Strategic Management (BBA 601) Unit 1

Strategic Management (BBA 601)

UNIT – I

The term "Business Policy" comprises of two words, Business and Policy.

Business: "Business means exchange of commodities and services for increasing utilities.

"Policy: Policies may be defined as "the mode of thought and the principles underlying the activities of an organization or an institution." Policies are plans in they are general statements of principles which guide the thinking, decision- making and action in an organization.

Business policy as a principle or a group of related principles, along with their consequent rule (s) of action that provide for the successful achievement of specific organization / business objectives. Accordingly, a policy contains both a "principle" and a "rule of action." Both should be there for the maximum effectiveness of a policy. Due to the increasing environmental changes in the 1930s and 40s in the US, planned policy formulation replaced ad hoc policy-making. Based on this second paradigm, the emphasis shifted to the integration of functional areas in a rapidly changing environment. Increasing complexity and accelerating changes in the environment made the planned policy paradigm irrelevant since the needs of a business could no longer be served by policy-making and functional-area integration only. By the 1960s, there was a demand for a critical look at the basic concept of business and its relationship to the environment. The concept of strategy satisfied this requirement and the third phase, based on & strategy paradigm, emerged in the early sixties. The current thinking- which emerged in the eighties- is based on the fourth paradigm of strategic management. The initial focus of strategic management was on the intersection of two broad fields of enquiry: the processes of business firms and the responsibilities of general management.

Difference between Strategic Management and Business Policy

Strategic Management		Business Policy
1)	Deals with strategic decisions that decide the long-term health of an enterprise. It is a comprehensive plan of action designed to meet certain specific goals.	It offers guidelines for managers to take appropriate decisions.
2)	It is a means of putting a policy into effect within certain time limits.	It is a general course of action with no defined time limits.
3)	Deals with those decisions which have not been encountered before in quite the same form, for which no predetermined and explicit set or ordered responses exist in the organization and which are important in terms of the resources committed or the precedents set.	It is a guide to action in areas of repetitive activity.
4)	It deals with crucial decisions, whose implementation requires constant attention of top management.	Once policy decisions are formulated, these can be delegated and implemented by others independently.
5)	Strategies are specific actions suggested to achieve the objectives.	Policies are statements or a commonly accepted understanding of decision making.
6)	Strategies are action oriented.	Policies are thought oriented.
7)	Everyone is empowered to implement the strategy.	Power is delegated to the subordinates for implementation.
8)	Strategies are means to an end.	Policies are guidelines.
9)	Strategy is concerned with uncertainties, competitive situations, and risks etc that are likely to take place at a future date.	Policy is in general concerned with the course of action to fulfill the set objectivies.
10)	Strategy is deployed to mobilize the available resources the best interest of the company.	Policy is an overall guide that governs and controls the managerial action.

Business policy has a general management orientation and tends to primarily to look inward with its concern for properly integrating the   corporation’s   many   functional   activities.   Strategic   management   as   a   field   incorporates the integrative concern of business policy with a heavy environmental and strategic emphasis. This means that strategic management has tended to replace

Business Policy defines the scope or spheres within which decisions can be taken by the subordinates in an organization. It permits the lower level management to deal with the problems and issues without consulting top level management every time for decisions.

Business policies are the guidelines developed by an organization to govern its actions. They define the limits within which decisions must be made. Business policy also deals with acquisition of resources with which organizational goals can be achieved. Business policy is the study of the roles and responsibilities of top level management, the significant issues affecting organizational success and the decisions affecting organization in long-run.

Features of Business Policy

An effective business policy must have following features-

1. Specific- Policy should be specific/ definite. If it is uncertain, then the implementation will become difficult.
2. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should be no misunderstandings in following the policy.
3. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the subordinates.
4. Appropriate- Policy should be appropriate to the present organizational goal.
5. Simple- A policy should be simple and easily understood by all in the organization.
6. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive.
7. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios
8. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance.

Strategy means “the art of the general” (the Greek stratos, meaning ‘field, spread out as in ‘structure’; and agos, meaning ‘leader’).  The term first gained currency at the end of the18th century, and had to do with stratagems by which a general sought   to deceive an enemy, with plans the general made for a campaign, and with the way the general moved and disposed his forces in war. A strategy of a business organization is a comprehensive master plan stating how the organization will achieve its mission and objectives.

Mintzberg has identified the 5 P’s of strategy. Strategy could be a plan, a pattern, a position,

a ploy, or a perspective.

1.        A plan, of  “how do I get there”

2.        A pattern, in consistent actions over time

3.        A position that is, it reflects the decision of the firm to offer particular products or services in particular markets.

4.        A ploy, a maneuver intended to outwit a competitor

5.        A perspective that is, a vision and direction, a view of what the company or organization is to become.

DEFINITION OF STRATEGY:

In a formal sense, strategic management can described as:

The process of identifying, choosing and implementing activities that will enhance the long-term performance of an organization by setting direction and by creating ongoing compatibility between internal skills and resources of the organization, and the changing external environment within which it operates.

The definition above indicates that the task of strategic managers is to identify, choose and implement what they believe will be winning strategies for their organization. While, at one level, strategies can described in generic terms, successful strategies are specific to individual organizations. It is the responsibility of management investigates and fully understands the specific circumstances of their organization before they identify, choose and implement a preferred strategy. The chosen strategy must be unique and different from other organizations.

Ansoff (1965) views strategy as the common threads among an organization’s activities. He therefore perceives strategy as a unifying factor that provides direction for the activities of the organization. This definition implies that strategy has something to do with resource allocation. Organization resources have to be geared towards the desired direction, which is what contributes to the common threats.

Andrews (1971, p28) adds another dimension to the strategy, which he defines as; “The pattern of major objectives purpose or goals and the essential policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be”

According to Andrews (1971) strategy also defines the competitive position of the organization. The additional dimension is the determination of the specific competitive posture of the organization in the market place. This view was further applied by Porter (1980) who agreed that strategy is the central vehicle for achieving competitive advantage in the market place. The aim   of strategy is to establish a sustainable and profitable position against the competitive focus in the industry.

Glueck and Jauch (1984) define strategy as;

“a unified, comprehensive and integrated plan that relates the strategic advantages  of  the  firm  to  the  challenges  of  the  environment  and  that    is designed to ensure that the basic objective of the enterprise are achieved through proper execution by the organization.”

In their definition Glueck and Jauch add a dimension that strategy is a company’s response to the external environment given the resources a company has. They also view strategy as a consisted unifying plan that coordinates the whole organization.

Chaffee (1985) views strategy as an organization’s attraction of individuals in a social contract or a collection of co-operative agreements. Strategy is perceived as guidance that helps enhance or elicit co-operation from the various stakeholders of the organization.

Throughout the 1990s to date strategy continues to be defined in its various  dimensions.  Ansoff’s (1990) addition to the definition emphasized a vital dimension of strategy. According to him, strategy is that which aligns the organization with its external environment. But it is Montgomery and Collis, (1997) who have captured a very interesting and the current key concern of organizations.  They define strategy as; “Corporate strategy is the way a company creates value through the configuration and coordination of its multimarket activities” (Montgomery and Collis, 1997).

This definition has three important aspects; value creation is identified as the ultimate purpose of corporate strategy. So strategy must lead towards creating value. The focus on the multimarket scope of the corporation means that strategy has to influence how the organization is to be structured taking care of its, product, geographic, and vertical boundaries. Lastly, the  emphasis  on how the firm manages the activities and businesses that lie within the corporate hierarchy  means that strategy has to inform how the organization is to be Coordinated.

These, different dimensions suggest that strategy is a multi-dimensional concept. It is evident   that no one definition would capture all the dimensions of strategy. The essential point is that all these dimensions of strategy complement each other.

From all these definitions strategy can be summarized by its characteristics as follows;

i)                   Strategy is a means to the ends of an organization which is value creation.

ii)                 It requires careful monitoring & analysis of changes in the organization external environment

iii)               It takes into account the relationship between external  environmental  forces and the organization internal resources.

iv)               Strategy involves the determination of the long-term mission  and  objectives of the organization and prescribes the course of action needed    to achieve competitive advantage

The decisions that strategy influences for an organization includes;

i)                   Its markets,

ii)                 Its operational activities,

iii)               Its own management structure,

iv)               Its own financial constitution,

v)                 Its competition.

Its critical tasks:

1.      Formulate the company's mission, including broad statements about its purpose, philosophy, and goals.

2.      Conduct an analysis that reflects the company's internal conditions and capabilities.

3.      Assess the company's external environment, including both the competitive and the general contextual factors.

4.      Analyze the company's options by matching its resources with the external environment.

5.      Identify the most desirable options by evaluating each option in light of the company's mission.

6.      Select a set of long-term objectives and grand strategies that will achieve the most desirable options.

7.      Develop annual objectives and short-term strategies that are compatible with the selected set of long-term objectives and grand strategies.

8.      Implement the strategic choices by means of budgeted resource allocations in which the matching of tasks, people, structures, technologies, and reward systems is emphasized.

9.      Evaluate the success of the strategic process as an input for future decision-making.

It involves the planning, directing, organizing, and controlling of a company's strategy-related decisions and actions.

Concept of Strategy:

Strategic management is that set of managerial decisions and actions that determines the long term performance of a corporation. The long-term effects on the business community as a whole and on individual organizations will depend on their ability to manage their organization strategically in an extremely volatile environment. From small local businesses through to multinationals employing vast number of people, the plans that have been and will be made will determine the future success of the business operation. Many organizational collapses, from the high-profile corporate sector through to small business, could have been prevented by paying greater attention to strategic management.

To understand the current role of strategic management it is useful to look at some of the sources of the ideas and methods on which is based. Strategic management developed as industry having moved from individuals working in their own homes through to multinationals working on a worldwide basis.  Strategic management does not seek to prescribe a course of action but rather to offer methods that can    be used by both large and small organizations seeking to reach their full potential. During the period of    its evolution it has allowed governments and organizations to withstand major social and economic upheavals by being prepared for likely eventualities.

Alternative Types of Strategy

Ø  Planned Strategy: Leaders formulate and strive for implementation with the minimum of distortion (Budgets, schedules etc). Formulated in the environment that is fairly predictable or controllable.

Ø  Entrepreneurial: More influenced by the individual, not as precise or articulate as planned strategy, requires an ability to impose one’s vision on the organisation. Entrepreneurial strategy provides flexibility at the expense of specificity and articulation of intentions.

Ø  Ideological Strategy: Shared vision collectively pursued is an ideology. Intentions can usually be identified. Positively embraced by members of the organisation, not passive acceptance.

Ø  Umbrella Strategy: Relax control, leaders set guidelines for behaviour, define boundaries and let actors manoeuvre within. All organizations actions fall under the umbrella (Pricing strategies for example). Umbrella strategy can be both deliberate and emergent.

The characteristics of strategic management: The characteristics of strategic management demonstrate that it is an extremely complex pursuit. Strategic managers are not only concerned with analyzing the environment, or choosing and implementing strategies, but are also concerned   with:

·        Motivate people to participate in the process

·        Seeking out and balancing viewpoints

·        Creating a cohesive set of organizational values to guide behavior

·        Fostering ideas

·        Managing risk profiles

·        Applying figurehead, innovation and interpersonal skills to act as dynamic leaders rather than mechanistic managers.

However, strategic management is complex because it is:

i)                   Multidimensional – it is influenced by a large number of variables, both internal and external to the organization.

ii)                 Based on partial ignorance: Managers can never be sure of the nature and significance of all external and internal trends affecting the organization in the future.

iii)               High-risks: it involves the commitment of substantial resources for long periods of time

iv)               Contextual: the complex internal and external context in which strategy occurs not only makes decision make difficult, but also complicates performance assessment.

v)                 Requires innovation—successful strategies are unique in some respect, they offer something different and advantageous in comparison with competitors.

THE NEED FOR STRATEGIC MANAGEMENT

1.      Strategic management is the primary means available to managers to deal with the increased scale and pace of change within and outside organizations. This is especially true due to the technological, social and economic environments in which business operates which are increasingly volatile and unpredictable

2.      Advances in information, communication and operations technology have not only significantly changed the way in which existing organizations function, but have created a whole new fields of business activity. The customers have also become more educated, informed and demanding while at the same time becoming less loyal. This calls for more efficient methods of serving them while remaining at the edge of competition.

3.      Besides the external challenges, management is now faced further by challenges of organizations themselves being in a state of turmoil. Some of organizations have grown so large and complex that they stretch the feasibility of traditional management theory, whereas others have experienced significant downsizing and refocusing of their activities.

4.      All managers must understand how their activities add value to the operations of the organization. Strategic management is, therefore, the responsibility of all managers in an organization. Strategic management is not an activity that is confirmed to large, conglomerate profit-oriented  organizations.

5.      A survey of nearly 50 corporations in a variety of countries and industries found the three  most  highly rated benefits of  strategic management to be:

i)                   Clearer sense of strategic vision for the firm

ii)                 Sharper focus on what is strategically important

iii)               Improved understanding of a rapidly changing environment

Since the literature on corporate strategy emerged in the 1950s and 1960s, different contributors have emphasized different dimensions of strategy. However, the fundamentals have always remained the same. What seems to change over time is the form. These changes are well understood in relation to the unfolding external business environment

Strategic management is basically needed for every organization and it offers several benefits.

Levels of Strategy

A typical business firm should consider three types of strategies, which form a hierarchy as shown in Figure1.1

Figure 1.1 Hierarchy of strategy

Corporate Strategy

This describes a company’s overall direction towards growth by managing business and product lines. These include stability, growth and retrenchment. For example, Coco cola, Inc., has followed the growth strategy by acquisition. It has acquired local bottling units to emerge as the market leader.

Business Strategy

Usually occurs at business unit or product level emphasizing the improvement of competitive position of a firm’s products or services in an industry or market segment served by that business unit. Business strategy falls in the in the realm of corporate strategy. For example, Apple Computers uses a differentiation competitive strategy that emphasizes innovative product with creative design.

Functional Strategy

It is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide the firm with a competitive advantage.

Operating Strategy

These are concerned with how the component, parts of an organization deliver effectively the corporate, business and functional -level strategies in terms of resources, processes and people. They are at departmental level and set periodic short-term targets for accomplishment.

Benefits of strategic management

1.         Strategic management improves organizational effectiveness: Strategic management improves organizational effectiveness by avoiding faddism and providing a methodology by which projects and processes are integrated to achieve overall objectives. In every organization there are essentially two prerequisites for success: efficiency and effectiveness.

·        Efficiency relates to how well an activity or operation is performed. This ensures that an organization does things right.

·        Effectiveness relates to performing the correct activity or operation. This is determined by the relationship between an organization and its environment. Effectiveness ensures that an organization does the right things.

Creating an efficient organization is often relatively easy. It involves setting up methods, procedures and systems to solve day-to-day problems. Strategic management is mainly  focused  on  creating  effectiveness because it is concerned with the long-term compatibility between an organization and its environment. It should be noted that effectiveness alone will not secure the long-term future of an organization. Effective organizations attract competition, thus reduce their uniqueness.

2.  Strategic management creates organizational flexibility:

Flexibility is essential if organizations are to respond effectively to the unknowns in the external environment. Strategic mistakes caused by misinterpreting environmental trends or not reacting rapidly enough to changed industry conditions can be devastating for an organization. Effective organizations need to consciously create flexibility through organizational design and management of resources. This    is particularly true for organizations that operate in highly changeable and volatile environment.

Strategic management assists organizations in developing strategies flexibility through a combination of activities, including environmental scanning, creating resource buffer to minimize the impact of sudden change of specific organizational activities, developing and positioning individual staff as champions of the strategic management process and shortening decision lines to allow for fast responses to changing conditions.

3.  Strategy utilizes the core competencies of an organization:

Core competencies refer to those activities of the firm that create unique value. These activities are not necessarily those on which the organization spends the most time, but those that have the potential to create sustained competitive advantage.

4.    Strategic management determines organizational risk profile

5.    Strategic management creates patterns of investment

6.    Strategic management creates sustainable competitive advantage (SCA)

7.    Universal

Strategy refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and expectations that provides general guidance for specific actions in pursuit of particular ends. Nations have, in the management of their national policies, found   it necessary to evolve strategies that adjust and correlate political, economic, technological, and psychological factors, along with military elements. Be it management of national polices, international relations, or even of a game on the playfield, it provides us with the preferred path that we should take for the journey that we actually make.

8.             Keeping Pace with Changing Environment

The present day environment is so dynamic and fast changing thus making it very difficult for any modern business enterprise to operate. Because of uncertainties, threats and constraints, the business corporations are under great pressure and are trying to find out the ways and means for their healthy survival. Under such circumstances, the only last resort is to make the best use of strategic management which can help the corporate management to explore the possible opportunities and at the same time to achieve an optimum level of efficiency by minimizing the expected threats.

9.       Minimizes Competitive Disadvantage

It minimizes competitive disadvantage and adds up to competitive advantage. For example, a company like Hindustan Lever Ltd., realized that merely by merging with companies like Lakme, Milk food, Ponds, Brooke bond, Lipton etc which make fast moving consumer goods alone will not make it market leader but venturing into retailing will help it  reap heavy profits. Then emerged its retail giant “Margin Free’ which is the market leader in states like Kerala. Similarly, the R.P. Goenka Group and the Muruguppa group realized that mere takeovers do not help and there is a need to reposition their products and reengineer their brands. The strategy worked.

10.             Clear Sense of Strategic Vision and Sharper Focus on Goals and Objectives

Every firm competing in an industry has a strategy, because strategy refers to how a given objective will be achieved. ‘Strategy’ defines what it is we want to achieve and charts our course in the market place; it is the basis for the establishment of a business firm; and it is a basic requirement for a firm to survive and to sustain itself in today’s changing environment by providing vision and encouraging mission.

11.          Motivating Employees

One should note that the labor efficiency and loyalty towards management can be expected only in an organization that operates under strategic management. Every guidance as to what to do, when and how to do and by whom etc., is given to every employee. This makes them more confident and free to perform their tasks without any hesitation. Labor efficiency and their loyalty which results into industrial peace and good returns are the results of broad-based policies adopted by the strategic management

12.          Strengthening Decision-Making

Under strategic management, the first step to be taken is to identify the objectives of the business concern. Hence a corporation organized under the basic principles of strategic management will find a smooth sailing due to effective decision-making. This point out the need for strategic management.

13.          Improved Understanding of Internal and External Environments of Business

Strategy formulation requires continuous observation and under- standing of environmental variables and classifying them as opportunities and threats. It also involves knowing whether the threats are serious or casual and opportunities are worthy or marginal. As such strategy provides for a better understanding of   environment.

Model of strategic management

It should be noted that strategic management consists of FOUR basic elements:

1.                 Environmental scanning: Is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation. Its purpose is to identify strategic factors – those external and internal elements that will determine the future of the corporation. This is well done through use of SWOT analysis tool.

2.                 Strategic formulation: Is the development of long term plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines.

3.                 Strategic implementation: Is the process by which strategies and polices are put into action through the development of programs, budgets and procedures. This process might involve changes within the overall culture, structure, and/or management system of the entire organization. Sometimes referred to as operational planning, strategy implementation often involves day-to-day decisions in resource allocation.

4.                 Evaluation and control: Is the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Managers at all levels use the resulting information to take corrective action and resolves problems. Although this is the final stage, it can also pin point weaknesses in the other stages thus stimulate the entire process to start all over again. This means that a good and effective process of strategic management must have room for feedback to ensure such changes and corrections are performed.

The study of strategic management includes environmental scanning (both external and internal), strategy formulation, strategy implementation, and evaluation and control. The study of strategic management emphasizes the monitoring and evaluation of external opportunities and threats in light of a corporation’s strengths and weaknesses. Originally called business policy, strategic management incorporates such topics as long-range planning and strategy.

PHASES OF STRATEGIC MANAGEMENT

Many of the concepts and techniques that deal with strategic management have been developed and used successfully by business corporations such as General Electric and the Boston Consulting Group. Over time, business practitioners and academic researchers have expanded and refined these concepts. Initially, strategic management was of most use to large corporations operating in multiple industries. Increasing risks of error, costly mistakes, and even economic ruin are causing today’s professional managers in all organizations to take strategic management seriously in order to keep their companies competitive in an increasingly volatile environment. As managers attempt to better deal with their changing world, a firm generally evolves through the following four phases of strategic management:

Phase 1—Basic financial planning: Managers initiate serious planning when they are requested to propose the following year’s budget. Projects are proposed on the basis of very little analysis, with most information coming from within the firm. The sales force usually provides the small amount of environmental information. Such simplistic operational planning only pretends to be strategic management, yet it is quite time consuming. Normal company activities are often suspended for weeks while managers try to cram ideas into the proposed budget. The time horizon is usually one year.

Phase 2— Forecast-based planning: As annual budgets become less useful at stimulating long term planning, managers attempt to propose five-year plans. At this point they consider projects that may take more than one year. In addition to internal information, managers gather any available environmental data—usually on an ad hoc basis—and extrapolate current trends five years into the future. This phase is also time consuming, often involving a full month of managerial activity to make sure all the proposed budgets fit together. The process gets very political as managers compete for larger shares of funds. Endless meetings take place to evaluate proposals and justify assumptions. The time horizon is usually three to five years.

Phase 3—Externally oriented (strategic) planning: Frustrated with highly political yet ineffectual five-year plans, top management takes control of the planning process by initiating strategic planning. The company seeks to increase its responsiveness to changing markets and competition by thinking strategically. Planning is taken out of the hands of lower-level managers and concentrated in a planning staff whose task is to develop strategic plans for the corporation. Consultants often provide the sophisticated and innovative techniques that the planning staff uses to gather information and forecast future trends. Ex-military experts develop competitive intelligence units. Upper-level managers meet once a year at a resort “retreat” led by key members of the planning staff to evaluate and update the current strategic plan. Such top-down planning emphasizes formal strategy formulation and leaves the implementation issues to lower management levels. Top management typically develops five-year plans with help from consultants but minimal input from lower levels.

Phase 4—Strategic management: Realizing that even the best strategic plans are worthless without the input and commitment of lower-level managers, top management forms planning groups of managers and key employees at many levels, from various departments and workgroups. They develop and integrate a series of strategic plans aimed at achieving the company’s primary objectives. Strategic plans at this point detail the implementation, evaluation, and control issues. Rather than attempting to perfectly forecast the future, the plans emphasize probable scenarios and contingency strategies. The sophisticated annual five-year strategic plan is replaced with strategic thinking at all levels of the organization throughout the year. Strategic information, previously available only centrally to top management, is available via local area networks and intranets to people through out the organization. Instead of a large centralized planning staff, internal and external planning consultants are available to help guide group strategy discussions. Although top management may still initiate the strategic planning process, the resulting strategies may come from anywhere in the organization. Planning is typically interactive across levels and is no longer top down. People at all levels are now involved.

General Electric, one of the pioneers of strategic planning, led the transition from strategic planning to strategic management during the 1980s.8 By the 1990s, most other corporations around the world had also begun the conversion to strategic management.

Strategic Decision Making:

The distinguishing characteristic of strategic management is its emphasis on strategic decision making. As organizations grow larger and more complex, with more uncertain environments, decisions become increasingly complicated and difficult to make. In agreement with the strategic choice perspective mentioned earlier, this book proposes a strategic decision-making framework that can help people make these decisions regardless of their level and function in the corporation.

What Makes a Decision Strategic:

Unlike many other decisions, strategic decisions deal with the long-run future of an entire organization and have three characteristics:

1. Rare: Strategic decisions are unusual and typically have no precedent to follow.

2. Consequential: Strategic decisions commit substantial resources and demand a great deal of commitment from people at all levels.

3. Directive: Strategic decisions set precedents for lesser decisions and future actions throughout an organization

MINTZBERG’S MODES OF STRATEGIC DECISION MAKING

Some strategic decisions are made in a flash by one person (often an entrepreneur or a powerful chief executive officer) who has a brilliant insight and is quickly able to convince others to adopt his or her idea. Other strategic decisions seem to develop out of a series of small incremental choices that over time push an organization more in one direction than another According to Henry Mintzberg, the three most typical approaches, or modes, of strategic decision making are entrepreneurial, adaptive, and planning (a fourth mode, logical incrementalism, was added later by Quinn):

_ Entrepreneurial mode: Strategy is made by one powerful individual. The focus is on opportunities; problems are secondary. Strategy is guided by the founder’s own vision of direction and is exemplified by large, bold decisions. The dominant goal is growth of the corporation. Amazon.com, founded by Jeff Bezos, is an example of this mode of strategic decision making. The company reflected Bezos’ vision of using the Internet to market books and more. Although Amazon’s clear growth strategy was certainly an advantage of the entrepreneurial mode, Bezos’ eccentric management style made it difficult to retain senior executives.

_ Adaptive mode: Sometimes referred to as “muddling through,” this decision-making mode is characterized by reactive solutions to existing problems, rather than a proactive search for new opportunities. Much bargaining goes on concerning priorities of objectives.

Strategy is fragmented and is developed to move a corporation forward incrementally. This mode is typical of most universities, many large hospitals, a large number of governmental agencies, and a surprising number of large corporations. Encyclopaedia Britannica Inc., operated successfully for many years in this mode, but it continued to rely on the door-to-door selling of its prestigious books long after dual-career couples made that marketing approach obsolete. Only after it was acquired in 1996 did the company change its door-to-door sales to television advertising and Internet marketing. The company now charges libraries and individual subscribers for complete access to Brittanica.com and offers CD-ROMs in addition to a small number of its 32-volume print set.

_ Planning mode: This decision-making mode involves the systematic gathering of appropriate information for situation analysis, the generation of feasible alternative strategies, and the rational selection of the most appropriate strategy. It includes both the proactive search for new opportunities and the reactive solution of existing problems. IBM under CEO Louis Gerstner is an example of the planning mode. When Gerstner accepted the position of CEO in 1993, he realized that IBM was in serious difficulty. Mainframe computers, the company’s primary product line, were suffering a rapid decline both in sales and market share. One of Gerstner’s first actions was to convene a two-day meeting on corporate strategy with senior executives. An in-depth analysis of IBM’s product lines revealed that the only part of the company that was growing was services, but it was a relatively small segment and not very profitable. Rather than focusing on making and selling its own computer hardware, IBM made the strategic decision to invest in services that integrated information technology. IBM thus decided to provide a complete set of services from building systems to defining architecture to actually running and managing the computers for the customer—regardless of who made the products. Because it was no longer important that the company be completely vertically integrated, it sold off its DRAM, disk-drive, and laptop computer businesses and exited software application development. Since making this strategic decision in 1993, 80% of IBM’s revenue growth has come from services.

_ Logical incrementalism: A fourth decision-making mode can be viewed as a synthesis of the planning, adaptive, and, to a lesser extent, the entrepreneurial modes. In this mode top management has a reasonably clear idea of the corporation’s mission and objectives, but, in its development of strategies, it chooses to use “an interactive process in which the organization probes the future, experiments and learns from a series of partial (incremental) commitments rather than through global formulations of total strategies. Thus, although the mission and objectives are set, the strategy is allowed to emerge out of debate, discussion, and experimentation. This approach appears to be useful when the environment is changing rapidly and when it is important to build consensus and develop needed resources before committing an entire corporation to a specific strategy. In his analysis of the petroleum industry, Grant described strategic planning in this industry as “planned emergence.” Corporate headquarters established the mission and objectives but allowed the business units to propose strategies to achieve them.

STRATEGIC DECISION-MAKING PROCESS: AID TO BETTER DECISIONS

Good arguments can be made for using either the entrepreneurial or adaptive modes (or logical incrementalism) in certain situations.85 This book proposes, however, that in most situations the planning mode, which includes the basic elements of the strategic management process, is a more rational and thus better way of making strategic decisions. Research indicates that the planning mode is not only more analytical and less political than are the other modes, but it is also more appropriate for dealing with complex, changing environments. Wetherefore propose the following eight-step strategic decision-making process to improve the making of strategic decisions (see Figure 1–5):

1. Evaluate current performance results in terms of (a) return on investment, profitability, and so forth, and (b) the current mission, objectives, strategies, and policies.

2. Review corporate governance—that is, the performance of the firm’s board of directors and top management.

3. Scan and assess the external environment to determine the strategic factors that pose Opportunities and Threats.

4. Scan and assess the internal corporate environment to determine the strategic factors that are Strengths (especially core competencies) and Weaknesses.

5. Analyze strategic (SWOT) factors to (a) pinpoint problem areas and (b) review and revise the corporate mission and objectives, as necessary.

6. Generate, evaluate, and select the best alternative strategy in light of the analysis conducted in step 5.

7. Implement selected strategies via programs, budgets, and procedures.

8. Evaluate implemented strategies via feedback systems, and the control of activities to ensure their minimum deviation from plans. This rational approach to strategic decision making has been used successfully by corporations such as Warner-Lambert, Target, General Electric, IBM, Avon Products, Bechtel Group Inc., and Taisei Corporation.

 

Dimensions of Strategic Decisions

1.      Strategic Issues Require Top-Management Decisions

Since strategic decisions over -arch several areas of a firm's operation, they require top management involvement, which has the perspective needed to understand the broad implications of such decisions and the power to authorize the necessary resource   allocations.

2.      Strategic Issues Require Large Amounts of the Firm's Resources

Strategic decisions involve substantial allocations of people, physical assets, or moneys that either must be redirected from internal sources or secured from outside the firm. They also commit the firm to actions over an extended period.

3.      Strategic Issues Often Affect the Firm's Long-Term Prosperity

Strategic decisions ostensibly commit the firm for a long time, typically five years; with the impact lasting much longer. Once a firm has committed itself to a particular strategy, its image and competitive advantages usually are tied to that strategy. Firms become known in certain markets, for certain products, with certain technologies. They would jeopardize their previous gains if they shifted from these markets, products, and technologies by adopting a radically different strategy.

4.      Strategic Issues Are Future Oriented

Strategic decisions are based on what manager’s forecast, rather than on what they know. Emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options.

In the turbulent and competitive free enterprise environment, a firm will succeed only if it takes a proactive (anticipatory) stance toward change.

5.      Strategic Issues Usually Have Multifunctional or Multi-business Consequences

Strategic decisions have complex implications for most areas of the firm. Decisions about such matters as customer mix, competitive emphasis, or organizational structure necessarily involve a number of the firm's strategic business units (SBUs), divisions, or program units. All of these areas will be affected by allocations or reallocations of responsibilities and resources that result from these decisions.

6.      Strategic Issues Require Considering the Firm's External Environment

All business firms exist in an open system. They affect and are affected by external conditions that are largely beyond their control. Therefore, to successfully position a firm in competitive situations, its strategic managers must look beyond its operations. They must consider what relevant others (e.g., competitors, customers, suppliers, creditors, government, and labor are likely to do.

In particular, formality is associated with the size of the firm and with its stage of development. Methods of evaluating strategic success also are linked to formality.