Department of Management

College of Business and Economics

Addis Ababa University

Strategic Management
Short Note

Yohannes Neda
yohannesneda@gmail.com

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Chapter Objectives
At the end of this course you will be able to:
 Define Strategic management
 Describe stages of Strategic management
 Explain the key terms and model of Strategic
management
 Describe benefits of Strategic management
Strategic Management
Chapter One
Introduction
Contents
 Defining Strategy and strategic management
 Stages of strategic management
 Key terms in strategic management
 Strategic management approach
 Industrial organization model
 Resource based model
 Benefits of strategic management
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 Chapter One: Introduction

Definitions of Strategy
What is Strategy?
According to Colin White (2004) Strategy is arguably the most important concept in management studies. Strategy making is arguably the most
important activity of a practicing manager. Yet it is a concept difficult to define, and an activity difficult to pursue with effectiveness. The
concepts of both strategy as well as strategic management are defined several ways by several authors including the following:

According to Johnson, Scholes & Whittington (2008: 3), Strategy is the direction and scope of an organization 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.

“The essence of formulating competitive strategy is relating a company to its environment” (Porter, 1998:3)

“In its simplest conception strategy is regarded as a unifying idea which links purpose and action” (Colin White, 2004: 5)

General Characteristics of Strategic Decisions

 Strategy is likely to be concerned with the long-term direction of an

organization.
 Strategic decisions are likely to be concerned with the scope of an organization’s
activities.
 Strategic decisions are normally about trying to achieve some advantage for the
organization over competition.
 Strategy can be seen as the search for strategic fit with the business
environment.
 Strategy can also be seen as creating opportunities by building on an
organization’s resources and competences.
 The strategy of an organization is affected not only by environmental forces and
strategic capability, but also by the values and expectations of those who have
power in and around the organization.

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Key Terms in Strategic Management
What is Strategic Management?
According to Fred R. David (2011), the notion of
strategic management is to achieve and maintain
competitive advantage.
“Strategic management can be defined as the art
and science of formulating, implementing, and
evaluating cross-functional decisions that enable an
organization to achieve its objectives” (Fred R.
David, 2011:6). According to the author, this
definition implies, strategic management focuses on
integrating management, marketing,
finance/accounting, production/operations, research
and development, and information systems to
achieve organizational success.
“Strategic management is a set of managerial
decisions and actions that determines the long run
performance of a corporation. It includes
environmental scanning (both external and internal),
strategy formulation (strategic or long-range
planning), strategy implementation, and evaluation
and control” (Wheelen & Thomas L., 2012:5).
Strategic Management
Chapter One: Introduction
Key Terms in Strategic Management
 Competitive advantage: Competitive advantage is anything that a firm does
especially well compared to rival firms
 Strategists: Strategists are the individuals who are most responsible for the
success or failure of an organization.
 vision statements: A vision statement describes where an organization wants to
see itself in the future.
 Mission statements: Mission is the fundamental purpose of the organization & its
scope of operation.
 External opportunities and threats: External opportunities and external threats
refer to economic, social, cultural, demographic, environmental, political, legal,
governmental, technological, and competitive trends and events that could
significantly benefit or harm an organization in the future.
 Internal strengths and weaknesses: Internal strengths and internal weaknesses are
an organization’s controllable activities that are performed especially well or poorly.
 Long-term objectives: Objectives can be defined as specific results that an
organization seeks to achieve in pursuing its basic mission. Long-term means more
than one year
 Strategies: Strategies are the means by which long-term objectives will be
achieved.
 Annual objectives: Annual objectives are short-term milestones that organizations
must achieve to reach long-term objectives.
 Policies: Policies are the means by which annual objectives will be achieved.
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 Chapter One: Introduction

Levels of Strategy

Strategies exist at a number of levels in an organization. As shown in the diagram

below, it is possible to distinguish at least three different levels of strategy.
Corporate Strategy
Business Level Strategy
 It is found in the middle of the decision making hierarchy and
composed mainly of business & corporate managers.
 It is concerned with a single strategic business unit (SBU) and
how each business attempts to achieve its mission within its
chosen area of activity.

Business 1 Business 2 Business 3  A strategic business unit is a part of an organization for

which there is a distinct external market for goods or services
that is different from another SBU.
 Managers at this level translate the statements of direction and
Finance and
R &D Accounting Marketing Production intent generated at the corporate level into concrete objectives
& strategies for individual SBUs.

 The strategy is directed towards identifying products that

Corporate Level Strategy 2 taking care of meeting the customer’s needs while achieving
 The top level is corporate-level strategy, concerned with the overall
scope of an organization and how value will be added to the different
parts (business units) of the organization.
 It is also called portfolio-level strategy & primarily concerned with top
management, chief executive or board level decisions for acquisitions,
mergers, major expansions, & divestitures that add or reduce product
line.
 It identifies the businesses that the organization is taking and should
take, and attempts to determine the roles each business activity is
playing and should play in the organization.
 At this level; only the global objectives that are likely to be growth,
stability or retrenchment (defense); & strategic orientation in order to
achieve them are clearly defined.
Strategic Management
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should be developed and offered to selected markets; and
the objectives of the organization.
Functional Level Strategy
 It is found at the bottom of the decision making hierarchy
composed of mainly of managers of functional areas.
 This strategy is implemented in order to support the
business strategy by each functional area.
 Functional level decisions are concerned with how to
implement new technologies, develop new products, open
new markets, expand new facilities, and institute new
human resource programs.
Yohannes Neda
 Chapter One: Introduction

Characteristics of Strategic Decisions Comprehensive Strategic Management

at Different Levels
Corporate Level Decision:
 As we move from corporate to functional level strategies, the
decisions become more detailed & specific
 The decisions at corporate level tend to be more value oriented,
conceptual, & less concrete
 Corporate level decisions are characterized by greater risk, cost
of risk, profit potential, greater need of flexibility & longer time
horizons
 Such decisions include the choice of businesses, dividend
policies, sources of long-term financing, & priorities of growth
Model
The strategic-management process can best be studied and applied using
a model. Every model represents some kind of process. The framework
illustrated in the figure below is a widely accepted, comprehensive model
of the strategic-management process. This model does not guarantee
success, but it does represent a clear and practical approach for
formulating, implementing, and evaluating strategies (Fred R. David,
2011). Relationships among major components of the strategic-
management process are shown in the model and this course more or less
addresses all the elements in the model in the subsequent chapters.
External
Audit

Business Level Decision:

Vision Generate, Implement Implement Measure &

 Helps to bridge decisions at corporate & functional levels &
Mission
Long-Term
Objectives
Evaluate,
Select
Strategies:
Mgmt.
Strategies:
Marketing,
Evaluate
Performance
 Common business level decisions include plant location, Strategies Issues Fin/Acct,
R&D, CIS
market segmentation, geographic coverage, & distribution
channels Internal

Functional Level Decision: Audit

 Implement the overall strategy formulated at the corporate &

business levels
 Involves action-oriented operational issues, relatively short Ch. 1-3

range & low risk Source: Fred R. David,“How Companies Define Their Mission,” Long Range Planning 22, no.3
 Incurs modest costs because it depends on available resources (June 1988): 40.
 Critically analyzed because it is relatively concrete & quantifiable

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 Chapter One: Introduction

Two Approaches to Strategic Management

1. The Industrial Organization (I/O) model of above average returns

• The industry in which a firm competes has a stronger External Environments

influence on the firm’s performance than do the choices
managers make inside their organizations. General
Environment
Industry properties include:
• economies of scale
• barriers to market entry
• diversification
• product differentiation
• degree of concentration of firms in the industry

Four Assumptions of the I/O Model 4

External environment imposes pressures and constraints that

1 determine strategies leading to above-average returns.

Most firms competing in an industry control similar strategically Based on the I/O model:
2 relevant resources and pursue similar strategies.

Resources used to implement strategies are highly mobile 1. Strategy is dictated by the external environment of the
3 across firms. firm (what opportunities exist in these environments?)

Organizational decision makers are assumed to be rational and 2. Firm develops internal skills required by external
committed to acting in the firm’s best interests (profit-
4 maximizing.)
environment (what can the firm do about the
opportunities?)
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 Chapter One: Introduction

How Does the I/O Model Work?

1. Study the external environment, especially the industry environment.
The External  The general environment
Environment  The industry environment
 The competitor environment

2. Locate an attractive industry with a high potential for above-average returns.

An Attractive Industry
 An industry whose structural characteristics suggest above-average returns.

Strategy Formulation 3. Identify the strategy called for by the attractive industry to earn above-average returns.
 Selection of a strategy linked with above-average returns in a particular industry.

4. Develop or acquire assets and skills needed to implement the strategy.

Assets and Skills
 Assets and skills required to implement a chosen strategy.

5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the
Strategy strategy.
Implementation
 Selection of strategic actions linked with effective implementation of the chosen strategy.

Superior Returns Superior returns: earning of above-average returns.

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 Chapter One: Introduction

2. The Resource-Based Model of Superior Resources and Capabilities

Returns
 Each organization is a collection of unique resources and  Resources  Capabilities
capabilities that provides the basis for its strategy and that ◦ Inputs into a firm’s ◦ Capacity of a set of
is the primary source of its returns. production process: resources to perform in
 Capabilities evolve and must be managed dynamically. an integrative manner.
 Capital equipment
 Differences in firms’ performances are due primarily to ◦ A capability should not
their unique resources and capabilities rather than  Skills of individual be:
employees
structural characteristics of the industry.  So simple that it is
 Firms acquire different resources and develop unique  Patents highly imitable
capabilities.  Finances  So complex that it
defies internal steering
 Talented managers and control

Firm’s Resources

Based on the resource based model:

1. Strategy is dictated by the firm’s unique

resources and capabilities.
2. Find an environment in which to exploit these
assets (where are the best opportunities?)

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 Chapter One: Introduction

How Does the Resource Based Model Work?

1. Identify the firm’s resources. Study its strengths and weaknesses compared with those of
competitors.
Resources
 Inputs into a firm’s production process

2. Determine the firm’s capabilities. What do the capabilities allow the firm to do better than
Capabilities its competitors.
 Capacity of an integrated set of resources to integratively perform a task or activity.

Competitive Advantage 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive
advantage.
 Ability of a firm to outperform its rivals.

4. Locate an attractive industry.

An Attractive Industry
 An industry with opportunities that can be exploited by the firm’s resources and capabilities.

5. Select a strategy that best allow the firm to utilize its resources and capabilities relative to
Strategy opportunities in the external environment.
Implementation
 Strategic actions taken to earn above-average returns.

Superior Returns Superior returns: earning of above-average returns

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 Chapter One: Introduction

Key Criteria of Resources and Resources and Capabilities, Core

Capabilities Competencies, and Outcomes

Valuable
 Resources and capabilities are valuable when they allow a
firm to take advantage of opportunities or neutralize
threats in external environment.
Core
Rare Valuable
Competencies

 Resources and capabilities are rare when possessed by

few, if any, current and potential competitors. Rare
Competitive
Advantage
Costly to Imitate
 Resources and capabilities are costly to imitate when other Costly to Imitate Value Creation
firms either cannot obtain them or are at a cost
disadvantage in obtaining them.
Above Average
Non-substitutable Nonsubstitutable
Returns
 Resources and capabilities are non-substitutable when
they have no structural equivalents.
2

 When the four key criteria of resources and capabilities are met, they become core
Important competencies.
Points:  Core competencies serve as a source of competitive advantage.

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 Chapter One: Introduction

Benefits and Possible Challenges of Strategic Management

Benefits of Strategic Management Possible Challenges/Constraints of

Strategic Management
 Strategic management allows an organization to be more proactive
than reactive in shaping its own future; it allows an organization to
initiate and influence (rather than just respond to) activities—and  The difficulties of forecasting the uncertain future accurately
thus to exert control over its own destiny.
 The complexity of the environment to be forecasted and the
 Prevent or mitigate the effects of risks complex relations involved between environmental variables
 Helps the managers to discharge their responsibilities since they
know what is expected of them  The limitations of the data available & the distrust of mgt.
techniques applied such as forecasting, modeling, cost analysis
 Encourages & permits to evaluate alternative courses of action & operational research
 It reveals & clarifies the SWOT analysis  The costly endeavor of the St. mgt process that entails the use
 It provides an overall framework for decision making & resource of specialists, taking up mgt. time, requiring the support of
allocation effectively many individuals and even other orgs.
 Serves as a means of communicating objectives, strategies, &
detailed operating plans
 It helps managers' master change
 It develops attitudes, perspectives, ways of thinking, decision-
making habits, & planning philosophy that will produce better
decisions
 It provides a basis for measuring qualitative performance –
creativity, innovation, imagination, motivation
 It keeps the org. invariably tied with its customers & stakeholders
and provide relevant service to the society it stands for
 It makes the organization a learning-organization whereby others
consider it as a model to be followed

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