett, Coleman and Co. (also referred to as The Times Group), Dabur India Ltd, Kirloskar Brothers Ltd (KBL), Delhi Cloth & General Mills Co (DCM) etc. These companies have been successful because they believed in changing and adapting to the changing environment. For example, Bombay Dyeing, which was established in 1879 is still going strong because of its ability to innovate and modernize continuously.
A survey of nearly 50 corporations in a variety of countries and industries found the three most highly rated benefits of strategic management to be:
- 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
A survey by McKinsey & Company of 800 executives found that formal strategic planning processes improved overall satisfaction with strategy development. To be effective, however, strategic management need not always be a formal process. It can begin with a few simple questions:
- Where is the organization now? (Not where do we hope it is!)
- If no significant changes are made, where will the organization be in one year? Two years? Five years? Ten years? Are the answers acceptable?
- If the answers are not acceptable, what specific actions should management undertake? What are the risks and payoffs involved?
The Bain & Company’s 2015 Management Tools and Trends survey of 1,067 global executives revealed that strategic planning was the number two tool used by decision makers just behind customer relationship management. Other highly ranked strategic management tools were mission and vision statements, change management programs, and balanced scorecards. A study by Joyce, Nohria, and Roberson of 200 firms in 50 subindustries found that devising and maintaining an engaged, focused strategy was the first of four essential management practices that best differentiated between successful and unsuccessful companies. Based on these and other studies, it can be concluded that strategic management is crucial for long-term organizational success.
Research into the planning practices of companies in the oil industry concludes that the real value of modern strategic planning is more in the strategic thinking and organizational learning that is part of a future-oriented planning process than in any resulting written strategic plan. Small companies, in particular, may plan informally and irregularly. Nevertheless, studies of small- and medium-sized businesses reveal that the greater the level of planning intensity, as measured by the presence of a formal strategic plan, the greater the level of financial performance, especially when measured in terms of sales increases.
Planning the strategy of large, multidivisional corporations can be complex and time consuming. It often takes slightly more than a year for a large company to move from situation assessment to a final decision agreement. For example, strategic plans in the global oil industry tend to cover four to five years. The planning horizon for oil exploration is even longer—up to 15 years. Because of the relatively large number of people affected by a strategic decision in a large firm, a formalized, more sophisticated system is needed
to ensure that strategic planning leads to successful performance. Otherwise, top management becomes isolated from developments in the business units, and lower-level managers lose sight of the corporate mission and objectives.
