Strategic Management & Strategic Planning Process

Strategic management process

is a method by which managers conceive of and implement a strategy that can lead to
a sustainable competitive advantage.
[1]

Strategic planning process

is a systematic or emerged way of performing strategic planning in the organization
through initial assessment, thorough analysis, strategy formulation, its implementation
and evaluation

5 stages of strategic planning process:

Initial Assessment

Components: Vision statement & Mission statement

Tools used: Creating a Vision and Mission statements. Business' vision answers the question: What
does an organization want to become?

mission describes companys business. It informs organizations stakeholders about the products,
customers, markets, values, concern for public image and employees of the organization (David, p.
93)[5]. Thorough mission statement acts as guidance for managers in making appropriate

Situation Analysis

Components: Internal environment analysis, External environment analysis and Competitor analysis
Tools used: PEST, SWOT, Core Competencies, Critical Success Factors, Unique Selling Proposition,
Porter's 5 Forces, Competitor Profile Matrix, External Factor Evaluation Matrix, Internal Factor
Evaluation Matrix, Benchmarking, Financial Ratios, Scenarios Forecasting, Market Segmentation,
Value Chain Analysis, VRIO Framework

Strategy Formulation

Components: Objectives, Business level, Corporate level and Global Strategy Selection
Tools used: Scenario Planning, SPACE Matrix, Boston Consulting Group Matrix, GE-McKinsey Matrix,
Porters Generic Strategies, Bowmans Strategy Clock, Porters Diamond, Game Theory, QSP Matrix.

Successful situation analysis is followed by creation of long-term objectives. Long-term objectives

indicate goals that could improve the companys competitive position in the long run.

They act as directions for specific strategy selection. In an organization, strategies are chosen
at 3 different levels:

Business level strategy. This type of strategy is used when strategic business units
(SBU), divisions or small and medium enterprises select strategies for only one
product that is sold in only one market. The example of business level strategy is well
illustrated by Royal Enfield firms. They sell their Bullet motorcycle (one product) in
United Kingdom and India (different markets) but focus on different market segments
and sell at very different prices (different strategies). Firms may select between
Porters 3 generic strategies: cost leadership, differentiation and focus strategies.
 Corporate level strategy. At this level, executives at top parent companies choose
which products to sell, which market to enter and whether to acquire a competitor or
merge with it. They select between integration, intensive, diversification and
defensive strategies.
Global/International strategy. The main questions to answer: Which new markets to
develop and how to enter them? How far to diversify

Strategy Implementation

Components: Annual Objectives, Policies, Resource Allocation, Change Management, Organizational

chart, Linking Performance and Reward
Tools used: Policies, Motivation, Resistance management, Leadership, Stakeholder Impact Analysis,
Changing organizational structure, Performance management

Strategy Monitoring

Components: Internal and External Factors Review, Measuring Companys Performance

Tools used: Strategy Evaluation Framework, Balanced Scorecard, Benchmarking.

Implementation must be monitored to be successful. Due to constantly changing external and

internal conditions managers must continuously review both environments as new strengths,
weaknesses, opportunities and threats may arise. If new circumstances affect the company,
managers must take corrective actions as soon as possible.

Competitive advantage
means superior performance relative to other competitors in the same industry or
superior performance relative to the industry average
Nearly everything can be considered as competitive edge, e.g. higher profit margin, greater return
on assets, valuable resource such as brand reputation or unique competence in producing jet
engines.

An organization that is capable of outperforming its competitors over a long period of time has
sustainable competitive advantage.
How a company can achieve it?
a. External Changes

Changes in PEST factors. PEST stands for political, economic, socio-cultural and
technological factors that affect firms external environment. When these factors change
many opportunities arise that can be exploited by an organization to achieve superiority over
its rivals. For example, new superior machinery, which is manufactured and sold only in
South Korea, would result in lower production costs for Korean companies and they would
gain cost advantage against competitors in a global environment. Changes in consumer
demand, such as trend for eating more healthy food, can be used to gain at least temporary
differentiation advantage if a company would opt to sell mainly healthy food products while
competitors wouldnt. For example, Subway and KFC.

If opportunities appear due to changes in external environment why not all companies are
able to profit from that? Its simple, companies have different resources, competences and
capabilities and are differently affected by industry or macro environment changes.

Companys ability to respond fast to changes. The advantage can also be gained when a
company is the first one to exploit the external change. Otherwise, if a company is slow to
respond to changes it may never benefit from the arising opportunities.

b. Internal Changes

VRIO resources. A company that possesses VRIO (valuable, rare, hard to imitate and
organized) resources has an edge over its competitors due to superiority of such resources. If
one company has gained VRIO resource, no other company can acquire it (at least
temporarily). The following resources have VRIO attributes:

Intellectual property (patents, copyrights, trademarks)

Brand equity
Culture
Know-how
Reputation

Unique competences. Competence is an ability to perform tasks successfully and is a cluster

of related skills, knowledge, capabilities and processes. A company that has developed a
competence in producing miniaturized electronics would get at least temporary advantage as
other companies would find it very hard to replicate the processes, skills, knowledge and
capabilities needed for that competence.

Innovative capabilities. Most often, a company gains superiority through innovation.

Innovative products, processes or new business models provide strong competitive edge due
to the first mover advantage. For example, Apples introduction of tablets or its business
model combining mp3 device and iTunes online music store

Two basic types

M. Porter has identified 2 basic types of competitive advantage: cost and differentiation
advantage.

Cost advantage. Porter argued that a company could achieve superior performance by
producing similar quality products or services but at lower costs. In this case, company sells
products at the same price as competitors but reaps higher profit margins because of lower
production costs. The company that tries to achieve cost advantage is pursuing cost
leadership strategy. Higher profit margins lead to further price reductions, more investments
in process innovation and ultimately greater value for customers.

Differentiation advantage. Differentiation advantage is achieved by offering unique

products and services and charging premium price for that. Differentiation strategy is used in
this situation and company positions itself more on branding, advertising, design, quality and
new product development rather than efficiency, outsourcing or process innovation.
Customers are willing to pay higher price only for unique features and the best quality.
The cost leadership and differentiation strategies are not the only strategies used to gain
competitive advantage. Innovation strategy is used to develop new or better products,
processes or business models that grant competitive edge over competitors.

Horizontal integration
Horizontal integration
is the process of acquiring or merging with competitors, leading to industry
consolidation.
Horizontal integration
is a strategy where a company acquires, mergers or takes over another company in the
same industry value chain.

What is horizontal integration?

It is a type of integration strategies pursued by a company in order to strengthen its position
in the industry. A corporate that implements this type of strategy usually mergers or acquires
another company that is in the same production stage. For example, Disney merging with
Pixar (movie production), Exxon with Mobile (oil production, refining and distribution) or
the infamous Daimler Benz and Chrysler merger (car developing, manufacturing and
retailing).

The purpose of horizontal integration (HI) is to grow the company in size, increase product
differentiation, achieve economies of scale, reduce competition or access new markets. When
many firms pursue this strategy in the same industry, it leads to industry consolidation
(oligopoly or even monopoly).

HI can occur in a form of mergers, acquisitions or hostile takeovers. Merger is the joining of
two similar sizes, independent companies to make one joint entity. Acquisition is the
purchase of another company. Hostile takeover is the acquisition of the company, which
does not want to be acquired.

HI may be an effective strategy when:

Organization competes in a growing industry.

Competitors lack of some capabilities, competencies, skills or resources that the
company already possesses.
HI would lead to a monopoly that is allowed by a government.
Economies of scale would have significant effect.
The organization has sufficient resources to manage M&A.

The following diagram illustrates HI in manufacturing industry:

Difference between horizontal and vertical integrations
HI is different from vertical integration, where a firm usually expands into another production
stage rather than merging or acquiring the company in the same production stage. For
example, a company is vertically integrating if it expands from manufacturing industry to
retailing industry, while HI would mean buying other firms in the same manufacturing
industry.

Advantages of horizontal integration

Lower costs. The result of HI is one larger company, which produces more services
and products. The higher output leads to greater economies of scale and higher
efficiency.
Increased differentiation. The combined company can offer more product or service
features.
Increased market power. The larger company has more power over its suppliers and
distributors/customers.
Reduced competition. The result of industry consolidation is fewer companies
operating in the industry and less intense competition.
Access to new markets. New markets and distribution channels can be accessed by
integrating with a company that produces the same goods but operates in a different
region or serves different market segment.

Disadvantages of the strategy

Destroyed value. M&A rarely add value to the companies. More often M&A fail and
destroy the value of the companies involved in it because expected synergies never
materialize.
Legal repercussions. HI can lead to a monopoly, which is highly discouraged by many
governments due to lack of competition. Therefore, governments usually have to
approve any larger M&A before they can happen.
Reduced flexibility. Large organizations are harder to manage and they are less
flexible in introducing innovations to the market.

Vertical Integration

Definition
Vertical integration

is a strategy used by a company to gain control over its suppliers or distributors in order to
increase the firms power in the marketplace, reduce transaction costs and secure supplies
or distribution channels.

Forward integration

is a strategy where a firm gains ownership or increased control over its previous customers
(distributors or retailers).

Backward integration

is a strategy where a firm gains ownership or increased control over its previous suppliers.

What is vertical integration?

Vertical integration (VI) is a strategy that many companies use to gain control over their
industrys value chain. This strategy is one of the major considerations when developing
corporate level strategy. The important question in corporate strategy is, whether the
company should participate in one activity (one industry) or many activities (many industries)
along the industry value chain. For example, the company has to decide if it only
manufactures its products or would engage in retailing and after-sales services as well. Two
issues have to be considered before integration:

Costs. An organization should vertically integrate when costs of making the product
inside the company are lower than the costs of buying that product in the market.
Scope of the firm. A firm should consider whether moving into new industries would
not dilute its current competencies. New activities in a company are also harder to
manage and control. The answers to previous questions determine if a company will
pursue none, partial or full VI.

The example below illustrates a general industry value chain and none, partial or full VI of a
corporate operating in that industry.
Difference between vertical and horizontal integrations
VI is different from horizontal integration, where a corporate usually acquires or mergers
with a competitor in a same industry. An example of horizontal integration would be a
company competing in raw materials industry and buying another company in the same
industry rather than trying to expand to intermediate goods industry. Horizontal integration
examples: Kraft Foods taking over Cadbury, HP acquiring Compaq or Lenovo buying
personal computer division from IBM.

Types of vertical integration

Firms can pursue forward, backward or balanced VI strategies

Forward integration
If the manufacturing company engages in sales or after-sales industries it pursues forward
integration strategy. This strategy is implemented when the company wants to achieve higher
economies of scale and larger market share. Forward integration strategy became very
popular with increasing internet appearance. Many manufacturing companies have built their
online stores and started selling their products directly to consumers, bypassing retailers.
Forward integration strategy is effective when:

Few quality distributors are available in the industry.

Distributors or retailers have high profit margins.
Distributors are very expensive, unreliable or unable to meet firms distribution needs.
The industry is expected to grow significantly.
There are benefits of stable production and distribution.
The company has enough resources and capabilities to manage the new business.

Backward integration
When the same manufacturing company starts making intermediate goods for itself or takes
over its previous suppliers, it pursues backward integration strategy. Firms implement
backward integration strategy in order to secure stable input of resources and become more
efficient. Backward integration strategy is most beneficial when:

Firms current suppliers are unreliable, expensive or cannot supply the required
inputs.
There are only few small suppliers but many competitors in the industry.
The industry is expanding rapidly.
The prices of inputs are unstable.
Suppliers earn high profit margins.
A company has necessary resources and capabilities to manage the new business

Balanced integration strategy is simply a combination of forward and backward integrations

Advantages
Advantages of the strategy:

Lower costs due to eliminated market transaction costs;

Improved quality of supplies;
Critical resources can be acquired through VI;
Improved coordination in supply chain;
Greater market share;
Secured distribution channels;
Facilitates investment in specialized assets (site, physical-assets and human-assets);
New competencies.

Disadvantages
Disadvantages of VI:

Higher costs if the company is incapable of managing new activities efficiently;

The ownership of supply and distribution channels may lead to lower quality products
and reduced efficiency because of the lack of competition;
Increased bureaucracy and higher investments leads to reduced flexibility;
Higher potential for legal repercussion due to size (An organization may become a
monopoly);
New competencies may clash with old ones and lead to competitive disadvantage.

Alternatives to VI
This strategy may not always be the best choice for an organization due to a lack of sufficient
resources that are needed to venture into a new industry. Sometimes the alternatives to VI
offer more benefits. The available choices differ in the amount of investments required and
the integration level. For example, short-term contracts require little integration and much
less investments than joint ventures.
DO YOU KNOW WHAT YOUR COMPETITORS ARE DOING?

The Competitive Profile Matrix (CPM)

is a tool that compares the firm and its rivals and reveals their relative strengths and
weaknesses.
In order to better understand the external environment and the competition in a particular industry,
firms often use CPM. The matrix identifies a firms key competitors and compares them using
industrys critical success factors. The analysis also reveals companys relative strengths and
weaknesses against its competitors, so a company would know, which areas it should improve and,
which areas to protect. An example of a matrix is demonstrated below.

The resource-based view (RBV)

is a model that sees resources as key to superior firm performance. If a resource
exhibits VRIO attributes, the resource enables the firm to gain and sustain competitive
advantage
RBV is an approach to achieving competitive advantage that emerged in 1980s and 1990s, after the
major works published by Wernerfelt, B. (The Resource-Based View of the Firm), Prahalad and
Hamel (The Core Competence of The Corporation), Barney, J. (Firm resources and sustained
competitive advantage) and others. The supporters of this view argue that organizations should
look inside the company to find the sources of competitive advantage instead of looking at
competitive environment for it.

Question of Value. Resources are valuable if they help organizations to increase the value
offered to the customers. This is done by increasing differentiation or/and decreasing the
costs of the production. The resources that cannot meet this condition, lead to competitive
disadvantage.

Question of Rarity. Resources that can only be acquired by one or few companies are
considered rare. When more than few companies have the same resource or capability, it
results in competitive parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least
temporary competitive advantage. However, the resource must also be costly to imitate or to
substitute for a rival, if a company wants to achieve sustained competitive advantage.

Question of Organization. The resources itself do not confer any advantage for a company
if its not organized to capture the value from them. Only the firm that is capable to exploit
the valuable, rare and imitable resources can achieve sustained competitive advantage.

Difference between resource-based and industrial

organization views
RBV holds that sustained competitive advantage can be achieved more easily by exploiting internal
rather than external factors as compared to industrial organization (I/O) view. While this is correct to
some degree, there isnt definite answer to which approach to strategic management is more
important. The chart [1] below shows how industry, firm and other effects explain firms
performance. From ~30% to ~45% of superior organizational performance can be explained by firm
effects (resource based view) and ~20% by industry effects (I/O view). This indicates that the best
approach is to look into both external and internal factors and combine both views to achieve and
sustain competitive advantage.

Value Chain Analysis

Value chain analysis (VCA)
is a process where a firm identifies its primary and support activities that add value to
its final product and then analyze these activities to reduce costs or increase
differentiation.
Value chain

represents the internal activities a firm engages in when transforming inputs into outputs. Its
goal is to recognize, which activities are the most valuable (i.e. are the source of cost or
differentiation advantage) to the firm and which ones could be improved to provide
competitive advantage. In other words, by looking into internal activities, the analysis reveals
where a firms competitive advantages or disadvantages are. The firm that competes through
differentiation advantage will try to perform its activities better than competitors would do. If
it competes through cost advantage, it will try to perform internal activities at lower costs
than competitors would do. When a company is capable of producing goods at lower costs
than the market price or to provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary
activities that add value to the final product directly and support activities that add value
indirectly.
PEST & PESTEL Analysis
PEST analysis
is an analysis of the political, economic, social and technological factors in the
external environment of an organization, which can affect its activities and
performance.
PESTEL model
involves the collection and portrayal of information about external factors which
have, or may have, an impact on business.

PEST or PESTEL analysis is a simple and effective tool used in situation analysis to identify
the key external (macro environment level) forces that might affect an organization. These
forces can create both opportunities and threats for an organization. Therefore, the aim of
doing PEST is to:

find out the current external factors affecting an organization;

identify the external factors that may change in the future;
to exploit the changes (opportunities) or defend against them (threats) better than
competitors would do.

Porter's Five Forces

Porters five forces model

is an analysis tool that uses five industry forces to determine the intensity of
competition in an industry and its profitability level.
[

Porter's Five Forces Factors

Threat of new entry
 Amount of capital required
Retaliation by existing companies
Legal barriers (patents, copyrights, etc.)
Brand reputation
Product differentiation
Access to suppliers and distributors
Economies of scale
Sunk costs
Government regulation

Supplier power
Number of suppliers
Suppliers size
Ability to find substitute materials
Materials scarcity
Cost of switching to alternative materials
Threat of integrating forward

Buyer power
Number of buyers
Size of buyers
Size of each order
Buyers cost of switching suppliers
There are many substitutes
Price sensitivity
Threat of integrating backward

Threat of substitutes
Number of substitutes
Performance of substitutes
Cost of changing

Rivalry among existing competitors

Number of competitors
Cost of leaving an industry
Industry growth rate and size
Product differentiation
Competitors size
Customer loyalty
Threat of horizontal integration
Level of advertising expense

IFE and EFE Matrix

Internal Factor Evaluation (IFE) Matrix

is a strategy tool used to evaluate firms internal environment and to reveal its
strengths as well as weaknesses.
[1]
External Factor Evaluation (EFE) Matrix
is a strategy tool used to examine companys external environment and to identify the
available opportunities and threats.
The internal and external factor evaluation matrices have been introduced by Fred R. David in his
book Strategic Management[1] (at least I found them there and couldnt trace their origins
anywhere else). According to the author, both tools are used to summarize the information gained
from companys external and internal environment analyses. The summarized information is
evaluated and used for further purposes, such as, to build SWOT analysis or IE matrix. Even though,
the tools are quite simplistic, they do the best job possible in identifying and evaluating the key
affecting factors. Both tools are nearly identical so well only show an example of an EFE matrix right
now.

Benefits

Both matrices have the following benefits:

Easy to understand. The input factors have a clear meaning to everyone inside or outside the
company. Theres no confusion over the terms used or the implications of the matrices.
Easy to use. The matrices do not require extensive expertise, many personnel or lots of time
to build.
Focuses on the key internal and external factors. Unlike some other analyses (e.g. value
chain analysis, which identifies all the activities in the companys value chain, despite their
importance), the IFE and EFE only highlight the key factors that are affecting a company or
its strategy.
Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-McKinsey matrix
or for benchmarking.

Limitations

Easily replaced. IFE and EFE matrices can be replaced almost completely by PEST analysis,
SWOT analysis, competitive profile matrix and partly some other analysis.
Doesnt directly help in strategy formation. Both analyses only identify and evaluate the
factors but do not help the company directly in determining the next strategic move or the
best strategy. Other strategy tools have to be used for that.
Too broad factors. SWOT matrix has the same limitation and it means that some factors that
are not specific enough can be confused with each other. Some strengths can be weaknesses
as well, e.g. brand reputation, which can be a strong and valuable brand reputation or a
poor brand reputation. The same situation is with opportunities and threats. Therefore, each
factor has to be as specific as possible to avoid confusion over where the factor should be
assigned.

BCG growth-share matrix

BCG matrix
(or growth-share matrix) is a corporate planning tool, which is used to portray firms
brand portfolio or SBUs on a quadrant along relative market share axis (horizontal
axis) and speed of market growth (vertical axis) axis.
Growth-share matrix
is a business tool, which uses relative market share and industry growth rate factors to
evaluate the potential of business brand portfolio and suggest further investment
strategies.
BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of
the business brand portfolio and its potential. It classifies business portfolio into four categories
based on industry attractiveness (growth rate of that industry) and competitive position (relative
market share). These two dimensions reveal likely profitability of the business portfolio in terms of
cash needed to support that unit and cash generated by it. The general purpose of the analysis is to
help understand, which brands the firm should invest in and which ones should be divested.

Market growth rate. High market growth rate means higher earnings and sometimes profits
but it also consumes lots of cash, which is used as investment to stimulate further growth.
Therefore, business units that operate in rapid growth industries are cash users and are worth
investing in only when they are expected to grow or maintain market share in the future.

There are four quadrants into which firms brands are classified:

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing
market. In general, they are not worth investing in because they generate low or negative cash
returns. But this is not always the truth. Some dogs may be profitable for long period of time,
they may provide synergies for other brands or SBUs or simple act as a defense to counter
competitors moves. Therefore, it is always important to perform deeper analysis of each
brand or SBU to make sure they are not worth investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation

Cash cows. Cash cows are the most profitable brands and should be milked to provide as
much cash as possible. The cash gained from cows should be invested into stars to support
their further growth. According to growth-share matrix, corporates should not invest into cash
cows to induce growth but only to support them so they can maintain their current market
share. Again, this is not always the truth. Cash cows are usually large corporations or SBUs
that are capable of innovating new products or processes, which may become new stars. If
there would be no support for cash cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Stars. Stars operate in high growth industries and maintain high market share. Stars are both
cash generators and cash users. They are the primary units in which the company should
invest its money, because stars are expected to become cash cows and generate positive cash
flows. Yet, not all stars become cash flows. This is especially true in rapidly changing
industries, where new innovative products can soon be outcompeted by new technological
advancements, so a star instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market
development, product development

Question marks. Question marks are the brands that require much closer consideration. They
hold low market share in fast growing markets consuming large amount of cash and incurring
losses. It has potential to gain market share and become a star, which would later become
cash cow. Question marks do not always succeed and even after large amount of investments
they struggle to gain market share and eventually become dogs. Therefore, they require very
close consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture

BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly.
They can help as general investment guidelines but should not change strategic thinking.
Business should rely on management judgement, business unit strengths and weaknesses and
external environment factors to make more reasonable investment decisions.

Benefits of the matrix:

Easy to perform;
Helps to understand the strategic positions of business portfolio;
Its a good starting point for further more thorough analysis.

Following are the main limitations of the analysis:

Business can only be classified to four quadrants. It can be confusing to classify an

SBU that falls right in the middle.
It does not define what market is. Businesses can be classified as cash cows, while
they are actually dogs, or vice versa.
Does not include other external factors that may change the situation completely.
Market share and industry growth are not the only factors of profitability. Besides,
high market share does not necessarily mean high profits.
It denies that synergies between different units exist. Dogs can be as important as cash
cows to businesses if it helps to achieve competitive advantage for the rest of the
company.

SWOT

Swot analysis involves the collection and portrayal of information about internal and
external factors which have, or may have, an impact on business.
SWOT is a framework that allows managers to synthesize insights obtained from an
internal analysis of the companys strengths and weaknesses with those from an
analysis of external opportunities and threats.

What is SWOT analysis? The answer to the question is simple: its a tool used for situation
(business or personal) analysis! SWOT is an acronym which stands for:

Strengths: factors that give an edge for the company over its competitors.
Weaknesses: factors that can be harmful if used against the firm by its competitors.
Opportunities: favorable situations which can bring a competitive advantage.
Threats: unfavorable situations which can negatively affect the business.

Strengths and weaknesses are internal to the company and can be directly managed by it,
while the opportunities and threats are external and the company can only anticipate and react
to them. Often, swot is presented in a form of a matrix as in the illustration below