UNIT 1

THE NATURE AND VALUE OF

STRATEGIC MANAGEMENT
If we could first learn where we are and where we are going, we would be better able to
judge what to do and how to do it." -Abraham Lincoln

STRUCTURE
1.1

Introduction

1.2

Definition

1.3

The Strategic Management Process

1.4

Importance of Strategic Management

1.5

Characteristics of Strategic Management

1.6

Benefits of Strategic Management

1.7

Pitfalls to Avoid in Strategic Management

1.8

Strategic Management Models

1.9

Research Studies in India on Strategic Management Models

1.10 Summary
1.11 Answers to Check Your Progress
1.12 Exercises and Questions
1.13 Further Reading

UNIT OBJECTIVES
In this unit, you will learn about:

Strategic management

Importance of strategic management

Characteristics of strategic management

Benefits of strategic management

Pitfalls in strategic management

Strategic Management Models

Research Studies in India on Strategic Management Models

The Changing Business Landscape and IBM

IBM provides computer hardware, software and services in more than 170 countries.
Several years ago, the company saw fundamental changes coming. Developing
economies were growing rapidly. New computing architecture was providing
unprecedented computing power and an ability to transform oceans of data into usable
information. Companies were seeking to integrate their advanced information
technologies with other business operations to improve efficiency and facilitate
innovation and growth. In response to these trends, IBM made several bold moves. First,
the company remixed its businesses to take advantage of the most attractive business
segments. The company exited commodity businesses such as PCs and disk drives.
Besides, it acquired over 100 companies (including PricewaterhouseCoopers
Consulting) in less than ten years. Internally, the company has formed new units in areas
such as analytics, which employs four thousand IBM consultants. Now the companys
historically large hardware operations provide less than 10% of its revenues, with
approximately 40% each coming from software and services (the rest is from financing
operations). Also, about one-third of IBMs revenues now come from non-U.S.
operations. Growth is especially strong in Brazil, Russia, India and China. Moving
forward, IBMs CEO Samuel J. Palmisano is positioning the company to be a major
player in infusing intelligence into the way the world actually works.
As illustrated by the IBM example, the most successful organizations are able to
acquire and manage resources and capabilities that provide competitive advantages.
Furthermore, they are capable of managing and satisfying a wide range of external
constituencies, called stakeholders. CEOs play a pivotal role in this process, as they help
their companies interpret trends in the external environment, lead in the development of
strategies and oversee their execution. In the IBM example, we see a company that has
transformed itself as a result of changes in the external environment. The processes
associated with evaluating the competitive situation of a company, acquiring and
managing resources and developing and executing strategies are a part of the field
generally referred to as strategic management.

1.1 INTRODUCTION
The twenty-first-century is a period of turbulence and rapid change. Globalization, rapid
changes in technology, increasing competition, changing workforce, changing market and
economic conditions and emerging resource shortages have all increased the complexity of
modern management. Strategic management is a way of running a firm that recognises the
complexity of its environment and seeks to establish sustainable competitive advantage at all

levels. A firm has a sustainable competitive advantage when it successfully implements a

strategy that other firms are unable to duplicate or find too costly to imitate.

1.2 DEFINITION
1 .2.1 Strategy
In its simplest conception, strategy is regarded as a unifying idea which links purpose and
action. For de Wit and Meyer, strategy is any course of action for achieving an organizations
purpose(s). In the words of Alfred Chandler, the first modern business strategy theorist,
strategy in the area of business is defined as 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.
According to Kenneth Andrews, "Corporate strategy is the pattern of decisions in a
company that determines and reveals its objectives, purposes or goals, produces the principal
policies and plans for achieving those goals and defines the range of business the company is
to pursue, the kind of economic and human organization it is or intends to be, and the nature
of the economic and non-economic contribution it intends to make to its shareholders,
employees, customers and communities."
According to Johnson, Scholes and Whittington, strategy is the direction and scope
of an organisation over the long term, which achieves advantage in a changing environment
through its configuration of resources and competences with the aim of fulfilling stakeholder
expectations.
Henry Mintzberg presents 5 "P's" as a way to define strategy. According to him, a
strategy can be defined as a plan, ploy, pattern, position or perspective:

Strategy is a plan

Strategy is a plansome sort of consciously intended course of action, a guideline (or

set of guidelines) to deal with a situation.

Strategy is a ploy

As plan, a strategy can be a ploy too- just a specific "manoeuvre" intended to outwit
an opponent or competitor. For example, a company may threaten to expand plant
capacity to discourage a competitor from building a new plant. Here the real strategy
is the threat, not the expansion itself. As such is, it is a ploy.

Strategy is a pattern

Defining strategy as a plan is not sufficient; we also need a definition that

encompasses the resulting behaviour. Thus, strategy is also defined as a pattern3

specifically, a pattern in a stream of actions. By this definition, strategy is consistency

in behaviour, whether or not intended. The definitions of strategy as plan and pattern
can be quite independent of one another: plans may go unrealised, while patterns may
appear without preconception. Plans are intended strategy, whereas patterns are
realised strategy. Thus strategies can be either deliberate strategies (where intentions
that existed previously were realised) or emergent strategies (where patterns
developed in the absence of intentions or despite them). Strategies, in other words, are
shaped partly by management analysis and choice and partly by the necessity of
adapting and learning by doing.

Strategy is a position

Strategy is also a position-specifically, a means of locating an organization in its

"environment." In ecological terms, strategy becomes a "niche"; in management
terms, a product-market "domain." Position is usefully identified with respect to
competitors.

Strategy is a perspective

While position looks out, seeking to locate the organization in the external
environment, perspective looks inside the organization, indeed inside the heads of the
strategists. Here, strategy becomes the ingrained way of perceiving the world. Some
organizations, for example, are aggressive pacesetters, while others build protective
shells around themselves. Strategy in this respect is to the organization what
personality is to the individual.
Each of these definitions adds important elements to our understanding of strategy. As
plan, strategy deals with how leaders try to establish direction for organizations, to set them
on predetermined courses of action. As ploy, strategy takes us into the realm of direct
competition, where threats and feints and other manoeuvres are employed to gain advantage.
As pattern, strategy focuses on action, reminding us that the concept is an empty one if it
does not take behaviour into account. As position, strategy encourages us to look at
organizations in context, specifically in their competitive environments-how they decide on
their products and markets and protect them in order to meet competition, avoid it or subvert
it. And finally as perspective, strategy raises intriguing questions about intention and
behaviour in a collective context.
Thus, strategy is an integrated set of commitments and actions designed to position an
organisation for sustainable competitive advantage. It involves choices about which industries
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to participate in, what products and services to offer and how to allocate corporate resources.
Its primary goal is to create value for stakeholders by providing customer value.

INTENDED STRATEGY VERSUS REALISED STRATEGY-THE

CASE OF HONDA
An example of intended versus realized strategy is Hondas entrance
into the American motorcycle market. When Honda entered the market
in 1959, its intended strategy was to market its motorcycles with 250 cc
and 305 cc engines even though it was selling the 50 cc model in Japan
with great success. However, the intended strategy failed because,
despite what Honda management believed, the U.S. market preferred
the smaller model. In the meantime, Sears Roebuck expressed an
interest in selling the smaller model. Honda changed its mind and
decided to sell the small bikes in the American market. It achieved great
success. By 1964, nearly one out of every two motor cycles sold in the
United States was a Honda. Thus, Hondas intended strategy was a near
disaster. The realized strategy which emerged through unplanned action
in response to unforeseen circumstances met with positive results.
Check your progress
1. Define strategy.
2. How does Mintzberg summarise the views on strategy?

1.2.2 Strategic Management

Strategic management consists of the decisions and actions used to formulate and implement
strategies that will provide a competitively superior fit between the organisation and its
environment to enable it to achieve organisational objectives. It can also be described as the
process of management needed to enable an organisation to move from where it is now to
where it wants to be in the future. It is about a sense of direction and aligning this with an
organisations aims.
Strategic management consists of the analysis, decisions and actions an
organization undertakes in order to create and sustain competitive advantages. Thus,
there are two main elements that go to the heart of the field of strategic management:

First, the strategic management of an organization entails three ongoing processes:

analysis, decisions, and actions. That is, strategic management is concerned with the
analysis of strategic goals (vision, mission, and strategic objectives) along with the
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analysis of the internal and external environment of the organization. Next, leaders
must make strategic decisions. These decisions, broadly speaking, address two basic
questions: What industries should we compete in? How should we compete in those
industries? These questions also often involve an organizations domestic as well as
its international operations. And last are the actions that must be taken. Decisions are
of little use, of course, unless they are acted on. Firms must take the necessary
actions to implement their strategies. This requires leaders to allocate the necessary
resources and to design the organization to bring the intended strategies to reality.
This is an ongoing, evolving process that requires a great deal of interaction among
these three processes.

Second, the essence of strategic management is the study of why some firms
outperform others. Thus, managers need to determine how a firm is to compete so
that it can obtain advantages that are sustainable over a long period of time. That
means focusing on two fundamental questions: How should we compete in order to
create competitive advantages in the marketplace? For example, managers need to
determine if the firm should position itself as the low-cost producer or develop
products and services that are unique which will enable the firm to charge premium
prices-or some combination of both. Managers must also ask how to make such
advantages sustainable in the marketplace. That is: How can we create competitive
advantages in the marketplace that are not only unique and valuable but also
difficult for competitors to copy or substitute? Ideas that work are almost always
copied by rivals immediately. The challenge, therefore, is to create competitive
advantage that is sustainable.
Michael Porter argues that sustainable competitive advantage cannot be achieved

through operational effectiveness alone. Most of the popular management innovations such as
total quality management, just-in-time, benchmarking, business process reengineering and
outsourcing are all about operational effectiveness. Operational effectiveness means
performing similar activities better than rivals. Each of these is important, but none can lead
to sustainable competitive advantage, for the simple reason that everyone is doing them.
Strategy is all about being different from everyone else. Sustainable competitive advantage is
possible only through performing different activities from rivals or performing similar
activities in different ways. Companies such as Wal-Mart, Southwest Airlines, IKEA,
Hindustan Unilever, Tata Motors and ITC have developed unique, internally consistent and

difficult to imitate activity systems that have provided them with sustained competitive
advantage.
Check your progress
3. Define strategic management.
4. How does Porter distinguish between strategy and operational effectiveness?

1.3 THE STRATEGIC MANAGEMENT PROCESS

Strategic management is the process of assessing the firm and its environment in order to
meet the firms long-term objectives of adapting and adjusting to its environment through
manipulation of opportunities and reduction of threats. This process requires a careful
evaluation of the firms environment before making managerial decisions and taking actions.
It results in the formulation and implementation of strategies designed to achieve the
objectives of the organization. Thus, the strategic management process involves the following
six steps:
(1) Establishing strategic intent;
(2) Environmental analysis;
(3) Identification of strategic alternatives;
(4) Choice of strategy;
(5) Implementation of strategy; and
(6) Evaluation and control

1.3.1 Establishing strategic intent

The starting point of the strategic management process is establishing the organisations
strategic intent. A strategic intent is an organisations visualisation of what it wants to achieve
in the long term. It consists of three major elements-vision, mission and objectives.
Vision is a short, succinct and inspiring statement of what the organization intends to
become and to achieve at some point in the future. It delineates managements aspirations for
the business, providing a panoramic view of where we are going. It describes aspirations
for the future without specifying the means that will be used to achieve those desired ends.
A mission can be described as an organizations raison dtre, or reason for existence.
Mission of an organisation is the fundamental unique purpose that sets it apart from other
organisations. In other words, a good mission statement describes a companys business
makeup and purpose in language specific enough to give the company its own identity and
distinguish it from other enterprises in the same or other industries. It provides general
descriptions of the products a firm intends to produce and the markets it will serve. It also
prescribes how the organisation will deal with its various stakeholders. A companys mission
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differs from vision in that it encompasses both the purpose of the company and the basis of
competition and competitive advantage.
Objectives follow from the specification of vision and mission. They specify and
quantify the targets towards which leadership, willpower, effort, the investment of resources
and the use of enterprise capability are to be directed such that the vision and mission are
achieved. They help to provide guidance on how the organization can fulfil or move toward
the mission and vision. As a result, they tend to be specific and cover a well-defined time
frame.

1.3.2 Environmental Analysis

Environmental analysis consists of analysing the internal and external factors that may affect
the organization and its ability to pursue a given course of action. Thus, environmental
consists of internal environment and external environment.
The internal environment is the set of conditions (such as strengths, resources,
capabilities, and so forth) inside the firm affecting the choice and use of strategies. Analysis
of a firms internal environment helps in identifying both strengths and weaknesses that can,
in part, determine how well a firm will succeed in an industry. Strengths are company
resources and capabilities that can lead to a competitive advantage. Weaknesses are resources
and capabilities that a company does not possess, to the extent that their absence places the
firm at a competitive disadvantage.
The external environment is a set of conditions outside the firm that affect the firms
performance. Changes in population trends and income levels, competition between firms,
and economic changes are examples of the many conditions in a firms external environment
that can affect its performance. Managers must monitor and scan the external environment as
well as analyse competitors. Such information is critical in determining the opportunities and
threats in the external environment. Opportunities are conditions in the external environment
that allow a firm to take advantage of organizational strengths, overcome organizational
weaknesses and neutralize environmental threats. Threats are conditions in the broad and
operating environments that may impede organizational competitiveness or the achievement
of stakeholder satisfaction.
On the basis of the analysis of the external and internal environment,
management determines the companys strengths, weaknesses, opportunities and threats
(SWOT). Then it matches the corporate strengths to the environmental opportunities
available, makes attempts to reduce the corporate weaknesses and neutralise the

environmental threats. This process is known as SWOT analysis. Management uses SWOT
analysis to make decisions about developing the overall strategy of the corporation.

1.3.3 Identification of Strategic Alternatives

Given the vision, mission and objectives and having analysed the strengths and weaknesses
of the organisation and opportunities and the threats in the environment, the firm should try to
generate alternative strategies. Different strategic options may be available to accomplish an
objective. For example, the objective may be growth. Growth can be achieved by establishing
new plants or through mergers and acquisitions. Similarly, an entry into a new business can
be achieved by setting up a green field venture or acquisition. All the strategic alternatives
have to be identified.

1.3.4 Choice of Strategy

Decision-makers will have to decide on the best choice of strategy from the various options
available to them. They have to select those strategies from the alternatives they have
identified that they consider will best or most effectively enable the enterprise to fulfil the
mission and achieve the objectives. This decision will require skill and judgement. Decisionmakers will have to think through the resource allocation implications of their strategic
choice. Can the enterprise afford to do what is being proposed? Has the organization got the
right people, the right leaders, the right skills and the right assets? And what kind of market,
financial or political returns will decisions on strategic choice bring?

1.3.5 Implementation of Strategy

Implementation involves transforming the chosen strategies into action and refers to the
methods and techniques the organization adopts to execute managements selected strategy.
Implementation is a process of selecting (1) the most appropriate structure for the chosen
strategy, (2) support systems for resource allocation, and (3) suitable motivation. Inherently,
implementation is critical to goal attainment since even the best strategy is worthless if
implemented incorrectly.
No matter how great the strategic plan appears to be, it is useless unless all levels of the
organization are committed to its implementation. To properly implement a strategy, five key
areas must be addressed:
(1) The organizational structure must be able to support the strategic action. In addition to
an appropriate structure, the strategy should include the degree of autonomy allowed
for each individual to carry out his or her portion of the required activities.
(2) Implementation systems must be in place to ensure that the firms activities, from the
decision-making process to output, are in accord with the agreed-upon strategy.
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(3) The organizations management style must focus on leadership, planning, organizing,
controlling, communicating, and problem-solving activities.
(4) The organizations culture must be in tune with, and supportive of, the strategic
process.
(5) There must be a match between the strategy and the implementation.
Thus, successful implementation of strategy requires a planned effort with commitment
from all members of the organization, not just from management. However, management
must ensure that the proper tools, support mechanisms and lines of authority exist within the
organizational structure to implement the strategy.

1.3. 6 Evaluation and Control

Evaluation and control involves monitoring the organizations performance to ensure that the
chosen strategy achieves the desired objectives. The firm evaluates and appraises its mission,
goals, objectives, strategies and policies in light of its dynamic and ever-changing
environment. Thus, the strategic management process goes full circle as a continuous and
repetitive cycle of vision, planning, implementing, and evaluating. Evaluation is an essential
function for validation of the success or failure of managements strategy. If results are below
expectations, the organization has the opportunity to reassess its direction and, if necessary,
alter the strategic plan.
THE STRATEGIC MANAGEMENT PROCESS AT APPLE
Consider Apples iPod.

Apples mission statement reads in part, Apple is also

spearheading the digital music revolution with its iPod portable music players and
iTunes online music store. A reasonable objective for Apple as it embarked upon this
part of its mission would have been, develop a stylish, highly functional digital music
device.

Apples external analysis would have shown that there were competing

technologies developing.

An important part of their external analysis must have

revealed that if a firm wanted to succeed with a hardware offering, it also needed a
reliable content provider. Apples internal analysis would have revealed that the firm
definitely had the R&D and design capabilities. Apples marketing capabilities, in
conjunction with its advertising agencies, were obviously capable as evidenced by their
history with other products. Strategic choices were made about developing the iPod and
bringing it to market along with the iTunes service. Implementation issues surrounding
the development and launch have been handled well. The ease of use of the iTunes
service is indicative of attention to implementation issues. Apple appears to be achieving
competitive advantage with its iPod product. Apples earnings increased from $1.989
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billion in 2006 to $3.496 billion in 2007 to $4.834 billion in 2008. In 2009, Apple
announced that with 4 billion iTunes downloads, it was the second largest music retailer
after Wal-Mart.

Apple appears to have applied the principles of the strategic

management process to the development and introduction of the iPod.

Check your progress

5. Explain the process of strategic management

1.4 IMPORTANCE OF STRATEGIC MANAGEMENT

Strategic management is very important for the following reasons:
(1) Winning in the market
There is a compelling need for managers to pro-actively shape how the business will be
conducted. A clear and reasoned strategy is managements clear prescription for doing
business, its roadmap to achieve competitive advantage, its game plan for pleasing customers
and achieving performance targets. Winning in the market place requires a well-conceived
opportunistic strategy. Such a strategy is usually characterised by offensives to outmanoeuvre
rivals and secure sustainable competitive advantage and using such advantage to achieve
superior financial performance. A powerful strategy enables the firm to achieve market
leadership and its products become the industry standard.
(2) Strong financial performance
The financial performance of a strategy focussed organisation is expected to be exceptionally
good. The quality of strategy formulation and execution has a positive impact on revenue
growth, earnings and return on investment.
(3) Co-ordinated efforts
When a company follows the strategic management process, initiatives and activities of
different divisions will be unified into a co-ordinated and cohesive effort. Mobilising the full
complement of company resources in a total team effort that relentlessly pursues the
execution of the chosen strategy and achievement of the targeted performance allows a
company to operate at full power.
(4) Coping with uncertain environment
The competitive and global environments that organizations operate in today are constantly
changing; they are dynamic. Strategic management provides a systematic approach for
coping with the uncertain environments that organizations face. By systematically following
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the strategic management process, strategic decision makers examine all the important
aspects (external and internal) in order to determine the most appropriate decisions and
actions. The deliberate structure of the strategic management process "forces" organizational
employees to examine relevant variables in deciding what to do and how to do it.
Check your progress
6. Explain the importance of strategic management.

1.5 CHARACTERISTICS OF STRATEGIC MANAGEMENT

Strategic management possesses the following characteristics:
(1) Futurity: The process of strategic management deals with future events and their
consequences, thus requiring top managers to possess a long-term concept of decision
making. Strategic management attempts to scan the broad future of the corporation using
a written corporate scenario. In essence, strategic planning involves anticipating future
events.
(2) Long-range impact: Strategic management encompasses long periods of time, often
exceeding five years. It attempts to predict events in the long run and analyze the
potential impact of such events on the corporation.
(3) Iterative process: Strategic management must be a continuous and repetitive process to
be effective. A new strategic plan is developed while the current plan is in action. New
plans are usually adopted and improved based upon the feedback obtained during the
implementation phase.
(4) Systematic and rational:

Systematic implies the use of orderly planning and

methodical approach, whereas rational implies possession of unemotional and logical

reasoning ability. Thus, strategic management is a systematic and rational process because
it consists of systematically processing decision inputs, which lead to rational and
expected outputs.
(5) Integrated function: Integration encompasses the concept of bringing all the parts
together to create a whole, i.e., to establish a set of policies and methods used by
management to facilitate communications and to coordinate the activities of individuals
or groups within the company. Thus, the strategic management process serves as a
foundation for the other activities and functions of the corporation, such as organization,
staffing and control.

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(6) Means to an end: Strategic management is not an end unto itself. It is a means, or a tool,
to be used to achieve corporate objectives.
(7) High stakes: Due to the long-term nature and the broad organizational scope of strategic
management, strategic decisions inherently involve the long-term commitment of a
substantial proportion of organizational resources.
Check your progress
7. State the characteristics of strategic management.

1.6 BENEFITS OF STRATEGIC MANAGEMENT

Strategic management helps organizations in formulating better strategies through the use of
a more systematic, logical and rational approach to strategic choice. Strategic management
leads to financial as well as non-financial benefits.

1.6.1 Financial Benefits

Strategic management results in the following financial benefits:
(1) Profitability
Research indicates that organizations using strategic-management concepts are more
profitable and successful than those that do not. Businesses using strategic-management
concepts show significant improvement in sales, profitability and productivity compared to
firms without systematic planning activities.
(2) Long-term financial performance
High-performing firms tend to do systematic planning to prepare for future fluctuations in the
external and internal environments. Firms with planning systems more closely resembling
strategic-management theory generally exhibit superior long-term financial performance
relative to their industries.

1.6. 2 Non-financial Benefits

Communication is a key to successful strategic management. The major aim of the
communication process is to achieve understanding and commitment throughout the
organization. It results in the great benefit of empowerment. As a result, an organization reaps
the following benefits:
(1) Enhancing the problem prevention capabilities
Strategy formulation activities enhance the problem prevention capabilities of the firm. The
strategic planning process encourages and rewards the participation of the subordinates in the
planning process. The subordinates who are aware of the requirements of strategic planning

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(such as awareness of external threats and understanding of competitors strengths) aid the
managers in their monitoring and forecasting responsibilities.
(2) Improved quality of decisions
Group-based strategic decisions are most likely to reflect the best available alternatives. The
process results in better decisions because of two reasons: first, group interaction facilitates
generating alternative strategies; second, screening of options is improved because group
members offer forecasts based on their specialized perspectives.
(3) Improved employee motivation
Employee motivation improves because employees better appreciate the productivity-reward
relationships inherent in every strategic plan. When employees or their representatives
participate in the strategy formulation process, they understand the priorities and operations
of the organizations reward system well. This encourages goal-directed behaviour.
(4) Reduction in gaps and overlaps
Participation in strategy formulation leads to clarification of role differentiation. This reduces
gaps and overlaps in activities among diverse individuals and groups.
(5) Reduction in resistance to change
Participation helps in eliminating the uncertainty associated with change, which is at the root
of most resistance. Employees are aware of the basis of choosing a particular option and the
parameters that limit the available options. So, they will willingly accept new plans.
(6) Order and discipline
In addition to empowering managers and employees, strategic management often brings order
and discipline to an otherwise floundering firm. It can be the beginning of an efficient and
effective managerial system.
Greenley states that strategic management offers the following benefits:

It allows for identification, prioritization, and exploitation of opportunities.

It provides an objective view of management problems.

It represents a framework for improved coordination and control of activities.

It minimizes the effects of adverse conditions and changes.

It allows major decisions to better support established objectives.

It allows more effective allocation of time and resources to identified opportunities.

It allows fewer resources and less time to be devoted to correcting erroneous or ad

hoc decisions.

It creates a framework for internal communication among personnel.

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It helps integrate the behaviour of individuals into a total effort.

It provides a basis for clarifying individual responsibilities.

It encourages forward thinking.

It provides a cooperative, integrated, and enthusiastic approach to tackling problems

and opportunities.

It encourages a favourable attitude toward change.

It gives a degree of discipline and formality to the management of a business.

Check your progress

8. What are the financial benefits of strategic management?
9. What are the non-financial benefits of strategic management?

1.7 PITFALLS TO AVOID IN STRATEGIC MANAGEMENT

Strategic planning is an involved, intricate and complex process that takes an organization
into unchartered territory. It does not provide a ready-to-use prescription for success; instead,
it takes the organization through a journey and offers a framework for addressing questions
and solving problems. Being aware of potential pitfalls and prepared to address them is
essential to success. Some pitfalls to watch for and avoid in strategic planning are listed
below:

Using strategic planning to gain control over decisions and resources

Doing strategic planning only to satisfy accreditation or regulatory requirements

Too hastily moving from mission development to strategy formulation

Failing to communicate the plan to employees, who continue working in the dark

Top managers making many intuitive decisions that conflict with the formal plan

Top managers not actively supporting the strategic-planning process

Failing to use plans as a standard for measuring performance

Delegating planning to a "planner" rather than involving all managers

Failing to involve key employees in all phases of planning

Failing to create a collaborative climate supportive of change

Viewing planning to be unnecessary or unimportant

Becoming so engrossed in current problems that insufficient or no planning is done

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Being so formal in planning that flexibility and creativity are stifled.

Check your progress

10. What are the pitfalls to avoid in strategic management?

1.8 STRATEGIC MANAGEMENT MODELS

There are two important models which firms can use to generate the information that they
need to form their vision and mission and then to select and decide how to implement one or
more strategies. They are:
(1) The Industrial Organisation Model; and
(2) The Resource-based Model.

1.8.1 The I/O Model

The I/O or Industrial Organization model adopts an external perspective to explain that forces
outside of the organization represent the dominant influences on a firm's strategic actions. In
other words, this model presumes that the characteristics of the external environment and
conditions present in it determine the appropriateness of strategies that are formulated and
implemented in order for a firm to earn above-average returns. In short, the I/O model
specifies that the choice of industries in which to compete has more influence on firm
performance than the decisions made by managers inside their firm.
According to the I/O model, firms must pay careful attention to the structured
characteristics of the industry in which they choose to compete. They should search for an
industry that is the most attractive to the firm, given the firm's strategically relevant
resources. Then, the firm must be able to successfully implement strategies required by the
industry's characteristics to be able to increase their level of competitiveness.
The I/O model is based on the following four assumptions:
(1) The external environmentthe general, industry and competitive environments
impose pressures and constraints on firms and determines strategies that will result in
superior returns. In other words, the external environment imposes pressure on the
firm to adopt strategies to meet that pressure while simultaneously constraining or
limiting the scope of strategies that might be appropriate and eventually successful.
(2) Most firms competing in an industry or in an industry segment control similar sets of
strategically relevant resources and thus pursue similar strategies. This assumption
presumes that, given a similar availability of resources, most firms competing in a
specific industry (or industry segment) have similar capabilities and thus follow

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strategies that are similar. In other words, there are few significant differences among
firms in an industry.
(3) Resources used to implement strategies are highly mobile across firms. Significant
differences in strategically relevant resources among firms in an industry tend to
disappear because of resource mobility. Thus, any resource differences soon disappear
as they are observed and acquired or learned by other firms in the industry.
(4) Organizational decision-makers are assumed to be rational and committed to acting
only in the best interests of the firm. The implication of this assumption is that
organizational

decision-makers

will

consistently

exhibit

profit-maximizing

behaviours.
Based on its four underlying assumptions, the I/O model prescribes a five-step process for
firms to achieve above-average returns:
(1) Study the external environmentgeneral, industry and competitiveto determine the
characteristics of the external environment that will both determine and constrain the
firm's strategic alternatives.
(2) Select an industry (or industries) with a high potential for returns based on the
structural characteristics of the industry.
(3) Based on the characteristics of the industry in which the firm chooses to compete,
strategies that are linked with above-average returns should be selected.

THE I/O MODEL

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Figure 1.1: I/O Model

(4) Acquire or develop the critical resourcesskills and assetsneeded to successfully

implement the strategy that has been selected.
(5)

The I/O model indicates that above-average returns will accrue to firms that
successfully implement relevant strategic actions that enable the firm to leverage its
strengths (skills and resources) to meet the demands or pressures and constraints of
the industry in which they have elected to compete.

The I/O model thus challenges firms to seek out the industry (or industry segment) with
the greatest profit potential and then learn how to use their resources to implement valuecreating strategies given the structural characteristics of the industry.

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Levi Strauss-The Industrial Organisation Model

The experiences of Levi Strauss demonstrate how important it is for firms to recognize
threats (and opportunities as well) in their external environment. During the late 1980s and
into the 1990s, Levi failed to detect changes in its external environment such as those in
customers preferences. Changing preferences mandated that the firm begin to produce
more fashionable jeans and related clothing items. Additionally, in contrast to competitors
such as Jordache, Ralph Lauren and Gloria Vanderbilt, Levi chose to remain focused on
traditional distribution channels, avoiding discounters Target and Wal-Mart in the process.
Thus, changes in Levis external environment (in the form of customer demand and retail
distribution patterns)changes that had negative effects on the firms financial
performancethreatened the success of the world-famous branded products company. In
response to the challenges facing it, Levi decided to change virtually every aspect of how it
conducts business. The firm now interacts with customers more frequently and with greater
intensity to understand their product preferences. Levi also enhanced its product innovation
capabilities and implemented a new business planning and performance model that
clarified roles, responsibilities and accountabilities and improved the firms operational
effectiveness. These efforts are proving worthwhile in that the firms financial performance
continues to improve compared to the 1980s and 1990s.

1.8.2 Resource-based Model

The resource-based model adopts an internal perspective to explain how a firm's unique
bundle or collection of internal resources and capabilities represent the foundation upon
which value-creating strategies should be built.
Resources are inputs into a firm's production process, such as capital equipment,
individual employee's skills, patents, brand names, finance and talented managers. These
resources can be tangible or intangible.
Individual resources alone may not yield a competitive advantage. They become a
source of competitive advantage when they are formed into capabilities. A capability is the
capacity for a set of resources to perform a task or activity in an integrative manner.
Capabilities evolve over a period of time and must be managed dynamically in pursuit of
above average returns.
Core competencies are resources and capabilities that serve as a source of competitive
advantage over its rivals. Core competencies are often visible in the form of organisational
function. For example, marketing is a core-competence for Hindustan Unilever. The company

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has used its resources to develop an excellent marketing network which allows it to market its
products in ways that are superior to how its competitors market their products.
Resources and capabilities can lead to a competitive advantage when they are valuable, rare,
costly to imitate and non-substitutable.

Resources are valuable when they support taking advantage of opportunities or neutralizing
external threats.

Resources are rare when possessed by few, if any, competitors.

Resources are costly to imitate when other firms cannot obtain them inexpensively (relative to
other firms).

Resources are non-substitutable when they have no structural equivalents.

According to the resource-based model, a firm's resources and capabilities found in its
internal environment are more critical to determining the appropriateness of strategic actions
than are the conditions and characteristics of the external environment. So, strategies should
be selected that enable the firm to best exploit its core competencies, relative to opportunities
in the external environment.
The resource-based model, consisting of five steps, describes the linkages between
resource identification and strategy selection that will lead to above-average returns. The
steps are:
(1) Firms should identify their internal resources and assess their strengths and
weaknesses. The strengths and weaknesses of firm resources should be assessed
relative to competitors.
(2) Firms should identify the set of resources that provide the firm with capabilities that
are unique to the firm, relative to its competitors. The firm should identify those
capabilities that enable the firm to perform a task or activity better than its
competitors.
(3) Firms should determine the potential for their unique sets of resources and capabilities
to outperform rivals in terms of returns. Determine how a firms resources and
capabilities can be used to gain competitive advantage.
(4) Locate and compete in an attractive industry. Determine the industry that provides the
best fit between the characteristics of the industry and the firms resources and
capabilities.
(5) To attain a sustainable competitive advantage and earn above-average returns, firms
should formulate and implement strategies that enable them to exploit their resources

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and capabilities to take advantage of opportunities in the external environment better

than their competitors.
THE RESOURCE-BASED MODEL

Figure 1.2 :Resource based Model

Thus, the resource-based model challenges firms to formulate and implement
strategies that allow the firm to best exploit its core competenciescapabilities that are
valuable, rare, costly to imitate and non-substitutablerelative to opportunities in the
external environment. Resources and capabilities that meet the criteria of core competencies
then serve as the basis of a firm's sustainable competitive advantage, enabling it to achieve
strategic competitiveness and earn above-average returns.
Resource-based strategy Canons Success
Canon had its first success producing 35 mm cameras. Since then it has gone on to
develop fax machines, calculators, copy machines, printers, video cameras, camcorders,
semiconductor manufacturing equipment, and many other products. Almost all the
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products of Canon products involve the application of three areas of technological

capability: precision mechanics, microelectronics and fine optics.

1.8. 3 I/O Model and Resource Based Model-A Comparison

Point of Comparison
Competitive Advantage

I/O View
Positioning in industry

Resource-Based View
Possessing unique
organizational assets

Determinants of
profitability

Type, amount and nature of

firms resources

Focus of analysis

Characteristics of industry;
firms position within
industry
External

Major concern

Competition

Resourcescapabilities

Strategic choice

Choosing attractive industry

Developing unique resources/

distinctive capabilities

Internal

Research shows that both the industry environment and a firms internal assets affect the
firms performance over time. Thus, to form vision and mission and subsequently select one
or more strategies and to determine how to implement them, firms use both the I/O and the
resource-based models. In fact, these models complement each other in that one (I/O) focuses
outside the firm while the other (resource-based) focuses inside the firm.
Check your progress
11. State the names of important strategic planning models.
12. Explain the I/O model of strategic management,
13. Explain the resourced- based model of strategic management.
14. Compare the I/O model and the resource based model.

1.9 Research Studies in India on Strategic Management

Models
Research in strategic management is a neglected area because of the following reasons:
The complex nature of the discipline;
Inaccessibility to prospective respondents; and
Uncooperative attitudes of prospective respondents
The main areas of research are:
Industry analysis;
Business growth and diversification;
Mergers and acquisitions;
Transnational investments;
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Globalisation;
Technology transfer;
Turnaround strategies ;
Corporate culture;
Corporate governance; and
Small and medium scale industries.

1.10 Summary
Strategy is an integrated set of commitments and actions designed to position an organisation for
sustainable competitive advantage. It involves choices about which industries to participate in, what
products and services to offer and how to allocate corporate resources. Its primary goal is to create
value for stakeholders by providing customer value. Strategic management consists of the decisions
and actions used to formulate and implement strategies that will provide a competitively superior fit
between the organisation and its environment to enable it to achieve organisational objectives. It can
also be described as the process of management needed to enable an organisation to move from where
it is now to where it wants to be in the future. It is about a sense of direction and aligning this with an
organisations aims.
The strategic management process involves six steps- establishing strategic intent,
environmental analysis, identification of strategic alternatives, choice of strategy, implementation of
strategy and evaluation and control.
Strategic management is very important because it enables the firm to achieve market
leadership, helps the firm to achieve superior financial performance, unifies the activities of different
divisions of the firm and enables it to cope with uncertainties in the environment.
Strategic management deals with the future and encompasses long periods of time. It is an
iterative and repetitive process. It is systematic and rational. It is an integrative function. It involves
high stakes. It results in financial as well as non-financial benefits.
There are two important models of strategic management- the Industrial Organisation Model
and the Resource-based Model.

The I/O or Industrial Organization model presumes that the

characteristics of the external environment and conditions present in it determine the appropriateness
of strategies that are formulated and implemented in order for a firm to earn above-average returns.
The Resource-based model challenges firms to formulate and implement strategies that allow the firm
to best exploit its core competencies. These models complement each other in that one (I/O) focuses
outside the firm while the other (resource-based) focuses inside the firm.

1.12 Answers to Check Your Progress

1. Strategy is an integrated set of commitments and actions designed to position an
organisation for sustainable competitive advantage.

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2. Henry Mintzberg presents 5 "P's" as a way to define strategy. According to him, a

strategy can be defined as a plan, ploy, pattern, position or perspective.
3. Strategic management consists of the decisions and actions used to formulate and
implement strategies that will provide a competitively superior fit between the
organisation and its environment to enable it to achieve organisational objectives. It
can also be described as the process of management needed to enable an organisation
to move from where it is now to where it wants to be in the future.
4. Operational effectiveness means performing similar activities better than rivals.
Strategy is all about being different from everyone else.
5. The strategic management process involves six steps- establishing strategic intent,
environmental analysis, identification of strategic alternatives, choice of strategy,
implementation of strategy and evaluation and control.
6. Strategic management is very important because it enables the firm to achieve market
leadership, helps the firm to achieve superior financial performance, unifies the
activities of different divisions of the firm and enables it to cope with uncertainties in
the environment.
7. Strategic management deals with future events and their consequences. It
encompasses long periods of time. It is a continuous and repetitive process. It
is a systematic and rational process. It integrates the all the functions of
management. It is a tool to achieve management objectives.

It

involves the long-term commitment of a substantial proportion of organizational

resources.
8. Improved profitability and long-term financial performance are the financial benefits
of strategic management.
9. Enhancing the problem prevention capabilities, improved quality of decisions,
improved employee motivation, reduction in gaps and overlaps, reduction in
resistance to change and order and decision are some of the non-financial benefits of
strategic management.
10. Some of the pitfalls to avoid are:
Using strategic planning to gain control over decisions and resources
Doing strategic planning only to satisfy accreditation or regulatory
requirements
Too hastily moving from mission development to strategy formulation
Failing to communicate the plan to employees
Top managers making many intuitive decisions that conflict with the formal
plan
Top managers not actively supporting the strategic-planning process
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Failing to use plans as a standard for measuring performance

Delegating planning to a "planner" rather than involving all managers
Failing to involve key employees in all phases of planning
Failing to create a collaborative climate supportive of change
Viewing planning to be unnecessary or unimportant
Becoming so engrossed in current problems that insufficient or no planning is
done
Being so formal in planning that flexibility and creativity are stifled.

11. Industrial organisation model and resource-based model

12. According to the I/O model, firms must pay careful attention to the structured
characteristics of the industry in which they choose to compete. They should search
for an industry that is the most attractive to the firm, given the firm's strategically
relevant resources. Then, the firm must be able to successfully implement strategies
required by the industry's characteristics to be able to increase their level of
competitiveness.
13. According to the resource-based model, a firm's resources and capabilities found in
its internal environment are more critical to determining the appropriateness of
strategic actions than are the conditions and characteristics of the external
environment. So, strategies should be selected that enable the firm to best exploit its
core competencies, relative to opportunities in the external environment.
14. I/O Model and Resource Based Model-A Comparison
Point of Comparison
Competitive
Advantage
Determinants of
profitability
Focus of analysis
Major concern
Strategic choice

I/O View
Positioning in industry
Characteristics of industry;
firms position within industry
External
Competition
Choosing attractive industry

Resource-Based View
Possessing unique
organizational assets
Type, amount and nature of
firms resources
Internal
Resourcescapabilities
Developing unique resources/
distinctive capabilities

1.13 Exercises and Questions

1.
2.
3.
4.
5.

Define strategy and strategic management.

Explain the steps involved in the strategic management process.
What is the importance of strategic management?
What are the benefits of strategic management?
State and explain the two models of strategic management. Which one is a better model?
Why?
1.14 Further Reading
Andrews, K.R. (1980) The Concept of Corporate Strategy, Irwin, Homewood, Illinois.

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Hambrick, D.C. and A. Cannella, Strategy Implementation as Substance and Selling,

Academy of Management Executive 3:4 (1989) 278-85.
Hambrick, D.C. and J.W. Fredrickson, Are You Sure You Have a Strategy? Academy of
Management Executive, 15:4 (2001), pp. 48-59.
Mintzberg, H., Ahlstrand, B., and Lampel, J (2005) Strategy Bites Back. Upper Saddle River,
New Jersey: Pearson Prentice Hall.
Sun Tzu (Translated by Thomas Cleary) (1988) The Art of War.

Boston: Shambhala

Publications, Inc.
Thomson, A.A., A.J. Strickland and J.E. Gamble (2008) Crafting and Executing Strategy, The
McGraw-Hill Companies Inc., New York.

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