Basic Model of Strategic Management
The strategic management process is a rational approach firms use to achieve strategic competitiveness and earn above-average returns. Strategic management process can be applied using a specific model.
The model of strategic management consists of 4 basic elements: (1) Environmental scanning, (2) Strategy formulation, (3) Strategy implementation, and (4) Strategy evaluation and control.
A change in any one of the major components in the model can necessitate a change in any or all of the other components. Environment scanning, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semiannually.
Environmental scanning, strategy formulation, implementation, and evaluation and control activities occur at three hierarchical levels in the organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among people across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses do not have divisions or strategic business units. Nevertheless, all managers and employees at these levels should be actively involved in strategic management activities.
These 4 steps build the foundation of a planning model describing what an organization, in general, should do in terms of building its own strategic management process. As environment variables fluctuate, organizations that put more effort into analyzing and anticipating the changing situation in which they are operating will outperform those that do not.
Step 1: Environment Scanning
This is the monitoring and evaluating information of the external and internal environment of an organization. The purpose is to identify strategic factors, for that these elements will play a central role in determining what the company will do in the future.
The most common way to conduct environmental scanning for strategic management is to do a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats that are the strategic factors for a specific organization.
The external environment consists of Opportunities and Threats that are outside the organization and typically not within the short-run control of top management. These variables form the context within which the organization exists. They may be general forces in society or specific factors that operate within the industry of the organization.
The internal environment consists of Strengths and Weaknesses that are within the organization itself and are not usually within short-run control of top management either. These variables form the context within which actual work of the organization can be done. Key strengths make up a set of core competencies that the organization can use to gain a competitive advantage.
Internal Strengths and Weaknesses refer to an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and development, and management information systems activities of a business.
Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic management activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.
Internal strategic factors can be determined in several ways, including computing ratios or measuring performance. Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.
External Opportunities and Threats refer to Political, Economic, Sociocultural, Technological, Ecological, and Legal trends that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization. These types of changes can create a different type of consumer and consequently a need for different types of products, services, and strategies.
A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats. The process of conducting research and gathering and assimilating external information is called environmental scanning. Lobbying is one activity that some organizations utilize to influence external opportunities and threats.
Step 2: Strategy Formulation
This is the actual development of long-run plans to manage the environmental opportunities and threats, in light of the organization strengths and weaknesses. This activity includes defining the organization mission, specifying objectives, developing strategies, and setting policy guidelines.
Strategy formulation includes developing a vision and mission, establishing long-term objectives, generating alternative strategies, and choosing strategies to pursue.
Because no organization has unlimited resources, management must decide which alternative strategies will benefit the firm most. Strategy formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period.
Step 3: Strategy Implementation
This is the process to put strategies and policies into action through the development of programs, budgets, and procedures. The process may involve changes within the organization culture, structure, and/or management system.
Strategy implementation is the part of strategic management that is usually referred to as operational planning and involves daily decisions in allocating and maximizing resource allocation.
Programs are statements of internal activities needed to accomplish a plan. It may involve restructuring the organization, changing the company internal culture, or beginning a new research effort.
Budgets are statements of programs in terms of dollar investment. A budget lists the detailed cost of each program. It is to ensure that any new program will be thoroughly evaluated to significantly add profits to the organization and values to shareholders.
Procedures are sequential techniques that describe how a particular task is to be done.
Step 4: Strategy Evaluation and Control
This is the process in which organization activities and performance results are monitored. Actual performance can then be compared with desired performance. Management needs to know when strategies are or are not working well.
Management at all levels uses the resulting information to take corrective actions and resolve problems.
The evaluation and control process can pinpoint weaknesses of previous elements of strategic management, and thus reinitiate the entire process again. Based on performance results, management can make adjustments in its strategy formulation, strategy implementation, or both.