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STRATEGIC MANAGEMENTPART 1
Contents:
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Understanding strategy
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Purpose of strategic management
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Distinguishing strategic problem from tactical problem
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Formulation of a strategic plan
A) Understanding strategy:
In understanding strategy two broad views are used, viz., strategic fit concept and strategicstretch concept. Both are discussed in the following paragraphs. But before discussing those two concepts,we need to discuss two factors on which these two concepts lean heavily i.e concept of external and internalenvironment.External environment lets one know the industry in which the firm is operating. It takes intoaccount the product and factor markets. Profitability of the firm essentially depends on these two markets.Equilibrium conditions in these two markets determines the profitability. Strategic management monitors thefactors which influence the equilibrium.Internal environment deals with the status of the resource base of the firm on the basis of which the firm competes in the market. This concept is encapsulated in the concept of SWOT analysis. SW-refers to internal environment whereas OT-Refers to the external environment. The essence is that strengthand weaknesses is matched with opportunities and threat to develop strategy. Now which environment ismore important? It is in this regard that the two broad views or schools of thought differ. Strategic fitconcepts or the classical school lays the importance on the external environment whereas the strategicstretch concept emphasizes on the internal environment of the firm. Let’s discuss both of them one by one---1. Strategic Fit concept:Michael Porter and other eminent classical strategy Gurus have the dominant figure inshaping this framework of business strategy. According to them, the central thrust of the strategy is to gain asustainable competitive advantage over the competitors which results in the superior profitability of the firm.In their opinion, the difference in profitability among the firms operating in the industry can be attributed tothe external environment and not to the internal resource base. This happens due to mobility of factors whichwipes out the heterogeneity of the resource base in the long run. Then the higher profitability is attributed tothe higher adaptive capacity of the firm in adapting to changing external environment. So monitor theenvironment, find opportunities and modify the resource base. So according to this view, strategy is a set of action plans which is used to monitor the external environment of the firm in order to adapt the firmaccording to the changes of the environment aiming at gaining a sustainable competitive advantage.2. Strategic Stretch concept:This concept evolved out of the quest for success of Japanese firm in 1970s when theyentered the U.S market. It was attributed to the factor that not the adaptive capacity but to the quality of theresource base that makes the difference in commercial success. So, the purpose of strategic management isto improve the quality of the resource base. The notion of core competencies is closely related to the so-called resource based view of the firm., which is most recent model to understand the mechanism for achieving competitive advantage. It represents a major departure from a strategic approach based on marketdriven considerations. But how the firm decides which resource base to use to gain positive economic profit? The criteria are as follows---
 
i) Is it easily available?
It means that the resources are traded in the market or not. For example, the rawmaterial or resources should not be easily available to the competitors.
ii) Inimitability:
The resource should be such that it cannot be easily copied by the competitors andhard to copy. There are certain features of resources which makes it hard to copy:
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Physical uniqueness: It refers to acquiring assets which are not available to any other competitor.For example: Service centres of Maruti.
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Path Dependency:A resource base is developed expending lot over a long period of time, whichif the competitor wants to copy or develop has to spend the same time andamount i.e will have to follow the same path. This is called path dependency.For example: Corporate image, Goodwill etc.
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Causal ambiguity:It means developing excellence in multi areas of which few can be copied but notthe all. It isdeveloping the sum total attribute of characteristics which are unique.
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Scale deterrence:It means coming out with a mammoth size plant then taking down the costwhich cannot be copied by the competitors.
iii) Durability:
Every asset depreciates with use. But to gain sustainable competitive advantage, firmneed to have assets which don’t depreciate with use such as non-physical asset. For example: Brand name of TATA.
iv) Appropriability:
Resources create value. Receiver of the values varies. As a manager, it is the duty totake care that the value created by firm remains within the firm. A strategy that is bothunique and sustainable generates a significant economic value. The issue of appropriability addresses the question of who will capture the resulting economic rent.Sometimes, the owners of the business unit do not appropriate the totality of the valuecreated because of the gap that might exist between ownership and control. Nonowners might control complementary and specialized factors that might divert thecash proceeds away from the business. This type of dissipation of value is calledholdup. A notorious example of holdup in recent business history has taken place inthe personal computer industry, where Microsoft and Intel have capturedmanufacturing firms the meager 20 percent remaining.
 
The second threat for the appropriability of the economic value is referred to as slack.It measures the extent to which the economic value realized by the business unit issignificantly lower than what potentially could have been created. Slack is often theresult of the inefficiencies or unwarranted benefits that prevent the accumulation of economic results in the business. While holdup produces a different distribution of thetotal wealth created, slack reduces the size of this wealth.
v) Substitutability:
If it can be substituted by anything else, then it can’t be the source of competitiveadvantage.
vi) Superiority:
Whether it is of superior value than the competiting firm or not.
vii) Opportunism and timing:
One other condition that is necessary to obtain competitive advantage occurs prior toestablishing superior resource position. It is necessary that the cost incurred inacquiring the resources are lower than the value created by them. In other words, thecost implicit in implementing the strategy of business unit should not offset the valuegenerated by it. This condition is what we aspire to capture under this requirement of opportunism and timing in order to secure competitive advantage.
B) Purpose of strategic management:
The primary concern of strategic management is to help the firm gain a sustainablecompetitive advantage in the market place. Competitive advantage is a competitivesuperiority in attracting customers. It helps the firm to gain a continuous positive economic profit. Now economic profit is defined as ---Economic profit= Profit after tax (PAT) --- Cost of equity capitalIt is considered as a measure of competitive advantage because it considers the productivityof all the factor. On economic profit there is no claimant. Thus it is called free cash which can be invested in future to meet company’s non-financial goal. The cost of equity capital iscalculated using the capital asset pricing model developed by William Sharpe.Knowledge of strategic management helps a manager in the following ways— 
i) Defining the boundary of the firm:
The boundary of the firm has three aspects--- corporate, horizontal and vertical boundary.
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Corporate boundary:It is not possible for a single firm to rule over the market. Thus instead of looking at all areas , the firm must decide what are the business areas it wantsto look for and compete. This defines the corporate boundary of the firm.
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