What is strategic management?
Strategic management is the process of setting objectives, analyzing the internal and external environment, and making decisions that enable an organization to achieve its objectives.
The field of strategic management can be traced back to the work of early military theorists. Writers like Sun Tzu and Carl von Clausewitz were among the first to formalize the strategy concept, and their work remains influential.
In the late 19th and early 20th centuries, business leaders began adopting some of these military ideas in their organizations. For example, military thinking heavily influenced Frederick Winslow Taylor’s scientific management principles.
As businesses grew more extensive and complex, they began developing their unique approaches to strategic planning. In the 1950s and 1960s, scholars such as Peter Drucker and Alfred Chandler laid the groundwork for modern strategic management theory.
Their work helped establish many concepts still central to the field today, including SWOT analysis, stakeholder analysis, and stakeholder mapping.
Since then, the field of strategic management has continued to evolve, incorporating new ideas and perspectives from various disciplines. However, its roots in military theory remain evident, even after more than a century of development.
Why strategic management is important
To succeed, every organization needs a clear strategy for allocating resources and achieving its goals. That’s where strategic management comes in.
It involves setting goals, analyzing the current situation, formulating a strategy, implementing it, and monitoring progress. Strategic management is essential because it helps organizations achieve their goals and stay ahead of the competition.
It can increase profits, market share, and shareholder value when done correctly. As such, it is essential for any organization that wants to be successful in the long term.
What is the process for strategic management?
Strategic management can be divided into 3 phases: goal setting, planning, and implementation.
Phase 1: Goal Setting
Goal setting involves determining what an organization wants to achieve. No matter what kind of business you operate, goal setting is an essential part of success. By taking the time to set clear, achievable goals, you can keep your team focused and on track.
Furthermore, setting goals gives you a way to measure progress and gauge whether or not you are meeting your objectives. However, keeping a few things in mind when setting goals for your business is essential. First, make sure that your goals are specific and realistic.
Vague goals are challenging to achieve and often lead to frustration. Second, be sure to involve your team in the goal-setting process. This will help ensure buy-in and commitment from everyone involved. Finally, don’t be afraid to revise your goals as needed.
The business world is constantly changing, so it’s essential to be flexible and adjust your goals. Following these tips, you can set practical goals to help your business succeed.
Phase 2: Planning
Planning involves designing a roadmap for how to achieve those goals. Business planning is essential for any business, large or small. By developing a comprehensive business plan, companies can save time and money in the long run.
By clearly defining their goals and objectives, businesses can create a roadmap for success. Furthermore, by outlining the key strategies and tactics that will be used to achieve these goals, companies can ensure that they are prepared for any challenges that may arise.
By carefully planning their business operations, businesses can avoid many pitfalls that can lead to failure. Therefore, it is clear that business planning is essential for any business that wants to succeed.
Phase 3: Implementation
Implementation involves putting the plan into action and ensuring it is executed effectively. The implementation begins with analyzing the current situation and identifying the problem that needs to be solved.
Once a solution has been identified, a plan is developed to test the new idea. If the test results are positive, the new idea can be implemented on a larger scale. This process can be applied to any business area, from customer service to product development.
By taking the time to implement new ideas, businesses can ensure that they are always moving forward and improving.
These three concepts work together to help organizations achieve their long-term objectives.
Essentials tools for strategic management
There are four essential and popular tools for strategic management: SWOT analysis, PESTEL analysis, Porter’s five forces, and Scenario Analysis. Let’s understand each mechanism in detail.
A SWOT analysis is a tool that can be used to assess a company’s strengths, weaknesses, opportunities, and threats. The strengths and weaknesses are internal, while the opportunities and threats are external. Companies can develop strategies to improve their competitive position by understanding all four elements.
- Strengths include a strong brand, experienced management team, and proprietary technology.
- Weaknesses might include a small market share, high-cost structure, or insufficient customer awareness.
- Opportunities might arise from favorable industry trends or changes in government regulations.
- Threats could come from new competitors entering the market or pricing pressure from existing competitors.
Once a company has identified its key strengths and weaknesses, it can develop strategies to capitalize on opportunities and mitigate threats. For example, if a company has a strong brand but a small market share, it might focus on expanding its marketing efforts to increase customer awareness.
Similarly, if a company has high costs but unique technology, it might seek partners to help commercialize its products and reduce costs. Ultimately, the goal of SWOT analysis is to help companies identify areas where they can improve their competitive position.
The PESTEL framework is a tool that can be used to identify and analyze the key drivers of change in the business environment. The framework comprises six components: political, economic, social, technological, environmental, and legal.
Each component can be considered a potential source of change that can impact the business. The framework can identify trends and patterns in the environment and develop scenarios for how the environment might evolve in the future.
By using the PESTEL framework, businesses can better understand the forces shaping their environment and make better-informed decisions about how to respond to change.
Porter’s 5 Forces
P Porter’s 5 Forces is a model used to analyze the competitive environment in which a business operates. The model considers five forces that can impact the profitability of a business: competition, customers, suppliers, new entrants, and substitute products.
By considering these forces, businesses can develop strategies to stay ahead of the competition and remain profitable.
Competition is perhaps the most vital force in Porter’s 5 Forces model. The level of competition in an industry will determine how much profit a business can earn. If there is a lot of competition, companies will have to fight for market share and may not be able to charge as high of prices for their products. On the other hand, if there is little competition, businesses will have more pricing power and can earn higher profits.
Customers are another critical force in Porter’s 5 Forces model. The bargaining power of customers refers to their ability to negotiate prices with businesses. If customers have a lot of bargaining power, they can drive down costs and eat into profits. Therefore, it is essential for companies to understand their customers’ needs and wants to keep them happy and keep them from going to the competition.
Suppliers are another critical player in Porter’s 5 Forces model. The bargaining power of suppliers refers to their ability to negotiate prices with businesses. Suppliers with much bargaining power can drive up costs and eat into profits. Therefore, companies must work with suppliers willing to offer competitive prices.
New entrants are another force that can impact an industry’s profitability. The threat of new entrants refers to the likelihood that new businesses will enter an industry and compete against existing businesses. Existing companies may have to lower their prices to compete, which will eat into profits if there is a high threat of new entrants. Therefore, businesses need to have some barriers to entry that will discourage new entrants from entering the market.
The last force in Porter’s 5 Forces model is substitute products. The threat of substitute products refers to the likelihood that consumers will purchase other products instead of those offered by a particular business. If many substitutes are available, it will be difficult for a company to charge high prices for its product.
Scenario analysis is a tool used by businesses to evaluate possible outcomes and plan for the future. By considering potential consequences, companies can be better prepared to deal with whatever might happen.
There are many different ways to conduct scenario analysis, but one common approach is identifying three or four key variables that could significantly impact the business. Once these variables have been identified, different possible scenarios can be created by varying the values of the variables.
For each scenario, companies can then consider what actions they would need to take to be successful.
By preparing for a range of different eventualities, companies can increase their chances of being able to weather any storm.
A sound strategic management process results in implementing policies and plans that guide an organization’s business activities. It helps leaders decide how to allocate resources and plan for future growth.
When done correctly, strategic management can improve organizational efficiency and effectiveness, resulting in a competitive advantage.
While ineffective strategic management can lead to missed opportunities and suboptimal performance, a well-designed process is critical for any organization wishing to achieve its long-term goals.