Topic 2

The Strategic Management Process

A. Strategic Formulation (Creating Strategies)

This involves creating a new strategy by first assessing existing strategies, the organization, and its
environment.
5 Strategic Questions (Peter Drucker):
1. What is our business mission?
2. Who are our customers?
3. What do our customers value?
4. What have been our results?
5. What is our plan?

- Identify and analyze current: Mission, Objectives and Strategies

- Analyze internal and external environments: Organizational Resources and Capabilities (strengths
and weaknesses); Industry and External Environment (opportunities and threats)
- Revise mission and objectives, select new strategies: Corporate, Business and Functional

B. Strategy Implementation (Putting strategies into action)

The process of allocating resources and putting strategies into action. Every organizational and
management system must be mobilized to support and reinforce the accomplishment of strategies.
- Implement strategies: Corporate Governance; Management Systems and practices; Strategic
Leadership
- Evaluate Results: Strategic Control; Renew Strategic Management Process

I. Analysis of Vision, Mission, Values and Objectives

VISION
- It is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve.
- The vision statement articulates the deal description of a organization and gives shape to its future.
It points the firm in the direction of where it would like to be in the years to come. A firm’s vision
tends to be enduring while its mission change with new environmental conditions. It should be short
and concise to be easily remembered.

MISSION
- (Or the purpose of the organization)
It is the organization’s reason for existence in society. It describes what the strategy or underlying
business model is trying to accomplish.
- Ask the questions like: “What are we moving to?” “What is our dream?” “What kind of difference
do we want to make in the world?” “What do we want to be known for?” When the mission is clear
and compelling, it is easier for an organization to rally resources and systems to pursue its strategic
intent.
- It specifies the businesses in which the firm intends to compete and the customers it intends to
serve.

- A mission statement should identify the purpose and philosophy of the organization in a way that
inspires the employees and external stakeholders. Stakeholders are the individuals and groups –
including customers, shareholders, suppliers, creditors, community groups, and others who are
directly affected by the organization and its strategic accomplishments.
 Stakeholders – are the individuals, groups, and organizations that can affect the firm’s vision and
mission, are affected by the strategic outcomes achieved, and have enforceable claims on the firm’s
performance.

Classification of Stakeholders:
1. Capital Market Stakeholders
- Shareholders
- Major suppliers of capital
2. Product Market Stakeholders
- Primary customers
- Suppliers
- Host communities
- Unions
3. Organizational Stakeholders
- Employees
- Managers
- Nonmanagers

An example of how stakeholders’ interest is reflected in the mission of a business firm:

Mission:
- For Employees – We respect the individuality of each employee . . . creativity and productivity are
encouraged, valued, and rewarded.
- For Communities – We are committed to being caring and supportive corporate citizens within the
worldwide communities in which we operate.
- For Shareholders – We are dedicated to . . . performing in a manner that will enhance returns on
investments.
- For Customers – We are committed to providing superior value in our products and services
- For Suppliers – We think of our suppliers as partners who share our goal of . . . highest quality.

CORE VALUES

Behavior in and by organizations will always be affected in part by values, which are broad beliefs of what is
or is not appropriate. (We know what is good and most of us want to do good things but we do not.)
- Core values are reflected in and shaped by organizational culture (the predominant value system of
the organization as a whole). In strategic management, the presence of strong core values for an
organization helps build institutional identity. It gives character to an organization in the eyes of its
employees and external stakeholders, and it backs up the mission statement. Shared values help
guide the behavior of the organization members in meaningful and consistent ways.

OBJECTIVES

Whereas a mission statement sets forth an official purpose for the organization, and the core values
describe appropriate standards of behavior for its accomplishment, operating objectives direct activities
toward key and specific performance results. These objectives are shorter-term targets against which actual
performance results can be measured as indicators of progress and continuous improvement.

According to Peter Drucker (management consultant and author), the operating objectives of a
business might include the following:

 Profitability – producing at a net profit in business

 Market share – gaining and holding a specific market share (the portion of a market
controlled by a particular company or product)
 Human talent – recruiting and maintaining a high-quality workforce
 Financial health – acquiring capital, earning positive returns
 Cost-efficiency – using resources well to operate at low cost
 Product quality – producing high-quality goods or services
 Innovation – developing new product or processes
  Social responsibility – making a positive contribution to society

II. The External Environment

A. Analysis of General Environment

General environment – it is composed of dimensions in the broader society that influence and industry and
the firms within it.

The Four Parts:

1. Scanning – identifying early signals of environmental changes and trends
2. Monitoring – detecting meaning through ongoing observations of environmental changes and trends
3. Forecasting – developing projections of anticipated outcomes based on monitored changes and trends
4. Assessing – determining the timing and importance of environmental changes and trends to firm’s
strategies and their management.

Dimensions/segments of the General Environment:

1. The Demographic Segment (population size, age structure, geographic distribution, ethnic mix, income
distribution)
2. The Economic Segment (the nature and direction of the economy in which a firm competes or may
compete)
3. The Political/Legal Segment (Concerned with how organizations try to influence governments and how
they try to understand the influences of those governments on their competitive actions and
responses.)
4. The Socio cultural Segment (concerned with society’s cultural values and attitudes)
5. The Technological Segment (this includes the institutions and activities involved in creating new
knowledge and translating that knowledge into new outputs, products, processes, and materials)
6. The Global Segment (includes relevant new global markets, existing markets that are changing,
important international political events, and critical cultural and institutional characteristics of global
markets)
7. The Sustainable Physical Environment Segment (This refers to potential and actual changes in the
physical environment and business practices that are intended to positively respond to those changes
with the intent of creating a sustainable environment)

B. Analysis of Industry Environment

Industry environment – it is the set of factors that directly influences a firm and its competitive actions and
responses.

Industry – it is a group of firms producing products that are close substitutes.

Opportunities and Threats can be found among macro environmental factors such as technology,
government, social structures, population demographics, the global economy and the natural environment.
They can also include developments in the industry environment of resource suppliers, competitors, and
customers.

The critical issue in the external environment (according to Michael Porter, a scholar and consultant) is the
nature of rivalry and competition within the industry. He offers the five forces model as a framework for
competitive industry analysis.

The five strategic forces are:

1. Competitors – intensity of rivalry among firms within the industry.
- When does competitive rivalry intensify?
2. New entrants – threats of new competitors entering the market.
- How can firms maintain a high entry barriers?
 3. Suppliers – bargaining power of suppliers.
- When are suppliers powerful?
4. Customers – bargaining power of customers.
- When are customers powerful?
5. Substitutes – threats of substitute products or services.
- When do product substitutes present a threat to a firm?

From Michael Porter’s perspective, these competitive forces constitute the “industry structure.” The
strategic management challenge is to position an organization strategically within its industry, taking
into account the implications of forces that make it more or less attractive.

Porter’s Model of five strategic forces affecting industry competition:

New Entrants
Threat of potential new
competitors

Suppliers Industry Competition Customers

Bargaining power of Rivalry among competing Bargaining power of
suppliers firms buyers

Substitute Products
Threat of substitute
products or services

C. Competitor Analysis

Competitor analysis - it is how companies gather and interpret information about their competitors.
- It focuses on each company against which a firm competes directly.

To analyze competitors, the firm should understanding the following:

- What drives the competitor, as shown by its future objectives
- What the competitor is doing and can do, as revealed by its current strategy
- What the competitor believes about the industry, as shown by its assumptions
- What the competitor’s capabilities are, as shown by its strengths and weaknesses

Competitor intelligence – it is the set of data and information the firm gathers to better understand and
anticipate competitors’ objectives, strategies, assumptions and capabilities.

III. The Internal Environment – Analysis of Organizational Resources and Capabilities

The increasing importance of the global economy emphasizes the need to use a global mind-set (it is the
ability to analyze, understand and manage an internal organization in ways that are not dependent on the
assumption of a single country, culture or context) to analyze the firm’s internal organization.
Components of an Internal Analysis
1. Resources (tangible and intangible)
2. Capabilities
3. Core Competencies
Discovering core competencies
- Four criteria of sustainable advantage: valuable, rare, costly to imitate, non-substitutable
- Value chain analysis: outsource
4. Competitive Advantage
5. Strategic Competitiveness

- The technique used is SWOT analysis – the internal analysis of organizational Strengths and Weaknesses as
well as the external analysis of environmental Opportunities and Threats.

The SWOT analysis begins with a systematic evaluation of the organization’s resources and capabilities. A
major goal is to identify core competencies in the form of special strengths that an organization has or does
exceptionally well in comparison with competitors. They are capabilities that by virtue of being rare, costly
to imitate, and non-substitutable, become viable sources of competitive advantage. Core competencies may
be found in special knowledge or expertise, superior technologies, efficient manufacturing technologies, or
unique product distribution systems, among many other possibilities.

Organizational weaknesses must also be identified to gain a realistic perspective on the formulation of
strategies. The goal in strategy formulation is to create the strategies that build upon organizational
strengths and minimize the impact of weaknesses.

Internal Assessment of the Organization

What are our strengths? What are our weaknesses?

 Manufacturing efficiency?  Outdated facilities
 Skilled workforce?  Inadequate R&D?
 Good market share?  Obsolete technologies?
 Strong financing?  Weak management?
 Superior reputation?  Past planning failure

SWOT ANALYSIS

What are our opportunities? What are our threats?

 Possible new markets?
 Strong economy?
 Weak market rivals?
 Emerging technologies?
 Growth of existing market?
 New competitors?
 Shortage of resources?
 Changing market tastes?
 New regulations?
 Substitute products?

External Assessment of the Environment