Published 18 Dec 2019

What is Strategic Management and Why Do You Need to Know?

by CoursesOnline Contributors

Strategic management often plays a key role in a business’s long term success. Companies that engage in the process are generally more profitable and their employees tend to be more productive. But what exactly is strategic management and how does it make such a difference?

Keep reading as we demystify this popular approach to business.

According to the Cambridge English Dictionary, a strategy is a detailed plan for achieving success or the skill of planning for such situations

Strategic management is a management system which aims to help companies develop so that they can maximise their strengths, fulfil their potential and gain a competitive advantage. It’s an ongoing business process which involves defining a company’s mission, evaluating their competitors, identifying the direction they’re moving in and setting long-term goals.

Once goals have been set, the next step is to identify the strategies and management techniques that can be used to achieve them. Any strategic planning that takes place at this stage needs to allow for possibilities such as unpredictable events, new innovations, fresh products and the emergence of new markets. When strategies have been identified, they are implemented and regularly evaluated.

The concept of strategic management originally sprang from the economic and social debates of the 1930s and 40s. During the following decades, influential figures such as Peter Drucker elaborated on the original concept, until strategic management was finally recognised as a formal discipline.

While there are many approaches to strategic management, the process generally involves four stages.

1. Strategic analysis

This stage focuses on assessing a company’s current position. It involves analysing:

The business environment, including factors such as competition, markets and regulations. These are often described as opportunities and threats.
The company’s strategic capability, including its strengths and weaknesses, its resources, its physical buildings, its financial structure and its products.
The company’s culture, beliefs and assumptions.
The expectations of the company’s stakeholders, including shareholders, employees, customers, managers and suppliers.

Key strategic models

A number of models have been developed to support strategic analysis. These include:

A SWOT Analysis
This business model looks at your company’s strengths, weaknesses, opportunities and threats. Opportunities include things like developing markets and new technology, while threats include issues such as supply chain problems and employee shortages.
A PEST Analysis
This examines the effect of political and legal factors, economic factors, social/cultural factors and technological factors.
Porter's Five Forces Model
This looks at five forces that could affect potential profits in a particular industry. These include competitive rivalry; the threat of new entrants; the threat of substitutes; the power held by customers; and the power held by suppliers.

2. Strategic choice

This stage focuses on generating strategic options. The two key issues that strategists need to take into consideration are the direction of growth and method of growth.

Direction of growth

Directional strategies relate to a company’s attitude towards growth. There are three main options which include:

Stability strategy-continuing to focus on one product line/industry.
Growth strategy-diversifying into new products and industries.
Retrenchment strategy-reducing current activities.

Method of growth

These strategies relate to how a company achieves growth. There are two options:

Internal growth – such as an investment in new product lines
External growth – such as a merger, an acquisition or a strategic alliance

When a company is deciding on its strategic approach, there are at least ten key questions to consider:

Is their choice consistent with the firm’s objectives?
Is it acceptable to stakeholders?
Will it affect resource allocation?
Will it overcome issues identified during the analysis stage?
Will it have an impact on profits?
Will it affect the company’s structure?
How will it impact suppliers?
How will it affect human resources?
What are the demands for production?
How much finance is required?

3. Implementation of strategy

To successfully implement a new corporate strategy, company leaders also need to consider how they will manage changes to systems, structures and employees. Change management is crucial because people are often resistant to change, particularly if it involves job losses, changes in company culture or new routines.

Sharing strategic approaches and explaining the reasons behind any changes can help senior managers to overcome this resistance. When it comes to specifying changes, many strategic managers motivate their employees by creating an action plan. This should state:

Who is responsible for each action
What the time frame is
What results are expected

4. Strategic evaluation

The evaluation stage enables managers to find out whether a particular strategic decision is resulting in a sustainable competitive advantage. If performance data and activity reports show that it’s not, changes can be made.

Return on Investment (ROI) is the most commonly used measure of company performance, as it produces a single figure that can be compared with competitors. It also shows how well managers are using company assets to create profit.

We hope our guide to the strategic management process has shown how successful strategies can boost a company’s efficiency, performance and profitability. And if you’re keen to discover how strategic management models can be applied to practical work scenarios, why not take a look at our excellent range of management courses?

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