Strategic management, strategy for short, is essentially about choice — in terms of what the organization will do and won’t do to achieve specific goals and objectives, where such goals and objectives lead to the realization of a stated mission and vision. Strategy is a central part of the planning function in P-O-L-C. Strategy is also about making choices that provide the organization with some measure of a sustainable competitive advantage. For the most part, this chapter emphasizes strategy formulation (answers to the “What should our strategy be?” question) as opposed to strategy implementation (answers to question “How do we execute our strategy?”). The central position of strategy is summarized in Figure 1.1.

As you can see in Figure 1.1, the P-O-L-C framework starts with “planning”. Planning is related to, but not synonymous with, strategic management. The concept of strategic management reflects what a firm is doing to achieve its mission and vision as seen by its achievement of specific goals and objectives. A more formal definition tells us that strategic management “is the process by which a firm manages the formulation and implementation of its strategy.”^[1]

Using the definition of strategic management above then, the strategic management process is “the coordinated means by which an organization achieves its goals and objectives.”^[2] Others have described strategy as the pattern of resource allocation choices and organizational arrangements that result from managerial decision making.^[3] Planning activities that lead to the formulation of a strategy is sometimes called strategic planning. Strategy implementation then refers to the tasks and tactics managers must perform to put the desired strategy into action. See Figure 1.2 for a description of how strategy fits with planning.

The concept of strategy is relevant to all types of organizations, from large, public companies like GE, to religious organizations, political parties, and nonprofits.

Strategic Management in the P-O-L-C Framework

If vision and mission are the heart and soul of planning (in the P-O-L-C framework), then strategy, particularly strategy formulation, would be the brain. Figure 1.3 summarizes where strategy formulation (strategizing) and implementation fit in the planning and other components of P-O-L-C. We will focus primarily on the strategy formulation aspects of strategic management because implementation is essentially organizing, leading, and controlling P-O-L-C components. Unit 4: Internal Capabilities of this textbook will provide additional information regarding the implementation components (O-L-C).

You see that planning starts with vision and mission and concludes with setting goals and objectives. In between is the critical role played by strategy. Specifically, a strategy captures and communicates how vision and mission will be achieved and sets forth the goals and objectives needed to demonstrate that the organization is on the right path for achieving them. At this point, even in terms of strategy formulation, there are two aspects of strategizing that you should recognize. The first, corporate strategy answers strategy questions related to “What business or businesses should we be in?” and “How does business X help us compete in business Y, and vice versa?” In many ways, corporate strategy considers an organization to be a portfolio of businesses, resources, capabilities, or activities.

The logic behind corporate strategy is one of synergy and diversification. That is, synergies arise when each of YUM! Brands food outlets does better because they have common ownership and can share valuable inputs into their businesses. Specifically, synergy exists when the interaction of two or more activities (such as those in a business) create a combined effect greater than the sum of their individual effects. The idea is that the combination of certain businesses is stronger than those same businesses would be individually. Their coordination under a common owner allows them to either do things less expensively, or of a higher quality.

Diversification, in contrast, is where an organization participates in multiple businesses that are in some way distinct from each other, as Taco Bell is from Pizza Hut, for instance. Just as with a portfolio of stock, the purpose of diversification is to spread out risk and opportunities over a larger set of businesses. Some may be high growth, some slow growth or declining; some may perform worse during recessions, while others perform better. There are three major diversification strategies: (1) concentric diversification, where the new business produces products that are technically similar to the company’s current product but that appeal to a new consumer group; (2) horizontal diversification, where the new business produces products that are totally unrelated to the company’s current product but that appeal to the same consumer group; and (3) conglomerate diversification, where the new business produces products that are totally unrelated to the company’s current product and that appeal to an entirely new consumer group.

Whereas corporate strategy looks at an organization as a portfolio of things, business strategy focuses on how a given business needs to compete to be effective. Again, all organizations need strategies to survive and thrive. A neighborhood church, for instance, probably wants to serve existing members, build new membership, and, at the same time, raise surplus monies to help it with outreach activities. Its strategy would answer questions surrounding the accomplishment of these key objectives. In a for-profit company such as McDonald’s, its business strategy would help it keep existing customers, expanding its business by moving into new markets, and taking customers from competitors like Taco Bell and Burger King, all while maintaining a profit level demanded by the stock market.

Strategic Inputs

So what are the inputs into strategizing? At the most basic level, you will need to gather information and conduct analysis about the internal characteristics of the organization and the external market conditions. This means both an internal and an external appraisal. On the internal side, you will want to gain a sense of the organization’s strengths and weaknesses; on the external side, develop a sense of the organization’s opportunities and threats. Together, these four inputs into strategizing (strengths, weaknesses, opportunities, and threats) are referred to as SWOT analysis. It doesn’t matter if you start this appraisal internally or externally, but you will quickly see the two perspectives need to mesh eventually.

Strengths and Weaknesses

A good starting point for strategizing is an assessment of what an organization does well and what it doesn’t do well. In general good strategies take advantage of strengths and minimize the disadvantages posed by any weaknesses. Michael Jordan, for instance, is an excellent all-around athlete; he excels in baseball and golf, but his athletic skills show best in basketball. As with Jordan, when you can identify certain strengths that set an organization well apart from actual and potential competitors, that strength is considered a source of competitive advantage. The hardest thing for an organization to do is to develop its competitive advantage into a sustainable competitive advantage. This means the organization’s strengths cannot be easily duplicated or imitated by other firms, nor made redundant or less valuable by changes in the external environment.

Opportunities and Threats

On the basis of what you just learned about competitive advantage and sustainable competitive advantage, you can see why some understanding of the external environment is a critical input into strategy. Opportunities assess the external attractive factors that represent the reason for a business to exist and prosper. These are external to the business. What opportunities exist in its market, or in the environment, from which managers might hope the organization will benefit? Threats include factors beyond your control that could place the strategy, or the business, at risk. These are also external—managers typically have no control over them, but may benefit by having contingency plans to address them if they occur.

In a nutshell, SWOT analysis helps you identify strategic alternatives that address the following questions:

1. Strengths and Opportunities (SO)—How can you use your strengths to take advantage of the opportunities?
2. Strengths and Threats (ST)—How can you take advantage of your strengths to avoid real and potential threats?
3. Weaknesses and Opportunities (WO)—How can you use your opportunities to overcome the weaknesses you are experiencing?
4. Weaknesses and Threats (WT)—How can you minimize your weaknesses and avoid threats?

Most importantly, a SWOT analysis needs to both draw a set of concrete conclusions from the firm’s specific situation and identify a set of strategic actions to address each. The ultimate goal is to match the company’s resource strengths and market opportunities, correct important weaknesses, and defend against external threats.

Internal Analysis Tools

While SWOT helps you identify an organization’s strengths and weaknesses, there are other tools available for internal analysis too; notably value chain and VRIO analysis. In effect, value chain analysis asks you to take the organization apart and identify its important constituent parts. Sometimes these parts take the form of functions, like marketing or manufacturing.

Value chain functions are also called capabilities. This is where VRIO comes in. VRIO stands for valuable, rare, inimitable, and organization—basically, the VRIO framework suggests that a capability, or a resource, such as a patent or great location, is likely to yield a competitive advantage to an organization when it can be shown that it is valuable, rare, difficult to imitate, and supported by the organization (and, yes, this is the same organization that you find in P-O-L-C).^[4] Essentially, where the value chain might suggest internal areas of strength, VRIO helps you understand whether those strengths will give it a competitive advantage.

External Analysis Tools

While there are probably hundreds of different ways for you to study an organization’s external environment, the two primary tools are PESTEL and industry analysis. PESTEL, as you probably guessed, is simply an acronym. It stands for political, economic, sociocultural, technological, environmental, and legal environments. Simply, the PESTEL framework directs you to collect information about, and analyze, each environmental dimension to identify the broad range of threats and opportunities facing the organization. Industry analysis, in contrast, asks you to map out the different relationships that the organization might have with suppliers, customers, and competitors. PESTEL provides you with a good sense of the broader macro-environment, whereas industry analysis should tell you about the organization’s competitive environment and the key industry-level factors that seem to influence performance.