(Please go and watch the introductory video if you have not)
OVERVIEW OF STRATEGIC MANAGEMENT, THE FOUNDATIONS OF STRATEGY FORMULATION
The two most important things in strategic management are thinking, preferably in a comprehensive, critical manner with a fair amount of rigor, and the ability to articulate and express that thinking.
Management is getting work done through others. Strategy can be defined as developing and deploying resources to gain a sustained competitive advantage over others. A sustained competitive advantage (SCA) is some performance advantage over rivals that persists.
The idea of a general manager can help facilitate thinking strategically. A general manager understands how all the basic functions of the firm come together to influence the performance of that organization. A function is any specific action or activity, so accounting, finance, marketing, production are all examples of basic business functions.
A good general manager recognizes the value all functions of an organization contribute to its success. An illustration may help clarify this idea:
Imagine you are in charge of the budget for a firm. You have called together all the heads of the various functional departments for a meeting to discuss their requirements for the coming year. Each reports to you all the additional wonderful things that they can accomplish if you provide them with additional resources. Accounting can improve their internal controls, providing you with additional cost information on your production. Your management information systems people say they can link all the information systems in your firm together to help improve order tracking and customer service. Finance wants to hire an investment advisor to consider the capital structure of the firm. The human resources officer is rolling her eyes and saying people are the difference, we need to invest in them, with training and better benefits. The production engineer is trying to hang himself with his tie because he needs new machinery.
Meanwhile the research department claims that with just a little more support a revolutionary product can be developed. Your marketing officer wants to do a new media buy to improve the image of the company.
Whose claims are most important? What should you do?
As an area of study, strategic management was developed in an effort to help address these types of difficult questions. Each department head has good and strong reasons for advocating the position they do. But in the absence of clear financial returns (and any estimates you have are probably little more than guesswork) how can you pick between so many good choices? Strategic management is about these attempts to balance the competing functional demands of a business. It is NOT about the answers to these problems, but it is about the best questions to ask to make the best decisions possible in addressing these problems.
As a result of this approach, strategic management is general and integrative in its approach. It is necessary to have some understanding of each of the functional areas of the firm in order to appreciate it, because as we’ve already stated, each of these areas comes together to explain why firm performance differs.
Why does firm performance differ? This is not an easy question and interestingly under neoclassical economics all firms should earn “normal” rents, the same returns given their risk adjusted cost of capital. There is just one minor problem with this model, it is demonstrably untrue. Firm performance (there are many measures for this, accounting returns, stock value, etc.) clearly varies tremendously, why? Because of the decisions human managers make about private resource allocation. The outcome of these decisions are contingent on the abilities of the firm and its external environment.
Therefore, the fundamental question is: How can you quickly understand your firm, what your environment is, and make good decisions given this information?
In summary, business strategy is a plan or pattern of resource development and allocation that enables firms to maintain or improve performance. Strategic management is the process through which business strategies are chosen and implemented. The outcomes of strategic decisions are almost always contingent in nature: there is no one right answer, because the outcome is dependent on the independent actions of others. Therefore, we’ll stress ways to think quickly and comprehensively in order to understand your environment, your firm, and what you should do.
Strategic planning was the first effort to attempt to systematically examine the internal abilities of an organization and its external environment. This gave us the acronym SWOT, for strengths, weaknesses, opportunities, and threats. SWOT analysis tries to take the strengths of the firm and use them in exploiting opportunities and minimizing external threats and internal weaknesses.