STRATEGIC MANAGEMENT

*SWOT analysis
*Porter’s Five Forces Model

Report by Doreen Appau-Duah 02/23/2019

Definition

Strategic management can be defined as the art and science of formulating,

implementing, and evaluating cross-functional decisions that enable an
organization to achieve its objectives.

As this definition implies, strategic management focuses on integrating

management, marketing, finance/accounting, production/operations, research and
development, and information systems to achieve organizational success.

Strategic management can also be defined as a bundle of decisions and acts which
a manager undertakes and which decides the result of the firm’s performance. The
manager must have a thorough knowledge and analysis of the general and
competitive organizational environment so as to take right decisions. They should
conduct a SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats),
i.e., they should make best possible utilization of strengths, minimize the
organizational weaknesses, make use of arising opportunities from the business
environment and shouldn’t ignore the threats.

Strategic management is nothing but planning for both predictable as well as

unfeasible contingencies. It is applicable to both small as well as large
organizations as even the smallest organization face competition and, by
formulating and implementing appropriate strategies, they can attain sustainable
competitive advantage.

Strategic Management gives a broader perspective to the employees of an

organization and they can better understand how their job fits into the entire
organizational plan and how it is co-related to other organizational members. It is
nothing but the art of managing employees in a manner which maximizes the
ability of achieving business objectives. The employees become more trustworthy,
more committed and more satisfied as they can co-relate themselves very well with
each organizational task. They can understand the reaction of environmental
changes on the organization and the probable response of the organization with the
help of strategic management. Thus the employees can judge the impact of such
changes on their own job and can effectively face the changes. The managers and
employees must do appropriate things in appropriate manner. They need to be both
effective as well as efficient.

The purpose of strategic management

The purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; long- range planning, in contrast, tries to optimize for
tomorrow the trends of today.

The term strategic planning originated in the 1950s and was very popular between
the mid-1960s and the mid-1970s.

During these years, strategic planning was widely believed to be the answer for all
problems. At the time, much of corporate America was “obsessed” with strategic
planning. Following that “boom,” however, strategic planning was cast aside
during the 1980s as various planning models did not yield higher returns.

The 1990s, however, brought the revival of strategic planning, and the process is
widely practiced today in the business world.

Importance of Strategic Management

 It guides the company to move in a specific direction. It defines organization’s
goals and fixes realistic objectives, which are in alignment with the company’s
vision.
 It assists the firm in becoming proactive, rather than reactive, to make it analyse
the actions of the competitors and take necessary steps to compete in the market,
instead of becoming spectators.
 It acts as a foundation for all key decisions of the firm.
 It attempts to prepare the organization for future challenges and play the role of
pioneer in exploring opportunities and also helps in identifying ways to reach
those opportunities.
 It ensures the long-term survival of the firm while coping with competition and
surviving the dynamic environment.
 It assists in the development of core competencies and competitive advantage
that helps in the business survival and growth.

Following are the important concepts of Strategic Management:

Strategy - Definition and Features

Components of a Strategy Statement
Strategic Management Process
Environmental Scanning
Strategy Formulation
Strategy Implementation
Strategy Formulation vs Implementation
Strategy Evaluation
Strategic Decisions
Business Policy
BCG Matrix
SWOT Analysis
Competitor Analysis
Porter’s Five Forces Model
Strategic Leadership
Corporate Governance
Business Ethics
Core Competencies

Strategy - Definition and Features

The word “strategy” is derived from the Greek word “stratgos”; stratus (meaning
army) and “ago” (meaning leading/moving).

Strategy is an action that managers take to attain one or more of the organization’s
goals. Strategy can also be defined as “A general direction set for the company and
its various components to achieve a desired state in the future. Strategy results
from the detailed strategic planning process”.

A strategy is all about integrating organizational activities and utilizing and

allocating the scarce resources within the organizational environment so as to meet
the present objectives. While planning a strategy it is essential to consider that
decisions are not taken in a vacuum and that any act taken by a firm is likely to be
met by a reaction from those affected, competitors, customers, employees or
suppliers.

Strategy can also be defined as knowledge of the goals, the uncertainty of events
and the need to take into consideration the likely or actual behavior of others.
Strategy is the blueprint of decisions in an organization that shows its objectives
and goals, reduces the key policies, and plans for achieving these goals, and
defines the business the company is to carry on, the type of economic and human
organization it wants to be, and the contribution it plans to make to its
shareholders, customers and society at large.

Features of Strategy

Strategy is Significant because it is not possible to foresee the future. Without a

perfect foresight, the firms must be ready to deal with the uncertain events which
constitute the business environment.

Strategy deals with long term developments rather than routine operations, i.e. it
deals with probability of innovations or new products, new methods of
productions, or new markets to be developed in future.

Strategy is created to take into account the probable behavior of customers and
competitors. Strategies dealing with employees will predict the employee behavior.

Strategy is a well-defined roadmap of an organization. It defines the overall

mission, vision and direction of an organization. The objective of a strategy is to
maximize an organization’s strengths and to minimize the strengths of the
competitors.

Strategy, in short, bridges the gap between “where we are” and “where we want to
be”.
Levels of strategy

Corporate Strategy

The first level of strategy in the business world is corporate strategy, which sits at
the ‘top of the heap’. Before you dive into deeper, more specific strategy, you need
to outline a general strategy that is going to oversee everything else that you do. At
a most basic level, corporate strategy will outline exactly what businesses you are
going to engage in, and how you plan to enter and win in those markets.

It is easy to overlook this planning stage when getting started with a new business,
but you will pay the price in the long run for skipping this step. It is crucially
important that you have an overall corporate strategy in place, as that strategy is
going to direct all of the smaller decisions that you make.
Business Strategy

It is best to think of this level of strategy as a ‘step down’ from the corporate
strategy level. In other words, the strategies that you outline at this level are
slightly more specific and they usually relate to the smaller businesses within the
larger organization.

Functional Strategy

This is the day-to-day strategy that is going to keep your organization moving in
the right direction. How the different functions of business support the Corporate
and Business strategies. Just as some businesses fail to plan from a top-level
perspective, other businesses fail to plan at this bottom-level. This level of strategy
is perhaps the most important of all, as without a daily plan you are going to be
stuck in neutral while your competition continues to drive forward. As you work
on putting together your functional strategies, remember to keep in mind your
higher level goals so that everything is coordinated and working toward the same
end.
It is at this bottom-level of strategy where you should start to think about the
various departments within your business and how they will work together to reach
goals. Your marketing, finance, operations, IT and other departments will all have
responsibilities to handle, and it is your job as an owner or manager to oversee
them all to ensure satisfactory results in the end. Again, the success or failure of
the entire organization will likely rest on the ability of your business to hit on its
functional strategy goals regularly. As the saying goes, a journey of a million miles
starts with a single step – take small steps in strategy on a daily basis and your
overall corporate strategy will quickly become successful.

Strategic Management Process

The strategic management process means defining the organization’s strategy. It is

also defined as the process by which managers make a choice of a set of strategies
for the organization that will enable it to achieve better performance.

Strategic management is a continuous process that appraises the business and

industries in which the organization is involved; appraises its competitors; and
fixes goals to meet all the present and future competitor’s and then reassesses each
strategy.

Strategic management process has following four steps:

1. Environmental Scanning- Environmental scanning refers to a process of

collecting, scrutinizing and providing information for strategic purposes. It
helps in analyzing the internal and external factors influencing an
organization. After executing the environmental analysis process,
management should evaluate it on a continuous basis and strive to improve
it.
2. Strategy Formulation- Strategy formulation is the process of deciding best
course of action for accomplishing organizational objectives and hence
achieving organizational purpose. After conducting environment scanning,
managers formulate corporate, business and functional strategies.
3. Strategy Implementation- Strategy implementation implies making the
strategy work as intended or putting the organization’s chosen strategy into
action. Strategy implementation includes designing the organization’s
structure, distributing resources, developing decision making process, and
managing human resources.
 4. Strategy Evaluation- Strategy evaluation is the final step of strategy
management process. The key strategy evaluation activities are: appraising
internal and external factors that are the root of present strategies, measuring
performance, and taking remedial / corrective actions. Evaluation makes
sure that the organizational strategy as well as it’s implementation meets the
organizational objectives.

These components are steps that are carried, in chronological order, when creating
a new strategic management plan. Present businesses that have already created a
strategic management plan will revert to these steps as per the situation’s
requirement, so as to make essential changes.

Components of Strategic Management Process

Strategic management is an ongoing process. Therefore, it must be realized that

each component interacts with the other components and that this interaction often
happens in chorus.
 1. Defining the levels of strategic intent of the business
 Establishing vision
 Designing mission
 Setting objectives

2. Formulation of strategy
 Performing environmental and organizational appraisal
 Considering strategies
 Carrying out strategic analysis
 Making strategies
 Preparing strategic plan

3. Implementation of strategy
 Putting strategies into practice
 Developing structures and systems
 Managing behavioral and functional implementation

4. Strategic Evaluation and Control

 Performing evaluation
 Exercising control
 Recreating strategies
SWOT ANALYSIS

Definition, Advantages and Limitations

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By

definition, Strengths (S) and Weaknesses (W) are considered to be internal factors
over which you have some measure of control. Also, by definition, Opportunities
(O) and Threats (T) are considered to be external factors over which you have
essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall
strategic position of the business and its environment. Its key purpose is to identify
the strategies that will create a firm specific business model that will best align an
organization’s resources and capabilities to the requirements of the environment in
which the firm operates.
In other words, it is the foundation for evaluating the internal potential and
limitations and the probable/likely opportunities and threats from the external
environment. It views all positive and negative factors inside and outside the firm
that affect the success. A consistent study of the environment in which the firm
operates helps in forecasting/predicting the changing trends and also helps in
including them in the decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and

Threats) is given below-

Strengths - Strengths are the qualities that enable us to accomplish the

organization’s mission. These are the basis on which continued success can be
made and continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed
in or what you have expertise in, the traits and qualities your employees possess
(individually and as a team) and the distinct features that give your organization its
consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an

organization, which includes human competencies, process capabilities, financial
resources, products and services, customer goodwill and brand loyalty. Examplesof
organizational strengths are huge financial resources, broad product line, no debt,
committed employees, etc.

Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences
on the organizational success and growth. Weaknesses are the factors which do not
meet the standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient

research and development facilities, narrow product range, poor decision-making,
etc. Weaknesses are controllable. They must be minimized and eliminated. For
instance - to overcome obsolete machinery, new machinery can be purchased.
Other examples of organizational weaknesses are huge debts, high employee
turnover, complex decision making process, narrow product range, large wastage
of raw materials, etc.
Opportunities - Opportunities are presented by the environment within which our
organization operates. These arise when an organization can take benefit of
conditions in its environment to plan and execute strategies that enable it to
become more profitable. Organizations can gain competitive advantage by making
use of opportunities.

Organization should be careful and recognize the opportunities and grasp them
whenever they arise. Selecting the targets that will best serve the clients while
getting desired results is a difficult task. Opportunities may arise from market,
competition, industry/government and technology. Increasing demand for
telecommunications accompanied by deregulation is a great opportunity for new
firms to enter telecom sector and compete with existing firms for revenue.

Threats - Threats arise when conditions in external environment jeopardize the

reliability and profitability of the organization’s business. They compound the
vulnerability when they relate to the weaknesses. Threats are uncontrollable. When
a threat comes, the stability and survival can be at stake. Examples of threats are -
unrest among employees; ever changing technology; increasing competition
leading to excess capacity, price wars and reducing industry profits; etc.

Steps on how to do SWOT Analysis

 Information collection - here and now- List all strengths and all weaknesses
that exist now.

 What might be- List all opportunities that will exist in the future.

 Plan of action- Review your SWOT matrix with a view to creating an action
plan to address each of the four areas.

What Makes A SWOT Analysis work?

 Trust
  Ability and willingness to implement change

 Diversity

 Time Generating Strategies: get them USED

How can a firm

 Use each strength?

 Stop each weakness?

 Exploit each opportunity?

 Defend against threat?

Simple Rules for SWOT Analysis

 Be realistic about the strengths and weaknesses of your organization or

group.

 Distinguish between where your organization is today, and where it could be

in the future

 Be specific: Avoid gray areas.

 Always analyze in relation to your core mission.

 Keep your SWOT short and simple. Avoid complexity and over analysis

 Empower SWOT with a logical conceptual framework.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong

tool, but it involves a great subjective element. It is best when used as a guide, and
not as a prescription. Successful businesses build on their strengths, correct their
weakness and protect against internal weaknesses and external threats. They also
keep a watch on their overall business environment and recognize and exploit new
opportunities faster than its competitors.
SWOT Analysis helps in strategic planning in following manner-
It is a source of information for strategic planning.
Builds organization’s strengths.
Reverse its weaknesses.
Maximize its response to opportunities.
Overcome organization’s threats.
It helps in identifying core competencies of the firm.
It helps in setting of objectives for strategic planning.
It helps in knowing past, present and future so that by using past and current data,
future plans can be chalked out.
SWOT Analysis provide information that helps in synchronizing the firm’s
resources and capabilities with the competitive environment in which the firm
operates.

Limitations of SWOT Analysis

There are certain limitations of SWOT Analysis which are not in control of
management. These include-

Price increase;
Inputs/raw materials;
Government legislation;
Economic environment;
Searching a new market for the product which is not having overseas market due to
import restrictions; etc.

Internal limitations may include-

Insufficient research and development facilities;
Faulty products due to poor quality control;
Poor industrial relations;
Lack of skilled and efficient labour; etc
Porter’s Five Forces Model of Competition

Michael Porter (Harvard Business School Management Researcher) designed

various vital frameworks for developing an organization’s strategy. One of the
most renowned among managers making strategic decisions is the five competitive
forces model that determines industry structure. According to Porter, the nature of
competition in any industry is personified in the following five forces:

 Threat of new potential entrants

 Threat of substitute product/services
 Bargaining power of suppliers
 Bargaining power of buyers
 Rivalry among current competitors

FIGURE: Porter’s five forces model

The five forces mentioned above are very significant from point of view of strategy
formulation. The potential of these forces differs from industry to industry. These
forces jointly determine the profitability of industry because they shape the prices
which can be charged, the costs which can be borne, and the investment required to
compete in the industry. Before making strategic decisions, the managers should
use the five forces framework to determine the competitive structure of industry.

Risk of entry by potential competitors: Potential competitors refer to the firms

which are not currently competing in the industry but have the potential to do so if
given a choice. Entry of new players increases the industry capacity, begins a
competition for market share and lowers the current costs. The threat of entry by
potential competitors is partially a function of extent of barriers to entry. The
various barriers to entry are-

Economies of scale

Brand loyalty

Government Regulation

Customer Switching Costs

Absolute Cost Advantage

Ease in distribution

Strong Capital base

Rivalry among current competitors: Rivalry refers to the competitive struggle

for market share between firms in an industry. Extreme rivalry among established
firms poses a strong threat to profitability. The strength of rivalry among
established firms within an industry is a function of following factors:

Extent of exit barriers

Amount of fixed cost

Competitive structure of industry

Presence of global customers

Absence of switching costs

Growth Rate of industry

Demand conditions

Bargaining Power of Buyers: Buyers refer to the customers who finally consume
the product or the firms who distribute the industry’s product to the final
consumers. Bargaining power of buyers refer to the potential of buyers to bargain
down the prices charged by the firms in the industry or to increase the firms cost in
the industry by demanding better quality and service of product. Strong buyers can
extract profits out of an industry by lowering the prices and increasing the costs.
They purchase in large quantities. They have full information about the product
and the market. They emphasize upon quality products. They pose credible threat
of backward integration. In this way, they are regarded as a threat.

Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to
the industry. Bargaining power of the suppliers refer to the potential of the
suppliers to increase the prices of inputs( labour, raw materials, services, etc) or the
costs of industry in other ways. Strong suppliers can extract profits out of an
industry by increasing costs of firms in the industry. Suppliers products have a few
substitutes. Strong suppliers’ products are unique. They have high switching cost.
Their product is an important input to buyer’s product. They pose credible threat of
forward integration. Buyers are not significant to strong suppliers. In this way, they
are regarded as a threat.

Threat of Substitute products: Substitute products refer to the products having

ability of satisfying customers’ needs effectively. Substitutes pose a ceiling (upper
limit) on the potential returns of an industry by putting a setting a limit on the price
that firms can charge for their product in an industry. Lesser the number of close
substitutes a product has, greater is the opportunity for the firms in industry to raise
their product prices and earn greater profits (other things being equal).

The power of Porter’s five forces varies from industry to industry. Whatever be the
industry, these five forces influence the profitability as they affect the prices, the
costs, and the capital investment essential for survival and competition in industry.
This five forces model also help in making strategic decisions as it is used by the
managers to determine industry’s competitive structure.

Porter ignored, however, a sixth significant factor- complementaries. This term

refers to the reliance that develops between the companies whose products work is
in combination with each other. Strong complementors might have a strong
positive effect on the industry. Also, the five forces model overlooks the role of
innovation as well as the significance of individual firm differences. It presents a
stagnant view of competition.

THE FIVE FORCES & PROFIT

FORCES PROFITABILITY PROFITABILITY WILL

WILL BE HIGHER IF; BE LOWER IF:
Threats of new entrants High entry barriers Low entry barriers

Bargaining Power of Weak suppliers Strong suppliers

suppliers

Bargaining Power of Weak buyers Strong buyers

Buyers
Threat of Substitute Few possible substitutes Many possible substitutes

Competitive rivalry Little rivalry Intense rivalry

ADVANTAGE OF THE MODEL

According to Porter, businesses can use the model to identify how to position itself
to take advantage of opportunities and overcome threats.

“Without a strategy the organization is like a ship without a rudder, going

around in circles”. ..Joel Ross and Michael Kami.
REFERENCES

https://www.managementstudyguide.com/strategy-definition.htm

http://www.free-management-ebooks.com/news/three-levels- of-strategy/

https://businessjargons.com/strategic-management.html