3.3 Strategic management process

	Strategic management is the process of ensuring that an organization possesses and benefits from the use of an appropriate organizational strategy. In this definition, an appropriate strategy is one best suited to the needs of an organization at a particular time.
	The strategic management process is generally thought to consist of five sequential and continuing steps.

		Environmental analysis.
		Establishment of an organizational direction.
		Strategy formulation.
		Strategy implementation.
		Strategic control.

3.3 Strategic management process

Environment analysis

	The first step of the strategic management process is environmental analysis. Environmental analysis is the study of the organizational environment to pinpoint environmental factors that can significantly influence organizational operations.
	Managers commonly perform environmental analyses to help them understand what is happening both inside and outside their organization and to increase the probability that the organizational strategies they develop will appropriately reflect the organizational environment.
	In order to perform an environmental analysis efficiently and effectively, a manager must thoroughly understand how organizational environments are structured.
	For purposes of environmental analysis, the environment of an organization is generally divided into three distinct levels: general environment, operating environment, and internal environment.
	Figurer 3.3 illustrates the positions of these levels relative to one another and to the organization; it also shows the important components of each level.
	Managers must be well aware of these three environmental levels, understand how each level affects organizational performance, and then formulate organizational strategies in response to this understanding.

3.3 Strategic management process

The general environment

	The level of an organization's external environment that contains components having broad long-term implications for managing the organization is the general environment.
	The components normally considered part of the general environment are economic, social, political, legal, and technological.

Figure 3.3: The organization, the levels of its environment, and the components of those levels.

3.3 Strategic management process

	The economic components: The economic component is that part of the general environment that indicates how resources are being distributed and used within the environment.
	This component is based on economics, the science that focuses on understanding how people of a particular community or nation produce, distribute, and use various goods and services.
	Important issues to be considered in an economic analysis of an environment are generally the wages paid to labor, inflation, the taxes paid by labor and businesses, the cost of material used in the production process, and the prices at which produced goods and services are sold to customers.
	These economic issues can significantly influence the environment in which a company operates, and the ease or difficulty the organization experiences in attempting to reach its objectives.
	The social component: The social component is part of the general environment that describes the characteristics of the society in which the organization exists.
	Two important features of a society commonly studied during environmental analysis are demographics and social values.

Demographics:

			Are the statistical characteristics of a population. These characteristics include changes in numbers of people and income distribution among various population segments.
			Such change can influence the reception of goods and services within the organization's environment and thus should be reflected in organizational strategy.

3.3 Strategic management process

Social values:

			Are the relative degrees of worth that society places on the ways in which it exists and functions. Over time, social values can change dramatically, causing significant changes in how people live.
			These changes later the organizational environment and, as a result, have an impact on organizational strategy.
			It is important for managers to remember that although changes in the values of a particular society may come either slowly or quickly, they are inevitable.

	The political component: The political component is that part of the general environment related to government affairs.
	Examples include the type of government in existence, government's attitude toward various industries lobbying efforts by interest groups, progress on the passage of laws and political party platforms and candidates.
	The legal component: The legal component is that part of the general environment that contains passed legislation. This component comprises the rules or laws that society's members must follow.
	Some examples of legislation specifically aimed at the operation of organizations are clean air regulations, which focus on minimizing air pollution, occupational safety regulations, and product-safety regulations.

3.3 Strategic management process

	Over time, new laws are passed and some old ones are amended or eliminated.
	The technology component: The technology component is that part of the general environment that includes new approaches to producing goods and services. These approaches can be new procedures as well as new equipment.
	The trend toward exploiting robots to improve productivity is an example of the technology component. The increasing use of robots in the next decade should vastly improve efficiency in many industries.

Operating environment

	The international component is the operating environment segment that is composed of all the factors relating to the international implications of organizational operations.
	Factors in the international component include other countries' laws, culture, economics, and politics. Important variables within each of these four categories are presented in Table 3.4.

3.3 Strategic management process

	The industry environment: The level of an organization's external environment that contains components normally having relatively specific and immediate implications for managing the organization is the industry environment.
	The five forces model, perhaps the best-known tool for industry analysis, was developed by internationally acclaimed strategic management expert Michael E. Porter.
	Essentially, Porter's model outlines the primary forces that determine competitiveness within an industry and illustrates how those forces are related.
	Porter's model is presented in figure 3.3 according to the model, the attractiveness of an industry is determined by five alternative forces.

		First: the threat of new entrants refers to the ability of new firms to enter an industry; as the threat of new entrant’s increases, the attractiveness of an industry decreases.
		Second: buyer power refers to the power that customers have over the firms operating in an industry; as buyer power increases, the attractiveness of an industry decreases.
		Third: supplier power denotes the power that suppliers have over the firms operating in an industry. As supplier power increases, industry attractiveness decreases.
		Fourth: the threat of substitute products refers to the extent to which customers may use products or services from another industry instead of the focal industry. As the threat of substitutes increases, which implies that customers have more choices, the attractiveness of an industry decreases.

3.3 Strategic management process

Finally: Intensity of rivalry refers to the intensity of competition among the organizations in an industry. As the intensity of rivalry increases, the attractiveness of an industry decreases.

Figure 3.4: Porter's model of factors that determine competitiveness within an industry

3.3 Strategic management process

Internal environment

	The level of an organization's environment that exists inside the organization and normally has immediate and specific implications for managing the organization is the internal environment.
	The internal environment includes marketing, finance, and accounting. From a more specific management viewpoint, it includes planning, organizing, leading, and controlling within the organization.

Establishing organizational direction

	The second step of the strategic management process is establishing organizational direction. Through an interpretation of information gathered during environmental analysis, managers can determine the direction in which an organization should move.
	Two important ingredients of organizational direction are organizational mission and organizational objectives (goals).

Organizational mission

	Organizational mission is the purpose for which – the reason why – an organization exists. In general, the firm's organizational mission reflects such information as what types of products or services it produces, who its customers tend to be, and what important values it holds.
	Organizational mission is a broad statement of organizational direction and is based on a thorough analysis of information generated through environmental analysis.

3.3 Strategic management process

	A mission statement is a written document developed by management, normally based on input by managers as well as non-managers that describes and explains what the mission of an organization actually is.
	The mission is expressed in writing to ensure that all organization members will have easy access to it and thoroughly understand exactly what the organization is trying to accomplish.
	Organizational mission is important to an organization because it helps management increase the probability that the organization will be successful. There are several reasons why it does this.

		First: The existence of an organizational mission helps management focus human effort in a common direction. The mission makes explicit the major targets the organization is trying to reach and helps managers keep these targets in mind as they make decisions.
		Second: An organizational mission serves as a sound rationale for allocating resources. A properly developed mission statement gives managers general, but useful, guidelines about how resources should be used to best accomplish organizational purpose.
		Third: A mission statement helps management define broad but important job areas within an organization and therefore critical jobs that must be accomplished.

3.3 Strategic management process

Organizational objective (goals)

	Organizational objectives were defined as the targets toward which the open management system is directed. Sound organizational objectives reflect and flow naturally from the purpose of the organization.
	The organization's purpose is expressed in its mission statement. As a result, useful organizational objectives must reflect and flow naturally from an organizational mission that, in turn, was designed to reflect and flow naturally from the results of an environmental analysis.

Strategy formulation

	The third step of the strategic management is strategy formulation.
	After managers involved in the strategic management process have analyzed the environment and determined organizational direction through the development of mission statement and organizational objectives, they are ready to formulate strategy.
	Strategy formulation is the process of determining appropriate courses of action for achieving organizational objectives and thereby accomplishing organizational purpose.
	Managers formulate strategies that reflect environmental analysis, lead to fulfillment of organizational mission, and result in reaching organizational objectives.
	Special tools they can use to assist them in formulating strategies include the following:

3.3 Strategic management process

		Critical question analysis.
		SWOT analysis.
		Business portfolio analysis.
		Porter's model for industry analysis.

These four strategy development tools are related but distinct. Managers should use the tool or combination of tools that seems most appropriate for them and their organizations.

Critical question analysis

Answering the four basic questions:

		What are the goals (objectives) of the organizational?
		Where is the organization presently going?
		In what kind of environment does the organizational now exist?
		What can be done to better achieve organizational goals (objective) in the future?

3.3 Strategic management process

SWOT analysis

	SWOT analysis is a strategic development tool that matches internal organizational strengths and weaknesses with external opportunities and threats. (SWOT is an acronym for a firm's strengths and weaknesses and its environment opportunities and Threats).
	It is important to note that when using SWOT analysis, strengths and weaknesses refer to the manager's firm, and opportunities and threats refer to the firm's external environment.
	SWOT analysis is based on the assumption that if managers carefully review such strengths, weaknesses, opportunities, and threats, a useful strategy for ensuring organizational success will become evident to them.

Business portfolio analysis

	Business portfolio analysis is another strategy development tool that has gained wide acceptance.
	Business portfolio analysis is an organizational strategy formulation technique that is based on the philosophy that organizations should develop strategy much as they handle investment portfolios.
	Just as sound financial investment should be supported and unsound ones discarded, sound organizational activities should be emphasized and unsound ones deemphasized.
	Two business portfolio tools are the Boston Consulting Group (BCG) and the General Electrics (GE).

3.3 Strategic management process

Porter's model for industry analysis

	Porter has developed three generic strategies to make their organization more competitive.
	Differentiation is a strategy that focuses on making an organization more competitive.
	Cost leadership: is a strategy that focuses on making an organization more competitive.
	Focus: is a strategy that emphasizes making an organization more competitive by targeting a particular customer.

Strategy Implementation

	The fourth step of the strategic management process, is putting formulated strategies into action.
	Without successive implementation, valuable strategies developed by managers are virtually worthless. The successful implementation of strategy requires four basic skills:

Interacting skill is the ability to manage people during implementation. Managers who are able to understand the fears and frustrations others feel during the implementation of a new strategy tend to be the best implementers. These managers empathize with organization members and bargain for the best way to put a strategy into action.

3.3 Strategic management process

		Allocating skill is the ability to provide the organizational resources necessary to implement a strategy. Successful implementers are talented at scheduling jobs, budgeting time and money, and allocating other resources that are critical for implementation.
		Monitoring skill is the ability to use information to determine whether a problem has arisen that is blocking implementation. Good strategy implementers set up feedback systems that continually tell them about the status of strategy implementation.
		Organizing skill is the ability to create throughout the organization a network of people who can help solve implementation problems as they occur. Good implementers customize this network to include individuals who can handle the special types of problems anticipated in the implementation of a particular strategy.

	Overall, then, the successful implementation of a strategy requires handling people appropriately, allocating resources necessary for implementation, monitoring implementation progress, and solving implementation problems as they occur.
	Perhaps the most important requirements are knowing which people can solve specific implementation problems and being able to involve them when those problems arise.

3.3 Strategic management process

Strategic Control

	Strategic Control
	Strategic control focuses on the activities involved in environmental analysis, organizational direction, strategy formulation, strategy implementation, and strategic control itself-checking that all steps of the strategic management process are appropriate, compatible, and functioning properly.
	Strategic control is a special type of organizational control