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Sunday, August 7, 2016

Introduction To Strategic Management

Introduction To Strategic Management 

Alfred D. Chandler, an American business historian, defined strategy as follows: Strategy is the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.
Here A. Chandler believes that strategy consists of equal importance to defining objectives and goals as it is to providing the measures for attaining them. Strategic management is a consistent level of managerial activity of setting up goals and tactics and ensures a variety of decisions by the top management to successfully achieve those aims or goals in the long term and at the same time providing for adaptive responses in the short term. This provides an overall direction to an organisation. The strategic management process consists of three components: Strategic analysis, strategic choices and strategic implementation. These components are vital in a firm as it appraises the business and industries in which the firm is a part of. It also brings about a healthy competition and helps in defining of attainable goals in present and future and also reevaluates each strategy. The Components Of Strategic Management Process, in its plainest sense, is fixing tactical decisions, evaluating the strength and recognising the critical external factors, which may play a part in influencing the position of the firm and also defining the factors that bring about the implementation of a firm through these components. Different from the "classic" business planning, Strategic management focus involves Mission, Vision and Out-of-the -box thinking. Top management uses strategic management to describe where and when they would want to position their firm in the industry. Strategic planning helps assess the firm's opportunities and threats, exposes its strengths and weaknesses as well as encourages the firm to adapt. A SWOT analysis, strengths, weakness, opportunities and threats, is an excellent way to help develop a strategic plan. Like used by many Fortune 500 companies, these four components pose as the building blocks of a strategic plan for a firm's existence. Similarly, PEST analysis (Political, Environmental, Social and Demographic and Technological factors) is a examination of the external macro-environmental in which in firm exist. It helps to examine the effect of these influences on the firm as opportunity and threat in the SWOT analysis. It is also used for assessing the market rise and fall, and as such the position, potential and direction of the firm. The BCG (Boston Consulting Group) Matrix is a four-celled matrix; it is the most renowned strategic planning tool. It provides a graphical representation for the firm to examine diverse companies in its portfolio. It provides the management with a comparative analysis of firm's potential and the evaluation of environment, which it operates in.
Organisation is a term that can be studied as a process as well as a structure. In a fixed sense, organisation is a structure, where a team of people functions and tries to accomplish a certain objective.
In the words of Kast and Rosenzweig, "structure is the established pattern of relationships among the component parts of the organisation". In this sense, the network of relationships among individuals and positions in the firm are refers to as an organisational structure.
Organisational structure defines how responsibility, roles and power are coordinated, controlled, how information moves between the different stages of management and how they are assigned. When the most of the decision making power and control over departments and division lie with the top level management it is know as Centralised structure. In a decentralised structure, the decision making power is distributed over the departments and allowing them to enjoy certain degrees of freedom. There are four major components that affect organisational structures, they are, Environment, Strategy, Technology and Human Resource. Environment being are very volatile factor itself, managers will face more problems depending on how fast it changes. Thus, structures need to be more flexible in order to face these changes; this would also suggest the need to decentralise authority. Various strategies would need to utilise different structures. Such as a differentiation strategy would require a flexible structure and low cost would need a more formal one. Organisation structures are also determined by what type of technology is being used. For instance, a company that has an automated operational system would opt for a decentralised structure because the progress of employees would be monitored and the immediate supervisor would be able to provide guidance and when needed. One of the most commonly found structures found within firms is the functional structure, it consist of small units or departments which are grouped or identified by speciality, like finance, IT, logistics, sales, human resource, and so on. This distinguishes the departments by product produce by each unit or geographical region; this enables managers to maintain more control over each group. This structure is based on high specialisation and high control and efficiency concept. In terms of effectiveness, the functional structure is most effective in small to medium size firms that only deal with a few product and services. A matrix structure is an organisation reporting structure frequently used for project-based teams. This structure uses both departments as well as products as determinate s to group teams together; this allows ideas to flow between various parts of the organisation. This is a complex structure of reporting relationships and has proven to be very flexible and can respond rapidly to change. It is effective for a large organisation with a large number of products and services.
A strategic group is a concept used in strategic management where companies that are a part of the same industry and provide similar business models and/or similar strategies are grouped together. For instance, the fast food industry can be divided into different fast food joints in terms of pizza or burgers, which can be based on different variables like time, price, presentation, etc. The number and the composition of the groups within the industry depend on the dimensions used to define them. Strategic management experts mainly use two-dimensional grid in order to justify their direct competitors, those with similar strategic models, and their indirect rivals. M. Hunt (1972) devised the term Strategic Group whist analysing the appliance industry after discovering the high level of competitive rivalry. He the then subscribed this to the subgroups existing the industry. This then caused the industry to undergo rapid innovation, price reduction, increase in quality and lower profitability than normal economic models would deliver. M. Porter (1980) developed the concept and explained strategic groups in terms of Mobility Barriers.

Value Chain Analysis

This analysis focuses on every level of the business that it goes through from raw materials to the final user. The goal is to maximise value at the least possible cost.
For one to better understand the activities from which an organisation creates shareholder value and competitive advantage, it has been proven useful to simplify the business system into series of value-generated activities, also known as value chain. Michael Porter, in his book Competitive advantage (1985), introduced a value chain model that consists of arrange of activities that was found to be common to a wide range of firms. M. Porter identified these activities and classified them into primary and support activities. The primary activities include Service, Marketing & Sales, Operations, Inbound and Outbound Logistics. Theses activities are supported by four components Infrastructure of the firm, Human Resource Management, Procurement and Technology Development. The main goal of the value chain analysis is these activities need to provide a higher level of customer satisfaction that exceeds the cost of them, thus creating profit margin. In other words, the firm's margin depends on how effective the firm is on performing these activities efficiently, so that the level of customer satisfaction is sufficient enough for them to pay for the products that exceed the cost of the activity itself. By re-configuring the value chain a firm may be able to achieve a competitive advantage by providing better differentiation or through lower costs. Value chain activities are not inaccessible from one another but rather one activity often affects the cost or the performance of the other. There may exist linkage between primary activities or between primary and support activities. The value chain analysis is a flexible tool for a firm; it's competitors and the industry. It can be used to create or study the competitive advantage on both cost and differentiation. Cost advantage is done through a better understanding and squeezing out the cost from value adding activities and differentiation is achieved by focusing over those activities with core capabilities in order to out preform the competitors. It provides a deeper understanding of the firm's strengthens and weaknesses. The main advantage of value chain is that it is adaptable to any type of business, big or small. However, M. Porter's book Competitive Advantage, the value chain is largely focused on manufacturing industry, thus puts off other types of business. Due to the complexity of the value chain analysis and the scope and scale of the value chain has proven to be intimidating, it is time consuming. To understand the firm competitors one must identify and examine the key differences and strategy drivers, hence, needing substantial information. The business information system is not always structured to draw out information easily for a value chain analysis.

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