Strategic Management

Originally published in December 2010 on Dr. Özgür Zan's original management blog, and preserved here in its original form.

Strategic Management involves four interrelated stages:

• Environmental Scanning (Internal and External)

• Strategy Formulation (Mission, Objectives, Strategies, Policies)

• Strategy Implementation (through Programs, Budgets and Procedures)

• Evaluation and Control (monitoring performance in order to take corrective action)

Strategy is an official plan which defines how to achieve long-term objectives of an organization.

Environmental Scanning

There are two environments. Internal environment consists of evaluating the internal factors of the organization such as Strengths and Weaknesses. The company shall formulate a strategy in line with her strength. For example, if a company who has numerous creative employees, decides to enter a new business which demands discipline and operational excellence, a mismatch is expected to occur.

Let’s review VRIO approach (Value: Does, Rareness, Imitability,  Organization) from a resource-based perspective:

• Value: Does the resource/capability of the organization provide competitive advantage?

• Rareness: Do the competitors of the organization possess same or similar resources/capabilities?

• Imitability: Is it costly for other competitors to imitate the resource? (e.g. when the organization holds a patent, it may provide a sustainable competitive advantage)

• Organization: Is the organization ready and well organized to exploit the resource/capability?

Examples to organizational resources: Experienced management team, leadership quality, education levels of employees, corporate culture, financial resources, know-how, and processes. Asset is the competency, process, skill, or knowledge controlled by the organization.

Evaluating resources help the company to discover and announce her core and distinctive competencies because resources that provide strength to company are combined into competencies. (My personal suggestion for leaders is to establish a new business for a new competency that deserves to be a core competence and has market potential/demand.)

The second environment that should be scanned is the External environment which consists of Societal and Task environments. The purpose of scanning the external environment is to comprehend the opportunities and threats waiting the organization. Once these opportunities and threats are discovered, the organization can formulate her strategy better.

• Societal Environment: includes the general forces with the acronym STEEP (socio-cultural, technological, economic, environmental and political-legal). These forces do not directly affect the organization but has indirect effects in the long-run.

• Task Environment: includes forces that directly affect the organization. It is the Industry in which the organization operates. Michael Porter’s five forces for industry analysis is a classic and it must be read by any business-person.

The degree of complexity and change in the external environment of the organization determine the environmental uncertainty. When the uncertainty is high it means that there is turbulence in the air and the pilot (leaders) should involve more in the implementation/execution (no automatic flight) and also shall provide  psychological support to employees. In those times both opportunities and risks are high so leaders should keep their eyes wide-open.

Strategy Formulation

After the organization scans the environment and finishes her SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) , the next step is to formulate the strategy.

• Mission: If the organization does not have a mission then define it. If the organization has a mission, review it with the new information gained from the environment and refine it if necessary.

• Vision: If there is a need to refine the vision due to disruptive events, refine the vision.

• Objectives: Define the objectives. Objectives should be challenging, achievable, specific and must have a time-interval.

• Strategy: official plan which defines how to achieve the long-term objectives. There are three levels of strategy:

• Corporate Strategy: Does the corporate pursue a growth strategy, stability or retrenchment? Two types of growth strategies exist (vertical and horizontal. Vertical means corporate acquires or enters into the business of her distributors, customers or vendors. That means new products or services. Horizontal means corporate widens her market by entering into new markets with the current products). BCG matrix provides a simple and useful framework for portfolio analysis and every leader must be aware of this approach.

• Business Strategy: Business Strategy focuses on improving the competitive position of an organization’s or business unit’s products or services within the specific industry or market segment that the firm serves. The keyword for business strategy is competition. The best and most popular framework for business strategy is strategies defined by Michael Porter. (Cost Leadership, Differentiation, Cost Focus and Focused Differentiation are defined by Porter)

• Functional Strategy: Examples for functional strategy consists of marketing, R&D, financial, operations, information technology, manufacturing, purchasing, logistics and human resources strategies.

Strategy Implementation

Although determining the effective strategy is necessary it is not sufficient. Execution is crucial for success. In order to carry out the strategy that is formulated, it must be implemented. In order to implement a strategy, there should be an alignment in the understanding of the strategy. This can be accomplished by determining the programs that support strategy as a whole. The budgets should be set and properly distributed to these programs to enable their execution. And the procedures and processes should be defined or revised to support the strategies defined.

I believe that the most important part of strategy implementation is forming a good team. The dream team whose members are talented, experienced and shows respect to each other, members who share knowledge, dependable, trustworthy and have a good-will. These attributes create a harmony and synergy for the team and the organization. Thus, staffing and human resources are very important to acquire and maintain people.

Evaluation and Control

This stage includes processes that ensures that the organization is achieving what it set out to accomplish. (i.e. Performance compared to desired results).

There are numerous metrics for measuring performance and it is discussed in “Organizational Effectiveness” concept which deserves a separate article. Three types of control can be deducted:

• Behavioral Control: Are policies, rules and directives fulfilled?

• Output Controls: Are objectives attained? Metrics such as Return On Investment (ROI), are financial results such as profitability satisfy shareholders? Is the market value of the company increased in the last quarter? Did the company gained new customers and leads?

• Input Controls: Did the organization attract and attain talented employees? Did the company found new sources of finance?

Norton and Kaplan’s Balanced Score Card (BSC) provides a comprehensive model for evaluating the performance of the organization. The following metrics are evaluated in BSC model:

• Financial Perspective: How do we look to our shareholders?

• Customer Perspective: How do our customers see us?

• Internal Business Process: What must we excel at?

• Learning and Growth: How can we continue to improve and innovate?