The strategic management process aims at delineating the organization’s strategy. It is defined as the process by which managers make a choice of a set of strategies for the organization to achieve efficient functioning and higher accomplishments. It is a continuous process that appraises the business and industries where organization is involved, evaluates its competitors, defines targets to meet all the present and future challenges and finally assesses each strategy periodically. Strategic management is a particular course of action that is meant to achieve a corporate goal. By and large, the owners, founders of the company take the first step of the process. They lay down the structure responsible for carrying out several functions such as providing direction and guidance to the employees, setting up measurable goals with defined time spans and designated duties.
Planning, budgeting, acquiring resources, maintaining resources and using follow-up techniques to resolve key issues are key elements for managers to know in the strategic management process. Strategic planning came into being years ago as an alternative to then popular tradition of long-range planning. Long-range planning was based on pooling historical data and several market assumptions to chart the direction that an organization should take. Strategic planning on the other hand is more leadership driven and vision-based; leaders decide on principles that guide the organization toward established goals.
Strategic Management Process – Steps
Strategic management process is defined by four major steps which can be defined as follows:
- Environmental Scanning– Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes, analyzing the internal and external factors influencing the organization. After gathering the required data, management evaluates it on a continuous basis and strives to improve its resource database.
- 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 at this stage formulate corporate, business and functional strategies.
- Strategy Implementation– Strategy implementation implies making the strategy work as intended or putting the organization’s chosen strategy into action. Strategy implementation encompasses designing the organization’s structure, distributing resources, developing decision making process, and managing human resources.
- Strategy Evaluation- Strategy evaluation is the final step of strategic 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 its implementation meets the organizational objectives.
These components are chronologically carried steps while creating a new strategic management plan. Firms with existing plan in use revert to these steps as per the situation’s requirement, so as to make essential changes.
1. Environmental Scanning: Internal & External Environment
Organizational environment consists of both external and internal factors which need to be continually monitored to determine development and forecasts of factors that will influence organizational success. Environmental scanning refers to possession and utilization of information about occasions, patterns, trends, and relationships within an organization’s internal and external environment. It helps the managers to decide the future path of the organization. Scanning must comprehensively identify the threats and opportunities existing in the environment such that efficient strategy which takes advantage of the opportunities and minimize the threats can be formulated.
Internal analysis of the environment is the first step of environment scanning. This primarily includes interaction of employees with other employees, management, manager interaction with other managers and shareholders, access to natural resources, brand awareness, organizational structure, main staff, operational potential, etc. Internal environment analysis helps identify strengths and weaknesses within the organization. Most commonly used instruments used for assessment include interviews, surveys, discussions etc.
While in external analysis, three correlated environment are studied and analysed – Immediate / Industry environment, National environment and Broader socio-economic environment / Macro-environment.
Examining the industry environment involves survey of the competitive structure of the organization’s industry, emphasizing competitive position of the organization with respect to its main rivals. This includes assessment of the nature, stage, dynamics, history of the industry and the effect of globalization on competition within the industry. Analyzing the national environment involves appraisal of efficacy of national framework in achieving competitive advantage in the global environment. Macro-environment analysis includes exploring macro-economic, social, government, legal, technological and international factors that may influence the environment. The analysis of organization’s external environment reveals opportunities and threats for the organization.
As business becomes more competitive, external environment fluctuates rapidly hence, information from external environment adds crucial elements to the effectiveness of long-term goals and strategies. It becomes indispensable to identify competitors’ moves and actions in the dynamic environment such that organizations can amend their core competencies and internal environment as per external environment. Strategic managers must not only recognize the present state of the environment and their industry but also be able to predict its future positions.
2. Strategy Formulation
Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives to fulfil organizational vision. The process of strategy formulation involves six main steps which can rationally be followed in the following order:
- Setting Organizations objectives – The key component of any strategy statement is to set the long-term objectives of the organization. Objectives specify the desired end state while strategy stresses upon the means of achieving it. Strategy encompasses both fixation of objectives and definition of the medium to be used to realize those objectives. Thus, strategy is an extensive word which is based on manner of deployment of resources to achieve desired goals. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analysed before the selection of objectives.
- Evaluating the Organizational Environment – The next step is to evaluate the general economic and industrial environment in which the organization operates highlighting its competitive position. This generally involves a qualitative and quantitative review of organizations existing product line. The aim is to ensure that factors important for competitive success in the market can be discovered such that management can identify and exploit its strengths and weaknesses against those of its competitors.
- Setting Quantitative Targets – In this step, an organization must fix desired quantitative target values for certain objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.
- Aiming in context with the divisional plans – In this step, the contributions made by each department, division, product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.
- Performance Analysis – Performance analysis includes discovering and analyzing the gap between the planned and desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.
- Choice of Strategy – This is the ultimate step in Strategy Formulation where the best course of action is selected after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.
3. Strategy Implementation
Strategy implementation is the translation of chosen strategy into organizational action so as to achieve strategic goals and objectives. Strategy implementation is also defined as the manner in which an organization should develop, utilize, and amalgamate organizational structure, control systems, and culture to follow strategies that lead to competitive advantage and a better performance. Organizational structure allocates special value developing tasks and roles to the employees and states how these tasks and roles can be correlated so as maximize efficiency, quality, and customer satisfaction-the pillars of competitive advantage.
But, organizational structure is not sufficient in itself to motivate the employees. An organizational control system is also required. This control system equips managers with motivational incentives for employees as well as feedback on employees and organizational performance. Organizational culture refers to the specialized collection of values, attitudes, norms and beliefs shared by organizational members and groups. Following are the main steps in implementing a strategy:
- Developing an organization having potential of carrying out strategy successfully.
- Disbursement of abundant resources to strategy-essential activities.
- Creating strategy-encouraging policies.
- Employing best policies and programs for constant improvement.
- Linking reward structure to accomplishment of results.
- Making use of strategic leadership.
Excellently formulated strategies fail if not properly implemented. Also, it is essential to possess stability between strategy and each organizational dimension such as organizational structure, reward structure, resource-allocation process, etc to ensure efficient strategy implementation. Strategy implementation poses a threat to many managers and employees in an organization as new power relationships are predicted and achieved. New groups (formal as well as informal) are formed whose values, attitudes, beliefs and concerns may not be known. With the change in power and status roles, the managers and employees may employ confrontation behavior .
Following are the main differences between Strategy Formulation and Strategy Implementation-
- Strategy Formulation includes planning and decision-making involved in developing organization’s strategic goals and plans. Strategy Implementation involves all those means related to executing the strategic plans.
- In short, Strategy Formulation is placing the Forces before the action. But, Strategy Implementation is managing forces during the action.
- Strategy Formulation is an Entrepreneurial Activity based on strategic decision-making. Strategic Implementation is mainly an Administrative Task based on strategic and operational decisions
- Strategy Formulation emphasizes on effectiveness. Strategy Implementation emphasizes on efficiency.
- Strategy Formulation is a rational process. Strategy Implementation is basically an operational process.
- Strategy Formulation requires co-ordination among few individuals. Strategy Implementation requires co-ordination among many individuals.
- Strategy Formulation requires a great deal of initiative and logical skills. Strategy Implementation requires specific motivational and leadership traits.
- Strategic Formulation precedes Strategy Implementation. Strategy Implementation follows Strategy Formulation.
4. Strategy Evaluation
Strategic Evaluation is the final phase of strategic management process. Strategy Evaluation throws light on the efficiency and effectiveness of the comprehensive plans in achieving the desired results as stated during strategy formulation. The management assesses the validity of current strategy in existing environment with respect to dynamic socio-economic, political and technological innovations.
The significance of strategy evaluation lies in its capacity to co-ordinate the task performed by managers, groups, departments etc, through control of performance. Strategic Evaluation is significant because of various factors such as – developing inputs for new strategic planning, the urge for feedback, appraisal and reward, development of the strategic management process, judging the validity of strategic choice etc.
The process of Strategy Evaluation consists of following steps:
- Fixing benchmark of performance – While fixing the benchmark, strategists answer questions such as – what benchmarks to set, how to set them and how to express them. In order to determine the benchmark performance to be set, it is essential to discover the special requirements for performing the main task. The performance indicator that best identify and express the special requirements might then be determined to be used for evaluation. The organization can use both quantitative and qualitative criteria for comprehensive assessment of performance. Quantitative criteria include determination of net profit, ROI, earning per share, cost of production, rate of employee turnover etc. Among the Qualitative factors are subjective evaluating factors such as – skills and competencies, risk taking potential, flexibility etc.
- Measurement of performance – The standard performance is a bench mark with which the actual performance is compared. The reporting and communication system help in measuring the performance. If appropriate means are available for measuring the performance and if the standards are set in the right manner, strategy evaluation becomes easier. But various factors such as managers’ contribution are difficult to measure. Similarly divisional performance is sometimes difficult to measure as compared to individual performance. Thus, variable objectives must be created against which measurement of performance can be done. The measurement must be done at right time for evaluation to meet its purpose. For measuring the performance, financial statements like – balance sheet, profit and loss account must be prepared on an annual basis.
- Analyzing Variance – While measuring the actual performance and comparing it with standard performance there may be variances which are further analysed. The strategists must mention the degree of tolerance limits between which the variance between actual and standard performance may be accepted. The positive deviation indicates a better performance but it is quite unusual exceeding the target always. The negative deviation is an issue of concern because it indicates a shortfall in performance. Thus in this case the strategists must discover the causes of deviation and must take corrective action to overcome it.
- Taking Corrective Action – Once the deviation in performance is identified, it is essential to plan for a corrective action. If the performance is consistently less than the desired performance, the strategists must carry a detailed analysis of the factors responsible for such performance. If the strategists discover that the organizational potential does not match with the performance requirements, then the standards must be lowered. Another rare and drastic corrective action is reformulating the strategy which requires going back to the process of strategic management, reframing of plans according to new resource allocation trend and consequent means going to the beginning point of strategic management process.