What is Strategic Management?

A set of managerial decisions and actions that determines the long-lasting performance of an
organization. This include four key phases:
a) Environmental scanning (external and internal)
b) Strategy formulation
c) Strategy implementation
d) Evaluation and control

The study of strategic management focuses on monitoring of business environment for

opportunities and threats in line with organization’s strengths and weaknesses.

The performance of organizations is largely determined by the concepts and techniques used to
execute strategies. Hence there are firms that have succeeded over others such as:
o Singapore Airline vs US Air o Safaricom vs Airtel and Telcom
o Virgin Blue Atlantic vs British Airways o Toyota vs other automobile companies
o Southwest Airlines vs United Airlines o Dell Computers vs Compaq and Apple

Examples of strategic management definitions:

o A set of decisions and actions in formulation and implementation of strategies designed
to achieve objectives of an organization (Pearce and Robinson).
 o The process of managing the organization mission while managing the relationship of the
organization to its environment (Lloyd L. Byasis).
o Formulation and implementation of plans and carrying out activities that matters are vital
to the total organization (Sharplin).

Importance of Strategic Management

Strategic management has become essential for each organization as the marketplace becomes
increasingly volatile due to tough economic times, advancing technological development, and
globalization. The benefits include it:
o Emphasizes long-term performance. Some firms may obtain short-term bursts of high
performance, but only a few can sustain it over a longer period of time.
o Enables the firm to satisfy an existing market, and also adapt to the new and changing
market forces.
o Enhances a balance or a “fit,” between a firm’s environment and its strategy, structure,
and processes.
o Allows firms to understand the rapid changes in the business environment.
o Strengthens the clear understanding of the strategic vision of the firm.
o Enables the firm to focus on what is strategically important.
o Enables firms to identify business opportunities for expansion.

What is a Strategy?
A planned course of action to achieve organizational goals and objectives. Other
definitions include:
o Adoption of courses of action and the allocation of resources necessary for achieving
company goals and objectives (Alfred D. Chandler)
o A plan or course of action for continuing importance to the organization as a whole
(Arthur Sharplin).
o The pattern of plan that integrates an organization’s goals, objectives, policies and action
sequences into a cohesive whole (James Brain Quinn).
Levels of Strategy
In an organization, strategies exist at three levels as shown in Figure 1.

Corporate
Strategy
Business
Strategy
Functional
Strategy

Figure 1: Strategy Levels

1. Corporate-level Strategy
These strategies are concerned with the:
o Overall scope of an organization and how value will be added to different units;
o Geographic coverage, diversity of products/services, and how resources are to be
allocated etc.;
o Expectations of the stakeholders, acquisition of new businesses etc.
2. Divisional/Business Unit Strategy
The strategies at this level are concerned with:
o How to compete successfully in the respective markets;
o Which products/services should be developed in which markets;
o The extent to which they are meeting the customer needs.
3. Functional-level Strategy
Strategies at this level are concerned with
o They include strategies for different functional units of an organization (e.g. finance,
HR, ICT, operations, procurement, research and development etc).
o Successful business strategies depend on the decisions that are taken at the
operational or functional level.
Strategic Management Process
The strategic management process follows a well-defined process as shown in Figure 2.

Figure 2: Strategic Management Process

1. Environmental Scan
It involves analysis of the business environment. It includes analysis of the:
o Internal environment (the organization);
o Firm's industry (micro or task environment);
o External macro environment (PEST analysis).
2. Strategy Formulation
The development of long-range plans for effective management. It includes:
o Defining the corporate mission and vision;
o Specifying achievable objectives;
o Developing strategy; and
o Setting policy guidelines.
3. Strategy Implementation
Putting into action the formulated strategies through development of programs, budgets &
procedures. It includes change of:
o Organizational culture;
o Organizational structure;
o Management system.
 4. Evaluation & Control
Measuring and evaluating the progress so that changes can be made if needed, to keep the overall
plan on track. It includes:
o Defining parameters to be measured;
o Comparing actual results and pre-determined standards;
o Making necessary changes.

Strategic Management in Different Context

Strategic management issues differ in different contexts:
a) Small (Private) Business Companies
o Operate in a single market with limited range of products/services;
o The scope of operation is less likely to be a strategic issue;
o Strategic issues are conducted by a CEO or the founder of the company;
o The founder or owner influences the choice of products, markets, and strategies for
the company.
b) Multinational Corporation
o They are diverse in terms of products and geographic markets;
o They have a wide range of businesses spread in different geographic regions (e.g.
franchised hotels, Coca Cola, etc);
o Strategic issues are major and complex and are concerned with how to coordinate and
allocate resources in various business units given their geographic locations.
c) Manufacturing & Service Organizations
o Service organizations –strategic focus is on how to enhance customer value
e.g. attitude of staff, efficiency of service delivery process etc.
o Manufacturing organizations – strategic focus is on how to improve the product itself
and minimize the cost of production.
d) Public Sector
There are various categories:
o Nationalized Organizations: commercialized enterprises owned and controlled by
government e.g. Postal Offices, KPLC, Uchumi Supermarket, etc
 o Government Agencies: relies on the political market that approves their budgets and
provide subsidies e.g. KRA, KPA, etc
o Public service organizations: health services, educational institutions etc. they face
challenges in strategic management since they are not flexible.
• In public sector, competition is concerned with competition for resource inputs
rather than the output though there’s a shift toward performance indicators, internal
markets and demand for better outputs.
• The criterion for stakeholder’s strategic choice is more significant in public sector
than it is in commercial sector.
e) Non-Profit Making Organizations
o They include charity organizations, churches, private schools etc.
o They have complex and diverse source of funds (grants) from funders who influence
strategy implementation.
o The focus is on resource efficiency rather than on outputs.
o Strategic issues are more complex due to the multiple sources of funding, high inter-
linkages and varied expectations. This lead to:
 Complex strategy formulation;
 Difficult decision-making process;
 Political lobbying.
SCANNING THE ENVIRONMENT: Situational Analysis Learning
Outcomes
At the end of this topic, the learner should be able to:
1. Apply various tools for situational analysis;
2. Describe forces in the macro-environment of an organization;
3. Describe industry analysis tools;
4. Describe task and societal environments.

What is Situational Analysis?

A collection of methods that managers use to analyze internal and external business environment
to understand the firm's position and survival techniques. There are two types of external
environments: macro environment and micro environment (Task environment). To conduct the
situational analysis of the external environment, three methods are used: PESTEL Analysis,
SWOT Analysis and Porter’s Five Competitive Forces Analysis.

a) Macro Environmental Factors

The external macro environment consists of nonspecific aspects in the organization's
surroundings that have the potential to affect the organization's strategies. They include:
i) Political Factors
They define both formal and informal rules under which the firm must operate. Examples include:
• Political stability • Social welfare policies
• Taxation Policy • Terrorism activities
• Foreign trade policies • Regional and international agreements and
associations
ii) Economic Factors
They affect the purchasing power of potential customers and the firm's cost of capital.
Examples include:
• Economic growth • Unemployment
• Interest rates • GDP trends
• Exchange rates • Per capita income
• Inflation rates
iii) Social-cultural Factors
These are demographics and cultural aspects that affect customer needs and the size of
markets. Examples include:
• Population growth rate • Attitudes to work and leisure
and demographics • Consumerism (tastes and preferences)
• Age distribution • Levels of education
• income distribution • Health consciousness e.g. Covid19
• Lifestyle changes pandemic

iv) Technological Factors

They lower barriers to entry, reduce minimum efficient production levels, and influence
outsourcing decisions. These include:
• R&D activity • Cybercrime
• New discoveries/development • Internet availability
• Speed of technology transfer • Skill levels of workforce
• Automation • Telecommunication infrastructure

v) Environmental Factors
The changes in the physical environment affect the business activities. These include:
• Environmental protection laws • Natural calamities (hurricanes,
• Waste disposal (e.g. plastic bags ban) tsunamis etc)
• Energy consumption • Global warming laws

vi) Legal Factors

They affect management activities of the organizations. They include Acts, regulations, rules,
precedent, institutions and processes. Examples are:
• Monopolies legislation • Employment laws
• Product safety laws • Licensing
• Health and safety regulations • Tax laws

b) Micro Environmental Factors

These are external factors close to the company that have a direct impact on the organizations
activities. These factors include:
i) Shareholders
• Any person or company that owns at least one share (a percentage of
ownership) in a company. Also known as a "stockholder". They exert pressure
on strategy.
 ii) Suppliers
• An individual/organization involved in the process of making a
product/service available for use by a consumer.
• A closer supplier relationship ensures competitive and quality products for an
organization.
iii) Distributors
• Entity that buys non-competing products or product-lines, warehouses them,
and resells them to retailers or direct to the end users.
• They provide a wide range of services (e.g. product information, estimates,
technical support, after-sales services, credit).
iv) Customers
• A person, company, or other entity which buys goods and services produced
by another person, company, or other entity.
• Firms must strive to provide the needs, wants and benefits for their customers.
v) Competitors
• A company in the same industry or a similar industry which offers a similar
product or service.
• They can reduce the prices of goods and services as they attempt to gain a
larger market share. Examples: McDonald's vs Burger King, Coca-Cola vs
Pepsi etc.
vi) Media
• Positive or adverse media attention on an organizations product or service can
make or break an organization.
• Consumer programmes with a wider and more direct audience can have a very
powerful and positive impact, forcing organizations to change their tactics.

Industry Analysis
An industry is a group of businesses that produce similar products or services (e.g. soft drinks or
education or financial services).
Industry analysis is examining the actions of key stakeholders in a particular industry such as
suppliers, competitors, and customers.
Michael Porter’s Five Competitive Forces Model
Michael Porter proposed an analysis of both the attractiveness of the industry and the firm’s
position in the industry. He suggested five forces model, which is one of the most recognized
framework for the analysis of business strategies.
These forces are as shown in Figure 3.

Figure 3: Porter’s Five Competitive Forces

a) Threat of new entrant: New entrants affect the company’s profits as the consumers have
more variety to choose from.
b) Bargaining power of buyers: The firms’ influence on the buyer to purchase their product
or how much the buyer depends on the product being produced by the firm.
c) Threat of substitute product of services: more than one firm producing similar or the
same product or service.
d) Bargaining powers of suppliers: Company dependence on resources the suppliers
provide to create their product or services.
e) Rival among existing competitors: Rivals fighting to be dominant in the market, to stay
in business and maximize profit.
SWOT Analysis
SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is a tool used to examine
the firm’s internal strengths and weaknesses and the opportunities and threats posed by the
external environment as shown in Figure 4.

Figure 4: SWOT Analysis

SWOT analysis has several benefits, it enables the firm to:

o Position itself to take opportunities from the business environment
o Identify and eliminate the threats from the business environment
o Focus on its strengths and minimize it weaknesses.
o Detect its distinctive strengths that are underutilized
o Formulate realistic strategies to achieve organizational goals and objectives.
o Determine the type of businesses or industries to operate.
However, SWOT has been criticized due to the following, it:

o Generates long list of priorities;

o Does not utilize weights to reflect the priorities;
o Uses ambiguous words and phrases;
o Lacks the link to strategy implementation;
o The same factor can appear twice (e.g. a strength can also be a weakness).
INTERNAL ENVIRONMENT: Organizational Analysis Learning Outcomes
At the end of the topic, the learner should be able to:
1. Analyze organizational resources and capabilities;
2. Discuss the core competencies of the company;
3. Assess organization’s competitive strengths;
4. Assess a company’s structure and corporate culture and how it affects strategy
development.

What is organizational Analysis?

 The process of identifying and establishing the firm’s resources and capabilities through
scanning the strengths and weaknesses.
 Internal scanning enables the firm to determine its capabilities in taking advantage of
opportunities while avoiding threats.

Core Resources and Capabilities

Resources: basic building blocks of the firm. They include:
a. Tangible assets e.g. b. Human assets e.g.
 Plants and location  Talented employees
 Equipment  Knowledge and skills
 Finances  Efficient leaders
 Machinery
c. Intangible assets e.g.
 Technology
 Patents and copyrights
 Culture
 Reputation
 Motivation
Capabilities: the ability of the firm to exploit its resources. Capabilities are built from
knowledge, skills talents, intellectual capital, and commitment of organizational workforce.
Hence capabilities are functional-based e.g.
 Marketing capabilities
 Manufacturing capabilities
 HR capabilities
Core Competencies: a cross-functional integration and coordination of company resources and
capabilities to build competitive advantage. Examples of core competencies:
Company Core Competencies
a. McDonald Restaurant operations, marketing and global infrastructure
b. Ford Design, branding, sales, service operations
c. Vodafone Extensive coverage, technology, low cost
d. Dr. Reddy’s Lab Low cost, quality, wide range of products

Evaluating Capabilities
Not all capabilities are core competencies. Hence firms use two methods to assess whether a
capability is a core competency or not. These include:
a. VRIO Framework
It consists of four specific criteria, namely (see Figure 5).
 Valuable capability Does it provide customer value and competitive advantage?
 Rare capability Do no other competitors possess it?
 Imitable capability Is it costly for others to imitate it?
 Organization capability Is the firm well-organized to exploit the resource?

Figure 5: VRIO Framework

 b. Value Chain Model
It examines the firm’s activities that contribute to the value to the customer. It views business
operations as a process of activities from raw material/inputs to the final stage of delivering the
product/service to the customer. It identifies the areas with high costs and how to minimize them
(see Figure 6).

Figure 6: Porters Value-Chain Model

 Primary activities: they begin with inbound logistics (inputs) through operations process
and outbound logistics (warehouse and distribution) to marketing and sales, and finally to
service (installation, repair and sale of parts).
 Support activities: these include procurement (purchasing), human resources, technology
development (R&D), and firm infrastructure (accounting, finance, strategic planning) ensures
that the firm’s primary value chain activities operate efficiently.
 Systematic examination of value chain activities enables the firm to identify its strength and
weaknesses.

Basic Organizational Structures

There are various forms of organizational structures ranging from basic to complex. Each
structure supports corporate strategy differently. However, the three basic structures are: Simple
structure
 No functional or product categories;
 Appropriate for small, entrepreneur-based firms with one or two product lines;
 Operate in niche markets.
Functional structure
 Applicable for medium-sized firm with several product lines in one industry;
 Employees are specialists in various business functions e.g. operations, marketing,
finance and HR.

Divisional structure
 Appropriate for large corporations with complex product lines in several industries;
 Employees are functional specialists in product or market distinctions;
 Examples General Motors, Bidco, P&G etc.
Corporate Culture
 The collection of beliefs, expectations, and values learned and shared by a
firm’s members and transmitted from one generation of employees to
another.
 Culture reflects the values of the founder and the mission of the firm.
 It gives the firm a sense of identity in terms who they are and what they do.
 It is the dominant orientation of the firm e.g. Innovation-Google, customer
service- Nordstrom, R&D- HP etc
 It includes informal work rules (known as “the company way” of doing
things) that employees follow without questioning.

Functions of Corporate Culture

a) Depicts a sense of identity for employees.
b) Enhances employee commitment to doing greater things.
c) Improves the stability of the firm as a social system.
d) Serves as a reference point for employees for appropriate behavior.
e) Shapes the behavior of people in the firm hence affecting performance.