Elements of Strategic Management - Coursework Example

344034: Strategic Management Introduction In this paper we propose to critically analyse some significant elements of strategic management and the role and importance of environmental tools in successfully implementing the functional constituents of ‘strategic management’. In the course of our analysis we shall consider the practical use of environmental scanning; whether the tools used for such scanning can be distinguished in terms of the use made of the information that they produce; and the circumstances under which particular tools are to be used. It is proposed to bring the whole gamut of strategic management under the scrutiny of ‘environmental scanning’. As a necessary prelude to an examination of the topic in this manner, we begin with an in-depth analysis of the concept and elements of strategic management. Strategic Management – what it is To begin with, a ‘definition’ of strategic management can be that it is a ‘managerial course of action’; “a process through which the Chief Executive Officer (CEO) and the executive team of officers specify the organization’s objectives, calibrate policies and plans to achieve these objectives, allocate resources in order to implement them and give the necessary direction to the organization to carry out its activities effectively and efficiently”. In short, strategic management can be ‘defined’ as a “combination of strategy formulation and strategy implementation.” (see www.webarticles.com/Business/Management/Strategic-management). Formulating strategy is the function of strategic planning. The plan should incorporate the objectives of the enterprise and the ways of achieving the objectives. The objectives may have a time dimension, in that some objectives are to be achieved in the long term, some in the medium term and some others in the short term. The long term objectives are spelled out in the ‘vision statement’, the medium term objectives in the ‘mission statement’ and the short term objectives in an analytical ‘current situation’ statement. Additionally the plan should provide an environmental-situation analysis which should cover both internal and external environment as well as the micro and macro aspects of the different elements in the environment. A strategic management plan would incorporate an appropriate and feasible course of action after assessing the present situation of the enterprise in the light of it past history and experience in order to enable it to reap benefits in the future. Strategic management recalibrates “traditional management activities such as budgeting, planning, monitoring, marketing, reporting, and controlling into a broader context, taking into account the external environment, internal organizational capabilities, and the organization’s overall purpose and direction” (Morrison and Wilson). Elements of Strategic Management According to Morrison and Wilson, 1996, the following diagram (reproduced from their article) depicts “the building blocks of for a comprehensive strategic management model – external analysis, internal assessment, strategic direction, strategic plans, implementation, and performance evaluation” (Morrison and Wilson). They emphasize that an important “principle of strategic management is that plans must be made on the basis of what has happened, is happening, and will happen in the world outside the organization with a focus on the threats and opportunities these external changes present to the organization”. The external environment includes political, economic, social, technological, and environmental trends and developments outside the organization, Along with an internal assessment of the organization’s vision, mission, strengths, and weaknesses, external analysis helps the management in delineating strategic directions and strategic policies. A PEST analysis, discussed below, is the appropriate tool to use to assess the conditions external to the organization. “A firm’s scanning of the environment usually includes analysis of all elements, both internal and external, to the firm, relevant to the task environment. Individual reports of these analyses are written by people in different ‘divisions’ of the firm, and are then summarized and transmitted to the strategic decision making entity. The many reports resulting from these scanning efforts when boiled down to their essential, act as a detailed list of external strategic factors.” (Kathwala) The internal assessment need to focus on an evaluation of the organization’s capacities – its management, program operations, appraise its resources – people, finances, facilities, technology, and information, and a review of its strengths and weaknesses that will have the greatest influence on the organization’s ability to capitalize on opportunities. A SWOT analysis is considered the most appropriate tool to assess the internal condition of the enterprise. It goes without saying that the strategic management plan needs to be implemented. Implementation should not be considered simply as an automatic, ongoing, day-to-day process. “It also requires ongoing motivation, recognition, and reward. This implies showing individuals and groups how their work has helped achieve the organization’s objectives. Implementation of the plan must become an integral part of day-to-day operations. It is not something extra to do; it is the thing to do. As such, it is the impetus for motivation.”(Morrison and Wilson). Integral to the scheme of strategic management plan is periodic evaluation of performance which will enable the decision makers to have an idea about how well the organization is using its resources, whether or not its operations are attuned to the realization of the objectives planned for, and whether or not its targeted actions are on schedule. Performance evaluation is a helpful managerial tool in that the strategic plan is thoroughly examined through ‘discussion and testing’ in the context of the actual situations that the organization faces during the evaluation process. Environmental scanning In the exercise of formulating a strategic management plan the first step is to conduct an environmental scanning. Environmental scanning is said to be “the monitoring, evaluating and disseminating of information from the external and internal environments to people within the corporation. It is a tool that a corporation uses to avoid strategic surprise and to ensure long-term health.”( Kathwala) Four methods of collecting scanning information have been suggested by Aguilar (1967). They are ‘undirected viewing’, ‘conditioned viewing’, ‘informal searching’ and ‘formal searching’. ‘Undirected viewing’ is random reading with no specific purpose in view except to get some general information about general things. ‘Conditioned viewing’ is gathering information relevant and useful to the organization and responding to it in terms of incorporating it as a feasible item in its strategic plan. ‘Informal searching’ is looking for specific information, but in a haphazard and ‘relatively unstructured way’, whereas ‘formal searching’ is, a positive methodological manner of seeking information attuned to specific purposes and particular items. Morrison, Renfro, and Boucher (1984) paraphrased these four methods as “passive” and “active” scanning. An example of “passive scanning” is reading newspapers and magazines wherein the information gleaned from them is not used as “intelligence information for the organization”; and further, information and ideas that may be portends for changes in the macro-environment affecting the organization are apt to be overlooked or missed in ‘passive scanning. Active scanning, on the other hand, is purposeful seeking information for operational benefit of the organization. “In active scanning, it is important to include information resources that represent different dimensions of the same category such as those in the national and international social, technological, economic, environmental, and political (STEEP) levels.”(Morrison and Wilson, 1996). This brings us to a consideration of the PEST analysis. PEST Analysis In a paragraph above, it has been stated that a first step in the formulation of a strategic plan is to analyze and incorporate in the plan the external elements affecting the organization. PEST analysis helps in doing it. It is a study of the external macro-environment that affects the organization. PEST is an acronym for the Political, Economic, Social, and Technological factors of the external macro-environment. Usually a business firm does not have control over external factors of this nature. Analysts and firms who consider these factors as ‘threats’ sometimes to firm’s operations tend to justify the term “pest” as being very appropriate for these factors. However, rearranging the letters would give us a “STEP” analysis which, taking away the odium associated with “pest” would be in keeping with the fact that changes in the external environment sometimes would signify the emergence new opportunities for the firm. . A perceptive article in the NetMBA internet site says: “Many macro-environmental factors are country-specific and a PEST analysis will need to be performed for all countries of interest. The following are examples of some of the factors that might be considered in a PEST analysis. Political Analysis: Political stability; Legal framework for contract enforcement; Intellectual property protection; Trade regulations & tariffs; Favoured trading partners; Anti-trust laws’ Pricing regulations’ Taxation - tax rates and incentives’ Wage legislation - minimum wage and overtime’ Work week’ Mandatory employee benefits’ Industrial safety regulations’ Product labelling requirements. Economic Analysis: Type of economic system in countries of operation’ Government intervention in the free market; Comparative advantages of host country; Exchange rates & stability of host country currency; Efficiency of financial markets; Infrastructure quality’ Skill level of workforce; Labour costs’ Business cycle stage (e.g. prosperity, recession, recovery); Economic growth rate; Discretionary income; Unemployment rate; Inflation rate; and Interest rates. Social Analysis: Demographics; Class structure; Education; Culture (gender roles, etc.); Entrepreneurial spirit; Attitudes (health, environmental consciousness, etc.); Leisure interests. Technological Analysis: Recent technological developments; Technology's impact on product offering; Impact on cost structure; Impact on value chain structure; Rate of technological diffusion. The number of macro-environmental factors is virtually unlimited. In practice, the firm must prioritize and monitor those factors that influence its industry. Even so, it may be difficult to forecast future trends with an acceptable level of accuracy”. (www.netmba.com/strategy/pest/) SWOT Analysis Another environmental scanning tool is found in what is known as SWOT analysis. While PEST analysis is directed more to an examination of the external situation, SWOT analysis is concerned with an examination of the internal situation of the business enterprise. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. The internal factors of the company are treated as strengths or weaknesses and the external factors as opportunities or threats. The firm can organize its competitive advantage on the factors that constitute its strengths while the factors responsible for its weaknesses may be obstacles to develop this advantage. By analyzing these four aspects of its situation, a firm may be in a position to use its strengths, correct its weaknesses, take advantage of opportunities, and prevent or avoid demoralizing threats. The analysis of the internal factors should comprehensively evaluate the organization’s actual and potential strengths and weaknesses in all its areas such as “company culture, company image, organizational structure, key staff, access to natural resources, operational efficiency, operational capacity, brand awareness, market share, financial resources, exclusive contracts, patents and trade secrets, etc. The SWOT analysis summarizes the internal factors of the firm as a list of strengths and weaknesses.”(www.netmba.com/strategy/swot/). Opportunity and threats are external environmental factors. An opportunity occurs when the firm has a chance to improve its profit position by introducing a new product or service or penetrating a new segment of the market, which are brought about by changes that occur in the external environment. The firm may consider some of these changes as threats to the market position of its existing products calling for a change in product specifications or the development of new products in order for the firm to retain its competitive advantage. “Changes in the external environment may be related to: customers, competitors, market trends, suppliers, partners, social changes, new technology, economic environment, political and regulatory environment, etc. The SWOT analysis summarizes the external environmental factors as a list of opportunities and threats. A SWOT profile can be generated and used as the basis of goal setting, strategy formulation, and implementation.”(www.netmba.com/strategy/swot/). A SWOT analysis is strengthened by supplementing it with a “Five-force Analysis” developed by Michael Porter, to a consideration of which we turn now. Porter’s analysis is another powerful environmental scanning tool appropriate for external factors’ scanning designed to rectify the likely drawbacks that may lie lurking in the internal factors. Porter’s five-force Analysis (Porter, Michael E., 1998) Porter’s analysis is an environmental scanning tool which will help in enhancing the organization’s competitive advantage over its rivals. Five elements constitute the components of this scanning tool. They are ‘supplier power’, ‘buying power’, ‘competitive rivalry’, ‘threat of substitution’, and ‘threat of new entry’. Porter referred to these ‘forces’ as ‘the microenvironment’ factors, probably to distinguish them from the ‘macro environment’ factors. These ‘forces’ consist of factors that affect the firm’s ability to offer acceptable service to its customers and make adequate profit from its operations. “These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porter’s model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry” (Porter’s Five Forces). Five Forces Analysis can offer valuable information for important aspects of strategic management planning. It would enable the decision makers to assess ‘the attractiveness’ of an industry, and to decide about entering or exiting from an industry or a market segment. “With the knowledge about intensity and power of competitive forces, organizations can develop options to influence them in a way that improves their own competitive position. The result could be a new strategic direction, e.g. a new positioning, differentiation for competitive products of strategic partnerships (Porters Five Forces, at www.themanager.org/Models/p5f.htm) Conclusion We have discussed above a few of the analytical techniques useful to convert environmental information into strategic management intelligence helpful to formulate plans for production policies and marketing strategies. It may sound as a truism to say that profitable actions can be taken based on information gathered from today's highly competitive market place, whether it is local, national or global. The required information have to be gathered in systematic and structured manner in order to formulate plans and policies attuned to the organization’s long term vision and short or medium term mission, and in the light of its strengths and weaknesses in order to counter the threats and rivalries of its competitors and thereby achieve its objectives. Our analysis has shown that in this endeavour the firm will be well advised to use the time tested analyses such as “pest”, “swot”, and the “five force analysis”. [Note: In writing this essay, recourse had been made to internet sites; and all citations made from such sources and books and periodicals had been accurately cited and acknowledged.] References Aguilar, F. (1967). Scanning the business environment. New York: Macmillan. Fahey, L., King, W. R., & Narayanan, V. K. (1981). Environmental scanning and forecasting in strategic planning: The state of the art. Long Range Planning, 14 (2), 32-39 Kathwala, Asik: Book Review of “Essentials of Strategic Management” by David Hunger & Thomas. L. Wheelen, at www.hrfolks.com/articles/strategic%20hrm/essentials%20of%20strategic%20management.pdf Morrison, J. L., Renfro, W. L., & Boucher, W. I. (1984). Futures research and the strategic planning process: Implications for higher education. ASHE-ERIC Higher Education Research Report No. 9. Washington, D.C.: Association for the Study of Higher Education. Morrison, James and Ian Wilson: (1996) “The Strategic Management Response to the Challenge of Global Change”, in H. Didsbury (Ed.), Future Vision, Ideas, Insights, and Strategies, The World Future Society, Bethesda, MD, (see http//www.horizon.unc.edu/courses/papers/Scenario_wksp.html/, retrieved August 1, 2007,) PEST Analysis: Internet Center for Management and Business Administration, Inc. www.netmba.com/strategy/pest/ retrieved August 7, 2007 Porter, Michael E., (1998): Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York, Free Press Porter’s Five Forces – “Management Tools and Models” - Management Portal, at www.themanager.org/Models/p5f.htm , retrieved August 7, 2007 SWOT Analysis: Internet Center for Management and Business Administration, Inc. at.www.netmba.com/strategy/swot/, retrieved August 6, 2007 Read More