Strategic Management: A First Principle Analysis | Part 1
Strategic management is the science and practice of making informed decisions about the future direction of an organization, based on solid analyses of the environment surrounding the company. Every organization is a complex system, composed of multiple groups with unstructured and differing interests. Taking into account the competing commitments (desires) of every stakeholder (groups and individuals with an interest in the organization's activities) while maintaining a long-term perspective on strategic thinking is the role of management and decision-makers. This is an intricate endeavor, due to the multi-layered nature of organizations. There are countless variables at play, and a strategic plan is a tool that ultimately allows for clarity and systematic decision-making.
A company is a group of integrated functions and departments performing different tasks to offer goods and services to the world (and more precisely their customer). All the functions of a company—departments—when put together, represent its value chain (each activity adds a piece of value to the process, in order to ultimately deliver that value to the customer). The value chain of an organization is composed of main and supporting functions. Main functions include procurement, production, sales. Supportive functions are logistics, quality assurance, Human Resources, Finance, and more also depending on the firm's nature.
The Role of Management
The role of management is to define the key (and supporting) activities of the company within its environment. The core management process is composed of 3 parts: plan, execute, control. You need a comprehensive and systematic planning process to define goals and set up the strategic framework to achieve them. Execution is a fundamental part of organizational management because this is the stage during which every team and individual acts responsibly to fulfill the higher plan set up in the Planning stage. Controlling and reflecting on execution to make informed decisions about the future direction of the firm is just as fundamental. Failing to review and adjust your strategy accordingly can lead to long-term failure. This is similar to our personal lives. We cannot only be in execution and planning mode. We need to reflect on what has been done, and convincedly decide on what requires improvement in the future.
The environment of an organization: conflicting interests and complexity in management
As mentioned earlier in the post, an organization is a complex entity, composed of many stakeholders with seemingly differing interests. Stakeholders are groups and individuals with an interest in the organization (e.g., suppliers, employees, managers, the government, society, customers, etc.). The management is only one of the groups influencing organizational decision-making. One of the core functions of internal decision-makers is to balance all the (often competing) inputs flowing from those stakeholders toward the firm. Suppliers may have the utmost interest in getting paid on time and at a good price. Customers may require low prices and reasonable quality of products/services. Investors may be most interested in profits and returns on investment. Society and the government may have at heart the social impact the organization has on the wider world.
Ultimately, whose interest should we favor? How can internal decision-makers effectively deal with the interest of conflicting stakeholders? There must be a point of balance stricken between meeting the business' interests and society's concerns. That's the sustainability sweet spot. Finding such a balance and maintaining it (especially in times of crisis) is a job that requires responsibility and a high level of awareness.
Strategic Management: A Definition
Strategic management is the process of planning and executing carefully, taking into account internal and external stakeholders. Strategic management can occur at a corporate level (a corporation is composed of multiple businesses—portfolio), or at a single-business level (stand-alone strategies—in harmony with corporate strategy if the business is part of a corporation).
Strategy is a plan developed and implemented systematically. Strategic Management consists of three steps:
Strategy Analysis
Strategy analysis is the process of studying the external and internal environment of the organization. This first step is pivotal in laying the foundations to understand where we are, and what are the forces at play around us (forces that influence our decisions). The external analysis consists of understanding facts about the industry and environment surrounding the firm. The PESTLE framework is one of the most renowned tools used to study the external environment. Porter's 5 Forces model is a useful tool to analyze the industry. Internal analysis is about "understanding oneself": strengths, weaknesses, performance, offers. Such investigation begins with the identification of core competencies. Those are the resources our customers find valuable, rare, sustainable, and organized. The second step of internal analysis is SWOT. This is an acronym for "Strengths", "Weaknesses", "Opportunities", "Threats". It is worth remarking that the SWOT analysis follows other, more fundamental studies of the environment and industry around us (PESTLE and Porter's 5 Forces). It is only by being aware of the environment we play within that we can define our role in it. Oftentimes, the SWOT analysis is performed in isolation. I would argue this is a wrong approach to it. The SWOT analysis aims at elaborating on the results of environmental analysis and drawing conclusions from it.
Strategy Formulation and Choice
The second stage of strategic management is Strategy Formulation and Choice. At this stage, we need to develop a concrete plan based on the data collected during step one (Strategy Analysis). The entire strategic framework depends on Competitive Advantage. Your competitive advantage is not a generic statement without supporting data. Instead, competitive advantage stems from the ongoing interaction between the organization and its customers. Competitive advantage is the ability of a company to outperform its competitors. There are two main ways a company can develop a competitive advantage: through differentiation, or cost leadership. A differentiation strategy leverages the uniqueness of the product by charging a premium price. The core value proposition here revolves around the unique quality of the product/service. Apple is an example company leveraging a differentiation competitive advantage strategy.
The second competitive advantage option is cost leadership. Such a strategy aims at validating the organization as the "cost-leader" in the industry by charging low prices. Zara is an example firm leveraging a cost leadership strategy to gain a competitive advantage. Sometimes, differentiation and cost leadership can be found in the same industry (and within the same company—e.g., offering a wide car product range).
Strategic approaches based on two dimensions: relative price and perceived performance
3. Strategy Implementation
The final step (an iterative one) of strategic management is about implementing the strategies at an organizational level. That means developing and deploying solid systems that support the higher strategy, converting it into operational plans, leading individuals and teams to act according to the strategy, and building consistent controlling systems to monitor the past and present and adjust the strategic plan accordingly.
Strategic thinking is a necessary tool in every organization's toolkit. It can change the game but also risk cannibalizing the most important of metrics: delivering consistent value to the customers and society at large. Ultimately, as legendary fighter Mike Tyson put it: "You have a strategy until you get punched in the nose"
