What is Strategic Management?
Strategic management is the formulation and implementation of major objectives and projects, by an organization’s management on behalf of its shareholders (or owners). Typically, the formulation process starts with an assessment of available resources, an industry analysis to assess the competitive environment in which the company operates, and an internal operations assessment. From this overall assessment, a strategy is then created to achieve the desired goals. Implementation of the formulated strategy seeks to steer and align the company with its main objectives.
Components of Strategic Management
Formulation includes an assessment of the environment in which the organization operates and then creating a strategy on how the organization will operate and compete. This is similar to the first step of the budgeting process.
Implementation includes the deployment of an organization’s resources to meet the desired objectives.
Frameworks for Strategic Management
#1. Competitive Advantage
An organization may achieve either lower cost of production or product differentiation as an advantage against its rivals. It is important to look at the market positioning of the brand and company and also to pinpoint all the competitive advantages the company has over its competitors.
#2. Corporate Strategy and Portfolio Theory
The Modern Portfolio Theory provides a framework for allocating assets so that, for a given level of risk, the expected return is maximized. Portfolio Theory allows corporations to perform a cost-benefit analysis on the deployment of resources and view the merit of individual resource placement to the company in its totality.
The Growth-Share Matrix, developed by the Boston Consulting Group, helps corporations analyze the value of their individual business units by plotting the business on an axis. The two parameters of judgment are market share – a measure of a business unit’s competitive position in regards to its peers – and industry growth rate – a measure of the prospects of the particular industry in which the unit operates.
#3. Core Competence
Businesses should seek to develop expertise in areas of relative excellence and eliminate or outsource the remainder of its business activities. By being able to do this, an organization can provide a unique and unparalleled product, service, or perspective to the market and consumers.
#4. Experience Curve
The experience curve expresses the proposition that whenever the output produced doubles, the value-added costs decline by a consistent percentage.
Generic Competitive Strategies
Companies should concentrate their strategy on either cost leadership, focus, or differentiation. According to famed business strategist Michael Porter, if a company does not place focus on a singular factor, it risks wasting its resources. Such a strategy places emphasis on either specializing in a product or service by creating a unique selling proposition or creating economies of scale to achieve low costs of production.
Industry Structure and Profitability
The Competitive Forces Model (Porters 5 Forces) is a framework used to assess the competitiveness of the industry.
#1. Threat of new entrants
In a competitive industry, the threat of new entrants will be high. Assuming an industry or sector is highly profitable, it will be considered as an attractive business prospect by many. Some deterrents to ease of entry into a market include patents, high capital requirements, customer loyalty to established brands, and existing economies of scale.
#2. Threat of substitutes
If a product or experience can be easily duplicated with a similar alternative, the demand for that product is said to be diluted. If consumers can find similar alternative products, the industry or sector is deemed to be competitive.
#3. Bargaining power of customers
Customers will enjoy high bargaining power in a competitive market. Sellers will not be able to exert pricing pressure that will favor their profitability.
#4. Bargaining power of suppliers
When several suppliers are present to source raw or intermediary materials, they are not able to influence the final price in an unjustifiable way.
#5. Competitive rivalries
Competitive industries enjoy a high degree of innovation and evolved competitive and marketing strategies.
SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats. This framework is employed to assess internal strengths and weaknesses, to explore the external scope of opportunities available for the business to exploit, and to confront threats presented by opponents or policies.
The value chain consists of a list of processes or activities that a company performs to bring a product or service into the market. The activities are divided into two functions:
#1. Primary activities
These include functions that go directly into creating a good or service. They consist of functions such as inbound and outbound logistics, operations, marketing and sales, and servicing the product.
#2. Support activities
These include functions that facilitate the production of the good or service. They consist of functions such as human resources, technology, procurement, and infrastructure.
According to Porter, aligning activities can improve the operational efficiency of an organization and ultimately create a competitive advantage for it.
Thank you for reading CFI’s guide to Strategic Management. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: