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Strategic Management and its role in Business Transformation
‘Strategic Management’ is a combination of two distinct concepts – ‘Strategy’ and ‘Management’. Clearly, Strategy is what comes first, before one can start managing anything.
Strategy involves the formulation – of directions and goals of the company, while management involves the assessment of available resources, planning, and implementing activities that lead to the attainment of these strategic goals.
There are several businesses that start small, to meet a certain market need or to utilize an opportunity or an advantage available to the entrepreneur. These businesses also become successful and grow large and profitable. Many of these are also known to ‘manage well’, or ‘manage tightly’ i.e., have operational effectiveness.
Is it sufficient to be operationally effective? These companies have no formally defined Strategy. Does this mean they lack Strategy and don’t need one? More often than not, a business that is successful consistently has an implicit Strategy, and as long as it succeeds in implementing that, it stays successful. These companies have implicitly adopted one of the basic strategies – Cost Leadership, Focus, or Differentiation. Let us look at what these basic strategies mean.Cost leadership Strategy
This is a strategy where the organization is one of the cheapest producers of what it sells. So, it can beat any pricing pressure or use its cost advantage to create entry barriers for competitors e.g., China-based manufacturers of basic chemicals have created such economies of scale that their cost of manufacturing became the lowest among the World. This led to manufacturers in other countries exiting these businesses, thus propelling a self-fueling leadership and even monopolistic position for the Chinabased manufacturers. It is sustainable and not easily replicable.
Focus
Focus is a seemingly easy strategic position yet difficult to implement and sustain. In this strategy, the company operates in a niche segment of the market and services some or all needs of that niche. E.g., The best Italian food restaurant in town serves only those people who want Italian cuisine. Moreover, it has aligned all its activities such that it is considered the ‘best’. This strategy is as much based on ‘what not to do’ as it is on ‘what to do’. Many times, this strategy can get diluted due to growth imperatives. A Thai restaurant doing roaring business can lead to tempting thoughts of adding Thai food to the menu. Yet, that would dilute the strategy and lead to erosion of the leadership in the Italian food business and also turn away some customers who come only because the restaurant focusses only on Italian food.
Differentiation
Differentiation is a strategy based on creating products or services that stand apart from the competition. To succeed as a strategy, Differentiation needs to be sustainable. Differentiation can be based on unique products or unique features, or unique positioning. This strategy is difficult to sustain because if it is successful, competitors will copy it and the differentiation could be lost. A very successful example is that of Apple Computers. Their products are differentiated by design features, quality, robustness, and innovation – all leading to their positioning as premium products amongst their categories! Apple products, many times, create a category of their own that is considered different even though the product features are similar! Interestingly, Apple has maintained this for several years through various efforts including innovation but also by controlling the supply chain both inward and outward, by keeping their products on closed source instead of open source, and so on.
Michael E. Porter, the Management Guru, says "Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well—not just a few— and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability. Management reverts to the simpler task of overseeing independent functions, and operational effectiveness determines an organization’s relative performance".
For companies to succeed year after year, formulating a strategy and implementing it over a longer horizon is crucial to be successful in a highly competitive environment. Operating efficiency can provide short-term advantages that competitors can catch up with and the race continues. A Strategy based on creating and sustaining competitive advantage is crucial for long-term and disproportionate success in the marketplace.
Reference
Michael E. Porter (Source: https://hbr.org/1996/11/whatis- strategy What Is Strategy? Harvard Business Review, November-December 1996).