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Chapter One
The Nature of Strategic Management
1.1 Definition of Strategic Management
Concept of Strategy
The word “strategy” is derived from the Greek word “stratçgos”; stratus (meaning army) and
“ago” (meaning leading/moving).
‘Strategy’ looks like as long ranges blueprint of an organization's desired image, direction and
destination.
Strategy, in short, bridges the gap between “where we are” and “where we want to be”.
Managers at all companies face three central questions in thinking strategically about their
company’s present circumstances and prospects: Such as:-
Where are we now? —concerns the ins and outs of the company’s present situation its market
standing, how appealing its products or services are to customers, the competitive pressures it
confronts, its strengths and weaknesses, and its current performance.
Where do we want to go? Deals with the direction in which management believes the
company should be headed in terms of growing the business and strengthening the company’s
market standing and financial performance in the years ahead.
How will we get there? Concerns crafting and executing a strategy to get the company from
where it is to where it wants to go
Strategy provides an integrated framework for the top management to search, evaluate and
exploit beneficial opportunities, to recognize and meet potential threats and crises, to make full
use of resources and strengths, to offset corporate weaknesses and to make major decisions in
general.
Features of Strategy
1. Strategy is Significant because it is not possible to foresee the future without a perfect
foresight; the firms must be ready to deal with the uncertain events which constitute the
business environment.
2. Strategy deals with long term developments rather than routine operations, i.e. it deals
with probability of innovations or new products, new methods of productions, or new
markets to be developed in future.
3. Strategy is created to take into account the probable behavior of customers and
competitors. Strategies dealing with employees will predict the employee behavior.

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Difference between Policy and Strategy

The term “policy” should not be considered as synonymous to the term “strategy”. The
difference between policy and strategy can be summarized as follows-
1. Policy is a blueprint of the organizational activities which are repetitive/ routine in nature.
While strategy is concerned with those organizational decisions which have not been
dealt/faced before in same form.
2. Policy formulation is responsibility of top level management. While strategy formulation
is basically done by middle level management.
3. Policy deals with routine/daily activities essential for effective and efficient running of an
organization. While strategy deals with strategic decisions.
4. Policy is concerned with both thought and actions. While strategy is concerned mostly
with action.
5. A policy is what is, or what is not done. While a strategy is the methodology used to
achieve a target as prescribed by a policy.
Definition of Strategic Management
Strategic Management can be defined as “the art and science of formulating, implementing and
evaluating cross-functional decisions that enable an organization to achieve its objective.”
Strategic Management is defined as the dynamic process of formulation, implementation,
evaluation and control of strategies to realize the organizations strategic goal.
Strategic management is that set of managerial decisions and actions that determines the long-
run performance of a corporation. It includes environmental scanning (both external and
internal), strategy formulation (strategic planning), strategy implementation, and evaluation and
control. The study of strategic management therefore emphasizes the monitoring and evaluating
of external opportunities and threats in light of a corporation’s strengths and weaknesses in order
to generate and implement a new strategic direction for an organization.
The overall objective of strategic management is twofold:
1. To create competitive advantage, so that the company can outperform the competitors in
order to have dominance over the market.
2. To guide the company successfully through all changes in the environment.
Characteristics of Strategic Management

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1. Future oriented: Strategic management is focused on proposing the future course of action.
An emphasis is placed on the development of projections that will enable the firm to select the
most promising strategic options.
2. Requires considering external environment: as you know, all business operate in open
system. That means their day to day and long term commitment is highly influenced by the
external environment. Hence, strategic management requires considering changes that will take
place in the external environment.
3. Requires larger resource commitment: Strategic management determines the future
direction of an organization. In the process, substantial allocation of resources is proposed.
Therefore, if there are failures of strategic management, the whole lot of resource of the
organization will be allocated in the wrong direction.
4. Requires involvement of top management : Since the future prospective success or failure is
determined in the strategic management, top management groups are actively involved in
determining major corporate objectives and framing out strategies.
1.2 Stages of Strategic Management
Strategic Management Process
Strategic management is a broader term than strategy and is a process that includes top
management’s analysis of the environment in which the organization operates prior to formulat-
ing a strategy, as well as the plan for implementation and control of the strategy. The difference
between a strategy and the strategic management process is that the latter includes considering
what must be done before a strategy is formulated through assessing whether or not the success
of an implemented strategy was successful. The strategic management process can be sum-
marized in five steps, each of which is discussed in greater detail in subsequent chapters of the
book.

1. External Analysis: Analyze the opportunities and threats, or constraints that exist in the
organization’s external environment, including industry and forces in the external
environment.

2. Internal Analysis: Analyze the organization’s strengths and weaknesses in its internal
environment. Consider the context of managerial ethics and corporate social responsibility.

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3. Strategy Formulation: Formulate strategies that build and sustain competitive advantage
by matching the organization’s strengths and weaknesses with the environment’s
opportunities and threats.

4. Strategy Execution: Implement the strategies that have been developed.

5. Strategic Control: Measure success and make corrections when the strategies are not
producing the desired outcomes.
1.3 Key terms in Strategic Management
Before we further discuss strategic management, we should define nine key terms:
competitive advantage, strategists, vision and mission statements, external opportunities and
threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives,
and policies.
1. Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. This term can
be defined as “anything that a firm does especially well compare to rival firm”.’ When a firm
can do something that rival firms cannot do, or owns something that rival firm’s desire, that can
represent a competitive advantage. Getting and keeping competitive advantage is essential for
long-term success in an organization.
A firm must strive to achieve sustained competitive advantage by
(1) Continually adapting to changes in external trends and events and internal capabilities,
competencies, and resources; and by
(2) Effectively formulating, implementing, and evaluating strategies that capitalize upon
those factors.
2. Strategists: - Strategists are the individuals who are most responsible for the success or
failure of an organization. Strategists have various job titles, such as chief executive officer,
president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur.
Strategists help an organization gather, analyze, and organize information. They track industry
and competitive trends, develop forecasting models and scenario analyses, evaluate corporate
and divisional performance, spot emerging market opportunities, identify business threats, and
develop creative action plans. The CEO is the most visible and critical strategic manager.
3. Vision and Mission Statements
Many organizations today develop a vision statement that answers the question, “What do we
want to become?” Developing a vision statement is often considered the first step in strategic
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planning, preceding even development of a mission statement. Many vision statements are a
single sentence.
For example, the vision statement of the Ethiopian Electric Power Corporation (EEPCo) is “To
be a centre of Excellence in providing quality electric service at every one’s door and being
competitive export industry.”
Mission statements are “enduring statements of purpose that distinguish one business from other
similar firms. A mission statement identifies the scope of a firm’s operations in product and
market term.” It addresses the basic question that faces all strategies: “What is our business?”
A clear mission statement describes the values and priorities of an organization. Developing a
mission statement makes strategists to think about the nature and scope of present operations and
to assess the potential attractiveness of future markets and activities. A mission statement
broadly charts the future direction of an organization.
An example of a mission statement is provided below for Microsoft.
Microsoft’s mission is to create software for the personal computer that empowers and enriches
people in the workplace, at school and at home. Microsoft’s early vision of a computer on every
desk and in every home is coupled today with a strong commitment to Internet-related
technologies that expand the power and reach of the PC and its users. As the world’s leading
software provider, Microsoft strives to produce innovative products that meet our customers’
evolving needs. At the same time, we understand that long-term success is about more than just
making great products. Find out what we mean when we talk about Living Our Values
(www.microsoft.com/mscorp/).
Another example of a mission statement of the Ethiopian Electric Power Corporation (EEPCo) is
To provide adequate and quality electricity generation, transmission, distribution, and sales
services, through continuous improvement of utility management practices responsive to the
socio-economic development and environmental protection need of the public”.
4. External Opportunities and Threats
External opportunities and external threats refer to economic, social, cultural, demographic,
environmental, political, legal, governmental, technological, and competitive trends and events
that could significantly benefit or harm an organization in the future.
Opportunities and threats are largely beyond the control of a single organization-thus the word
external. The wireless revolution, biotechnology, population shifts, changing work values and
attitudes, space exploration, ecological packages, and increased competition from foreign

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companies are examples of opportunities or threats for companies. These types of changes are
creating a different type of consumer and consequently a need for different types of products,
services, and strategies. Many companies in many industries face the severe external threat of
online sales capturing increasing market share in their industry.
5. Internal Strengths and Weaknesses
Internal strengths and internal weaknesses are an organization’s controllable activities that are
performed especially well or poorly. They arise in the management, marketing,
finance/accounting, production/operations, research and development, and management
information systems activities of a business. Identifying and evaluating organizational strengths
and weaknesses in the functional areas of a business is an essential strategic-management
activity. Organizations strive to pursue strategies that capitalize on internal strengths and
eliminate internal weaknesses.
Strengths and weaknesses are determined relative to competitors. Relative deficiency or
superiority is important information. Also, strengths and weaknesses can be determined by
elements of being rather than performance.
For example, strength may involve ownership of natural resources or a historic reputation for
quality.
Strengths and weaknesses may be determined relative to a firm’s own objectives.
For example, high levels of inventory turnover may not be strength to a firm that seeks never to
stock-out.
6. Long-Term Objectives
Objectives can be defined as specific results that an organization seeks to achieve in pursuing its
basic mission essential. Long-term means more than one year. Objectives are for organizational
success because they state direction; aid in evaluation; create synergy; reveal priorities; focus
coordination; and provide a basis for effective planning, organizing, motivating, and controlling
activities. Objectives should be challenging, measurable, consistent, reasonable, and clear.
7. Strategies
Strategies are the means by which long-term objectives will be achieved. Business strategies
may include geographic expansion, diversification, acquisition, product development,
market penetration, reduction of expenditure, liquidation, and joint venture.
Strategies are potential actions that require top management decisions and large amounts of the
firm’s resources. In addition, strategies affect an organization’s long-term prosperity, typically

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for at least five years, and thus are future-oriented. Strategies have multifunctional or
multidivisional consequences and require consideration of both the external and internal factors
facing the firm.
8. Policies
Policies are the means by which annual objectives will be achieved. Policies include guidelines,
rules, and procedures established to support efforts to achieve stated objectives. Policies are
guides to decision making and address repetitive or recurring situations.
Policies are most often stated in terms of management, marketing, finance/ accounting,
production/operations, research and development, and computer information systems activities.
Policies can be established at the corporate level and apply to an entire organization at the
divisional level and apply to a single division or at the functional level and apply to particular
operational activities or departments. Policies are especially important in strategy
implementation because they outline an organization’s expectations of its employees and
managers. Policies allow consistency and coordination within and between organizational
departments.
1.4 Strategy at Different Levels of a Business
Strategies exist at several levels in any organization - ranging from the overall business (or group
of businesses) through to individuals working in it.
 Corporate Strategy - is concerned with the overall purpose and scope of the business to
meet stakeholder expectations. This is a crucial level since it is heavily influenced by
investors in the business and acts to guide strategic decision-making throughout the
business. Corporate strategy is often stated explicitly in a "mission statement".
 Business Unit Strategy - is concerned more with how a business competes successfully
in a particular market. It concerns strategic decisions about choice of products, meeting
needs of customers, gaining advantage over competitors, exploiting or creating new
opportunities etc.

 Operational Strategy - is concerned with how each part of the business is organized to
deliver the corporate and business-unit level strategic direction. Operational strategy
therefore focuses on issues of resources, processes, people etc.
TIP 1. Strategy + good strategy execution = good management
TIP 2. Strategic Management= How strategy is Managed

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1.5 The strategic management approach

The two Models of Superior Returns
 Industrial organization (I/O) model
 Resource-based Model
1. I/O Model of Above-average Returns
The Industrial Organization model suggests that above-average returns for any firm are largely
determined by characteristics outside the firm. This model largely focuses on industry structure
or attractiveness of the external environment rather than internal characteristics of the firm.
The external environments are:
 General environment : political, economical, global, demographic, socio cultural and
technological
 Industry environment
 competitor environment
Four Assumptions of the I/O Model
1. The external environment is assumed to possess pressures and constraints that determine the
strategies that would result in above-average returns
2. Most firms competing within a particular industry or within a certain segment of it are
assumed to control similar strategically relevant resources and to pursue similar strategies in
light of those resources
3. Resources used to implement strategies are highly mobile across firms
4. Organizational decision makers are assumed to be rational and committed to acting in the
firm’s best interests, as shown by their profit-maximizing behaviors
 I/o model
1. Study the external environment, especially the industry environment
 economies of scale
 barriers to market entry
 diversification
 product differentiation
 degree of concentration of firms in the industry
2. Locate an attractive industry with a high potential for above-average returns. Attractive
industry: one whose structural characteristics suggest above-average returns
3. Identify the strategy called for by the attractive industry to earn above-average returns

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 Strategy formulation: selection of a strategy linked with above-average returns in a

particular industry
4. Develop or acquire assets and skills needed to implement the strategy
Assets and skills: those assets and skills required to implement a chosen strategy
5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy.
Strategy implementation: select strategic actions linked with effective implementation of the
chosen strategy
 Resource-Based Model of Above-average Returns
The Resource-Based model suggests that above-average returns for any firm are largely
determined by characteristics inside the firm. This model focuses on developing or obtaining
valuable resources and capabilities which are difficult or impossible for rivals to imitate.
1. Identify the firm’s resources--strengths and weaknesses compared with competitors
Resources: inputs into a firm’s production process
2. Determine the firm’s capabilities--what it can do better than its competitors
 Capability: capacity of an integrated set of resources to perform a task or activity in an
integrated manner. Four Attributes of Resources and Capabilities (Competitive
Advantage)
 Valuable: When they allow the firm to exploit opportunities or neutralize threats in its
external environment
 Rare: When possessed by few, if any, current and potential competitors
 Costly to imitate: When other firms cannot obtain them or must obtain them at a much
higher cost
 Non-substitutable: When they have no structural equivalents
3. Determine the potential of the firm’s resources and capabilities in terms of a competitive
advantage Competitive advantage: ability of a firm to outperform its rivals
4. Locate an attractive industry. An attractive industry: an industry with opportunities that can be
exploited by the firm’s resources and capabilities
5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to
opportunities in the external environment
Strategy formulation and implementation: strategic actions taken to earn above average returns
1.6 Benefits of Strategic Management
Strategic Management

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 allows an organization to be more proactive than reactive in shaping its own future;
 It allows an organization to initiate and influence (rather than just respond to) activities-
and thus to exert control over its own destiny.
Small business owners, chief executive officers, presidents, and managers of many for-profit and
non-profit organizations have recognized and realized the benefits of strategic management.
Historically, the principal benefit of strategic management has been to help organizations
formulate better strategies through the use of a more systematic, logical, and rational approach
to strategic choice.
A great benefit of strategic management, then, is the opportunity that the process provides to
empower individuals. Empowerment is the act of strengthening employees’ sense of
effectiveness by encouraging them to participate in decision making and to exercise initiative
and imagination, and rewarding them for doing so.
Although making good strategic decisions is the major responsibility of an organization’s owner
or chief executive officer, both managers and employees must also be involved in strategy
formulation, implementation, and evaluation activities.
a) Financial Benefits of Strategic Management
Research indicates that organizations using strategic-management concepts are more profitable
and successful than those that do not. Businesses using strategic management concepts show
significant improvement in sales, profitability, and productivity compared to firms without
systematic planning activities. High-performing firms tend to do systematic planning to prepare
for future fluctuations in their external and internal environments.
High-performing firms seem to make more informed decisions with good anticipation of both
short- and long-term consequences. On the other hand, firms that perform poorly often engage in
activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists
of low-performing organizations are often preoccupied with solving internal problems and
meeting paperwork deadlines. They typically underestimate their competitors’ strengths and
overestimate their own firm’s strengths. They often attribute weak performance to uncontrollable
factors such as a poor economy, technological change, or foreign competition.
It is quite normal to witness businesses in our country failing annually. Business failures include
bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many
factors besides a lack of effective strategic management can lead to business failure, the planning
concepts and tools described in this teaching material can yield substantial financial benefits for

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any organization. An excellent Web site for businesses engaged in strategic planning is
www.checkmateplan.com.
b) Non financial Benefits
Besides helping firms avoid financial demise, strategic management offers other tangible
benefits, such as
 an enhanced awareness of external threats,
 an improved understanding of competitors’ strategies,
 increased employee productivity,
 reduced resistance to change, and
 A clearer understanding of performance-reward relationships.
Strategic management enhances the problem-prevention capabilities of organizations because it
promotes interaction among managers’ at all divisional and functional levels. Firms that have
nurtured their managers and employees, shared organizational objectives with them, empowered
them to help improve the product or service, and recognized their contributions can turn to them
for help in a pinch because of this interaction.
In addition to empowering managers and employees, strategic management often brings order
and discipline to an otherwise floundering firm. It can be the beginning of an efficient and
effective managerial system. Strategic management may renew confidence in the current
business strategy or point the need for corrective actions. The strategic-management process
provides a basis for identifying and rationalizing the need for change to all managers and
employees of a firm; it helps them view change as an opportunity rather than as a threat.
The benefits of strategic management can be condensed into five points as follows:
1) Strategy formulation activities enhance the firm’s ability to prevent problems. Managers
who encourage subordinates’ attention to planning are aided in their monitoring and
forecasting responsibilities by subordinates who are aware of the needs of strategic
planning.
2) Group-based strategic decisions are likely to be drawn from the best available
alternatives. The strategic management process results in better decisions because group
interaction generates a greater variety of strategies and because forecasts based on the
specialized perspectives of group members improve the screening of options.

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3) The involvement of employees in strategy formulation improves their understanding of

the productivity - reward relationship in every strategic plan and, thus, heightens their
motivation.
4) Gaps and overlaps in activities among individuals and groups are reduced as participation
in strategy formulation clarifies difference in roles.
5) Resistance to change is reduced. Though the participants in strategy formulation may be
no more pleased with their own decisions than they would be with authoritarian decision,
their greater awareness of the parameters that limit the available options makes them
more likely to accept those decisions.
1.7 Business Ethics and Strategic Management
Business ethics can be defined as principles of conduct within organizations that guide decision
making and behavior. Good business ethics is a prerequisite for good strategic management;
good ethics is just good business!
Business Ethics refers to carrying business as per self-acknowledged moral standards. It is
actually a structure of moral principles and code of conduct applicable to a business. Business
ethics are applicable not only to the manner the business relates to a customer but also to the
society at large. It is the worth of right and wrong things from business point of view.
Business ethics not only talk about the code of conduct at workplace but also with the clients and
associates. Companies which present factual information respect everyone and thoroughly
adhere to the rules and regulations are renowned for high ethical standards. Business ethics
implies conducting business in a manner beneficial to the societal as well as business interests.
Every strategic decision has a moral consequence. The main aim of business ethics is to provide
people with the means for dealing with the moral complications. Ethical decisions in a business
have implications such as satisfied work force, high sales, low regulation cost, more customers
and high goodwill.
Strategists are the individuals primarily responsible for ensuring that high ethical principles are
espoused and practiced in an organization. All strategy formulation, implementation, and
evaluation decisions have ethical implication.
A new wave of ethics issues related to product safety, employee health, sexual harassment, AIDS
in the workplace, smoking, acid rain, affirmative action, waste disposal, foreign business
practices, takeover tactics, conflicts of interest, employee privacy, inappropriate gifts, security of
company records, and layoffs has accented the need for strategists to develop a clear code of

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business ethics. A code of business ethics can provide a basis on which policies can be devised to
guide daily behavior and decisions at the work site.
A code of ethics can be viewed as a public relations device. To ensure that the code is read,
understood, believed, and remembered, organizations need to conduct periodic ethics workshops
to sensitize people to workplace circumstances in which ethics issues may arise. If employees
see examples of punishment for violating the code and rewards for upholding the code, this helps
reinforce the importance of a firm’s code of ethics.
To help create an ethics culture, some organizations have developed a code-of- conduct manual
outlining ethical expectations and giving examples of situations that commonly arise in their
businesses.
Strategists are responsible for developing, communicating and enforcing the code of business
ethics for their organizations. Although primary responsibility for ensuring ethical behavior rests
with a firm’s strategists, an integral part of the responsibility of all managers is to provide ethics
leadership by constant example and demonstration. Managers hold positions that enable them to
influence and educate many people. This makes managers responsible for developing and
implementing ethical decision making.
More and more firms believe that ethics training and an ethics culture create strategic
advantage. Ethics training programs should include messages from the CEO emphasizing
ethical business practices, the development and discussion of codes of ethics, and procedures for
discussing and reporting unethical behavior. Firms can align ethical and strategic decision
making by incorporating ethical considerations into long-term planning, by integrating ethical
decision making into the performance appraisal process, by encouraging the reporting of
unethical practices, and by monitoring departmental and corporate performance regarding ethical
issues.
Below is a list of some significant ethical principles to be followed for a successful business-
1. Protect the basic rights of the employees/workers.
2. Follow health, safety and environmental standards.
3. Continuously improvise the products, operations and production facilities to optimize the
resource consumption
4. Do not replicate the packaging style so as to mislead the consumers.
5. Indulge in truthful and reliable advertising.
6. Strictly adhere to the product safety standards.

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7. Accept new ideas. Encourage feedback from both employees as well as customers.
8. Present factual information. Maintain accurate and true business records.
9. Treat everyone (employees, partners and customers) with respect and integrity.
10. The mission and vision of the company should be very clear to it.
11. Do not get engaged in business relationships that lead to conflicts of interest. Discourage
black marketing, corruption and hoarding.
12. Meet all the commitments and obligations timely.
13. Encourage free and open competition. Do not ruin competitors’ image by fraudulent
practices.
14. The policies and procedures of the Company should be updated regularly.
15. Maintain confidentiality of personal data and proprietary records held by the company.
16. Do not accept child labor, forced labor or any other human right abuses.

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