Firms operate in a dynamic business environment where the fundamentals of the market are fluid and in constant flux, requiring that firms be adaptable and efficient if they have to survive in the competitive environment. Managers have the responsibility of ensuring that they align the firm in such a manner that it has a competitive advantage that allows it to outperform rivals and grow its market share and profitability. To achieve the business goals, strategic management has become a tool that is used by management to deliver value, to not only the consumers, but also the shareholders and other stakeholders of a business entity. Strategic management has become a buzzword in the modern management lexicon, although the specific definition of the term remains vague and there are disagreements between scholars on formulation of a coherent identity (Nag, Hambrick and Chen, 2007). Despite the ambiguity in the definition of strategic management, it is important to have an overview of what it entails in order to appreciate its importance in the management of firms. There are three main components of strategic management, namely, analysis, decisions and actions that a firm takes in a bid to create and sustain competitive advantages over its competitors.
For effective strategic management, managers analyze strategic goals of an organization vis-à-vis their alignment with current realities of the firm. The analysis also entails the careful examination of the internal and external environment to generate sufficient data that is current and accurate, which can be used to aid the decision making process. Analysis of the business environment helps a firm to identify competitors within its market niche, as well as determining the strategies to use to compete effectively. After analysis, management uses the data generated to make informed strategic decisions on the direction that the business entity should take. Decisions made after thorough analysis of the business environment help business entities to substantially reduce mistakes and to respond expeditiously to changing business dynamics. Lastly, the decision making process outcomes must be converted into actionable points that the business entity can implement. Making decisions is important in a business, but can be ultimately an exercise in futility if there is no mechanism to act on the decisions.
Implementation of decisions is the most challenging aspect of strategic management, requiring the allocation of considerable material and human resources to the implementation process. The implementation process is dynamic and ongoing, requiring continuous feedback loop to help managers to respond quickly to any challenges that may arise and institute intervention measures. Analysis, decision-making, and actions form the three main pillars of strategic management that managers must address if a business entity is to survive and be competitive in the marketplace. Strategic management should be comprehensively applied to all of a business entity’s activities for formulation of a coherent business strategy (Hambrick, 2004 p. 95). There are a number of areas of strategic management that are critical to the success of contemporary organizations, which include corporate governance, PESTEL, Porter’s 5 forces, stakeholder management/analysis, emergent strategy, and CSR/sustainability.
Corporate governance is an area that is critical to the success of a strategic management policy in a firm, considering that the adoption of the policy is a management decision. In its broadest sense, corporate governance can be considered as the set of interrelationships between the board, shareholders, and other stakeholders of a firm (Afsharipour 2009, p. 342). More elaborate and specific definitions for corporate governance exist, with some scholars conceptualizing it as policies, laws, customs, processes, and institutions that affect how a corporation is administered or controlled. Although the concept of corporate governance has been in academic discourse for some time, it has become a public policy concern in the recent past following the corporate scandals of the early 2000s that led to massive investor losses and the bankruptcy of some corporations (Gill, 2008, p. 457). There have been a considerable amount of reforms in corporate governance, with governments enacting legislation to increase transparency and accountability in corporate affairs, requiring companies to fully disclose their activities as a means of protecting shareholder and stakeholder interest. In most companies, there is a separation between the functions of the chairperson and the CEO brought about by reforms in corporate governance, with different people holding the important offices to ensure that there is a strong internal monitoring system for all the decisions that management make. Fortescue at some point had a chairman, who also doubled up as the company’s CEO, although this arrangement was abandoned in favor of a separation of the roles. Fortescue has a linear management system, where the CEO is highly involved in the decision making process and determining the strategic direction of the organization. This is in contrast to MHI model, where stores managers are allowed considerable latitude in the running of the stores. The relative success of Fortescue and MHI shows that corporate governance is continuum and success is not limited to a dogmatic approach to management. Good governance practices encourage shareholders to engage and actively participate in formulating the direction that the firm takes through the board of directors and effecting of checks and balances amongst the shareholders. Corporate governance is an important part of strategic management because it improves firm performance through the adoption of sound management practices that do not endanger shareholder investments. In addition, the checks and balances afforded by good corporate governance ensure that management does not lose sight of the strategic direction of the firm.
Analysis is an integral pillar of strategic management because it enables management to obtain up-to-date data that is essential in the formulation of informed decisions and action plans. PESTEL is an important analysis tool that enables management to have a comprehensive view of the external macro environment, and how it is likely to affect operations. The six factors analyzed by the tool are not independent variables, but are interdependent and need to be analyzed holistically, rather than in isolation. A PESTEL analysis enables management to shape the firms strategic goals in such a way that the firm can take advantage of favorable conditions, as well as institute timely intervention measures to mitigate adverse conditions (Doherty, Steel and Parrish, 2012 p. 109). The growth of the Indian tea industry can be understood through the application of a PESTEL analysis.
The change in political climate brought by a peace deal between the government and rebels led to an exponential growth in the volume of tea produced because former rebels turned to tea growing through government support. In addition, the peace enjoyed in Assam made it possible for increased investment in tea growing. The poor economic return enjoyed from other farming activities like potato and pineapple farming also led to many farmers shifting to grow tea, which promises better returns. An organization must be wary of the social trends when formulating strategic goals because such trends have a material effect on the buying preferences of consumers as well as shaping the attitudes that consumers are likely to have towards the organization and its products. Organizations must also keep in pace with technological changes, especially in the information technology sector, for the emergence of disruptive technologies with the potential to substantially change the status quo and institute appropriate intervention measures. Facebook, which was initially designed using a computer based platform faced disruption from the increasing use of handheld devices to access the service. This led to problems in monetization of the service, considering that phone screens are too small to run ads, which are the main source of income for the organization. unless the company finds an effective way of generating revenue from mobile phone use, it may be unsustainable in the long term. The physical environment in which an organization operates also determines the strategic direction adopted, especially in agricultural and tourism industries. The legal framework governing the production of tea in India makes the Indian production process uncompetitive due to its strong CSR component that forces producers to incur extra costs. A holistic examination of all of these factors gives a nuanced picture of the macro-environment that an organization is operating in, information that can then be used to formulate an organization’s strategic goals. Therefore, PESTLE analysis is an indispensible tool in strategic management because it provides the information needed to make decisions and formulate the strategic direction of the organization.
Porter’s five forces
Porter developed this simple yet influential model for analyzing the market in the late 1970s, with the model helping in determining the locus of power in business situations using an outside-in perspective (Johnson, Scholes and Whittington, 2008). The model lists five forces at the microenvironment level considered to be the most potent in influencing the probability of a company making a profit. The model is based on the assumption that market structure determines the profitability and attractiveness of a market to organizations, and has remained largely unchanged over the subsequent decades (Slater and Olson, 2002, p. 16).
Considering that market structure moderates the behavior of participants in the market, the organization that is cognizant of the five factors is likely to establish apposition in the market that is not easily susceptible to attack. Porter’s model provides a useful framework for strategic analysis of the market, and determining the most important forces that are acting on an organization. Other than rivalry between existing competitors, Porter identifies bargaining power of suppliers, bargaining power of buyers, threat of new entrants and threat of substitute products and products as, the forces that are likely to have a significant impact on competitiveness of an organization (Porter, 2008, p. 81). The rivalry between the two main players in the Australian supermarket industry has a detrimental effect on profitability as companies are forced to sell some lead items at or below cost in a bid to increase foot traffic, and hopefully sales of other more lucrative products. The industry is hostile to new entrants because it has very high entry barriers that require serious investment to overcome. The two forces, bargaining power of suppliers and bargaining power of customers are antagonistic in nature, with strong suppliers driving prices up due to increased production costs while strong customers tend to drive the prices downwards (Porter, 2008, p. 87). Collingwood Football Club also faces similar problems in the football industry where the threat of substitute products requires that the club be innovative in generating revenue streams. Although Porter’s forces remain a useful tool in strategic management, criticisms abound on the criteria used to select the five forces as well as the static nature of the model that does not account for a dynamic marketplace (Dulčić, Gnjidić and Alfirević, 2012, 1079). In addition, other forces like information technology have risen recently and they are more important in achieving the strategic goals of an organization.
One of the most challenging tasks in strategic management is to find an appropriate way to manage the different organization’s stakeholders. Often the demands of different stakeholders are at odds with each other as well as the organization’s strategic needs, hence the need to delicately mange the interface between the competing and conflicting demands to ensure that the organization’s strategic goals are not defeated by stakeholder factionalism(Ackermann and Eden, 2011, p. 180). The definition of a stakeholder varies depending on the inclusions or exclusions desired, with some definition being narrow, limiting stakeholders to those who have power to affect an organization’s outcomes, while more inclusive definitions include stakeholders who are nominally powerless vis-a vis the organizational outcomes (Bryson, 2004 p. 24). To identify the stakeholders that an organization has, it is necessary to conduct a stakeholder analysis using a broad definition of stakeholder as a party that will affect or be affected by an organization’s strategy while being cognizant of the organization’s strategic environment.
A number of frameworks have been developed to help in the analysis of stakeholders, with the challenge being to be inclusive enough to include all the stakeholders while also limiting the numbers to manageable levels. Facebook, a service company has billions of users across the globe, whose level of engagement with the social networking site varies. Determining the stakeholders of such a company is difficult considering that it operates across many countries that have different cultures. However, even for commodity organizations like Fortescue, the stakeholders are many, ranging from the shareholders, employees and the community in which the company operates. However, despite the complexity in determining stakeholders, it is important for a company to have a clear idea of its stakeholders, public and private, to avoid antagonizing them like Facebook did when changing the security settings.
The purpose of strategic management is to chart an organizations strategic direction in a particular direction that is well-defined with measurable milestones against which progress will be checked. Ideally strategic management is about intended strategy and the achievement of desired organizational objectives. However, when implementing strategy there arise challenges and opportunities in the implementation process that had not been foreseen in the planning period. In such circumstances, there is need for an organization to respond to these unexpected problems and opportunities, and alter the strategy to suit the new conditions. Emergent strategy occurs at the business unit where strategies is being implemented and not at corporate headquarters, and the outcomes that are produced by emergent strategy are not pre-intended (Mcgee, Thomas & Wilson 2005 p. 11). The Indian tea sector has seen tea growers improve the working conditions of farm workers beyond the legal minimum to attract workers who are attracted to better prospects. The tit-for-tat price adjustments in the Australian supermarket industry are due to emergent strategy, where companies have to respond to changing market dynamics to remain afloat.
The modern consumer has changed considerably and is not merely interested in the services and products offered by organization, but also in the manner that the services and products are procured by the organization. There has been a clamor for organizations to behave in a socially responsible manner in their business practices and deal ethically, especially with their developing world suppliers (Campbell, 2007 p. 949). CSR is now a mainstream concern with human rights groups and civil society organizations pushing for the adoption of ethical behavior in business practices. The changing consumer trends towards responsible consumerism means organizations that have strong CSR programs are likely to gain a competitive advantage which will reflect in increased earnings (Mackey, Mackey and Barney, 2007 p. 832). Although CSR is sometimes legislated for, for example in the Indian tea industry, sometimes companies have to do more to attract employees, like the Indian farms. Fortescue has invested massively in the amelioration of the working conditions of its employees in addition to building infrastructure which can be used by the community. Facebook’s CSR has been in the area of privacy, where the organization has invested considerably and involved stakeholders to assure users that it will not abuse their privacy through improper use of the data in its possession.
Strategic management has become an integral management tool in the modern organization, helping management to formulate strategy that can be implemented to increase an organization’s competitiveness in the market and help it to grow revenues and profitability. Strategic management cuts across all of the organizations activities and its success depends on the way it is implemented, with success likely only when there is a coherent implementation plan. Each of the factors examined above has an effect on the efficacy of strategic management and mangers need to examine each of the factors to ensure that there is no oversight that could lead to the failure of the management system to the detriment of the organization.
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