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Chapter 2

Review of Related Literature

 

Company Overview

The Concept of Strategic Management

Strategic management can be defined as the art and science of formulating, implementing and evaluating cross-functional decisions that enables any organisation to attain its objectives.  As this definition entails, strategic management gives emphasis on integrating management, marketing, finance, production/operations, research and development and computer information systems to achieve organisational success. The term strategic management is also used synonymously with strategic planning (David, 2001).

Strategic management is guiding an organisation relative to challenges and opportunities appearing in the contingent environment. This environment is composed of those external elements that most directly affect organisational goal achievement and new goal development. Thus, organisation system design and management should complement strategic actions taken for productive subsystems, as well as those providing output delivery and other support functions for the organisation. To the extent possible, the organisation bases its actions on strategic planning that, rather than a one-time effort, is an ongoing process of adaptation of original conceptions of mission, goals, structure, roles, and so forth relative to environmental dynamics (Siegel, 1992).

Furthermore, due to the existence of competitions within and outside the marketing arena, it is therefore very significant for a company to establish strategic management and set a strategic plan for its development and improvement. It is for the reason that the twenty-first-century realities of globalisation, rapid changes in technology, increasing competition, a changing workforce, changing market and economic conditions, and developing resource shortages all increase the complexity of modern management. Whereas strategic planning was a competitive advantage in the past decade, it is a necessity of global thinking in this century. Planning strategically is certainly a new requirement in the global business world. In order to survive the new business challenge, global thinking and practice must permeate all corporate activities. Successful companies are, of course, the first to consider the global marketplace as their arena for competition. According to David (1999), strategic management has become a vital part of most, if not all, organisations. "Almost all organisations of any reasonable size have some kind of strategic planning." More importantly, strategy implementation has been heralded as the key to corporate strategic success.

 

Potential Benefits and Limitations of Strategic Management

            Strategic management can contribute significantly to organisational performance; however, its practice can have limitations. The statement means that although strategic management can consider as one of the most effective strategy to attain business goals and to gain an efficient organisational performances and functions, its practice can also have restrictions and limitations because of different factors that might affects the overall implementation of strategic management within a company. As mentioned, the whole concept of strategic management encompasses potential benefits and limitations.

Historically, the principal benefit of strategic management has been to help organisation formulate better strategies through the uses of a more systematic, logical and rational approach to strategic choice (Thompson & Strickland, 2003). One of the potential benefits of strategic management is it make sure that the organisation only follows one direction or path and that is towards the achievement of its business mission, objectives and success. Through the used of strategic planning as part of the strategic management concept, the company will be able to determine the best approach to be used in order to efficiently attain the said goals. In addition, strategic management is also beneficial in ensuring not only the success of an organisation but also its survival by adapting the whole organisation to changes in its environment and making sure that the organisation remains competitive (Drejer, 2002).

            One of the advantages of strategic management is it enables a firm to proficiently identify how a certain organisation should deploy its resources in the environment and adapts the organisation to satisfy the long-term objectives of the firm. It is important to note that strategic management deals with several time spans. The organisation needs to be more than just competitive here-and-now. The competition for industry leadership is just as crucial to firms as is the competition for developing the right competencies in the right time. Thus, strategic management is also about integrating time horizons and activities related to all three kinds of competition. This often means finding those issues that should be kept invariant for the time being and adjusting other activities and issues accordingly (Pearce & Robinson, 2000).

            Although strategic management encompasses many advantages and benefits for the organisation, strategic management has also some restrictions or limitations. One of the limitations of strategic management is it may not function well enough for the organisation without having a good and effective leader to initiate such approach.  It is known that strategic management is a concept of determining and executing the most effective business approach, however, if the leader of such company do not have what it takes for implementing effectively the strategic plan formulated, then strategic management will not be successful as expected.

Strategic management is a process used in an organisation so as to develop essential goals and resources. It is a combination of impure, mixed and interactive process loaded with difficulty, both politically and intellectually. Strategic management and human resource are very much related to each other. Through the combined efforts of these two practices, several improvements can be attained, however, without an effective human resources, implementation of strategic management will not be possible (Boxall and Purcell, 2003). In addition, strategic management is a three way process (choice, analysis and implement), hence, if one of the three processes does not meet the company's expectations, then it will affect other process which can make the use of strategic management a failure for the organisation. It is important note, that in order to gain success through strategic management, the company must be strategic from the very beginning up to the last. When, one does not become successful, all other functions and operations within the organisation will be affected; hence can make the business to face its major downturn (Pearce & Robinson, 2000).

 

Generic Strategies

Successful strategy requires the firm to choose the markets in which its distinctive capabilities yield competitive advantage. But the adaptive,
incremental nature of strategy means that the starting-point is where the
firm is now. 
Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet needs of the markets and fulfil stakeholder expectations. The strategy answers both the questions "where do you want to go?" and "how do you want to ge there?" but the first question is answered when each industry set the goals and the second is answered when such industries plan the strategies. The traditional approach basically focused on the first question but the traditional approach gives equal importance to both of them. While developing a corporate strategy for the any profit organisation, the management have to keep in mind the demand of the customers and the marketability of the products and services offered.

These generic strategies are used by different organisation because of the potentialities that the management have seen with these strategy and the benefits it may provide. However, if the company should not strongly commit themselves with these strategies, like what Southwest Airlines and British Airways have done, then, instead of achieving competitive advantage within the marketplace, the industry might be at risk of falling.

These generic strategies are guiding an organisation relative to challenges and opportunities appearing in the contingent environment. This environment is composed of those external elements that most directly affect organisational goal achievement and new goal development. Thus, organisation system design and management should complement strategic actions taken for productive subsystems, as well as those providing output delivery and other support functions for the organisation. To the extent possible, the organisation bases its actions on strategic planning that, rather than a one-time effort, is an ongoing process of adaptation of original conceptions of mission, goals, structure, roles, and so forth relative to environmental dynamics. There are five different generic strategies that a business can choose. 

These include cost leadership, differentiation, focused cost leadership and integrated cost leadership/differentiation.  Each generic strategy helps the company to establish and exploit a competitive advantage within a particular competitive scope (Hitt, Ireland & Hoskisson 2003). By applying these strengths, three generic strategies are resulted: cost leadership, differentiation and focus (Johnson & Scholes 1997).  The strategies used by the company include cost leadership, differentiation strategy and focused differentiation.

Cost leadership strategy is based upon a business organising and managing its value-adding activities so as to be the lowest cost producer of a product within an industry (Campbell, 2002). Cost advantage may achieve in terms of how product or services is designed or in terms of its quality. Differentiation strategy is based upon persuading customers that a product is superior to that offered by competitors (Campbell, 2002). The value added by the uniqueness of the product or services may allow the company to charge a premium price for it. However, the danger associated with differentiation may include imitation by competitors and changes in customer tastes.

Focus-differentiation strategy is aimed at a segment of the market fro a product rather than at the whole market or many markets (Campbell, 2002). The successful way using focus strategy is to tailor a broad of product or service development strengths to a relatively narrow market segment that they know very well. The risk may include imitation and changes in the target segments.

 

Experiential Learning Theory

In business strategies, it is important that the management must be able to identify the needs of the business. In this regard, the adaptive competency approach to needs analysis is based upon Kolb (1984) Experiential Learning Theory (ELT) which allows one to view the person (employee) and job in commensurate terms. The cornerstone of this approach is that learning, adaptation, and problem-solving processes are similar and that all jobs involve each of these processes. Therefore, if one describes both the person's adaptive skills and job requirements in learning terms, then one can identify and describe the adaptive or interactive processes that occur in the work setting.

ELT conceptualizes the learning process in such a way that differences in learner styles and corresponding learning environments can be identified. The application of the adaptive competency approach accepts the premise that typical needs analysis at the employee level portrays jobs in one set of terms (i.e., job specifications), and employees are thought of in another set of terms (person-trait characteristics).

To achieve a commensurate means of assessing business needs at the employee and job interaction level two critical assumptions underlie the adaptive competency approach: (1) that the person or employee be viewed as an adult learner, and (2) that the job context be viewed as a learning environment in which job performance necessitates some type of cycling through the ELT process (Sims, 1983).

Using ELT in business strategies, the management will be able to determine the specific needs of the company based on their learning styles. Through this, the outdoor development program will ensure that the employees are learning things within their potentialities and their capacities. Through this also, the company will also be able to identify which strategies will be suitable for the company.

Key Elements of Strategic Management

Strategic management is the process of specifying an organisation's objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans. It provides overall direction to the whole enterprise (Abell, 1999). It can be "viewed as a set of theories, frameworks designed to explain the factors underlying the performance of organisations and to assist managers in thinking, planning and acting strategically" (Campbell, et al. 2002).

Strategic management can be thought of as having three main elements-strategic analysis, strategic choice and strategic implementation (See Appendix 2). First, strategic analysis is concerned with understanding the strategic position of the organisation. Secondary, strategic choice is the result of strategic analysis, which is to do with the formulation of possible course of action, their evaluation and the choice between them. Last, strategic implementation is concentrated on how the choice of strategy can be put into effect (Johnson & Scholes, 1997).

Strategic analysis includes developing a vision and mission to be achieved by the organisation, analysing and identifying an organisation's external opportunities and threats, determining the internal position of the company including its strengths and weaknesses and establishing long-term objectives. Strategic analysis means to know the overall position of the organisation within and outside the marketing environment. There are many ways in which a company can be able to analyse the overall position of the organisation internally and externally.

For the external analysis, an organisation can be analysed through the used of Porter's Five Forces Model or Political, Economical, Sociological and Technological (PEST) Analysis. The major concern of this analysis is to determine and present the level of the company to be geographically positioned in accordance with the degree of its external environment. And to be able to strategically analyse the internal position of an organisation, the management can use SWOT Analysis or Value Chain Analysis. Value chain is the framework for examining the strengths and weaknesses of an organisation, and for using the results of this analysis to improve performance.

On the other hand, strategic choice refers to the activity of an organisation which involves generating alternative strategies and choosing particular strategies to pursue. The degree of discretion or strategic choice an organisation has will be determined to a large extent by leadership style, national culture, commitment to past and continuing strategies, the success of certain symbolic actions, and the nature of its systems and processes (Gratton, et al, 1999). The perspective of strategic choice reverses the emphasis by concentrating on the responsibilities of the management teams in shaping the conditions and processes of the strategic management from both internal and external environment of an organisation.  In addition, strategic action draws upon the social activities and strategic management concept to improve the view that any managerial actions can influence or affect performance.  The range of strategic actions is very broad.  In environmental context, strategic choice comprises the selection of the product/market realm in which a certain organisation will engage (Thompson & Strickland, 2003).

On the other hand, in organisational context, strategic choice involves the selection of the structures and allocation of the resources to be adopted within the chosen real.  Further, strategic choice also involves activities for selecting the most appropriate strategy to be used by the organisation to stay competitive and survive in the stiff competition of the marketplace. Hence, it can be said that strategic choice is one of the crucial element of strategic management because the success of the implementation of the strategic management depends on how well and efficient the choice made by the management team.

Lastly, the third key element of strategic management is strategic implementation. Strategic implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that the formulated strategies can be executed effectively. Strategic implementation includes developing a strategy-supportive culture, creating an effective organisational structure, redirecting marketing efforts, preparing budgets, developing and utilising information systems and linking employee compensation to organisational performance.

In addition, strategic implementation is often regarded as the action stage of strategic management. Implementing the most appropriate strategy means mobilising employees and managers to put formulated strategies and theories into practice.  It is also considered as one of the most difficult and complex stage in strategic management because it requires personal discipline, commitment and sacrifice. Successful strategic implementation hinges upon manager's ability to motivate employees, which is more an art than science. Strategies formulated and analysed but not implemented serve no useful purpose (Miller, 1992).

It is said that each of the three key elements of strategic management is essential and that the used of these elements must be integrated with each other.  If such elements will be treated as a discrete element or if one is separated from the other, it can be concluded that the organisation may not be able to achieve the main objective of using the concept of strategic management. It is said that strategic analysis, strategic choice and strategic implementation activities occur at three hierarchical levels in a large organisation: corporate, divisional or strategic business unit and functional. By using these three as interdependent with each other will make any business organisation have the competitive edge in the business arena (Hax and Majluf, 1996).

 

Approaches to Strategic Management

            The concept of strategic management was developed to enable managers to align their organisations with the changing environment in order to achieve organisational goals and objectives (Liou, 2000). Today, strategic management has been associated with a variety of models and styles. The development of this concept is essential because it corrects the anxiety with strategy analysis in the early stage and gives special attention to strategic choice and strategic implementation in the later stage. 

            Strategic management may be viewed from three general perspectives: product-market strategy, competence-based strategy and the integration of the first two by means of the mission and the vision of the organisation. The product-market strategy perspective views the firm as a collection of product/market combinations (i.e., a portfolio). This view sees strategy as a matter of positioning the firm in its environment, either by selecting the optimal mix of product/market combinations or by positioning in relation to stakeholders.

Instead of viewing the firm as a collection of product/markets, it is also possible/feasible to view an organisation as a collection of resources or competencies. This view starts in opposite perspective from that of the traditional product-market. It assumes that a firm cannot be defined by the changing nature of its products and/or markets, but rather by its core competencies, which may be less likely to change in the long run. The rationale, then, is to generate competitive advantage by means of internal factors (i.e., technologies or core competencies). The next approach is core competencies which are considered to be a more appropriate term for describing what generates competitive advantage for a firm. These two views appear to be a duality. A core competence is a well-performed internal capability that is central, not peripheral, to a company's strategy, competitiveness, and profitability. The best-known explanation of core competence is provided by Prahalad and Hamel (1990): " core competencies are the collective learning of the organization, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies".

 On the one hand, they appear to be rather incompatible, but on the other hand, they are still two sides to the same coin: the organisation that must survive and prosper. This corresponds to the third view, which is a holistic view in the sense that it sees both product-markets and core competencies and attempts to integrate them for the benefit of the firm. The considerations so far make it possible to propose a division of strategic management into three sub decision areas: product-market strategy, competence-based strategy, and integration of the other two decision areas.


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