Strategic management is a crucial process that helps organizations define their goals, create effective plans, and execute strategies to achieve success. Whether running a small business or managing a multinational corporation, understanding the basics of strategic management is essential for sustainable growth and long-term success. This guide will take you through the core concepts, principles, and strategic management processes in a simple, conversational tone. Let’s dive in!
What is Strategic Management?
Strategic management is the process of identifying an organization’s purpose, setting goals, and planning actions to achieve those goals. It’s like creating a roadmap to reach a destination.
Example:
Think of a tech startup aiming to revolutionize online education. Strategic management will involve analyzing market trends, identifying customer needs, developing a unique product, and implementing a plan to capture market share.
Two Views of Strategic Management
Prescriptive View
What is the prescriptive view?
In the prescriptive view of strategic management, strategy is planned and executed over time. The prescriptive view assumes that strategies can be planned systematically, much like a doctor prescribing a treatment for a patient. Once planned, these strategies are implemented step-by-step to achieve the organization’s objectives. Example of Google (Prescriptive View) In its early days, Google’s purpose was simple: to provide jobs for its founders, friends, and employees. But as Google grew, its purpose expanded:
- Early Stage: Small operations, focusing on supporting its creators and a few employees.
- Later Stage: It broadened its goals to include:
- Serving a larger customer base.
- Offering dividends to shareholders.
- Expanding internationally and diversifying its services, like Google Maps and Google Ads.
Through planned efforts, Google continuously developed new opportunities, expanded globally, and grew its range of products and services.
Key Components of Strategic Management in the Prescriptive View
Strategic management has two main elements:
1. Corporate-Level Strategy
This involves decisions about:
- What business the company should be in For example, Google decided to expand into areas like AI, cloud computing, and self-driving cars.
- The culture and leadership of the organization: Google ensured that its international offices maintained the same innovative and playful culture (e.g., bean bags, and pen office designs).
Example
When Google established its European headquarters in Zurich, it created an environment similar to its American offices to maintain its unique corporate culture. This decision was made at the corporate level.
2. Business-Level Strategy
This focuses on:
- Competing for customers.
- Creating value from resources.
- Sustaining competitive advantages over rivals.
Example
Google’s investment in internet services like Google Earth helped it stay ahead of competitors. At this level, the strategy emphasizes aligning the company’s internal strengths with external opportunities and challenges, such as:
- Responding to competitors.
- Serving customers better.
Definitions at Both Levels:
- Corporate-Level: What business should we be in? What kind of company are we?
- Business-Level: How do we use our strengths to compete and respond to external challenges?
Emergent View
What is the emergent view?
In the emergent view of strategic management, strategy evolves based on changing situations and new opportunities. Some experts argue that strategies cannot always be planned due to the uncertainty of the future. They believe that strategies should be flexible, entrepreneurial, and adaptive to changes. Strategic management involves finding market opportunities, experimenting, and developing competitive advantages over time, even if the initial plan changes.
Example of Google (Emergent View)
Google initially had a specific approach to selling advertising space. Over time, based on market experiences, it revised this strategy twice to better suit customer needs and market conditions. This demonstrates that strategy isn’t static—it evolves as circumstances change.
Main Topics Covered in Strategy
- Internal Resources
- External Environment
- Adding Value to What the Organization Does
1. Internal Resources
Every organization relies on its internal resources to function and grow. These include:- History: The organization’s past experiences and achievements.
- Skills: The abilities and expertise of employees.
- Resources: Financial assets, physical infrastructure, technology, and human resources.
- Knowledge: Information and expertise developed over time.
Example
For a tech company like Apple, internal resources include:- Its design and innovation expertise.
- A talented workforce (e.g., engineers, marketers).
- Financial resources for research and development (R&D).
- Historical success with products like the iPhone.
2. External Environment
Organizations don’t operate in isolation. They must respond to external factors like:- Customers: What customers want and how their needs are changing.
- Suppliers: Relationships with those providing raw materials or services.
- Competitors: Other companies competing in the same market.
- Economic and Social Environment: Economic trends, societal norms, and government regulations.
Example
A car manufacturer like Tesla must consider:- Customer demand for electric vehicles (EVs).
- Supply chain challenges for materials like lithium for batteries.
- Competition from other EV makers like Rivian or legacy automakers transitioning to EVs.
- Government incentives for green technology and environmental regulations.
3. Adding Value
Adding value means creating something unique or better than competitors to attract customers. This could involve:- Enhancing product features.
- Providing exceptional customer service.
- Innovating in processes to reduce costs while maintaining quality.
Example
A food delivery service like Uber Eats adds value by:- Offering a seamless app experience for customers to order food quickly.
- Providing options like real-time delivery tracking.
- Partnering with a wide range of restaurants to cater to diverse tastes.
Linking Internal and External Factors
Strategic management connects an organization’s internal resources with the external environment to determine the best course of action.- Internal Strengths: Used to take advantage of external opportunities or respond to external threats.
- External Challenges: Managed using internal skills and resources.
Example
A fashion retailer like Zara:- Internal Strengths: A fast and efficient supply chain.
- External Challenge: Changing fashion trends and customer preferences.
Core Areas of Strategic Management
Strategic management consists of three main stages: Strategic Analysis, Strategy Development, and Strategy Implementation. Let’s explore each in detail.
1. Strategic Analysis
This is the foundation of strategic management. It involves examining the organization, understanding its objectives, and analyzing its relationship with its environment.
Key Components:
- Mission and Objectives: Define the purpose of the organization and the goals it wants to achieve.
- Stakeholders: Identify the people or groups (e.g., employees, customers, shareholders) affected by the organization’s success or failure.
- Internal Resources: Assess what the organization has in terms of skills, finances, technology, and human resources.
- External Environment: Study external factors like competitors, market trends, regulations, and economic conditions that can impact the business.
Example:
- Apple Inc.: When Apple started planning the iPhone, it analyzed its resources (e.g., strong design team and brand reputation) and market opportunities (a growing demand for smartphones). It also considered competitors like Nokia and BlackBerry to understand how it could differentiate itself.
2. Strategy Development
This step involves creating possible strategies and deciding which ones to pursue. A good strategy builds on the organization’s unique strengths (skills, resources, or relationships) and creates long-term advantages over competitors.
Key Points:
- Options Creation: Brainstorm different ways the organization can achieve its goals.
- Evaluation of Options: Assess the pros and cons of each strategy, including potential risks and rewards.
- Selection: Choose the strategy that aligns with the organization’s objectives, resources, and market opportunities.
Example:
- Tesla’s Strategy: Tesla had several options for entering the automobile market. It could compete directly with traditional carmakers or focus on electric vehicles (EVs). Tesla chose the latter, leveraging its expertise in battery technology and aligning
3. Strategy Implementation
This step involves creating possible strategies and deciding which ones to pursue. A good strategy builds on the organization’s unique strengths (skills, resources, or relationships) and creates long-term advantages over competitors.
Key Points:
- Options Creation: Brainstorm different ways the organization can achieve its goals.
- Evaluation of Options: Assess the pros and cons of each strategy, including potential risks and rewards.
- Selection: Choose the strategy that aligns with the organization’s objectives, resources, and market opportunities.
Example:
- Tesla’s Gigafactories: After deciding to focus on electric vehicles, Tesla implemented its strategy by building Gigafactories to manufacture batteries at scale. This required significant investments, coordination with suppliers, hiring skilled employees, and overcoming regulatory hurdles in various countries.
- Challenges: Some factories faced delays due to construction issues and local government regulations. Tesla’s leadership adapted by revising timelines and increasing collaboration with local authorities.
Importance of Strategy Implementation:
Even the best strategy will fail if not executed properly. Implementation often involves:
- Motivating employees to adopt new roles or processes.
- Negotiating with governments or partners for necessary approvals.
- Overcoming challenges like financial constraints, resistance to change, or market uncertainties.
How It Interacts with Other Core Areas:
Although implementation comes after analysis and development, organizations often work on all three areas simultaneously. For example:
- While implementing one part of a strategy, companies might still analyze other opportunities or adjust their plans based on feedback.
Practical Insight:
Imagine a small restaurant launching an online delivery service:
- Analysis: They assess customer demand, competitor offerings, and their own delivery capability.
- Development: They decide to partner with a delivery app rather than building their own platform.
- Implementation: They negotiate with the app provider, train staff on managing online orders, and launch the service with a marketing campaign.
Without proper implementation, even a well-developed strategy like adding online delivery would fail, leaving the restaurant unable to compete in a digital era.
Key Elements of Strategic Decisions
Strategic decisions are crucial for an organization to thrive, add value, and compete effectively. These decisions involve understanding customers, implementing strategies, sustaining competitive advantages, leveraging relationships, and maintaining a vision for the future. Let’s break down each element with examples:
1. Existing and New Customers
Customers are central to strategic management because they decide whether to purchase a product or service. Without customers, even the most innovative products or services will fail. While competitors are important, focusing on customer needs is the key to success.
Example:
Consider Microsoft Xbox:
- Before launching the Xbox gaming console, Microsoft needed to ensure it could attract enough customers.
- By 2011, Microsoft sold over 50 million Xbox units globally. This success was driven by their focus on customer preferences, such as high-quality gaming experiences and online playability.
Even in non-profit sectors, understanding “customers” (e.g., beneficiaries or donors) is vital. For example, a charity organization must appeal to donors to fund its activities.
2. Implementation Processes to Deliver the Strategy
A good strategy isn’t enough—it must be implemented effectively. Strategic decisions often involve setting long-term goals, deciding on investments, and rolling out plans systematically.
Example
When Microsoft decided to enter the video game market:
- It launched the Xbox in the U.S. in 2001, Japan in 2002, and Europe shortly after.
- It continued to innovate, releasing the Xbox 360 in 2006 and the Kinect controller in 2010.
- This step-by-step implementation allowed Microsoft to build its market presence and gain customer trust.
Key takeaway: Implementation requires planning, adaptation, and sustained effort over time.
3. Offer Sustainable Competitive Advantage
A competitive advantage means offering something better or different from competitors. To succeed long-term, this advantage must be sustainable—it should not easily disappear or be copied by rivals.
Example
Microsoft faced established competitors like Sony PlayStation and Nintendo Wii.
- To compete, Xbox focused on superior video graphics and online gameplay, which appealed to tech-savvy gamers.
- Over time, Microsoft introduced innovations like the Kinect motion-sensing controller, which differentiated its product further.
However, competitive advantage often involves risks. For example, Sony faced delays with its PlayStation 3 due to technical problems, giving Xbox an advantage during that period.
4. Exploit Linkages Between the Organization and Its Environment
Organizations interact with various external factors, such as suppliers, customers, competitors, and even governments. Strategic success often depends on how well these relationships are managed and leveraged.
Example
Microsoft leveraged its dominance in software (e.g., Windows operating system and Internet Explorer) to promote Xbox.
- While these connections didn’t fully guarantee Xbox’s success, they helped create familiarity and trust among users.
Similarly, businesses often rely on strong supplier relationships, government support (e.g., tax benefits), or partnerships to gain an edge.
5. Vision and Purpose
A vision is a long-term idea of what the organization wants to achieve, while purpose defines its role in achieving that vision. Together, they guide strategic decisions and motivate employees to innovate and adapt.
Example
Microsoft’s vision for Xbox:
- Expand from traditional office software to home entertainment, providing new revenue streams.
- This shift required innovative solutions, such as the Kinect controller, which allowed users to play games without traditional controllers.
Nintendo’s Vision:
- The Wii, launched in 2006, aimed to revolutionize gaming by focusing on motion controls and casual gamers.
- This vision differed from Sony and Microsoft, focusing less on high-end graphics and more on accessible gameplay, which expanded the gaming audience.
A strong vision ensures the organization remains relevant in changing markets.
Outcome of Strategic Management: Delivering Long-Term Value
The ultimate goal of strategic management is to create and sustain long-term value for the organization.
- This involves balancing immediate profitability with investments in future opportunities.
- For example, Microsoft initially struggled to make profits on Xbox but persisted. By 2014, Xbox had become a profitable venture, contributing significantly to the company’s overall revenue.
Summary of Strategic Management
Strategic management involves making major decisions to:
- Utilize resources efficiently.
- Address both current and future market needs.
- Enhance the organization’s performance.
- Add value for stakeholders, including customers, employees, and shareholders.
Real-World Example
Consider Tesla:
- Existing and New Customers: Tesla targeted eco-conscious consumers with its electric vehicles.
- Implementation: It began with luxury EVs like the Model S and later introduced affordable options like the Model 3.
- Sustainable Competitive Advantage: Tesla developed a vast charging network and innovative battery technology, setting it apart.
- Linkages: Partnerships with suppliers and government incentives helped Tesla thrive.
- Vision and Purpose: Tesla’s vision is to transition the world to sustainable energy, driving its strategies in EVs, batteries, and solar products.
By following these elements, Tesla became a leader in the automotive and energy industries.
Strategic Management in Practice
Strategic management connects the organization’s internal resources with its external environment to create value. Let’s break it down further:
Internal Resources
Organizations utilize their skills, knowledge, and assets to achieve goals.
Example:
Google’s expertise in data analysis and artificial intelligence helps it develop innovative products.
External Environment
Understanding market trends and customer needs is essential for success.
Example:
Netflix adapted to the rise of streaming by transitioning from DVD rentals to an online platform.
Adding Value
Strategic management ensures that every action contributes to long-term value.
Example:
Amazon’s focus on customer-centric innovation, such as fast delivery and user-friendly interfaces, creates lasting value.
Conclusion
Strategic management is not just about planning; it’s about creating a vision, making informed decisions, and taking deliberate actions to achieve long-term success. By mastering the core areas of strategic analysis, strategy development, and implementation, organizations can navigate challenges, seize opportunities, and deliver value to their stakeholders. Whether you’re a small business owner or a corporate manager, strategic management empowers you to align resources, adapt to change, and achieve your goals. Remember, strategy is not static—it evolves with time, just like the organizations it serves.
Final Tip:
Start small. Analyze your business, create a clear vision, and focus on delivering value to your customers. With consistent effort, strategic management will become second nature!