Strategic management is the main tool for maintaining the competitive advantage of companies in a complex contemporary environment. Currently, organizations need to constantly transform their strategy in accordance with the changing external conditions. Strategic management focuses on analyzing a variety of factors and developing the most relevant business strategy in accordance with the company’s vision and goals. This report provides comprehensive information on the integral parts of the strategic analysis and strategy formulation process.
The Framework of Strategic Management
Strategic management is a process aimed at shaping a firm’s strategy to create and maintain a competitive advantage. The organization’s strategy determines “the efficiency by which an organization reaches its objectives satisfying the needs of the customer” (Fuertes et al., 2020, p. 15). Managers need to assess both external and internal factors that affect the company’s operations in order to respond to existing and potential changes. The strategic management process includes analysis, decision making, and action. The strategy itself should focus on the goals and objectives of a particular company, assess the needs of stakeholders and include them in the decision-making process, evaluate short-term and long-term prospects, and also seek a balance between efficiency and effectiveness.
Strategic analysis plays a key role in formulating a strategy capable of creating a competitive advantage. The most important stage of this process is the assessment of the goals and objectives of the company since they are the main criterion for the choice of practices and techniques that need to be implemented. It is also critical to carefully analyze both the internal and external conditions influincing the organization’s operations.
Evaluating a company’s intellectual assets allows managers to identify opportunities for innovative and creative solutions that involve risk for the company. Strategic analysis should also take into account the company’s vision, mission, and strategic objectives, which determine what long-term goals the firm is working towards and what tools it use to achieve them. All these aspects of the analysis enable the formulation of a strategy that can later be implemented at various levels.
The contemporary business environment is highly complex and flexible, requiring managers to continually transform the organization’s strategy to respond to external threats. Analysis of the external environment allows assessing the conditions in which the company operates and over which it has no control or influence. This process consists of several key steps, including scanning, monitoring, competitive intelligence, and environmental forecasting. Environmental scanning consists of surveillance of the external environment and detecting current or potential changes in it. Monitoring is used to assess external trends, streams of activity, or events. Competitive intelligence allows analyzing the strengths and weaknesses of the company’s competitors, which makes it possible to predict and effectively respond to their actions. The final stage of assessing the external environment is forecasting, which uses the data collected in the previous stages to determine and adapt to external factors.
There are various types of the external environment, approaches to the analysis of which also differ. The general environment has potentially the strongest impact on the company and cannot be controlled by it. This type includes demographic, sociocultural, political, technological, economic, and global segments. The interaction of these elements influences the planning and performance of the organization, determining decisions about the production, marketing, or sale of certain goods to customers. The general environment also provides a company with a number of opportunities and threats that must be exploited or minimized in order to be successful.
Another type of environment over which the company has more control is the competitive environment. The analysis of this aspect is to assess how competitors’ products and services affect the company’s operations. Porter’s Five Forces model is used to analyze current competitive forces, as well as the general structure of the specific industry. Assessment of such indicators as the threat of new entrants, bargaining power of buyers and suppliers, the threat of substitute products and services, and the intensity among competitors within an industry give managers the opportunity to transform the strategy for effectively allocating resources to respond to threats and search for opportunities within the industry.
The internal environment of the company is completely controlled by it and needs management in accordance with the conditions of the external environment. To analyze the internal environment, you must first pay attention to value chain activities, which determine how valuable the product is for the buyer, the company creates, which determines its competitive advantage. Value creation is that the profit from a firm’s product or service exceeds the cost of creating it. Thus, within the framework of the analysis of the internal environment, such aspects as logistics, operations, marketing, materials, supplies, technical and human resources are considered. Evaluation of these indicators is necessary to optimize the costs of the company to create its products and maximize the potential profit.
The company’s resources are the basis for creating a competitive advantage, since the more of them a firm has, the more value it can generate. Organizations have tangible resources, including financial, technological, physical assets, that are easy enough to measure and imitate for competitors. Intangible resources consist of reputational, human, and innovative resources, which, on the contrary, are difficult to assess and often unique. There are also organizational capabilities, which refer to the ability of people in a company to turn input into output, that is, effectively use resources to create value. To achieve sustainable competitive advantage, a company needs to have as many valuable and rare resources as possible that are not easy to imitate but can be replaced with equivalents if necessary.
When analyzing the internal environment, it is also necessary to assess the company’s performance in order to determine how successful the company is at present and what strategy should be applied. To achieve this goal, financial ratio analysis is used, which evaluates the economic performance of the company, and a balanced scorecard is utilized, which helps managers to form a comprehensive view of the company’s current activities and development prospects. The balanced scorecard measures customer satisfaction, the ability to innovate, financial performance, and internal operations of a company to look for threats or development paths.
The key intangible resource for organizations in the modern world is intellectual assets that are capable of providing long-term development and sustainable competitive advantage. This concept includes the correct management of human resources and the development of their skills to generate knowledge. Hiring talented people and developing their skills allows firms to more efficiently use their resources, introduce new technologies and innovations, which are key factors for development.
The attraction and empowerment of human capital is an important, but not the only, part of the accumulation of intellectual assets. It is also important for companies to create social capital, which aims to develop connections and relationships between professionals for the accumulation and dissemination of knowledge. Through this concept, talents can work together to generate a firm-specific knowledge base that would provide a competitive advantage. An important stage in the accumulation of intellectual assets for an organization is also the protection of its intellectual property through patents, copyrights, trademarks, and other tools.
Strategic Formation
Business-Level Strategy
There are various levels of the company’s strategy; one of them is the business level, for which the key indicator is firm performance. The basis for the formation of a strategy for this level is overcoming the five competitive forces and achieving an advantage.
There are three typical strategies that allow companies to function effectively based on their goals and resources. The first strategy functions through cost leadership and is implemented due to a variety of cost minimization practices across all value chain and product generation processes. Thus, when applying this strategy, the company offers the customer a product at the lowest price in the industry, but it should not be inferior in quality to competitors’ products. Another strategy is differentiation, which means that the firm creates a product or service that is unique to the industry. The third strategy is the focus implying that a company offers products and services to a specific group of consumers. Companies can also combine strategies such as cost leadership and differentiation to achieve a more sustainable competitive edge and reach a wider audience.
The planning and implementation of the strategies described should also take into account the life cycle of the industry, which affects the strengths and weaknesses of companies within it at different stages. Each stage, including introduction, growth, maturity, and decline, is characterized by its own features that form a competitive environment. Strategic management must take into account the specifics of each of them in order to select the most effective tools and transform the strategy when moving to a new stage in the life cycle of the industry.
Corporate-Level Strategy
At the corporate level, the company’s strategy focuses on the diversification of activities and products. Diversification is achieved through the synergy of several companies that create more value together than individually. Companies choose a variety of ways to diversify their activities, including mergers strategic alliances, acquisitions, and joint ventures, as well as internal development. These activities allow companies to either pool resources for better performance. Within corporations, there are horizontal relationships between related businesses and hierarchical relationships between unrelated businesses. Depending on the type of relationship, the strategy of interaction and resource allocation also changes.
There is also related and unrelated diversification, the choice of which depends on the external strategic goals of the company. When diversifying, companies can focus on increasing revenue through sharing activities and efficient use of the core competencies.
This strategy provides support for existing businesses in the corporation and the development of new ones through joint value generation. Corporations can also focus on expanding market power through vertical integration and pooled negotiating power. These techniques allow companies to increase bargaining power, which provides new opportunities for development. The described types of strategies are related to related diversification, while parenting, restructuring, and portfolio management are related to unrelated diversification. In this case, the task of the corporation is to identify the least developed units and allocate resources to achieve the best performance.
International Strategy
Global expansion and entry into the international market is one of the possible diversification strategies. To create and maintain a competitive advantage at this level, companies need to focus on both internal and industry factors. With the international expansion, it is extremely important to assess the factors of national production and competition within the industry. Most important is also how quickly the resources available to the company can be used and how developed the infrastructure is. It is necessary to take into account the demand for the product in the national market, as well as the presence of supporting or related industries in order to create a more efficient supply chain.
International competition contributes to the development of the company in the national market, as well as the development of the national industry. In turn, competition within the domestic market forces companies to seek new sources of advantage and consider opportunities for global diversification.
The goals of international expansion can be to enter a new market, increase revenue, reduce operating costs, find the most convenient locations for each stage of the value chain, as well as extend the product life cycle. Global diversification has a number of key risks, including political, financial, and management risks, which also need to be minimized. Outsourcing and offshoring allow companies to adapt to the conditions of the global market by reducing costs and adapting to the local market. Depending on the focus, the company can choose global, international, multi-domestic, and transnational strategies.
Each of them is characterized by the use of different tools to achieve either local adaptation or low costs and find a balance between these two indicators. Depending on the goals of the companies, there are also various ways to enter the foreign market, from export to the creation of a subsidiary. The choice of a particular approach depends on the resources and goals of a particular company.
Entrepreneurial Strategy
Entrepreneurship is one of the ways to create value through the use of opportunities. Various factors can become sources of opportunity both in existing firms and for the creation of new enterprises. Entrepreneurship opportunities may be found by chance or may arise from deliberately seeking ways to expand or address current business problems. However, not all entrepreneurship opportunities are equally promising, so one needs to assess them first. In order to determine whether it is possible to turn the concept into a full-fledged idea, it is necessary to conduct a study of the target audience, the market, and the product. A good business opportunity can be characterized as attractive, achievable, durable, and capable of generating value.
Utilizing an entrepreneurial opportunity requires assessing the resources required to launch the product, as well as the qualities of the entrepreneur. The main difficulties at the initial stage are limited financial resources, human and social capital. However, it is also important that the entrepreneur have the necessary qualities and vision, which can become the most valuable asset. Using it, the entrepreneur is able to attract the resources necessary for the implementation of the concept. An entrepreneur can use a variety of analysis tools to select strategies, entry methods and also adopt generic strategies.
Strategic Control and Corporate Governance
The successful functioning of the company depends to a large extent on the management of internal processes, including the provision of a control system. First of all, one needs to pay attention to information control, which allows collecting data for analysis. There are traditional control methods that focus on collecting feedback, but they do not provide the opportunity for ongoing strategic transformation. Contemporary control systems, which are based on constant monitoring of the external and internal environment, provide the ability to respond to emerging changes, which greatly increases flexibility.
Traditional control measures are carried out through a fixed process of strategy formation, implementation, and control. Such a system is suitable for companies that are in a stable environment, have strictly defined tasks, and do not need constant changes in performance. Contemporary control systems are based on the interaction between strategy formulation, implementation, and control. This concept also includes informational and behavioral control, which focuses on assessing the quality of choice and implementation of the strategy. This concept also includes informational and behavioral control, which focuses on assessing the quality of planning and implementation processes of the strategy. Information control implies the development of a strategy that is consistent with the current strategic environment and the goals of the company.
The peculiarity of the contemporary approach lies in the constant transformation of the strategy depending on the acquired knowledge. Behavioral control is exercised through the search for a balance between culture, reward, and boundaries, whereas traditional systems measure results according to fixed rules.
Corporate governance is carried out through the creation of a strong organizational culture, which is based on a set of boundaries that determine ethical behavior within the company. This concept describes how a company does business and what approach it takes to maintain its competitive advantage. The reward system is an important part of corporate governance, as it allows you to manage performance. Corporate governance allows you to regulate the relationship between shareholders, managers, and the board of directors. The separation of these roles is necessary to ensure the efficient functioning of the company. Corporate governance mechanisms also allow aligning the interests of different parties to meet the needs of all parties.
Creating Effective Organizational Designs
The choice of the organization’s design and structure plays a key role in achieving strategic goals. The structure allows you to manage the interaction of all company resources, including technology, people, and tasks. The structure allows firms to divide existing tasks into groups so that they can later be integrated to generate effectiveness and efficiency. There are various growth patterns for large companies in which they move from simple structures to international and worldwide.
The simple structure is characterized by centralized decision-making, direct coordination of tasks, and a small number of regulations, norms, and rules. Within the functional structure, subdivisions appear, which are managed by specialized managers. This structure is created in a company with several related industries and the presence of vertical integration. The divisional structure builds the company’s activities around specific projects and products, dividing specialists depending on competencies. There is also a matrix structure, which is a hybrid of functional and divisional structures.
Boundaries in the design of organizations exist, including vertical, horizontal, external, and geographic boundaries. Modern companies strive to create ever more permeable boundaries that would facilitate better internal and external communication of the firm. Bridging boundaries allows companies to better share interests and knowledge, which allows them to develop both human and social capital by generating intellectual assets. The main focus in today’s complex environment is the creation of a sufficiently effective operating structure, which at the same time would be flexible enough to respond to external changes.
Strategic Leadership
Leadership is an integral part of the transformation of the organization in accordance with the strategic goals and objectives. The leader of the company must have such characteristics as proactivity, focus on the implementation of a creative vision or goal orientation. A leader needs to work on three areas: company design, creating a culture of efficiency and ethics, and setting direction. The leader needs to participate in scanning the environment by applying his knowledge of stakeholders and external trends and integrate the vision and organization for transformation in accordance with the strategy.
The design of the organization should be consistent with the leader’s vision and effectively contribute to its implementation. With regard to building organizational culture, the leader and top managers must take personal responsibility for maintaining ethical behavior and promote it as central to the mission and vision of the company. The leader has both personal and organizational power, which is based on legitimate, information, coercive, and rewarding aspects. Emotional intelligence, along with cognitive abilities and technical skills, is the main trait of a leader. This concept also includes the skills of self-awareness, self-regulation, empathy, motivation, and social skills.
The leader is able to create an environment in the learning organization in which employees develop their skills, accumulate knowledge, collect and apply external information, and are also motivated to achieve goals. The ethical structure of an organization is also a reflection of its leadership and determines how the company conducts business. An ethical organization provides opportunity discovery, group and individual decision making, organization design, and a common frame of reference. Highly ethical companies are distinguished by their scoring and reward systems, policies and procedures, role models, and code of conduct.
There are integrity-based and compliance-based approaches to the ethical management of an organization. An Integrity-based strategy differs from a compliance-based focus on empowerment, leadership, building social connections, and a shared vision, rather than creating norms and regulations.
Managing Innovation and Fostering Corporate Entrepreneurship
Innovation is the key to the success of modern companies and an integral part of the transformation of organizations. Radical innovation introduces fundamental disruption to the existing structure of companies and can revolutionize an entire industry. Incremental innovation is gradual and focuses on systematically improving existing aspects, allowing for slow evolution. Product innovation is the application of new technologies to create new products, which is also associated with de-versification.
Process innovation enables a company’s operations to be more efficient. The introduction of innovations is fraught with a number of challenges, including a high risk of inefficiency, the need to develop new skills, resource allocation. Before introducing an innovation, a company needs to analyze the cost-benefit ratio, focusing on value assessments as well as learning perspectives in the event of failure. The innovation process must be regulated by the company like any other operation, and support collaboration with more supportive and competent partners.
Corporate entrepreneurship is often the backbone of innovative ideas and projects. This process allows groups and individuals to have more decision-making power to create new products within the company. For sustainable development, firms need to develop an entrepreneurial culture that encourages the pursuit of opportunities at all levels of the organization. Every entrepreneurial project must be evaluated for potential effectiveness and promoted if possible. This approach can provide a company with a competitive advantage through the creation of innovative ideas and technologies, but it is associated with risk.
Reference
Fuertes, G., Alfaro, M., Vargas, M., Gutierrez, S., Ternero, R., & Sabattin, J. (2020). Conceptual framework for the strategic management: A literature review—Descriptive. Journal of Engineering, 2020, 1-21. Web.