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Chapter 1: Basics of Strategic
Management
1 Introduction
1.1 Strategy
Originating from the Greek words "Stratos," meaning army, and "Agein," meaning to lead, the
term strategy dates back to the 6th century BC. In a modern context, strategy is defined as a
comprehensive action plan designed to set a long-term direction and guide the allocation of resources
to achieve organizational goals. The ultimate aim is to secure a sustainable competitive advantage,
indicating that a well-crafted strategy not only directs current actions but also anticipates future
challenges and opportunities to ensure the enduring success of an organization.
1.2 Strategic Management
Strategic management is a critical organizational process that encompasses the formulation,
implementation, and evaluation of cross-functional decisions. These decisions, or strategies, are
fundamental to achieving long-term goals and maintaining a competitive edge in the market. The
process requires a holistic view of the organization, taking into consideration various departments and
how they can work together effectively to implement strategies that will lead to sustainable success.
Through continuous evaluation, strategic management ensures that an organization not only sets
ambitious targets but also adjusts its course as necessary to respond to an ever-changing business
environment.
1.2.1 Integration
Strategic management acts as the glue that holds various departments of a company together,
ensuring they work in harmony towards common goals. By integrating key areas such as Management,
Marketing, Finance, Operations, Research & Development, and Information Systems, a company can
align its actions and strategies across the board. This alignment is crucial for efficiently achieving
business objectives and gaining a competitive edge. It ensures that each department's efforts
contribute positively to the company's overall success, making the organization more robust in the face
of market challenges and changes.
1.2.2 Benefits
Strategic management offers clear benefits for a firm: it crystallizes the company's long-term
goals, ensuring everyone is working towards the same vision. It sharpens the focus on key priorities,
allowing the firm to channel its efforts and resources more effectively. Additionally, it equips the firm
with a better grasp of the changing business landscape, enabling quicker and more informed decisions
in response to new challenges and opportunities. These advantages collectively contribute to a firm's
sustained success and competitiveness.
1.2.3 Main Questions
These questions facilitate a comprehensive evaluation of the organization's current position
and its trajectory:
1. "Where is the organization now?" This question demands an assessment of the current state
of affairs, recognizing strengths, weaknesses, and the immediate competitive context.
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2. "If no changes are made, where will the organization be in 1-2-5 years?" This predictive query
encourages forward-thinking, projecting the future condition of the organization if it continues
on its present path.
3. "If the answers are not acceptable, what specific actions should management undertake?"
Here, the focus shifts to remedial strategy, soliciting actionable steps that management can
deploy to alter the projected course.
4. "What are the risks and payoffs?" This final question balances potential rewards against
associated risks, promoting a risk-aware approach to decision-making.
Addressing these questions allows an organization to strategically plan for the future, anticipate
challenges, and position itself for success.
2 Basic Model of Strategic Management
Environmental
Scanning
Strategy Strategy Strategy
Formulation Implementation Evaluation
2.1 Environmental Scanning
Environmental scanning is a method used within strategic management to gauge both the
internal and external factors that can affect an organization's performance and long-term viability. It
involves a thorough analysis of the external environment through the DESTEP framework, which
includes understanding the social environment and the task environment—such as political, economic,
social, technological, environmental, and legal factors that can influence the organization's operations.
Internally, environmental scanning requires assessing the organization's structure, culture, and
resources. The structure refers to the organizational hierarchy and layout of departments and teams.
Culture encompasses the shared values, beliefs, and norms that shape the behavior and practices
within the organization. Resources involve all the assets at the organization's disposal, including human
skills, financial assets, technology, and physical facilities.
By systematically evaluating these internal and external aspects, an organization can better
prepare for and respond to the changes and challenges presented by its operational environment. This
proactive approach is integral to sustaining a competitive edge and achieving strategic goals.
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2.1.1 External
In strategic planning, external analysis is a crucial step for identifying opportunities and threats
facing an organization. The DESTEP+ framework is often utilized for this purpose, encompassing several
critical dimensions:
• Demographic: This looks at population statistics such as age, race, gender, and income levels,
which can affect market needs and labor forces.
• Economic: It involves assessing the overall economic environment, including growth rates,
inflation, and exchange rates, which can influence business operations and profitability.
• Socio-cultural: This factor examines societal values, beliefs, and lifestyles that can impact
consumer behavior and, consequently, market demand.
• Technological: It involves analyzing the pace of technological change and innovation, which
can lead to new ways of working or disrupt existing business models.
• Ecological: This reflects on environmental concerns and the drive towards sustainability,
affecting regulatory requirements and consumer preferences.
• Political: It takes into account government policies, political stability, and regulatory changes
that can affect the business environment.
Additionally, an in-depth look at cultural trends can help in understanding shifts in consumer
preferences, while a competitor analysis provides insight into the competitive dynamics of the market,
enabling organizations to position themselves strategically.
2.1.2 Internal
In strategic planning, conducting an internal analysis is critical to understand an organization's
strengths and weaknesses. This analysis typically focuses on the key functional areas of the firm, which
include:
• Management: Evaluating the leadership effectiveness, decision-making processes, and
governance structures.
• Marketing: Assessing the firm's market position, brand strength, and customer relationships.
• Finance/Accounting: Looking at the firm's financial health, including liquidity, profitability, and
capital structure.
• Production/Operations: Examining the efficiency and effectiveness of production processes
and the quality of the outputs.
• Research & Development (R&D): Gauging the firm's capacity for innovation and development
of new products or services.
• Computer Information Systems: Analyzing the firm's IT infrastructure for its ability to support
operations and drive innovation.
Understanding these internal elements helps a firm leverage its strengths and address its weaknesses,
which is essential for sustaining competitive advantage and achieving strategic goals.
