12.1: Strategic Management

12.1.1: What is Strategy?

A strategy is a plan of action designed to achieve a specific goal or series of goals within an organizational framework.

Learning Objective

Define strategy within the context of a business and their organizational goals

Key Points

Strategic management is the process of building capabilities that allow a firm to create value for customers, shareholders, and society while operating in competitive markets.
Strategy entails: specifying the organization’s mission, vision, and objectives; developing policies and plans to execute the vision; and allocating resources to implement those policies and plans.
Strategy is largely about using internal assets to create a value-added proposition. This helps to capture opportunities in the competitive environment while avoiding threats.
Experts in the field of strategy define the potential components of strategy and the different forms strategy can take.

Key Terms

balanced scorecard: A strategic performance management tool used by managers to track the execution of activities within their control and monitor the consequences of these actions.
strategic management: The art and science of formulating, implementing, and evaluating cross-functional decisions that will enable an organization to achieve its objectives.
strategy: A plan of action intended to accomplish a specific goal.

Strategy involves the action plan of a company for building competitive advantage and increasing its triple bottom line over the long-term. The action plan relates to achieving the economic, social, and environmental performance objectives; in essence, it helps bridge the gap between the long-term vision and short-term decisions.

Strategic Management

Strategic management is the process of building capabilities that allow a firm to create value for customers, shareholders, and society while operating in competitive markets (Nag, Hambrick & Chen 2006). It entails the analysis of internal and external environments of firms to maximize the use of resources in relation to objectives (Bracker 1980). Strategic management can depend upon the size of an organization and the proclivity to change the organization’s business environment.

The process of strategic management entails:

Specifying the organization’s mission, vision, and objectives
Developing policies and plans that are designed to achieve these objectives
Allocating resources to implement these policies and plans

As an example, let’s take a company that wants to expand its current operations to producing widgets. The company’s strategy may involve analyzing the widget industry along with other businesses producing widgets. Through this analysis, the company can develop a goal for how to enter the market while differentiating from competitors’ products. It could then establish a plan to determine if the approach is successful.

Keeping Score

A balanced scorecard is a tool sometimes used to evaluate a business’s overall performance. From the executive level, the primary starting point will be stakeholder needs and expectations (i.e., financiers, customers, owners, etc.). Following this, inputs such as objectives, operations, and internal processes will be developed to achieve these expectations.

Another way to keep score of a strategy is to visualize it using a strategy map. Strategy maps help to illustrate how various goals are linked and provide trajectories for achieving these goals.

Strategy map

This image is an example of a strategy map for a public-sector organization. It shows how various goals are linked and providing trajectories for achieving these goals.

Common Approaches to Strategy

Richard Rumelt

In 2011, Professor Richard P. Rumelt described strategy as a type of problem solving. He outlined a perspective on the components of strategy, which include:

Diagnosis: What is the problem being addressed? How do the mission and objectives imply action?
Guiding Policy: What framework will be used to approach the operations? (This, in many ways, should be the decision of a given competitive advantage relative to the competition.)
Action Plans: What will the operations look like (in detail)? How will the processes be enacted to align with the guiding policy and address the issue in the diagnosis?

Michael Porter

In 1980, Michael Porter wrote that formulation of competitive strategy includes the consideration of four key elements:

Company strengths and weaknesses
Personal values of the key implementers (i.e., management or the board)
Industry opportunities and threats
Broader societal expectations

Henry Mintzberg

Henry Mintzberg stated that there are prescriptive approaches (what should be) and descriptive approaches (what is) to strategic management. Prescriptive schools are “one size fits all” approaches that designate best practices, while descriptive schools describe how strategy is implemented in specific contexts. No single strategic managerial method dominates, and the choice between managerial styles remains a subjective and context-dependent process. As a result, Mintzberg hypothesized five strategic types:

Strategy as plan: a directed course of action to achieve an intended set of goals; similar to the strategic planning concept
Strategy as pattern: a consistent pattern of past behavior with a strategy realized over time rather than planned or intended (where the realized pattern was different from the intent, Mintzberg referred to the strategy as emergent)
Strategy as position: locating brands, products, or companies within the market based on the conceptual framework of consumers or other stakeholders; a strategy determined primarily by factors outside the firm
Strategy as ploy: a specific maneuver intended to outwit a competitor
Strategy as perspective: executing strategy based on a “theory of the business” or a natural extension of the mindset or ideological perspective of the organization

Example

A company wants to expand its current operations to produce widgets. The company’s strategy may involve analyzing the widget industry along with other businesses producing widgets. Through this analysis, the company can develop a goal for how to enter the market while differentiating from competitors’ products. It could then establish a plan to determine if the approach is successful.

12.1.2: The Importance of Strategy

Strategic management is critical to organizational development as it aligns the mission and vision with operations.

Learning Objective

Evaluate the implications of the three key questions defining strategic planning

Key Points

Strategic management seeks to coordinate and integrate the activities of the various functional areas of a business in order to achieve long-term organizational objectives.
The initial task in strategic management is typically the compilation and dissemination of the vision and the mission statement. This outlines, in essence, the purpose of an organization.
Strategies are usually derived by the top executives of the company and presented to the board of directors in order to ensure they are in line with the expectations of the stakeholders.
The implications of the selected strategy are highly important. These are illustrated through achieving high levels of strategic alignment and consistency relative to both the external and internal environment.
All strategic planning deals with at least one of three key questions: “What do we do?” “For whom do we do it?” and “How do we excel?” In business strategic planning, the third question refers more to beating or avoiding competition.

Key Terms

mission statement: A declaration of the overall goal or purpose of an organization.
board of directors: A group of people elected by stockholders to establish corporate policies and make managerial decisions.

Strategic management is critical to the development and expansion of all organizations. It represents the science of crafting and formulating short-term and long-term initiatives directed at optimally achieving organizational objectives. Strategy is inherently linked to a company’s mission statement and vision; these elements constitute the core concepts that allow a company to execute its goals. The company strategy must constantly be edited and improved to move in conjunction with the demands of the external environment.

Strategy and Management

As a result of its importance to the business or company, strategy is generally perceived as the highest level of managerial responsibility. Strategies are usually derived by the top executives of the company and presented to the board of directors in order to ensure they are in line with the expectations of company stakeholders. This is particularly true in public companies, where profitability and maximizing shareholder value are the company’s central mission.

The implications of the selected strategy are also highly important. These are illustrated through achieving high levels of strategic alignment and consistency relative to both the external and internal environment. In this way, strategy enables the company to maximize internal efficiency while capturing the highest potential of opportunities in the external environment.

Key Strategic Questions

The initial task in strategic management is to compile and disseminate the organization’s vision and mission statement. These outline, in essence, the purpose of the organization. Additionally, they specify the organization’s scope of activities. Strategic planning is the formal consideration of an organization’s future course, and all strategic planning deals with at least one of three key questions:

What do we do?
How do we do it?
How do we excel?

In business-related strategic planning, the third question refers more to beating or avoiding competition.

Strategic management is the art, science, and craft of formulating, implementing, and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives. It involves specifying the organization’s mission, vision, and objectives; developing policies and plans to achieve these objectives; and then allocating resources to implement the policies and plans. Strategic management seeks to coordinate and integrate the activities of a company’s various functional areas in order to achieve long-term organizational objectives.

Product improvement strategies

This strategy map illustrates an example of how product improvements are designed and implemented. Improvements move from the original plan, to design changes, to production modification, to deployments, to upgrades.

12.1.3: Making Strategy Effective

Effective strategies must be suitable, feasible, and acceptable to stakeholders.

Learning Objective

Apply the three criteria for strategic efficacy identified by Johnson, Scholes and Whittington and the 11 forces that should be incorporated into strategic consideration as argued by Will Mulcaster

Key Points

Johnson, Scholes, and Whittington suggest evaluating strategic options based on three key criteria: suitability, feasibility, and acceptability.
Suitability refers to the overall rationale of the strategy and its fit with the organization’s mission.
Feasibility refers to whether or not the organization has the resources necessary to implement the strategy.
Acceptability is concerned with stakeholder expectations and the expected outcomes of implementing the strategy.
Will Mulcaster provides an additional 11 strategic forces which may impact the effectiveness of a given strategy.

Key Terms

effectiveness: The capability of producing a desired result.
strategy: A plan of action intended to accomplish a specific goal.

Effectiveness is the capability to produce a desired result. Strategy is considered effective when short-term and long-term objectives are accomplished and are in line with the mission, vision, and stakeholder expectations. This requires upper management to recognize how each organizational component combines to create a competitive operational process.

Suitability, Feasibility, and Acceptability

With the above framework in mind, a number of academics have proposed perspectives on strategic effectiveness. Johnson, Scholes, and Whittington suggest evaluating the potential success of a strategy based on three criteria:

Suitability deals with the overall rationale of the strategy. One method of assessing suitability is using a strength, weakness, opportunity, and threat (SWOT) analysis. A suitable strategy fits the organization’s mission, reflects the organization’s capabilities, and captures opportunities in the external environment while avoiding threats. A suitable strategy should derive competitive advantage(s).
Feasibility is concerned with whether or not the organization has the resources required to implement the strategy (such as capital, people, time, market access, and expertise). One method of analyzing feasibility is to conduct a break-even analysis, which identifies if there are inputs to generate outputs and consumer demand to cover the costs involved.
Acceptability is concerned with the expectations of stakeholders (such as shareholders, employees, and customers) and any expected financial and non-financial outcomes. It is important for stakeholders to accept the strategy based on the risk (such as the probability of consequences) and the potential returns (such as benefits to stakeholders). Employees are particularly likely to have concerns about non-financial issues such as working conditions and outsourcing. One method of assessing acceptability is through a what-if analysis, identifying best and worst case scenarios.

SWOT Analysis

Here is an example of the SWOT analysis matrix.

Mulcaster’s Managing Forces Framework

Will Mulcaster argued that while research has been devoted to generating alternative strategies, not enough attention has been paid to the conditions that influence the effectiveness of strategies and strategic decision-making. For instance, it can be seen in retrospect that the financial crisis of 2008 and 2009 could have been avoided if banks had paid more attention to the risky nature of their investments. However, knowing in hindsight cannot address how banks should change the ways they make future decisions.

Mulcaster’s Managing Forces Framework addresses this issue by identifying 11 forces that should be taken into account when making strategic decisions and implementing strategies:

Time
Opposing forces
Politics
Perception
Holistic effects
Adding value
Incentives
Learning capabilities
Opportunity cost
Risk
Style

While this is quite a bit to consider, the key is to be as circumspect as possible when analyzing a given strategy. In many ways it is similar to the potential issues a scientist faces. A scientist must always be objective and conduct experiments without a bias toward a specific outcome. Scientists don’t prove something to be true; they test hypotheses. Similarly, strategists must not create a strategy to get to an end point; they must instead create a series of likely endpoints based on organizational inputs and operational approaches. Uncertainty is key, allowing strategic improvement for higher efficacy.

Example

A firm may perform a break-even analysis to determine if a strategy is feasible. The break-even point (BEP) is the point at which costs or expenses and revenue are equal: there is no net loss or gain, so the company has “broken even.” For example, if a business sells fewer than 200 tables each month, it will make a loss; if it sells more, it will make a profit. With this information, managers could determine if they expected to be able to make and sell 200 tables per month and then implement a strategy that is in accordance with their projections.

12.1.4: Differences Between Strategic Planning at Small Versus Large Firms

The effectiveness of a strategy is heavily dependent upon the size of the organization.

Learning Objective

Apply the size of a firm to the basic strategic management theories

Key Points

Size is highly relevant to organizational strategy and structure, and understanding the influencing factors is important for management to elect optimal strategic plans.
A global or transnational organization may employ a more structured strategic management model due to its size, scope of operations, and need to encompass stakeholder views and requirements.
A small or medium enterprise may employ an entrepreneurial approach due to its comparatively smaller size and scope of operations and its limited access to resources.
Smaller firms also tend to focus more on differentiation due to an inability to achieve scale economies. Similarly, larger firms tend to have more cost-sensitive strategic capabilities.
No single strategic managerial method dominates, and the choice of managerial style remains a subjective and context-dependent process.

Key Terms

structured interview: A quantitative research method commonly employed in survey research where each potential employee is asked the same questions in the same order.
entrepreneurial: Having the spirit, attitude or qualities of a person who organizes and operates a business venture.
structured: The state of being organized.

Strategic management can depend on the size of an organization and the proclivity of change in its business environment. In the U.S., an SME (small and medium enterprise) refers to an organization with 500 employees or less, while an MNE (multinational enterprise) refers to a global organization with a much larger operational scope. Size is highly relevant to organizational strategy and structure, and understanding the influencing factors is important for management to elect optimal strategic plans.

Strategic Management in Large Organizations

MNEs (multinational enterprises) may employ a more structured strategic management model due to its size, scope of operations, and need to encompass stakeholder views and requirements. MNEs are tasked with aligning complex and often dramatically different processes, demographic considerations, employees, legal systems, and stakeholders. Due to the wide variance and high volume of business, upper management needs stringent control systems embedded in the managerial strategy to enable predictability and conformity to mission, vision, and values.

For example, McDonald’s operates restaurants all over the globe. They have different menus in China than in France due to differing consumer tastes. They also have different hiring standards, regulations, and sourcing methods. How does management create a strategy that doesn’t confine these geographic regions (and lose localization) yet still maintains each region’s alignment with the mission, vision, and branding of McDonald’s?

Low-cost Strategy

Ideally, McDonald’s can construct careful strategic models and systems which control the critical components of the operations without hindering the localization. From a strategic point of view, this involves creating a system of quality control, reporting, and localization that maintains the competitive advantage of scale economies and strong branding. Large firms such as McDonald’s often achieve better scale economies and thus can pursue low-cost strategies. This requires enormous managerial competency with meticulously crafted strategies at various levels in the organization (including corporate, functional, and regional).

Strategic Management in Small Firms

SMEs (small and medium enterprises) may employ an entrepreneurial approach due to its comparatively smaller size and scope of operations and limited access to resources. A smaller organization needs to be agile, adaptable, and flexible enough to develop new strengths and capture niche opportunities within a competitive industry with bigger players. This requires fluidity in strategy while simultaneously maintaining a predetermined vision and mission statement.

Achieving this requires a great deal of balance; it often requires a strategy that is created to enable multiple paths to the same objectives. Small firm strategies often incorporate flexibility to capture new opportunities as they arise, as opposed to maintaining an already well-established competitive advantage.

Differentiation

In most cases, low-cost strategies require substantial economies of scale. Because of this constraint, smaller firms most often use differentiation strategies that focus on innovation over efficiency. Enabling creativity and innovation is strategically difficult to do as it requires a hands-off approach that empowers autonomy over structure. Innovate ideas are primarily trial and error, and so instilling creativity into a strategic process is also a high-risk approach.

Example of a strategy map

This image is an example of a strategy map that organizes a firm’s stakeholder interests. You can see the firm’s three main goals across the top (corporate citizenship, capital efficiency, and network efficiency) and the categories of potential actions down the left (learning innovation, internal action, customer action, and financial action).

12.1.5: The Impact of External and Internal Factors on Strategy

Analysis of both internal factors and external conditions is central to creating effective strategy.

Learning Objective

Examine the discrepancies between internal proficiency and external factors to capture strategic value

Key Points

Strategic management is the managerial responsibility to achieve competitive advantage through optimizing internal resources while capturing external opportunities and avoiding external threats.
While different businesses have different internal conditions, it is easiest to view these potential attributes as generalized categories. A value chain is a common tool used to accomplish this.
A value chain identifies the supporting activities (employee skills, technology, infrastructure, etc.) and the primary activities (acquiring inputs, operations, distribution, sales, etc.) that can potentially create profit.
The external environment is even more diverse and complex than the internal environment, and there are many effective models to discuss, measure, and analyze it (i.e., Porter’s Five Force, SWOT Analysis, PESTEL framework, etc.).
With both the internal value chain and external environment in mind, upper management can reasonably derive a set of strategic principles which internally leverage strengths and externally capture opportunities to create profits.

Key Term

analysis: The process of breaking down a substance into its constituent parts, or the result of this process.

Strategic management is the managerial responsibility to achieve competitive advantage through optimizing internal resources while capturing external opportunities and avoiding external threats. This requires carefully crafting a structure, series of objectives, mission, vision, and operational plan. Recognizing the way in which internally developed organizational attributes will interact with the external competitive environment is central to successfully implementing a given strategy—and thus creating profitability.

Internal Conditions

The internal conditions are many and varied depending on the organization (just as the external factors in any given industry will be). However, management has some strategic control over how these various internal conditions interact. The achievement of synergy in this process derives competitive advantage. While different businesses have different internal conditions, it is easiest to view these potential attributes as generalized categories.

A value chain is a common tool used to identify each moving part. It is a useful mind map for management to fill in during the derivation of internal strengths and weakness. A value chain includes supports activities and primary activities, each with its own components.

Supports Activities

Firm infrastructure: the organizational structure, mission, hierarchy and upper management
Human resource management: the skills embedded in the organization through human resources
Technology: the technological strengths and weaknesses (such as patents, machinery, IT, etc.)
Procurement: a measure of assets, inventory, and sourcing

Primary Activities

Inbound logistics: deriving inputs for operational process
Operations: running inputs through organizational operations
Outbound logistics: shipping, warehousing, and inventorying final products
Marketing and sales: building a brand, selling products, and identifying retail strategies and opportunities
Service: following up with customers to ensure satisfaction, provide and fulfill warranties, etc.

Michael Porter’s value chain

This model, created by Michael Porter, demonstrates how support and primary activities add up to potential margins (and potential competitive advantage). Support activities include HR management and technology; primary activities include operations, marketing and sales, and service.

External Opportunities and Threats

The external environment is even more diverse and complex than the internal environment. There are many effective models to discuss, measure, and analyze the external environment (such as Porter’s Five Force, SWOT Analysis, PESTEL framework, etc.). For the sake of this discussion, we will focus on the following general strategic concerns as they pertain to opportunities and threats:

Markets (customers): Demographic and socio-cultural considerations, such as who the customers are and what they believe, are critical to capturing market share. Understanding the needs and preferences of the markets is essential to providing something that will have a demand.
Competition: Knowing who else is competing and how they are strategically poised is also key to success. Consider the size, market share, branding strategy, quality, and strategy of all competitors to ensure a given organization can feasibly enter the market.
Technology: Technological trajectories are also highly relevant to success. Does the manufacturing process of the product have new technologies which are more efficient? Has a disruptive technology filled the need that was currently being filled?
Supplier markets: Suppliers have great power as they control the necessary inputs to an organization’s operational process. For example, smartphones require rare earth materials; if these materials are increasingly scarce, the price points will rise.
Labor markets: Acquiring key talent and satisfying employees (relative to the competition) is critical to success. This requires an understanding of unions and labor laws in regions of operation.
The economy: Economic recessions and booms can change spending habits drastically, though not always as one might expect. While most industries suffer during recession, some industries thrive. It is important to know which economic factors are opportunities and which are threats.
The regulatory environment: Environmental regulations, import/export tariffs, corporate taxes, and other regulatory concerns can poise high costs on an organization. Integrating this into a strategy ensures feasibility.

While there are many other external considerations one could take into account during the strategic planning process, this list gives a good outline of what must be considered in order to minimize unexpected threats or missed opportunities.

Strategic Analysis

With both the internal value chain and external environment in mind, upper management can reasonably derive a set of strategic principles that internally leverage strengths while externally capturing opportunities to create profits—and hopefully advantages over the competition.

Competitive and cooperative forces

This chart diagrams the external factors that should be considered when analyzing a firm’s strategy. Competitive and cooperative forces include rivals, new entrants, suppliers, and retailers; business factors include resources and capabilities.

12.2: External Inputs to Strategy

12.2.1: Porter’s Five Forces

Michael Porter, a leading business analyst and professor, identified five critical external factors that affect strategy in any industry.

Learning Objective

Apply Porter’s Five Forces to the external landscape to derive optimal strategies

Key Points

Porter’s Five Forces include: threat of new entrants (also know as barriers to entry), threat of substitutes, rivalry, bargaining power of suppliers, and bargaining power of buyers.
Managers use the Five Forces model to help identify opportunities and threats or to evaluate decisions in the context of their organization’s environment.
Attractiveness refers to the overall industry profitability. An “unattractive” industry is one in which the combination of the Five Forces drives down overall profitability.
In analyzing these five factors, it is useful to rate each category as an external risk factor (i.e., low, medium, or high). Ideal industries have low threats from each of these forces (i.e., low buy power, low rivalry, low risk of new entrants, etc.).
This model is a useful for the strategic derivation of managers; it allows them to narrow down their focus on specific key issues within a given industry.

Key Terms

substitute: A replacement or stand-in for something that achieves a similar result or purpose.
entrant: Participant.

Michael Porter, a leading business analyst and professor at Harvard Business School, has identified five key forces that affect the strategy of any industry. His list, Porter’s Five Forces, draws upon industrial organization (IO) economics to derive forces that determine the competitive intensity—and therefore attractiveness—of a market.

Industry Attractiveness

Attractiveness refers to the overall industry profitability. An “unattractive” industry is one in which the combination of the Five Forces drives down overall profitability. A very unattractive industry would be one approaching “pure competition.” In this state, available profits for all firms are driven to normal profit rates. In analyzing the following five factors, it is useful to rate each category as an external risk factor (i.e., low, medium, or high). Ideal industries will have low threats from each of these forces (i.e., low buy power, low rivalry, low risk of new entrants, etc.).

The Five Forces

Porter’s Five Forces include:

Threat of new entrants (or barriers to entry): From the view of current incumbents, profitable markets that yield high returns will attract new firms. This results in many new competitors and eventually decreases profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend toward zero (also known as “perfect competition”). From the perspective of new entrants, high barriers to entry mean that the capital costs of getting into the industry make it difficult to compete with current incumbents.
Threat of substitute products or services: The existence of products outside of the realm of the common product boundaries, which fulfill the same need, increases the propensity of customers to switch to alternatives. This should not be confused with competitors’ similar products; it is instead a different product that fills the same need. Take transportation as an example: General Motors (GM) would view city subways as a substitute to someone buying a new car.
Rivalry: For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. This involves how many firms are in the industry and how their competitive dynamics reduce profitability. Airlines have extremely high rivalry, for example.
Bargaining power of buyers: The bargaining power of customers is also described as the market of outputs. It is the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. Picture a supply and demand curve: if the supply greatly outstrips the demand, the buyers have more power than the suppliers.
Bargaining power of suppliers: The bargaining power of suppliers is also described as the market of inputs. When there are few substitutes, suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers can refuse to work with the firm or charge excessively high prices for unique resources. Similar to power of buyers, this bargaining power relies on scarcity and basic economics of supply and demand.

Strategic Implications

Managers use the Five Forces model to help identify opportunities or evaluate decisions in the context of the environment. Often, the Five Forces are mapped against a SWOT analysis to develop a corporate strategy. To complete a Five Forces analysis, it is often best to build a grid on a piece of paper and label each section. Filling in each section to develop a view of the industry can help managers determine if the industry is truly competitive, a monopoly, or an oligopoly. An important question to ask is: “What will make a company able to compete in this environment? “

Porter’s Five Forces

This image illustrates the important factors within Porter’s Five Forces model.

12.2.2: Limitations of the Five-Forces View

Like most models, Porter’s Five Forces has advantages and limitations when applied to strategic planning processes.

Learning Objective

Employ Porter’s Five Forces in a meaningful strategic way, with a thorough understanding of the potential limitations

Key Points

Strategy consultants will use Porter’s Five Forces framework when making a qualitative evaluation of a firm’s strategic position; however, it is only one tool of many and is not infallible.
According to Porter, the Five Forces model should be used at the broader level of an entire industry; it is not designed to be used at a smaller group or market level.
Another limitation, which Porter’s model shares with most competitive frameworks, is that of chronological thinking. Porters model is inherently static, representing only aspects of the present day.
The purpose of the model is brainstorming: a thinking exercise to demonstrate the subjective attractiveness of a given industry landscape. It is not designed to decide optimal industries with certainty.

Key Terms

Porter’s Five Forces Model: A business tool to qualitatively measure business framework.
framework: A basic conceptual structure.

Strategy consultants will use Porter’s Five Forces framework when making a qualitative evaluation of a firm’s strategic position; however, it is only one tool of many and is not infallible. The framework is only a starting point or checklist. Like most models, Porter’s Five Forces has advantages and limitations when applied to strategic planning processes; one must understand how it is designed to be used and recognize its limitations.

Single Industry vs. Multiple Industry Operation

According to Porter, the Five Forces model is best used at the broader level of an entire industry. Assessing at the smaller levels of sectors, competitive groups, or general markets will not yield strategically relevant information. Porter’s factors are specifically determined based on the industry level. Large organizations analyzing markets that are too broad and smaller organizations focusing on specific sectors need to keep this limitation in mind when using this framework.

Some firms operate in only one industry, while others operate in multiple industries. A firm that competes in a single industry will realistically only need to assess the industry it is in (and perhaps other supporting industries depending upon the situation). For diversified companies, however, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should focus. Following this, each line of business should develop its own industry-specific Five Forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business). These large firms require a diversified series of analyses.

Adaptability and Evolution

Another limitation—which Porter’s model shares with most competitive frameworks—is that of chronological thinking. Porters model is inherently static, representing only aspects of the present day (and perhaps those that are easily predicted within the short term). As strategic planning involves long-term objectives and the pursuit of adaptability, Porter’s model is too static to be relied upon outside of short- to medium-term objectives.

Uncertainty

It has been noted that conclusions from the Five Forces model are highly debatable. This is deliberate, as models are designed to spark discussion and underline key concerns. However, false conclusions can be reached when models are taken as certain. The purpose of the model is brainstorming: a thinking exercise to demonstrate the subjective attractiveness of a given industry landscape. It is not designed to decide optimal industries with certainty. In short, conclusions should be taken in the context of the broader strategic discussion and not as opposed to a stand-alone recommendation.

Porter’s Five Forces

This diagram represents the components of Porter’s Five Forces model: (1) threat of new entrants, (2) threat of established rivals, (3) threat of substitute products, (4) bargaining power of buyers, and (5) bargaining power of suppliers.

12.2.3: The PESTEL and SCP Frameworks

PESTEL and SCP frameworks are models for understanding different industry and market factors that impact strategic management.

Learning Objective

Apply PESTEL and SCP frameworks to industries in which incumbents operate

Key Points

A PESTEL analysis looks at the six most common macro-environmental factors (political, economic, social, technological, environmental, and legal) in order to understand their interaction with the organization.
A PESTEL analysis is a part of the external strategic analysis when conducting market research; it gives an overview of the different macro-environmental factors that the company has to take into consideration.
According to the structure-conduct-performance (SCP) approach, an industry’s performance depends on the conduct of its firm, which is dependent on its structure.
Components that make up the SCP model for industrial organization include: basic conditions, structure, conduct, performance, and government policy.
While the PESTEL and SCP models share many similarities, it is useful for managers to view the industry from both frameworks as they decide upon optimal operating strategies.

Key Term

environmental scanning: The study and interpretation of the political, economic, social, and technological events and trends that influence a business, an industry, or even a total market

PESTEL Analysis

A PESTEL analysis looks at the six most common macro-environmental factors to understand their interactions. The acronym stands for political, economic, social, technological changes, ecology, and legislation. A PESTEL analysis is a useful strategic tool for understanding market growth or decline, business position, potential, and direction for operations. The basic premise behind this framework, from a strategy perspective, is to identify opportunities and threats in the market.

PESTEL Factors

Political factors include how, and to what degree, a government intervenes in the economy. Specifically, political factors include areas such as tariffs, political instability, and other policy-based obstacles that businesses encounter in a given region.
Economic factors include economic growth, interest rates, exchange rates, and the rate of inflation. Economic factors are by far the easiest to quantify, and they provide a basic framework for capital exchange and consumer purchasing ability.
Social factors include the cultural aspects of the environment, such as health consciousness, population growth rate, age distribution, career attitudes, and emphasis on safety. Often referred to socio-demographic factors, they largely consist of preferences and attitudes displayed by different groups of individuals within a given market. Social factors can be very difficult to measure with certainty.
Technological factors include research and development (R&D), automation, technology incentives, and the rate of technological change. Disruptive innovations can dramatically alter an industry and change who is best poised for competition. Carefully monitoring these factors on a daily basis is crucial to a company’s success and has grown in importance over the years.
Environmental factors include ecological and environmental aspects such as weather, climate, and climate change. Industries like tourism, farming, and insurance are especially affected by these factors. Growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.
Legal factors include discrimination laws, consumer laws, antitrust laws, employment laws, and health and safety laws. These factors can affect how a company operates, its costs, and the demand for its products.

SCP Analysis

According to the structure-conduct-performance (SCP) approach, an industry’s performance (or the success of an industry in producing benefits for the consumer) depends on the conduct of its firm. The conduct of the firm, in turn, is dependent on its structure (or factors that determine the competitiveness of the market).

The structure of the industry depends on basic conditions such as technology and demand for a product. This creates a linear relationship of sorts, where the structural inputs can impact the conduct and strategy of the firm, leading to better (or worse) performance.

Taken into account alongside the PESTEL framework, management should carefully consider and define the structure of a given industry. This structure will provide critical inputs for the broader industry, which in turn will impact the conduct of the organization through strategic integration. If this process is accomplished effectively—and management has integrated the external structure with the internal conduct strategically—higher performance can then be derived.

12.2.4: Competitive Dynamics

Crafting an effective strategy requires understanding the competitive dynamics of the space in which the business operates.

Learning Objective

Identify critical competitive components that directly influence strategic development

Key Points

Competitor analysis is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context in order to identify opportunities and threats.
Competitor analysis requires the specific selection of key success factors within an industry; it also requires the qualitative measurement of accomplishing these for both the firm and its key competitors.
Competitor profiling coalesces all of the relevant sources of competitor analysis into one framework to support efficient and effective strategy formulation, implementation, monitoring, and adjustment.
By identifying key competitors and relative strengths and weaknesses, organizations can react more quickly and effectively from a strategic perspective.

Key Terms

assessment: An appraisal or evaluation.
dynamic: Changeable; active; in motion, usually as the result of an external force.

Competition in Business

Merriam-Webster defines competition in business as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms.” The competition is a moving-target, ever-evolving and adapting to better capture market share and profitability; therefore competition is a critical area of analysis for strategic managers. Observing and predicting competitive movements and dynamics is a key to success and a primary responsibility of upper management.

The Dynamic Model of Competition

The dynamic model of the strategy process is a way of understanding how strategic actions occur. It recognizes that strategic planning is dynamic; that is, strategy-making involves a complex pattern of actions and reactions. It is partially planned and partially unplanned. Competitive dynamics thus looks at how competitive firms act and react.

Competitive Dynamics

In marketing and strategic management, competitor analysis is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context in order to identify opportunities and threats. Competitor profiling coalesces all of the relevant sources of competitor analysis into one framework to support efficient and effective strategy formulation, implementation, monitoring, and adjustment.

Components of Competitor Analysis

Competitor analysis is an essential component of corporate strategy. It is argued that most firms do not conduct this type of analysis systematically enough. Instead, many enterprises operate on conjectures and informal impressions gathered from information received about competitors. As a result, traditional environmental scanning places many firms at risk of dangerous competitive “blind spots” due to a lack of robust competitor analysis.

Example of Competitor Profiling

The folio plot visualizes the relative market share of a portfolio of products versus the growth of their market. The circles differ in size by their sales volume. Note that the highest-selling product, Dorian, shows the highest market growth and a high (though not the highest) market share; the lowest-selling, Zodial, shows both low market growth and low market share.

Competitor analysis requires the specific selection of key success factors within an industry. It also requires the qualitative measurement of accomplishing these for both the firm and its key competitors. For example, consider that customer service, quality, and brand perception are the key success factors in retail fashion. In this case, Ralph Lauren should identify key competitors (Liz Claiborne, Calvin Klein, etc.) and provide a numeric score of their success or failure in each category. Through this competitive analysis, Ralph Lauren can improve its competition.

Competitor profiling facilitates this strategic objective in three important ways:

First, profiling can reveal strategic weaknesses in rivals that the firm may exploit.
Second, the proactive stance of competitor profiling can allow the firm to anticipate its rivals’ strategic response to the firm’s planned strategies, the strategies of other competing firms, and changes in the environment.
Third, this proactive knowledge can give the firm strategic agility. Offensive strategy can be implemented more quickly in order to exploit opportunities and capitalize on strengths. Similarly, defensive strategy can be employed more deftly in order to counter the threat of rival firms exploiting the firm’s own weaknesses.

12.3: Internal Analysis Inputs to Strategy

12.3.1: The Mission Statement

A mission statement defines the fundamental purpose of an organization or enterprise.

Learning Objective

Outline the appropriate content necessary to construct a comprehensive mission statement

Key Points

A mission statement is generated to retain consistency in overall strategy and to communicate core organizational goals to all stakeholders.
The business’s owners and upper managers develop the mission statement and uphold it as a standard across the organization. It provides a strategic framework by which the organization is expected to abide.
In a best-case scenario, an organization conducts internal and external assessments relative to the mission statement to ensure it is being upheld.
A mission statement informs the key market, contribution, and distinction of an organization. It describes what the organization does, why it does so, and how it excels.

Key Terms

stakeholder: A person or organization with a legitimate interest in a given situation, action, or enterprise.
mission: A set of tasks that fulfills a purpose or duty; an assignment set by an employer.

A mission statement defines the purpose of a company or organization. The mission statement guides the organization’s actions, spells out overall goals, and guides decision making. The mission statement is generated to retain consistency in overall strategy and to communicate core organizational goals to all stakeholders. The business’s owners and upper managers develop the mission statement and uphold it as a standard across the organization. It provides a strategic framework by which the organization is expected to abide.

Mission statement

An example of a mission statement, which includes the organization’s aims and stakeholders and how it provides value to these stakeholders.

In a best-case scenario, an organization conducts internal and external assessments relative to the mission statement. The internal assessment should focus on how members inside the organization interpret the mission statement. The external assessment, which includes the business’s stakeholders, is valuable since it offers a different perspective. Discrepancies between these two assessments can provide insight into the effectiveness of the organization’s mission statement.

Effective mission statements start by articulating the organization’s purpose. Mission statements often include the following information:

Aim(s) of the organization
The organization’s primary stakeholders, including clients/customers, shareholders, congregation, etc.
How the organization provides value to these stakeholders, that is, by offering specific types of products or services
A declaration of an organization’s core purpose

According to business professor Christopher Bart, the commercial mission statement consists of three essential components:

Key market – Who is your target client/customer? ( generalize if necessary)
Contribution – What product or service do you provide to that client?
Distinction – What makes your product or service so unique that the client would choose you?

Assimilation

To be truly effective, an organizational mission statement must be assimilated into the organization’s culture (as the theory states). Leaders have the responsibility of communicating the vision regularly, creating narratives that illustrate the vision, acting as role-models by embodying the vision, creating short-term objectives compatible with the vision, and encouraging employees to craft their own personal vision that is compatible with the organization’s overall vision.

12.3.2: Porter’s Competitive Strategies

Michael Porter classifies competitive strategies as cost leadership, differentiation, or market segmentation.

Learning Objective

Discuss the value of using Porter’s competitive strategies of cost leadership, differentiation, and market segmentation

Key Points

Michael Porter defines three strategy types that can attain competitive advantage. These strategies are cost leadership, differentiation, and market segmentation (or focus).
Cost leadership is about achieving scale economies and utilizing them to produce high volume at a low cost. Margins may be narrower, but quantity is larger, enabling high revenue streams.
Differentiation is creating a unique service or product offering, either through good branding or strong internal skills. This strategy aims at offering something difficult to copy and is strongly associated with an organization’s brand.
Market segmentation strategy is narrower in scope. Both cost leadership and differentiation are relatively broad in market scope and can encompass both strategic advantages on a smaller scale.
Porter warns that companies who try to accomplish both cost leadership and differentiation may fall into the “hole in the middle”; he notes that specializing is the ideal strategic approach.

Key Terms

Market Share: Percentage of a specific market held by a company.
competitive advantage: Something that places a company or a person above the competition.

Michael Porter described a category scheme consisting of three general types of strategies commonly used by businesses to achieve and maintain competitive advantage. These three strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension and considers the size and composition of the market the business intends to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm.

Porter identifies two competencies as most important: product differentiation and product cost (efficiency). He originally ranked each of the three dimensions (level of differentiation, relative product cost, and scope of target market) as either low, medium, or high and juxtaposed them in a three-dimensional matrix. That is, the category scheme was displayed as a 3x3x3 cube; however, most of the twenty-seven combinations were not viable.

Cost Leadership, Differentiation, and Market Segmentation

Porter simplified the scheme by reducing it to the three most effective strategies: cost leadership, differentiation, and market segmentation (or focus). He characterizes each as the following:

Cost leadership pertains to a firm’s ability to create economies of scale though extremely efficient operations that produce a large volume. Cost leaders include organizations like Procter & Gamble, Walmart, McDonald’s and other large firms generating a high volume of goods that are distributed at a relatively low cost (compared to the competition).
Differentiation is less tangible and easily defined, yet still represents an extremely effective strategy when properly executed. Differentiation refers to a firm’s ability to create a good that is difficult to replicate, thereby fulfilling niche needs. This strategy can include creating a powerful brand image, which allows the organization to sell its products or services at a premium. Coach handbags are a good example of differentiation; the company’s margins are high due to the markup on each bag (which mostly covers marketing costs, not production).
Market segmentation is narrow in scope (both cost leadership and differentiation are relatively broad in scope) and is a cross between the two strategies. Segmentation targets finding specific segments of the market which are not otherwise tapped by larger firms.

Porter’s competitive strategies

Porter’s three strategies can be defined along two dimensions: strategic scope and strategic strength.

Avoiding the “Hole in the Middle”

Empirical research on the profit impact of marketing strategy indicates that firms with a high market share are often quite profitable, but so are many firms with low market share. The least profitable firms are those with moderate market share. This is sometimes referred to as the “hole-in-the-middle” problem. Porter explains that firms with high market share are successful because they pursue a cost-leadership strategy, and firms with low market share are successful because they employ market segmentation or differentiation to focus on a small but profitable market niche. Firms in the middle are less profitable because of the lack of a viable generic strategy.

12.3.3: SWOT Analysis

A SWOT analysis allows businesses to assess internal strengths and weaknesses in relation to external opportunities and threats.

Learning Objective

Explain how a SWOT analysis can be used as a tool in strategic decision making

Key Points

SWOT analysis is a strategic planning method used to evaluate a business’s strengths, weaknesses, opportunities, and threats.
The goal of a SWOT analysis is to analyze the business environment to develop a strategic plan of action that captures opportunities using internal strengths (and avoids threats while addressing weaknesses).
Businesses set objectives after the SWOT analysis has been performed, which allows the organization to define achievable goals.

Key Term

environment: The surroundings of, and influences on, a particular item of interest.

A method of analyzing the environment in which businesses operate is referred to as a context analysis. One of the most recognized of these is the SWOT (strengths, weaknesses, opportunities, and threats) analysis. Performing a SWOT analysis allows a business to gain insights into its internal strengths and weaknesses and to relate these insights to the external opportunities and threats posed by the marketplace in which the business operates. The main goal of a context analysis, SWOT or otherwise, is to analyze the business environment in order to develop a strategic plan.

SWOT and Strategy

A SWOT analysis is a strategic planning method used to evaluate the strengths, weaknesses, opportunities, and threats related to a project or business venture. A SWOT assessment involves specifying the business’s objective and then identifying the internal and external factors that are favorable and unfavorable toward the business’s ability to achieve its objective. Setting the objective, in terms of moving from strategy planning to strategy implementation, should be done after the SWOT analysis has been performed. Doing so allows the organization to set achievable goals and objectives.

Components of SWOT

Strengths: internal characteristics of the business that give it an advantage over competitors
Weaknesses: internal characteristics that place the business at a disadvantage against competitors
Opportunities: external chances to improve performance in the overall business environment
Threats: external elements in the environment that could cause trouble for the business

SWOT analysis

The SWOT analysis matrix illustrates where the company’s strengths and weaknesses lie relative to factors in the market. Strengths and opportunities (the S and O of SWOT) are both helpful toward achieving company objectives, but strengths originate internally while opportunities originate externally. Similarly, weaknesses and threats (the W and T of SWOT) are harmful toward achieving objectives, but weaknesses originate internally and threats originate externally. Assessing all four points of the SWOT acronym ensures a thorough evaluation.

Identifying SWOTs is essential, as subsequent stages of planning can be derived from the analysis. Decision makers first determine whether an objective is attainable, given the SWOTs. If the objective is not attainable, a different objective must be selected, and then the process can be repeated. Users of SWOT analysis must ask and answer questions that generate meaningful information for each category to maximize the benefits of the evaluation and identify the organization’s competitive advantages.

12.3.4: Forecasting

Forecasting is the process of making statements about expected future events, based upon evidence, research, and experience.

Learning Objective

Demonstrate the value and role of effective forecasting in the development of successful strategies

Key Points

An important aspect of forecasting is the relationship it holds with planning. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like.
As part of the implementation of policies and strategies, the forecasting method develops a reliable picture of the company’s expected future environment.
Quantitative forecasting generally employs statistical confidence intervals and historical data to project potential future trends that are based upon the criteria being analyzed.
Qualitative approaches are the opposite: they rely on logical premises, expertise, or past experience to generate estimates of future circumstances.
Forecasting enables a manager to look at the current environment and identify likely scenarios, each of which may require a deviation from the overall strategy.

Key Terms

scenario: An outline or model of an expected or supposed sequence of events.
forecast: An estimation of a future condition.
planning: The act of formulating a course of action or of drawing up plans.

Forecasting is the process of making statements about expected future events based upon evidence, research, and experience. For example, a business might estimate the exchange rate between the U.S. and the EU one year from now to determine the real financial cost of a project.

An important and often overlooked aspect of forecasting is the relationship it holds with planning. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. While both are managerial functions, forecasting is rife with external uncertainty while planning is hindered by internal uncertainty.

Forecasting Methods

Forecasting can be accomplished in a variety of different ways, some more statistically reliable than others. Following are a few critical points of differentiation and specific strategies to keep in mind when forecasting.

Quantitative vs. Qualitative

One of the simplest points of differentiation between methods is the reliance on numbers for accuracy. Quantitative forecasting generally uses statistical confidence intervals and historical data to project potential future trends that are based upon the criteria being analyzed. In this format, results are expressed in certainty intervals (i.e., how confident can we be that this will be the case?) and often rely on financial data (exchange rates, industry growth, etc.).

Qualitative approaches are the opposite; they rely on logical premises or past experience to generate estimates about future circumstances. The inherent problem with the qualitative approach is simple: subjectivity. While quantitative measure use data to express objective results, qualitative approaches do not have this luxury. Generally this type of forecast will include the opinions of experts, upper management, and market research.

Quantitative vs. qualitative forecasting

This flow chart compares quantitative and qualitative forecasting methods. Qualitative forecasting relies more on opinions than data and can employ market research, sales-force input, or a jury of executives. In contrast, quantitative forecasting relies more on objective, numerical data, and can look at chronological trends and statistical regression to infer cause-and-effect.

Causal Forecasting

Another method of forecasting, which is likely to be both quantitative and qualitative, is the causal/econometric approach. This strategy tasks managers with identifying cause and effect relationships of past instances by defining a series of if/then statements that express the likelihood of the outcome which follows. For example, if consumer spending is down in Q2, then it is likely that gross domestic product (GDP) growth will be down in Q3. Whether or not this is true would have to be supported with data, but the forecast is that Q2 consumer spending results could forecast Q3 GDP growth.

Implications of Forecasting

Keeping these methods in mind, it is important to understand how management uses these forecasts to draw conclusions. Forecasting plays a role in the implementation of policies and strategies. The practice helps businesses create plans for different situations, in addition to contingency plans for adapting if and when necessary.

Forecasting enables a manager to look at the current environment and identify likely scenarios, each of which may require a deviation from the overall strategy. As the management team implements the broader strategy, it must continuously monitor the current environment for deviations and use forecasting to adapt both the primary strategy and contingency plans for potential shifts.

To summarize, forecasts enable businesses to prepare new strategies or reinforce the existing strategy, based upon the projections made.

12.3.5: The Resource-Based View

In the resource-based view (RBV), strategic planning uses organizational resources to generate a viable strategy.

Learning Objective

Describe the intrinsic competitive advantage defined by the resource-based view strategy

Key Points

Strategic approaches are wide and varied, and the resource-based view is a commonly cited strategic approach to attaining competitive advantage.
To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources be varied in nature and not perfectly mobile. They also must not be easily imitated or substituted without great effort.
The RBV theory involves first identifying the firm’s potential key resources and deriving a strategy to apply them to create synergy.
If key resources are valuable, rare, inimitable, and non-substitutable (VRIN), they may enable a strategy for achieving competitive advantage.

Key Terms

heterogeneous: Diverse in kind or nature; composed of diverse parts.
imitable: Capable of being copied.
substitutable: Capable of being replaced.

The resource-based view (RBV) of strategy holds company assets as the primary input for overall strategic planning, emphasizing the way in which competitive advantage can be derived via rare resource combinations. To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile. Effectively, this principle translates into valuable resources that are cannot be either imitated or substituted without great effort. If the firm’s strategy emphasizes and accomplishes this goal, its resources can help it sustain above-average returns.

Applicability to Strategy

In many ways, business strategy aims to achieve competitive advantage through the proper use of organizational resources. As a result, the resource-based view offers some insight as to what defines strategic resources and furthermore what enables them to generate above-average returns (profit). Upper management must carefully consider what resources are at the company’s disposal and how these assets may equate to operational value through strategic processes.

The VRIN Characteristics

In achieving a competitive advantage, the resource-based view defines characteristics which make a competitive process sustainable. These characteristics are described as valuable, rare, inimitable, and non-substitutable, referred to as VRIN:

Valuable – A resource must enable a firm to employ a value-creating strategy by either outperforming its competitors or reducing its own weaknesses. The value factor requires that the costs invested in the resource remain lower than the future rents demanded by the value-creating strategy.
Rare – To be of value, a resource must be rare by definition. In a perfectly competitive strategic factor market for a resource, the price of the resource will reflect expected future above-average returns.
Inimitable – If a valuable resource is controlled by only one firm, it can be a source of competitive advantage. This advantage can be sustained if competitors are not able to duplicate this strategic asset perfectly. Knowledge-based resources are “the essence of the resource-based perspective.”
Non-substitutable – Even if a resource is rare, potentially value-creating and imperfectly imitable, of equal importance is a lack of substitutability. If competitors are able to counter the firm’s value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents, resulting in zero economic profits.

A company should care for and protect resources that possess these characteristics, because doing so can improve organizational performance. The VRIN characteristics mentioned are individually necessary, but each is insufficient on its own to sustain competitive advantage. Within the framework of the RBV, the chain is as strong as its weakest link, and therefore requires the resource to display each of the four characteristics to be a viable strategy for competitive advantage.

Example of VRIN resources

Rare earth elements satisfy the requirements of being VRIN, in that they are valuable, rare, largely inimitable due to few extraction sites, and difficult to substitute.

12.4: Creating Strategy: Common Approaches

12.4.1: Strategic Management

Strategic management entails five steps: analysis, formation, goal setting, structure, and feedback.

Learning Objective

Identify the five general steps that allow businesses to develop a strategic process

Key Points

Strategic management analyzes the major initiatives, involving resources and performance in external environments, that a company’s top management takes on behalf of owners.
The first three steps in the strategic management process are part of the strategy formulation phase. These include analysis, strategy formulation, and goal setting.
The final two steps in strategic management constitute implementation. These steps include creating the structure (internal environment) and obtaining feedback from the process.
By integrating these steps into the strategic management process, upper management can ensure resource allocation and processes align with broader organizational purpose and values.

Key Terms

implementation: The process of moving an idea from concept to reality. In business, engineering, and other fields, implementation refers to the building process rather than the design process.
objectives: The goals of an organization.

Strategic management analyzes the major initiatives, involving resources and performance in external environments, that a company’s top management takes on behalf of owners. It entails specifying the organization’s mission, vision, and objectives, as well as developing policies and plans which allocate resources to drive growth and profitability. Strategy, in short, is the overarching methodology behind the business operations.

Strategic management framework

The above model is a summary of what is involved in each of the five steps of management: 1. analysis (internal and external), 2. strategy formation (diagnosis and decision-making), 3. goal setting (objectives and measurement), 4. structure (leadership and initiatives), and 5. control and feedback (budgets and incentives).

Five Steps of Strategic Management

As strategic management is a large, complex, and ever-evolving endeavor, it is useful to divide it into a series of concrete steps to illustrate the process of strategic management. While many management models pertaining to strategy derivation are in use, most general frameworks include five steps embedded in two general stages:

Formulation

Analysis – Strategic analysis is a time-consuming process, involving comprehensive market research on the external and competitive environments as well as extensive internal assessments. The process involves conducting Porter’s Five Forces, SWOT, PESTEL, and value chain analyses and gathering experts in each industry relating to the strategy.
Strategy Formation – Following the analysis phase, the organization selects a generic strategy (for example, low-cost, differentiation, etc.) based upon the value-chain implications for core competence and potential competitive advantage. Risk assessments and contingency plans are also developed based upon external forecasting. Brand positioning and image should be solidified.
Goal Setting – With the defined strategy in mind, management identifies and communicates goals and objectives that correlate to the predicted outcomes, strengths, and opportunities. These objectives include quantitative ways to measure the success or failure of the goals, along with corresponding organizational policy. Goal setting is the final phase before implementation begins.

Implementation

Structure – The implementation phase begins with the strategy in place, and the business solidifies its organizational structure and leadership (making changes if necessary). Leaders allocate resources to specific projects and enact any necessary strategic partnerships.
Feedback – During the final stage of strategy, all budgetary figures are submitted for evaluation. Financial ratios should be calculated and performance reviews delivered to relevant personnel and departments. This information will be used to restart the planning process, or reinforce the success of the previous strategy.

12.4.2: Combining Internal and External Analyses

Using combined external and internal analyses, companies are able to generate strategies in pursuit of competitive advantage.

Learning Objective

Apply a comprehensive understanding of internal and external analyses to the effective formation of new strategic initiatives

Key Points

Organizations must carefully consider what internal assets are available that will differentiate them from the competition, within the same competitive environment.
Similarly, organizations must understand the context in which they operate if they aspire to acquire competitive advantage over other incumbents.
By understanding how internal and external factors relate, companies can piece together the ideal way in which their strengths can capture opportunities while offsetting threats and rectifying weaknesses.
Implementing strategies that take into account both the internal and external environments will likely achieve competitive advantage and improve an organization’s ability to adapt. This is profit-generating strategic thinking.

Key Terms

external: Concerned with the public affairs of a company or other organization.
internal: Concerned with the non-public affairs of a company or other organization.

Organizations must carefully consider what internal assets will differentiate them from the competition, within the same competitive environment. This internal analysis requires careful consideration of the following models and factors:

Core mission
Overall strategy
Porter’s competitive strategies
SWOT analysis
Forecasts
Resource-based view

SWOT Analysis

Here is an example of the SWOT analysis matrix, which arranges strengths, weaknesses, opportunities, and threats.

Similarly, organizations must understand the context in which they operate if they aspire to acquire competitive advantage over other incumbents. Models such as the following outline these concerns effectively:

Porter’s five forces (and limitations)
PESTEL and SCP
Competitive dynamics

Merging Analyses for Competitive Advantage

These inputs generally outline each of the specific analyses a company should conduct to understand its internal and external environments. Combining these two constitutes context analysis, which is a method of analyzing the environment in which a business operates. Environmental scanning focuses mainly on the macro-environment of a business. Context analysis considers the entire environment of a business, both internal and external.

Using context analysis, alongside the necessary external and internal inputs, companies are able to generate strategies which actively capitalize on this knowledge in pursuit of competitive advantage. This strategic development requires companies to understand the opportunities and threats in the external environment and benchmark these against the strengths and weaknesses of their internal environment. By understanding how internal and external factors relate, companies can piece together the ideal way in which their strengths can capture opportunities while offsetting threats and rectifying weaknesses.

This melding of internal and external factors in pursuit of competitive advantage is an ongoing process, as the company must evolve and change in concert with the environment. As a result, strategic management is the process of constantly assessing both environments to ensure that the company retains a unique competitive position in which to generate value for stakeholders and customers. This implementation of strategies that take into account both the internal and external environments eventually achieves dynamic capabilities for the companies involved.

Change is costly, so firms must develop processes to find low pay-off changes. The ability to change depends on the ability to scan the environment, evaluate markets, and quickly accomplish reconfiguration and transformation ahead of the competition. These actions can be supported by decentralized structures, local autonomy, and strategic alliances.

12.4.3: Implementing Strategy

Strategic planning involves managing the implementation process, which translates plans into action.

Learning Objective

Define the necessary processes involved in executing and implementing a newly created strategy

Key Points

The implementation process requires establishing or modifying the organizational hierarchy, allocation of resources, accountability, and control processes.
Depending on industry and geographic location, implementation often requires integrating an organization with other firms via strategic partnerships (suppliers, joint ventures, acquisitions, etc.).
To implement a strategy requires moving beyond the theoretical and research-based view. This demands practical pragmatism on the part of senior strategists.
Action plans that describe the way processes are transformed into tangible operations are a critical success factor and often a point of difficulty for conceptual strategists.

Key Terms

hierarchy: An arrangement of items in which the items are represented as being “above,” “below,” or “at the same level as” one another.
implementation: The process of moving an idea from concept to reality. In business, engineering, and other fields, implementation refers to the building process rather than the design process.
execute: To carry out; to put into effect.

The implementation process requires establishing or modifying an organizational hierarchy so the company can achieve its objectives. The following stages constitute the strategic implementation process:

Allocating and managing sufficient resources (financial, personnel, operational support, time, technology support)
Establishing a chain of command or some alternative structure (such as cross-functional teams)
Assigning responsibility of specific tasks or processes to specific individuals or groups. Accountability is critical to the action plan process.
Creating a feedback loop for control processes

Strategy implementation also involves managing the overall process. Process management comprises monitoring results, measuring benchmarks, following best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary. When an organization implements specific programs, it must acquire the requisite resources, develop the process, train, and perform process testing, documentation, and integration with legacy processes.

A visual depiction of the strategic management process

The strategic management process never ends. The process restarts after a plan ends, when the company reviews the results and re-evaluates its position.

Additionally, businesses must consider the exact means of implementing a strategy, which may entail:

Alliances with other firms to fill capability/technology/resource/legal gaps
Investment in internal development
Mergers/acquisitions of products or firms to reduce time to market
Doing business with protectionist countries such as India and China, which require market entrants to operate via partnerships with local firms

Executing a Strategic Plan

One of the core goals when drafting a strategic plan is to develop it in a way that is easily translated into action plans. Most strategic plans address high-level initiatives and overarching goals but are not always translated into the day-to-day projects and tasks required to achieve the plan.

Poor terminology or word choice and the wrong level of writing are both examples of ways to fail to translate a strategic plan so that it makes sense and is executable. Often, plans are filled with conceptual terms that do not connect to day-to-day realities for the staff that is expected to carry out the plans. Strategists need to be both practical and pragmatic when devising strategy for effective implementation.

Put simply, walking the talk is easy to say and difficult to accomplish. Strategy formulation must always consider the implementation phase as the primary framework. Action plans that describe the way processes are transformed into tangible operations are a critical success factor and often a point of difficulty for conceptual strategists.

12.4.4: Maintaining Control

Controlling requires taking an aerial view of operational processes, identifying gaps and weaknesses to improve efficiency.

Learning Objective

Apply the concept of maintaining control to planning and strategy

Key Points

Dissonance is often present between the way in which the company ideally wants to operate from a strategic perspective and the way it actually does.
Planning and controlling are closely linked. Planning is the benchmark which controlling uses to outline deviations. In this sense, they are two sides of the same strategic process of improvement.
Once a company designs a strategic plan parallel with the corporate mission and vision, the implementation process requires both control and planning to ensure it is appropriately communicated and executed.
Managers are tasked with ensuring that the organizational processes reflect the mission statement and vision as closely as possible, controlling aspects of the operations in pursuit of this goal.

Key Terms

controlling: To exercise influence over, to suggest or dictate the behavior of.
planning: The act of formulating a course of action, or of drawing up plans.

Controlling is one of the primary theoretical managerial functions (alongside planning, organizing, staffing, and directing). Maintaining control is about identifying deviations from intended results and improving the process to achieve desired outcomes. According to modern concepts, control is a foreseeing action; an earlier concept of control identified it as chiefly detecting errors.

Control in management means setting standards, measuring actual performance, and taking corrective action. Control thus comprises three main questions: Where are we now? Where did we plan to be? How can we bridge the gap between the two? Control is inherently cyclical.

Monitoring and controlling project activities

These steps are involved in management control of project activities.

Robert J. Mockler on Control

Robert J. Mockler presented a more comprehensive definition of managerial control. He defined it as a systematic effort by business management to compare performance to predetermined standards, plans, or objectives to assess whether performance is in line with these standards and presumably to take any remedial action required. According to Mockler, the purpose of control is to ensure that human and other corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives.

Relationship Between Planning and Controlling

Mockler’s definition shows the close link between planning and controlling. Planning is a process which establishes an organization’s objectives and the methods to achieve those objectives. Controlling is a process that measures and directs the actual performance against the planned goals of the organization. Thus, goals and objectives are often referred to as Siamese twins of management: managing and correcting performance to make sure that enterprise objectives and the goals designed to attain them are accomplished.

Application to Strategy

Control, relative to strategy, defines the latter stage of overall strategy. Once a company designs a strategic overview parallel with the corporate mission and vision, the implementation process requires control to ensure that strategy is appropriately communicated and executed. The direction of organizational control derives from the strategic plan of the organization. Control is an active process that evaluates current performance against this strategic backdrop to ascertain how closely the operations represent the desired functioning of the company.

Dissonance is often present between the way in which the company ideally wants to operate from a strategic perspective and the way it actually does. This is where control comes into play. Managers are tasked with ensuring that the organizational processes reflect the mission statement and vision as closely as possible, controlling aspects of the operations in pursuit of this goal. As a result, maintaining control is a constant responsibility that keeps the business as close as possible to its core strategies.

12.5: Common Types of Corporate Strategies

12.5.1: Growth Strategy

Growth platforms are specifically named initiatives selected by a business organization to fuel revenue and earnings growth.

Learning Objective

Distinguish between the varying integrations and diversifications that allow businesses to pursue strategic growth

Key Points

Strategic growth platforms are long-term initiatives for high-scale revenue increases. Generic examples of commonly selected strategic-growth platforms include pursuing specific and new product areas or entering new distribution channels.
Diversification is a form of corporate strategy that seeks to increase profitability through greater sales volume obtained from new products or new markets.
Market development strategy entails expanding the current incumbent market through new users or new uses.
Market penetration occurs when a company penetrates a market in which current products already exist, enabling the business to compete head to head with incumbents in the market.
New product development (NPD) is the internal process of bringing a new product to market.
Integration, either horizontal or vertical, is a merger or acquisition process of entering new, related industries (for example, acquiring a supplier or a competitor in a related industry).

Key Terms

vertical integration: The integrating of successive stages in the production and marketing process under the ownership or control of a single management organization.
diversification: A corporate strategy in which a company acquires or establishes a business other than that of its current product.
horizontal integration: The merger or acquisition of new business operations.

Growth platforms are specifically named initiatives selected by a business organization to fuel revenue and earnings growth. Growth platforms may be strategic or tactical. Strategic growth platforms are longer-term initiatives for high-scale revenue increases. Generic examples of commonly selected strategic growth platforms include pursuit of specific and new product areas, entry into new distribution channels, vertical or horizontal integration, and new product development. Illustrative examples of growth platforms include:

Apple Computer’s targeting of “personal music systems” to accelerate growth faster than with its personal computer business alone.
IBM’s coining of the term “e-business,” and its subsequent use as the organizing theme for all that the company did in the late 1990s.
Google’s entry into the operating system and laptop realms.

Wikipedia growth goals and projections

These graphs show goals and projections for growth for Wikipedia visitors and contributors from The Bridgespan Group for Strategy Development. The graph in the left panel shows the target growth trajectory in number of visitors, from less than 500 million to over 600 million. The graph in the right panel shows an overall increase in the number of contributors across all Wikipedias, with more growth indicated for the already higher-traffic Wikipedias.

Types of Strategies

There are a number of different growth strategies, but the most common are:

Horizontal integration – The merger or acquisition of new business operations. An example of horizontal integration would be Apple entering the search-engine market or a new industry related to laptops and smartphones.
Vertical integration – Integrating successive stages in the production and marketing process under the ownership or control of a single management organization. An example might include a gas-station company acquiring a oil refinery.
Diversification – A corporate strategy in which a company acquires or establishes a business other than that of its current product. Diversification can occur either at the business-unit level or at the corporate level. At the business-unit level, diversification is most likely to involve expansion into a new segment of an industry in which the business already competes. At the corporate level, it generally means entrance into a promising business outside the scope of the existing business unit.

Other Product / Market Growth Types

Market Penetration

Market penetration occurs when a company penetrates a market in which current products already exist. This strategy generally requires great competitive strength, a strong brand, or both, as most market penetrations demand actively taking market share from current incumbents. It is an aggressive and often risky approach to growth.

Market Development Strategy

Market development strategy entails expanding the potential market through new users or new uses for a product. The strategy is best accomplished through identifying unique niche needs in a specific type of user and filling those needs. Market research is critical in development strategies. New users can be defined as new geographic segments, new demographic segments, new institutional segments, or new psychographic segments.

New Product Development

In business and engineering, new product development (NPD) is the process of developing, researching, and bringing a new product to market. A product is a set of benefits offered for exchange and can be tangible (that is, something physical you can touch) or intangible (for example, a service, experience, or belief). Identifying new needs or new ways of filling them and developing a new process or product that accomplishes this aim are the goal of this growth strategy. NPD requires investment in research and development, usually over the long term, and extensive trial and error.

12.5.2: Consolidation Strategy

In business, consolidation refers to the mergers and acquisitions of many smaller companies into much larger ones for economic benefit.

Learning Objective

Explain the relevance of consolidation from a strategic management perspective

Key Points

Mergers and acquisitions (M&A) is an aspect of corporate strategy dealing with the buying, selling, dividing, and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location, or acquire new sectors or locations.
Consolidation occurs when two companies combine to form a new enterprise altogether, eliminating competition and creating broader economies of scale or scope.
Generally speaking, a merger is a combination of organizations which each abandons its previous brand and business models, creating a new organization with the combined capacities of each.
In an acquisition, one organization buys out another, with the acquired business usually placing its processes under the brand name of the acquirer.
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. However, on average and across most commonly studied variables, M&A activity does necessarily not improve financial performance.
Because of the costs involved, consolidation is a very high-level strategic decision. All stakeholders on both ends should be consulted, and agreements will often take many months or years to conclude.

Key Terms

acquisition: The act or process of acquiring.
consolidation: The act or process of consolidating, making firm, or uniting; the state of being consolidated; solidification; combination.
merger: The legal union of two or more corporations into a single entity, with assets and liabilities typically assumed by the buying party.

Consolidation (or amalgamation) is the act of merging two or more organizations into one. In strategic management, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. Consolidation occurs when two companies combine to form a new enterprise altogether; neither of the previous companies survives independently. The logic driving consolidation is the creation of economies of scale, economies of scope, new locations, new technology, or some other form of increased competitive capacity.

Mergers and Acquisitions

Mergers and acquisitions (M&A) are aspects of corporate strategy, corporate finance, and management that deal with the buying, selling, dividing, and combining of different companies and similar entities. This activity can help an enterprise grow rapidly in its sector or location of origin or expand into a new field or new location. M&A is different from joint ventures and other forms of strategic alliance, as mergers or acquisitions aim to create a single organization.

The distinction between a “merger” and an “acquisition” has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared. Generally speaking, a merger is a combination of organizations in which each abandons its previous brand and business models, creating a new organization with the combined capacities of each one. In an acquisition, one organization buys out another, with the acquired company usually placing its processes under the brand name of the acquirer.

Mergers and acquisitions of U.S. Banks

This diagram of bank mergers in the United States shows how extensive the consolidation of various companies has been. What start as more than 50 distinct companies have eventually consolidated into fewer than 20.

Merger Dynamics

In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist independently; a new company, GlaxoSmithKline, was created.

The classic example of consolidation is the merger of Bell Atlantic with GTE, out of which resulted Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the combined company lost the considerable value of both Yellow Freight and Roadway Corp.

Rationale

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: economy of scale, economy of scope, increased revenue or market share, cross-selling, synergy, taxation, geographical or other diversification, resource transfer, vertical integration, and hiring.

However, on average and across the most commonly studied variables, acquiring firms’ financial performance does not positively change as a function of their acquisition activity (King, D. R.; Dalton, D. R.; Daily, C. M.; Covin, J. G. 2004. “Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators.” Strategic Management Journal 25 (2): 187–200. doi:10.1002/smj.371). Other motives for merger and acquisition that may not add shareholder value include diversification, manager overconfidence, empire-building, and management compensation.

Managerial Implications

Because of the costs involved, consolidation is a very high-level strategic decision. All stakeholders in both organizations should be consulted, and agreements will often take many months or years to conclude. Cultural conflicts between two different organizations are not uncommon, as the mission, vision, and values of the individuals and groups within them are likely to differ. Managing this type of change strategically is complex and rife with conflict. Mismanagement during these processes can minimize the potential synergistic gains and reduce the efficacy of the new strategic plan.

12.5.3: Global Strategy

Global strategy, as defined in business terms, is an organization’s strategic guide to pursuing various geographic markets.

Learning Objective

Explain the concept of global strategy within the context of international business and a globalized economy

Key Points

A global strategy may be appropriate in industries where firms face strong pressures to reduce costs but weak pressures for local responsiveness, allowing these firms to sell a standardized product worldwide.
Companies using a global strategy may achieve economies of scale to improve margins or low price points.
Globalization is not limited to cost leadership. Differentiation strategies also enable economies of scope, either fulfilling different needs in different markets with a similar series of products, or developing new products based upon the needs and consumption habits of a new market.
Other primary strategic reasons for globalization are to build supplier relationships, to improve access to raw materials (unique to a given region), and to cut costs by relying on other regions’ specializations.
With global markets in mind, strategic managers must expand their perspective and use varied models to generate different strategies for different places.

Key Terms

fixed costs: A cost of business which does not vary with output or sales; overheads.
centralized: Having power concentrated in a single, central authority.
multinational: Operating, or having subsidiary companies in multiple countries (especially more than two).

Global strategy, as defined in business terms, is an organization’s strategic guide to pursuing various geographic markets. A global strategy should address the following questions: What should be the extent of an organization’s market presence in the world’s major markets? How can the organization build the necessary global presence? What are the optimal locations around the world for the various value-chain activities? How can the organization turn a global presence into global competitive advantage?

When to Go Global

Cost Leadership

A global strategy may be appropriate in industries where firms face strong pressures to reduce costs but weak pressures to respond locally; globalization therefore allows these firms to sell a standardized product worldwide. By expanding to a broader consumer base, these firms can take advantage of scale economies (cost advantages that an enterprise obtains due to expansion) and learning-curve effects because they are able to mass-produce a standard product that can be exported (providing that demand is greater than the costs involved).

Market Expansion

Globalization is not limited to cost leadership, however. Differentiation strategies also enable economies of scope, either fulfilling different needs in different markets with a similar series of products, or developing new products based upon the needs and consumption habits of a new market. Differentiation as part of a global strategy will often require localization, as organizations must adapt to consumer tastes better to compete in the new country. For example, Coca Cola tastes different depending on the country where it is bought because of differences in local preferences.

Sourcing

Other popular and primary strategic reasons for globalization include building supplier relationships, improving access to raw materials (unique to a given region), and cutting costs by using other regions’ specializations. Starbucks sources coffee beans from all over the world, as climate dramatically affects the type and quality of the bean. The globalization strategy of Starbucks—while it includes selling in many countries—is hugely depending on global sourcing, and strategic managers must carefully monitor this process for costs and benefits.

Global strategies require firms to coordinate tightly their product and pricing strategies across international markets and locations; therefore, firms that pursue a global strategy are typically highly centralized.

Corporate Strategy Implications

With global markets in mind, strategic managers must expand their perspective and use varied models to generate different strategies for different places. For example, companies must now conduct a PESTEL analysis for each region in which they operate and recognize expense and competition deviations between regions. For example, tariffs in country A may be much higher than country B, but country B has fewer individuals willing to pay a high price for the good the organization is selling. Managers must conduct a cost/benefit analysis to identify which country actually offers the best profit potential. These analyses are how strategists incorporate global concerns into strategic management.

Gross domestic product (GDP) worldwide

The map identifies GDP (nominal) in different countries;countries with higher GDPs offer high consumer spending opportunities for multinational enterprises. The U.S. and China have the highest GDPs.

12.5.4: Cooperative Strategy

A strategic alliance is a cooperation where each member expects the benefit from cooperation will outweigh the cost of individual efforts.

Learning Objective

Identify the steps involved in forming a strategic alliance to employ cooperative strategies

Key Points

A strategic alliance is a relationship between two or more parties to pursue a set of agreed-upon goals or to meet a critical business need while remaining independent organizations. This form of cooperation lies between mergers and acquisitions and organic growth.
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.
Upper management is tasked with the complex process of identifying good partners and generating agreements of mutual benefit. Strategic alliances can be high-cost, complex strategic components.
Strategic alliances allow each partner to concentrate on its own best capabilities, learn and develop other competences, and assure adequate suitability of resources and competencies.

Key Term

alliance: The state of being allied; the act of allying or uniting; a union or connection of interests between families, states, parties, etc.

A strategic alliance is a relationship between two or more parties to pursue a set of agreed-upon goals or to meet a critical business need while remaining independent organizations. This form of cooperation lies between mergers and acquisitions (M&A) and organic growth.

Reasons for Strategic Alliance

The alliance is a cooperation or collaboration that aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.

The alliance often involves technology transfer (access to knowledge and expertise), economic specialization (David C. Mowery, Joanne E. Oxley, Brian S. Silverman. Strategic Alliances and Interfirm Knowledge Transfer. Winter 1996. Strategic Management Journal, Vol. 17, Special Issue: Knowledge and the Firm, pp. 77-91), shared expenses, and shared risk.

U.S. patents from 1790-2010

The above chart highlights the total patents granted over time in the U.S. Because the number of patents has increased in recent years, technology transfers in strategic alliances have become more common.

Cooperative sourcing is a collaboration or negotiation between different companies with similar business processes. To save costs, the competitor with the best production capability can insource the business process of the other competitors. This practice is especially common in IT-oriented industries as a result of low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcers or insourcers, the main challenge in this collaboration is to find a stable coalition and the company with the best production function. High switching costs, costs for searching potential cooperative sourcers, and negotiating may result in inefficient solutions.

Forming a Strategic Alliance

Upper management is tasked with the developing complex interactive strategies when entering a strategic alliance. Aligning stakeholders from different businesses and ensuring the costs do not outweigh the benefits requires careful managerial consideration. The following steps highlight key aspects of the strategic alliance process:

Strategy development involves studying the alliance’s feasibility, objectives, and rationale; it also entails focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.
Partner assessment involves analyzing a potential partner’s strengths and weaknesses; creating strategies to accommodate all partners’ management styles; preparing appropriate partner selection criteria; understanding a partner’s motives for joining the alliance; and addressing resource capability gaps that may exist for a partner.
Contract negotiation involves determining whether all parties have realistic objectives; forming high-caliber negotiating teams; defining each partner’s contributions and rewards as well as protecting any proprietary information; addressing termination clauses and penalties for poor performance; and highlighting the degree to which arbitration procedures are clearly stated and understood.
Alliance operations comprise addressing senior management’s commitment; finding the caliber of resources devoted to the alliance; linking budgets and resources to strategic priorities; measuring and rewarding alliance performance; and assessing the performance and results of the alliance.
Alliance termination entails winding down the alliance—for instance, when its objectives have been met or cannot be met or when a partner adjusts priorities or reallocates resources elsewhere.

Potential Benefits of Strategic Alliances

Benefits of strategic alliances vary according to each business’s strengths and objectives and may include:

Pooling expensive resources and share development or R & D costs on new products
Locking in supply chains
Building credibility with customers (“Our strategic partners include…”)
Allowing each partner to concentrate on activities that best match its capabilities
Learning from partners and developing competencies that may be more widely exploited elsewhere
Creating adequate suitability of resources and competencies for an organization to survive

12.5.5: E-Business Strategy

In the emerging global economy, e-business has become an increasingly necessary component of business strategy.

Learning Objective

Define and explain the general value chain of an e-business strategy and its advantages

Key Points

The integration of information and communications technology (ICT) has revolutionized relationships within organizations and among organizations and individuals. It has also enhanced productivity, encouraged greater customer participation, enabled mass customization, and reduced costs.
Companies use ICT to enhance e-business, which includes any process that a business organization (either a for-profit, governmental, or non-profit entity) conducts over a computer-mediated network.
E-business enhances three primary processes: those related to production, customer focus, and internal management.

Key Terms

e-business: A business that operates partially or primarily over the Internet, usually providing services to other businesses.
e-learning: An online platform for training modules, whether internal or external to an organization.
e-commerce: Commercial activity conducted via the Internet.

The term electronic business (commonly referred to as E-business or e-business) is sometimes used interchangeably with e-commerce. In fact, e-business encompasses a broader definition that includes not only e-commerce, but customer relationship management (CRM), business partnerships, e-learning, and electronic transactions within an organization.

Electronic-business methods enable companies to link their internal and external data-processing systems more efficiently and flexibly, to work more closely with suppliers and partners, and to better satisfy the needs and expectations of customers. In practice, e-business is more than just e-commerce. While e-business refers to a strategic focus with an emphasis on the functions that occur using electronic capabilities, e-commerce is a subset of an overall e-business strategy.

E-Business Process

E-business involves business processes that span the entire value chain: electronic purchasing and supply-chain management, electronic order processing, customer service, and business partner collaboration. Special technical standards for e-business facilitate the exchange of data between companies. E-business software allows the integration of intrafirm and interfirm business processes. E-business can be conducted using the Internet, intranets, extranets, or some combination of these.

Automated online assistant

In e-commerce, electronic (i.e., online) purchasing and ordering can be enhanced by the use of automated online assistants like this. This greatly reduces the burden on the company’s customer service team, allowing them to deal with only the most highly escalated cases.

In the emerging global economy, e-commerce and e-business have become increasingly necessary components of business strategy and strong catalysts for economic development. The integration of information and communications technology (ICT) in business has revolutionized relationships within organizations and those among organizations and individuals. Specifically, the use of ICT in business has enhanced productivity, encouraged greater customer participation, and enabled mass customization.

Advantages of E-Commerce

E-business enhances three primary processes:

Production processes including procurement, ordering and replenishment of stocks; processing of payments; electronic access to suppliers; and production control processes
Customer-focused processes including promotional and marketing efforts, Internet sales, customer purchase orders and payments, and customer support
Internal management processes including employee services, training, internal information-sharing, videoconferencing, and recruiting. Electronic applications enhance information flow between production and sales forces to improve sales-force productivity. ICT improves the efficiency of work-group communications and electronic publishing of internal business information.

12.6: The Planning Process

12.6.1: Defining Strategic Planning

Strategic planning is concerned with defining company goals and determining the resources needed to achieve them.

Learning Objective

Assess the definition of planning in context with strategy and the various planning process approaches

Key Points

To determine the direction of the organization, it is necessary to understand its current position and the possible avenues through which it can pursue a particular course of action.
There are many approaches to strategic planning, but typically either the situation-target-proposal approach or the draw-see-think-plan approach is used to generate a plan’s structure.
The primary purpose of planning is to create universal buy-in and understanding of the objectives, and to put operational processes in place to guide the organization towards their achievement.

Key Terms

plan: A set of intended actions, usually mutually related, through which one expects to achieve a goal.
allocate: To distribute according to a plan.
strategy: A plan of action intended to accomplish a specific goal.

Strategic planning is an organization’s process of defining its strategy and making decisions on how to allocate resources to pursue that strategy. To determine the direction of the organization, it is necessary to understand its current position and the possible avenues through which it can pursue a particular course of action. Strategic planning generally deals with at least one of three key questions:

What do we do?
For whom do we do it?
How do we excel?

In many organizations, this is viewed as a process for determining where the organization is going over the next year or, more typically, three to five years, although some extend their vision to 20 years. The last question—how do we excel?—is critical to achieving competitive advantage, and it should be answered clearly and practically in the planning process prior to extensive investment in resources.

Components of a Strategic Plan

Planning is concerned with defining goals for a company’s future direction and determining the resources required to achieve those goals. To meet the goals, managers will develop marketing and operational plans inclusive of key organizational values (vision, mission, culture, etc.).

Common components of a business plan include external and internal analyses, marketing and branding, investments, debt, resource allocation, suppliers, production processes, competition, and research and development. While different business models include different components in their planning, based on unique organizational or industry needs, the central theme is that all aspects of the strategy should be researched and discussed prior to incurring the costs of operations.

Business plan

This image summarizes some of the factors that should be considered in the creation of a business plan, such as a company’s mission and purpose, personnel, financial resources, market and customer base, competition, and strengths and weaknesses.

Planning Process

There are many approaches to strategic planning, but typically one of the following approaches is used.

Situation-Target-Proposal

This method involves the following steps:

Situation: Evaluate the current situation and how it came about.
Target: Define goals and objectives (sometimes called ideal state).
Proposal: Map a possible route to the goals and objectives.

Draw-See-Think-Plan

This method involves addressing the following questions:

Draw: What is the ideal state or the desired end state?
See: What is today’s situation? What is the gap between today’s situation and the ideal state, and why?
Think: What specific actions must be taken to close the gap between today’s situation and the ideal state?
Plan: What resources are required to execute these specific actions?

12.6.2: Benefits of Strategic Planning: Focus, Action, Control, Coordination, and Time Management

Planning enables companies to achieve efficiency and accuracy by coordinating efforts and managing time effectively.

Learning Objective

Identify the critical benefits derived through utilizing business and marketing plans in strategic management

Key Points

Planning is a management process concerned with defining goals for a company’s future direction and determining the resources required to achieve those goals. Managers may develop a variety of plans (business plan, marketing plan, etc.) during the planning process.
Achieving a vision requires coordinated efforts that adhere to a broader organizational plan. This is enabled through consistent strategies that are supported by staff at all levels.
Planning enables increased focus on, and coordinated action toward, competitive strategies, while minimizing wasted time and ensuring there are benchmarks for the control process.
Planning typically offers a unique opportunity for information-rich and productively focused discussions between the various managers involved. The plan and the discussions that arise from it provide an agreed context for subsequent management activities.

Key Terms

business plan: A summary of how a business owner, manager, or entrepreneur intends to organize an endeavor and implement activities necessary and sufficient to achieve success.
time management: The management of time in order to make the most of it.
planning: The act of formulating a course of action.

The planning process is concerned with defining a company’s goals and determining the resources necessary to achieve those goals. Achieving a vision requires coordinated efforts that adhere to a broader organizational plan. This is enabled through consistent strategies that are supported by staff at all levels. To meet business goals, managers develop business plans not only to reach targets but also to strengthen and change public perception of the company’s brand.

Integrated business plan

This business plan takes aspects of a business and identifies clear goals for each: e.g., for the technology to move from being weak and non-integrated to enabling workflows, and for the business’s focus to transition from being inwardly to outwardly focused.

Since they have achieved defined goals through the planning process, managers and employees can focus and control their efforts and their resources, follow determined plans of action, coordinate activities between divisions, and use time management to meet specific goals. Planning helps to achieve these goals or targets by efficiently and effectively using available time and resources. In short, planning, if executed properly, should lead to the following benefits:

Focus

There are a wide variety of activities an organization (or the individuals within the organization) might viably pursue. While there is value in the pursuit of many activities, understanding which ones the organization should focus on to leverage organizational competencies and align with market research requires careful planning and delegation. This is how planning achieves focus.

Coordinated Action

If department A is reliant on inputs from department B, department A cannot utilize department B’s work without coordination. If department B has too much work and department A too little, there is poor interdepartmental coordination. This is alleviated through detail-oriented planning processes.

Control

The control process is based on benchmarks, which is to say that controlling requires a standard of comparison when viewing the actual operational results. Control relies on the planning process to set viable objectives, which can then be worked towards through controlling operations.

Time Management

Time management underlines the importance of maximizing the use of time to minimize the cost of production. If a full-time employee can accomplish their work within 32 hours, the planning process can find meaningful use for their remaining time. Costs can be lowered and productivity increased by ensuring that each element in the operational process functions according to ideal time constraints.

The Process Itself

Perhaps the most important benefit of developing business and marketing plans is the nature of the planning process itself. This typically offers a unique opportunity, a forum, for information-rich and productively focused discussions between the various managers involved. The plan and the discussions that arise from it provide an agreed context for subsequent management activities, even those not described in the plan itself.

12.6.3: Overview of Inputs to Strategic Planning

Strategic plans can take the form of business or marketing plans, and consultants and industry experts are used in their development.

Learning Objective

Review the various tools for effective plan development, including stakeholder input, consultants, and data collection

Key Points

In most corporations, there are several levels of management, including the corporate, business, functional, and strategic levels.
Strategic management is the highest of these levels in the sense that it is the broadest—it applies to all parts of the firm and incorporates the longest time horizon.
A marketing plan is a written document that details the actions necessary to achieve one or more marketing objectives.
A business plan is a formal statement of a set of business goals, the reasons they are attainable, and the plan for reaching them.
Available business resources for creating a plan include industry experts, consultants, and stakeholder input, which can help enable an objective and comprehensive view of internal and external factors.

Key Term

tactical planning: An organization’s process of determining how to optimize current resources and operations.

Strategy Hierarchy

In most corporations, there are several levels of management. Strategic management is the highest of these levels in the sense that it is the broadest—it applies to all parts of the firm and incorporates the longest time horizon. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under the broad corporate strategy are business-level competitive strategies and functional unit strategies.

Corporate strategy refers to the overarching strategy of the diversified firm.
Business strategy refers to the aggregated strategies of a single business firm or a strategic business unit (SBU) in a diversified corporation.
Functional strategies include marketing strategies, new-product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information-technology management strategies. The emphasis is on short-term and medium-term plans and is limited to the domain of each department’s functional responsibility. Each functional department attempts to do its part to meet overall corporate objectives, so to some extent their strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to organize activities, so they often re-engineer according to processes or SBUs. A strategic business unit is a semi-autonomous unit that is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit center by corporate headquarters.

Business Plans

A business plan is a formal statement of a set of business goals, the reasons they are attainable, and the plan for reaching them. It may also contain background information about the organization or team attempting to reach those goals.

For example, a business plan for a nonprofit might discuss the fit between the business plan and the organization’s mission. Banks are quite concerned about defaults, so a business plan for a bank loan will build a convincing case for the organization’s ability to repay the loan. Venture capitalists are primarily concerned about initial investment, feasibility, and exit valuation. A business plan for a project requiring equity financing will need to explain why current resources, upcoming growth opportunities, and sustainable competitive advantage will lead to a high exit valuation.

Preparing a business plan draws on a wide range of knowledge from many different business disciplines: finance, human resource management, intellectual-property management, supply-chain management, operations management, and marketing. It can be helpful to view the business plan as a collection of subplans, one for each of the main business disciplines.

Marketing Plans

A marketing plan is a written document that details the actions necessary to achieve one or more marketing objectives. It can be for a product, a service, a brand, or a product line. Marketing plans span between one and five years.

A marketing plan may be part of an overall business plan. Solid strategy is the foundation of a well-written marketing plan, and one way to achieve this is by using a method known as the seven Ps (product, place, price, promotion, physical environment, people, and process). A product-oriented company may use the seven Ps to develop a plan for each of its products. A market-oriented company will concentrate on each market. Each will base its plans on the detailed needs of its customers and on the strategies chosen to satisfy those needs.

The seven Ps

In marketing, the general process of identifying and approaching a target market is captured through the seven Ps: Place, Price, Promotion, People, Process, Physical Evidence, and Product.

Tools for Planning

Often discussed in tools for planning are models that measure the internal and external environments (e.g. Porter’s Five Forces, SWOT, Value Chain, etc.). These models create forward-looking projections based on past and present data; therefore, they are useful only once enough data have been collected. Because of this, tools for planning largely focus on generating enough data to construct valid recommendations. These tools can include:

Industry experts: Whether internal employees or external consultants, a few individuals with extensive experience in a given industry are valuable resources in the planning process. These industry experts can move beyond the PESTEL and Porter’s Five Forces frameworks, making intuitive leaps as to the trajectory of the industry.
Consultants: Consultants are commonly brought in during strategy formulation and for a variety of other reasons. Most important of these would be providing an objective lens for internal affairs. It is difficult to see the whole house from inside the house, and upper management can utilize an external opinion to ensure they are seeing operations clearly and objectively.
Inclusion of stakeholders: Upper management will want as much information as possible from everyone involved. Some examples include consumer surveys on satisfaction, supplier projections for costs over a given time frame, consumer inputs on needs still unfilled, and shareholder views. The inclusion of stakeholders offers a variety of tools, each of which may or may not be a useful input depending on the context of the plan.

12.6.4: Responding to Uncertainty in Strategic Planning

Uncertainty exists when there is more than one possible outcome; it is best managed using scenario-planning tools.

Learning Objective

Recognize the inevitability of uncertainty in strategic planning, alongside planning for effective responses to these uncertainties

Key Points

Strategic management is having a clear view, based on the best available evidence and on defensible assumptions, of what is possible to accomplish within the constraints of a given set of circumstances.
Initial ideas about corporate objectives may have to be altered if there is no feasible implementation plan that will meet with a sufficient level of acceptance among stakeholders, or if the necessary resources are not available, or both.
Scenario planning starts by separating things believed to be known, at least to some degree, from those considered uncertain or unknowable.

Key Terms

uncertainty: A state of having limited knowledge such that it is impossible to exactly describe an existing state or future outcomes or to determine which of several possible outcomes will happen.
tactical planning: An organization’s process of determining how to optimize current resources and operations.
qualitative: Described in terms of characteristics and attributes rather than numbers and quantities.

Uncertainty

Management specialists define uncertainty as a state of having limited knowledge such that it is impossible to exactly describe an existing state or future outcomes or to determine which of several possible outcomes will happen. It is still possible, however, to measure uncertainty—by assigning a probability to each possible state or outcome to estimate its likelihood.

In the past, strategic plans have often considered only the “official future,” which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department and lacked discussions of demographics or qualitative differences in social conditions. These simplistic guesses can be good in some ways, but they fail to consider qualitative social changes that can affect an organization.

Instead of just following trend lines, scenarios focus on the collective impact of many factors. Scenario planning helps to understand how the various strands of a complex tapestry move if one or more threads are pulled. A list of possible causes, like a fault-tree analysis, tends to downplay the impact of isolated factors. When factors are explored together, certain combinations magnify the impact or likelihood of other factors. For instance, an increased trade deficit may trigger an economic recession, which in turn creates unemployment and reduces domestic production.

Fault tree

Fault trees can help outline possible outcomes. This fault tree visually lays out all the different steps at which something could go wrong in a spacecraft’s flight, from the spacecraft itself spinning to fast to motor failure to a valve being stuck open.

Responding to Uncertainty

Organizations need to cope with issues that are too complex to be fully understood, yet significant decisions need to be made that are based on a limited understanding or limited information. There are several ways of dealing with this.

Be Iterative

The process of developing organizational strategy must be iterative. That is, it should involve toggling back and forth between questions about objectives, implementation planning, and resources. For example, an initial plan for a project may have to be adjusted if the budget changes.

Use Scenario Planning

Scenario planning starts by separating things believed to be known, at least to some degree, from those considered uncertain or unknowable. The first component, knowledge, includes trends, which cast the past forward, recognizing that the world possesses considerable momentum and continuity. The second component, uncertainties, involves indeterminable factors such as future interest rates, outcomes of political elections, rates of innovation, fads in markets, and so on. The art of scenario planning lies in blending the known and the unknown into a limited number of internally consistent views of the future that span a very wide range of possibilities.

Numerous organizations have applied scenario planning to a broad range of issues, from relatively simple, tactical decisions to the complex process of strategic planning and vision building. Scenario planning for business was originally established by Royal Dutch/Shell, which has used scenarios since the early 1970s as part of its process for generating and evaluating strategic options. Shell has been consistently better in its oil forecasts than other major oil companies, and predicted the overcapacity in the tanker business and Europe’s petrochemicals earlier than its competitors.

Accept Uncertainty

It serves little purpose to pretend to anticipate every possible consequence of a corporate decision, every possible constraining or enabling factor, and every possible point of view. What matters for the purposes of strategic management is having a clear view, based on the best available evidence and on defensible assumptions, of what is possible to accomplish within the constraints of a given set of circumstances. As the situation changes, some opportunities for pursuing objectives will disappear and others will arise. Some implementation approaches will become impossible, while others, previously impossible or unimagined, will become viable. Strategic management adds little value, and may do harm, if organizational strategies are designed to be used as detailed and infallible blueprints for managers.

12.7: Types of Plans

12.7.1: Overview of Types of Strategic Plans

The broader overview of strategic plans, as well as the five subgroups within strategic planning, provide businesses with direction.

Learning Objective

Differentiate between the five general planning frames and recognize considerations that must be made prior to planning

Key Points

Strategic plans are what communicate the corporate strategy, direction, and resource allocation. There are generally five subgroups of strategic plans.
Short-range plans generally constitute a specific time frame in which a specific series of operations will be carried out, assessed, and measured.
Long-range plans are arguably the most crucial to the continued success of a business, ultimately highlighting the way in which operations interact to achieve long-term profitability and returns on investment.
Operational plans comprise the most specific subgroup of strategic planning, describing the specific objectives and milestones a business should consider in executing each particular operation. Operational plans are often used by control professionals.
Standing plans are based on the operations that must be repeated indefinitely within a business or corporation.
As opposed to standing plans, single-use plans cover a specific operation or process that is an outlier to normal operations.

Key Terms

strategic planning: An organization’s process of defining its direction and making decisions on allocating resources to pursue that direction.
single-use plans: A strategy for achieving an objective that can only be used in one situation.
standing plan: A strategy for achieving an objective that can be continually used or modified.

Strategic management is primarily concerned with the planning and execution processes that lead to the effective operations of a business. Strategic management leverages strategic planning in order to design and execute a variety of plans specifically created to approach various facets of the business and competitive environment. It is worth analyzing the broader overview of strategic plans, as well as the five subgroups within strategic planning that provide businesses with an outline of their strategic direction.

Strategic plans are what communicate the corporate strategy, direction, and resource allocation.

Factors of a strategic plan

This illustration summarizes the various factors that must be considered in constructing a corporation’s strategic plan. At the pinnacle of the pyramid is the most important element of any strategic plan—the vision. Under that, in descending order, are accountability, stakeholder involvement, tools and skills, enabling behavior, and measures and processes.

Specific Types of Plans

Following the generation of a vision and mission statement, and the subsequent operations that will allow these to be achieved, smaller facets of the planning process begin to come into play. These include five general planning frames, which can be applied to different aspects of the operational process:

Short-range plans: Short-range plans generally apply to a specific time frame in which a specific series of operations will be carried out, assessed, and measured. The standard short-range plan will represent annual or semiannual operations with a short-term deliverable. These short-term plans cover the specifics of each day-to-day operation.
Long-range plans:Long-range plans are arguably the most crucial to the continued success of a business, ultimately highlighting the way in which operations interact to achieve long-term profitability and returns on investment. As corporations grow in size and complexity, so do the long-range plans that constitute the interaction of individual processes. Long-range plans are those most closely related to the overall strategic-planning process.
Operational plans:Operational plans are the most specific subset of strategic planning, describing the specific objectives and milestones a business should consider in executing each particular operation. Operational plans establish both the budgetary resources necessary for execution and the tangible and easily assessed objectives that can define the success of any given project.
Standing plans:Standing plans are based on the operations that must be repeated indefinitely within a business or corporation. Standing plans govern the processes that occur regularly, providing an overview for consistent activities.
Single-use plans:As opposed to standing plans, single-use plans cover a specific operation or process that is an outlier to normal operations. In all likelihood, a single-use plan will never need to be repeated and will simply cover the content involved in one circumstance.

By combining all of these plans—often a few of each subgroup, depending on the scale and complexity of a business—a general strategic overview can be obtained. The interaction of all of these plans constitute the overall strategic trajectory of a business, measuring profitability and efficiency as the company executes operations.

12.8: Planning Tools

12.8.1: Overview of Strategic Planning Tools

Strategists have developed a large array of tools useful in plan formulation, all of which provide unique insights and advantages.

Learning Objective

Outline the wide array of useful tools to improve upon the scope and effectiveness of the planning process within the context of strategic management

Key Points

Forecasting, consisting of the basic concept of projecting future outcomes, is the most common tool in the strategic tool belt.
Scenario planning is where strategists construct various scenarios to test out the potential trajectories of a specific operational plan.
Contingency planning can be simply described as the back-up plan, while participatory planning is the primary plan. If (or, more likely, when) things do not go according to plan, a contingency plan should be in place.
Management by objectives (MBO) is the process of defining, disseminating, and implementing the objectives that an organization has identified as strategic.
The SMART model identifies specific goals, measures inputs and outputs, ensures that the goals are attainable and relevant to the mission of the company, and constructs a timeline.
Incorporating concepts such as forecasting and benchmarking in conjunction with larger corporate-strategy frameworks such as SMART goals and MBO will equip strategists with a strong short-term and long-term approach.

Key Terms

forecasting: Estimating how a condition will be in the future.
benchmark: A standard that allows a manager to compare metrics, such as quality, time, and cost, across an industry and against competitors.
contingency plan: An alternative to be put into operation if needed, especially in case of an emergency or if a primary plan fails.

Strategists have developed a large array of tools useful in the assessment of strategic planning, all of which provide unique insights into the feasibility and profitability of a given operational project. Identifying these tools, and selecting which are most appropriate for determining the effectiveness or efficiency of a project, is a central responsibility of a strategic-management team.

Listed below are the main tools available for consideration along with a brief description of how each tool is useful.

Forecasting

Forecasting is the the most common strategic tool and it should be considered whenever projects are being designed. Forecasting, simply put, is projecting the future of a project by leveraging all of the available knowledge to generate a likelihood of success. It is useful to construct pro forma financial statements, which illustrate expected costs and revenues.

Scenario Planning

Scenario planning is an interesting tool with which strategists construct various scenarios to test out the potential trajectories of specific operational plans. One popular scenario application is called the zero-sum game, where the costs and revenues are equated to see at what level of cost or what level of revenue a zero-sum bottom line can be achieved. By benchmarking this situation against reality, strategists can see in which situations value can be captured.

Benchmarking

Benchmarking can be done qualitatively or quantitatively, and it is a comparative approach to strategy. Benchmarking usually requires the identification of a close competitor with similar strategic prerogatives so that the strategist can compare and contrast the two companies’ strengths and weaknesses, identifying strategies for improvements or competitive advantages.

Participatory and Contingency Planning

Contingency planning can be simply described as the back-up plan, while participatory planning is the primary plan. An excellent tool for strategists pursuing a particularly risky venture is to develop the primary objectives and strategy while simultaneously constructing a contingency plan that will limit the negative effects of failure. This offsets risk through finding various ways to achieve value regardless of the success of the overall venture. This requires creativity and a degree of adaptability.

Goal Setting

Goal setting, similar to MBO and SMART, is a simple method for strategists to establish and enforce specific goals within the organization or strategic business unit (SBU). Goal setting creates incentives for employees by identifying achievable end results, which drives the direction of the company towards commonly established goals. This theory was developed by Edwin A. Locke in the 1960s and is considered an “open” theory, which implies that new thoughts and developments may be layered on top of the original goal-setting framework.

Management by Objectives

MBO is the process of defining, disseminating, and implementing the objectives that an organization has identified as strategic. Objectives provide factual and achievable strategies that align with employee and manager goals in order to ensure that all participants are on the same page. It is also useful to set goals and a timeline to assess progress and ensure that each individual is achieving their segment of the plan.

SMART Goals

The SMART model aims to design goals that are specific, measurable, achievable, realistic, and time-targeted (SMART).

SMART criteria

Each component of the SMART model describes an effective attribute of a performance objective. Objectives will ideally conform to these expectations.

The SMART model identifies specific goals, measures inputs and outputs, ensures that the goals are attainable and relevant to the mission of the company, and constructs a timeline.

Though there are many other potential tools for strategists, these seven provide a strong framework for further development of strategic methodologies. Incorporating concepts such as forecasting and benchmarking in conjunction with larger corporate strategy frameworks such as SMART goals and MBO will equip strategists with a strong short-term and long-term approach.

12.9: The Planning Cycle

12.9.1: Planning a Project

Identifying stages in a project plan, complete with objectives, implementation, and assessment, is a primary responsibility of strategists.

Learning Objective

Outline the five basic stages in the planning cycle as derived within the field of strategic management

Key Points

The initiation stage includes generating ideas, assessing the feasibility and profitability of the project, conceptualizing the operational benefits and bottom line, and getting approval and resources.
Planning and design follows the initiation stage, bringing the project under the microscope to assess the smaller details. Planning predicts the time investment, costs, and specific resources required.
The simplest stage in theory, and perhaps the most complicated in practice, is the execution stage. This requires integrating all of the identified inputs from the planning-and-design phase to construct the actual end product or service.
In the monitoring and controlling phase, analysis of the efficiency and quality of the project cycle from a strategic perspective allows for the optimization of the operational process itself.
At the end of the project-management cycle, the closing phase determines that the project no longer captures value and should be harvested or divested.
This cycle is iterative, and, unless the project is harvested or divested, should be continuously assessed and altered whenever deemed necessary.

Key Terms

optimization: The design and operation of a system or process to make it as good as possible in some defined sense.
feasibility: The state of being possible.
forecast: An estimation of a future condition.

The stages of a project within the strategic-planning discipline provide a step-by-step approach to generating and implementing an effective strategy, for either a corporation or a strategic business unit (SBU). Implementing a framework for generating a project-planning cycle, complete with strategic objectives, implementation methods, and assessment, is a primary responsibility of strategic managers.

Project-planning cycle

As shown in the figure, there are five basic strategic management steps in the planning cycle.

The Steps in Strategic Planning

Initiation: The initiation stage includes generating the idea, assessing the feasibility and profitability of the project, conceptualizing the operational benefits and the bottom line, and getting approval and resources. This stage should determine the scope of the operation.
Planning and design: Planning and design brings the project under the microscope by assessing the smaller details. This stage includes predicting the time investment, costs, specific resources required, and the necessary inputs to achieve the outputs forecasted in the initiation stage. This stage is the most strategic in nature, mapping out the business processes in sufficient detail to effectively accomplish the required objectives.
Executing: The simplest stage in theory, and perhaps the most complicated in practice, is the execution stage. It involves the integration of all inputs identified in the planning-and-design stage to construct the actual end product or service. This integration should be in line with the framework established in the first two stages.
Monitoring and controlling: This can be thought of as the perfecting stage, in which analyzing the efficiency and quality of the project cycle from a strategic perspective allows for the optimization of operational processes. Monitoring the operation for ways to increase value can redirect the strategic-planning cycle back to the planning-and-design stage. This stage allows the process to run internally in a cyclical fashion, constantly adding improvements to capture more value.
Closing: The project-management cycle ends with the determination that the project no longer captures value and should be harvested or divested. This stage is the other possible result from the monitoring and controlling phase—that is, instead of being redirected back to the planning-and-design phase, the assessment shows that value is now being lost and it is no longer profitable to continue the process. Therefore, the project cycle is closed.

This step-by-step process highlights each feasible stage in the project-management cycle. By appropriately incorporating each stage of the model into the planning process, managers can effectively forecast the deliverable, and they can avoiding losing value by accurately assessing the margins that will be produced in a given strategic initiative. This allows for informed and knowledgeable decisions to be made at each relevant point in the operation.