Year: 2020

Strategic management is the management of an organization’s resources to achieve its goals and objectives. Strategic management involves setting objectives, analyzing the competitive environment, analyzing the internal organization, evaluating strategies, and ensuring that management rolls out the strategies across the organization.

Strategic management is divided into several schools of thought. A prescriptive approach to strategic management outlines how strategies should be developed, while a descriptive approach focuses on how strategies should be put into practice. These schools differ on whether strategies are developed through an analytic process, in which all threats and opportunities are accounted for, or are more like general guiding principles to be applied.

Strategic management has been defined by various thinkers, philosophers and practitioners. Strategic management can be defined as the formal process for defining company vision & mission, assess internal & external environment, formulate strategies under resource constraints, implement strategies, and evaluate the strategies. Strategic management is the art and science of formulating, implementing and evaluating cross function decision that enable the business to achieve its objectives.

Lamb Robert (1984) – Strategic management is an on-going process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e., regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment, or a new social, financial, or political environment.

Learned (1965): It is the study of the functions and responsibilities of general management and the problems which affect the character and success of the total enterprise.

Schendel and Hofer (1979): Strategic management is a process that deals with the entrepreneurial work of the organization, with organizational renewal and growth, and, more particularly, with developing and utilizing the strategy which is to guide the organization’s operations.

Bracker (1980): Strategic management entails the analysis of internal and external environments of firms to maximize the utilization of resources in relation to objectives.

Jemison (1981): Strategic management is the process by which general managers of complex organizations develop and use a strategy to co-align their organization’s competence and the opportunities and constraints in the environment.

Van Cauwenbergh and Cool (1982): Strategic management deals with the formulation aspects (policy) and the implementation aspects (organization) of calculated behaviour in new situations and is the basis for future administration when repetition of circumstances occurs.

Schendel and Cool (1988) – Strategic management is essentially work associated with the term entrepreneur and his function of starting (and given the infinite life of corporations) renewing organizations.

Fredrickson (1990) – Strategic management is concerned with those issues faced by managers who run entire organizations, or their multifunctional units.

Teece (1990): Strategic management can be defined as the formulation, implementation, and evaluation of managerial actions that enhance the value of a business enterprise.

Rumelt, Schendel, and Teece (1994): Strategic management is about the direction of organizations, most often, business firms. It includes those subjects of primary concern to senior management, or to anyone seeking reasons for success and failure among organizations.

Bowman, Singh, and Thomas (2002): The strategic management field can be conceptualized as one centred on problems relating to the creation and sustainability of competitive advantage, or the pursuit of rents.

Example of Strategic Management

For example, a for-profit technical college wishes to increase new student enrollment and enrolled student graduation rates over the next three years. The purpose is to make the college known as the best buy for a student’s money among five for-profit technical colleges in the region, with a goal of increasing revenue.

In that case, strategic management means ensuring the school has funds to create high-tech classrooms and hire the most qualified instructors. The college also invests in marketing and recruitment and implements student retention strategies. The college’s leadership assesses whether its goals have been achieved on a periodic basis.

Importance of Strategic Management

• It guides the company to move in a specific direction. It defines organization’s goals and fixes realistic objectives, which are in alignment with the company’s vision.
• It assists the firm in becoming proactive, rather than reactive, to make it analyse the actions of the competitors and take necessary steps to compete in the market, instead of becoming spectators.
• It acts as a foundation for all key decisions of the firm.
• It attempts to prepare the organization for future challenges and play the role of pioneer in exploring opportunities and also helps in identifying ways to reach those opportunities.
• It ensures the long-term survival of the firm while coping with competition and surviving the dynamic environment.
• It assists in the development of core competencies and competitive advantage, that helps in the business survival and growth.

The basic purpose of strategic management is to gain sustained-strategic competitiveness of the firm. It is possible by developing and implementing such strategies that create value for the company. It focuses on assessing the opportunities and threats, keeping in mind firm’s strengths and weaknesses and developing strategies for its survival, growth and expansion.

Features of Strategy

• 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.
• 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.
• Strategy is created to take into account the probable behavior of customers and competitors. Strategies dealing with employees will predict the employee behavior.

Strategic management is a continuous process of decision-making that is vital to the very survival, growth and flourishment of an organization that contribute to wealth maximization. Strategic management is different from routine management in the sense that it is making of strategic decisions and implementation of those to get pre- calculated results.

These strategic issues influence the decisions as management is a decision making process. One point is to pounder that all the decisions are important; however, all the decisions are of not of equal importance; hence, they become strategic and non-strategic. As a decision-making process, strategic management is characterized by at least six distinct points.

These are:

1. Strategic Issues Warrant Top Management Decisions

Strategic decisions have far-reaching impact on several areas of firms operations. Hence, top management involvement in decision making is imperative. These decisions must be made by top management as these are the pillars of the organization. Let us take the example of a pharmaceutical firm.

The quality of the product and the price you are charging they are most important. These decisions will not be left to business level or functional level. Only at the top level there is perfect perspective understanding, anticipating broad implications and the branching out and ramifications and the power to authorize the resource allocation that is needed for implementation of what is contemplated.

2. Strategic Issues Involve the Allocation of Large Amounts and Resources

By very nature, strategic issues call for allocation of large amounts and resource deployment. The strategic issue is one of expansion or expanding the production capacity, or entering into new market or modernization to cut cost (technological up-gradations). All these are so vital that they eat huge amounts of funds in sunk assets; in addition they need more people, other inputs to reach the goal of expansion to reap the benefits.

This resource allocation takes place in one of the ways:

(i) By sparing the internal funds out of accumulated reserves and surplus;

(ii) By fresh issue of capital both owned and borrowed;

(iii) Any combination of the two to reach the third alternative whichever is viable. These issues need commitment to spare and spend as per the plan of expansion or modernisation. It is top management which again has upper hand.

3. Strategic Issues are Likely to have Impact on the Long Term Prosperity of the Firm

The strategic decisions are such that their impact good or bad will be known in the long-run. When a company sticks to a particular strategic option, its competitive image and merits are tied to that strategy option only.

A firm which is spending huge amount on building company’s image which is dependent on its position in product market, capital market and labour market will be known in due course of time but not immediately.

The company’s products may be well in demand giving a larger share of market; investors are lured by constant and high rate of dividends; it might be a good pay master where every, stake- holder is happy. These need change in market mix, market-segmentation, and public-relations building and so on.

These decisions are to be taken by top level authorities. Of course, taking the business level and operation level also man power. The effects are felt over a longer period of time where the business environment has undergone a thorough change. All firms will not succeed, and even if succeed not equally.

That is why some wise person has said “There are companies that make things happen; there are companies which keep on watching things happening and there are those companies who wonder as to what happened?” A company committed to strategic management belongs to first category. In a nutshell, these strategic decisions have enduring effects on firm.

4. Strategic Issues are Future Oriented

Whether it is dynamic business world or the ground reality living of us-what is important is—what you are? and what you will? not what were? Past is past, present is present and future is future. However, one cannot manage past; one can manage present; but managing for future is most ticklish and dare-devil activity.

Management-we mean managing the future because first function of management is foreseeing the future or planning-then rest of the functions come into picture. Strategic decisions are future oriented. Each manager worth calling is one who wants to calculate what future holds for him or his firm.

Prediction of future is almost very difficult, if not impossible. You know the mightiest nation-the USA succeeded in using all its resources to capture Osama Bin Laden and of Saddam Hussain; however, the results were not commensurate with. What they put in terms of treasure, time and talent.

However, if they are really strategic, their plans are going to be true. Business world in quite vibrant, turbulent where competitive forces are driving, one cannot have smooth sailing, strategic management teaches to be pro-active rather than reactive because, one has no control over external forces. It is situational or contingency approach that is going to solve the problems.

5. Strategic Issues have Consequences of Multi Business

Strategic decisions are not one man show. The CEO has to invite people from all levels namely top, functional and operative. That is, these strategic decisions are coordinative or participative in nature. Top management may have wonderful plan but it should be carried out because there vast difference between promise and performance a dream and a reality.

Each one-departmental heads, divisional heads, sectional heads all are to consist and work as a team. There are many vital decisions-about marketing mix, market-segments, organizational structure, competitive emphasis that involve a firm’s strategic business units (SBUs) functions, divisions, programmes units and so on. Such segregation, segmentation, compartmentalization calls for allocation and reallocation of firm’s resources and responsibilities which have impact on final results.

6. Strategic Issues Warrant due Weightage to the Firm’s External Environment

Each business unit is a sub-system that exists in open and supra-system which is otherwise known as environment. A firm as a sub-system has great influence of the environmental forces on it and it has its own impact on environment. However, the environmental forces are so powerful that it is very difficult to exert control on them.

To survive each firm has to adjust to these external forces in future because these forces are constantly changing. That is why, the strategic managers have to look beyond the limits of firm’s operations.

They will have to watch and act their competitors, customers, suppliers, creditors, labour force, governmental policies, technology and so on. The smooth functioning of a firm depends on how well it understands the behaviour of all these variables in future.

7. Strategic Management is a Process

Strategic management has emerged out of management in other areas where the concept of management is taken as a process for achieving certain objectives of the organization for which it is brought into existence.

Strategic management brings in a frame-work that helps in performing various processes. The configuration strategic management embodies all general management principles and practices devoted to strategy formulation and implementation in the organization.

As a process, it has logical steps namely, formulation of objectives of the organization; keen observation and monitoring of environment-both external and internal so as to identify the opportunities and threats; evaluation of firm’s strengths and weaknesses, viz a viz the opportunities and threats, formulation of variant and matching strategies to achieve these objectives; implementation of these strategies and evaluation and monitoring of the results of these strategies to ensure the organizational objectives are being achieved.

8. Strategic Management Stresses both Efficiency and Effectiveness

This is very important point because many people do not differentiate “efficiency” from “effectiveness.” The professors Alex Miller and George Dess have pinpointed the difference between ‘efficiency’ and effectiveness. Many a times what is efficient may not be effective but other way round not normally may not be true.

“Doing things right” is efficiency and “doing the right things” is effectiveness. Generally, a manager who takes the word in narrow sense concentrates on efficiency or improving on his efficiency level yet he may not be successful all the time because he is concentrating on his functional or divisional area than overall business.

By working so hard at trying to do ‘things right’, they forget to look up from their work occasionally to consider, whether they are working on the right things that will be effective in moving their organisation towards the final vision. A strategic manager or a strategist has right blend of ‘efficiency’ and ‘effectiveness’ in his performance. He knows not only to hit but he knows where exactly to hit.

Strategic management is all about identification and description of the strategies that managers can carry so as to achieve better performance and a competitive advantage for their organization. An organization is said to have competitive advantage if its profitability is higher than the average profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a manager undertakes and which decides the result of the firm’s performance. The manager must have a thorough knowledge and analysis of the general and competitive organizational environment so as to take right decisions.

They should conduct a SWOT analysis strengths, weaknesses, Opportunities, and Threats), i.e., they should make best possible utilization of strengths, minimize the organizational weaknesses, make use of arising opportunities from the business environment and shouldn’t ignore the threats.

Strategic management is nothing but planning for both predictable as well as unfeasible contingencies. It is applicable to both small as well as large organizations as even the smallest organization faces competition and, by formulating and implementing appropriate strategies, they can attain sustainable competitive advantage.

Strategic management is a way in which strategists set the objectives and proceed about attaining them. It deals with making and implementing decisions about future direction of an organization. It helps us to identify the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls the business and the industries in which an organisation is involved; evaluates its competitors and sets goals and strategies to meet all existing and potential competitors; and then revaluates strategies on a regular basis to determine how these have been implemented and whether these were successful or require replacement.

Strategic Management Process

Strategic management involves certain functions or activities. The systematic way of doing these functions or activities is described as strategic management process.

It consists of:

1. Strategy formulation

Strategy formulation is the first phase in the strategic management process. It is concerned with devising a suitable plan of action after studying the external business environment, analyzing the industry and assessing the internal capabilities of the business concern. It involves six important steps.

The steps to be followed for the formulation of a strategy are explained below:

(i) Defining the Company Mission: The first step in the formulation of a strategy is a clear definition of the mission of the company. This is necessary to formulate an ideal strategy. Otherwise, the strategy will not produce the desired results. An ideal strategy is one which reflects the mission of the company. A mission is the long-term vision of what an organization wants to be and to whom it wants to serve and what impact on the society. The mission is, thus, the basic, unique purpose that differentiates a business from others.

(ii) Analysis of the External Business Environment: The second step in the formulation of a strategy is an analysis of the external business environment. It is concerned with studying or observing what is prevailing in the external business environment and what changes have taken place. Such an assessment is necessary because every incident or change will have either positive or negative impact on the business.

It involves – (a) analysis of remote environment and (b) analysis of operating environment. The external business environment thus provides opportunities or threats to the business concerns. The business concern must formulate a suitable strategy to exploit the opportunities or manage threats depending up on its strengths or weaknesses.

(iii) Analysis of the Industry: The third step in the formulation of a strategy is an analysis of the industry. It involves the examination of certain forces operating in an industry to understand the nature and the degree of competition in that industry. The level of competition in an industry depends on five basic forces which determine the profit potential of an industry. They are (a) the threat of new entrants, (b) The bargaining power of buyers, (c) The bargaining power of suppliers, (d) The threat of substitute products, and (e) Rivalry among the existing firms.

The study of these forces indicates the trend of industry, the strength and weakness of the company in the industry. Such a study will be useful to formulate a suitable strategy to utilize the opportunities or threats.

(iv) Internal Analysis of the Firm: The fourth step in the formulation a strategy is a thorough internal analysis of the firm. It is concerned with a systematic appraisal or examination of the internal capabilities of a firm. Such an appraisal is necessary to know the strengths and weaknesses of the firm in the areas of finance, production, marketing, technology, research and development, and human resource management.

A systematic internal analysis of the firm involves (a) identification of strategic internal factors and (b) evaluation of the strategic internal factors to identify the key strategic strength and weakness. A factor is considered a strength only when a firm has a distinct competency in it than the competitors in the industry.

A factor is considered a weakness only when a firm performs it poorly than the competitors in the industry. A new strategy therefore has been formulated after considering the internal strategic strengths and weaknesses of the firm to utilize the external opportunities or minimize its activities to overcome threats.

(v) Strategic Alternatives: The fifth step in the formulation of a strategy is developing strategic alternatives. They are concerned with identifying other possible ways of achieving the same strategy formulated to utilise external business opportunities or minimise the firm’s activities to overcome threats.

For example, growth strategy may be achieved by intensive growth strategy of market penetration, market development, and product development or integrative growth strategy of horizontal integration and vertical integration or diversification strategy depending upon the internal strengths and weaknesses provided the external business environment is favorable.

(vi) Strategic Analysis and Choice: The last step in the formulation of a strategy is strategic analysis and choice. Strategic analysis involves a systematic evaluation of strategic alternatives with reference to certain criteria. Each alternative has its own merits and demerits but all alternatives cannot be equally appropriate.

2. Strategy Implementation

Strategy implementation is the second phase in the strategic management process. It is concerned with putting the strategy into operation or translating the strategy into strategic action. It necessitates three interrelated activities of

(i) Determination of annul objectives

(ii) Development of specific functional strategies

(iii) Development of policies. For the successful implementation, the strategy must be also institutionalized through structure, leadership, and culture.

3. Strategy Evaluation and Control

Strategy evaluation and control is the last phase in the strategic management process. Strategy evaluation is concerned with examining whether the strategy implemented is working or producing results or accomplishing its objectives or not. Strategic control is concerned with continuous monitoring and tracking the strategy— putting the strategy in the right path or direction.

Strategic management process has following five steps:

1. Mission and Goals

The first step in the strategic management begins with senior managers evaluating their position in relation to the organization’s current mission and goals. The mission describes the organization’s values and aspirations; and indicates the direction in which senior management is going. Goals are the desired ends sought through the actual operating procedures of the organization. It typically describe short-term measurable outcomes.

2. Environmental Scanning

Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes and helps in analyzing the internal and external factors influencing an organization. After executing the process, management should evaluate it on a continuous basis and strive to improve it.

3. Strategy Formulation

Strategy formulation is the process of deciding best course of action for achieving organizational objectives. After conducting environment scanning process, managers formulate corporate, business and functional strategies.

4. Strategy Implementation

Strategy implementation implies putting the organization’s chosen strategy in to action and making it work as intended. Strategy implementation includes designing the organization’s structure, distributing resources, developing decision making process, and effectively managing human resources.

5. Strategy Evaluation

Strategy evaluation which is the final step of strategy management process involves- appraising internal and external factors, measuring performance, and taking remedial/corrective actions. Evaluation assure the management that the organizational strategy as well as its implementation meets the organizational objectives.

These steps are carried by the businesses, in chronological order, when creating a new strategic management plan. Present businesses that have already created a strategic management plan will revert to these steps as per the situation’s requirement, so as to make essential changes.

Strategic management is not without limitations. While strategic management has a number of benefits as pointed out above, it is also a fact that many firms fail despite adopting strategic management and many firms which do not have strategic management are successful. In short, strategic management by itself does not ensure unconditional success.

The important limitations of strategic management are the following:

1. Strategic management is based on certain premises and if the premises do not hold valid, the strategy or plans based on them would not be realistic or effective. These points to the need for exercising due diligence in premising and to the importance of strategic control, particularly premise control.
2. SWOT analysis has a very important role in strategic management. Obviously, if the SWOT analysis is not right, the strategy based on it may go awry. SWOT analysis is an exercise which requires lot of expertise and information. When these two are lacking, the utility of the SWOT analysis is questionable and it could even lead to formulation of wrong or ineffective strategies.
3. Strategic management is a means to achieve the mission and objectives of the organization. Hence, any lack of realism or other limitation of the mission/objectives would naturally get reflected in the strategy.
4. One of the criticisms against strategic management is that it sometimes makes the organization over-ambitious and the resultant failure to reach the goals cause frustration. Unrealistic strategies may land companies in severe problems.
5. Another criticism advanced against strategic management is that it makes the future vision tunneled that several opportunities may be overlooked. Against this criticism, it may be argued that the strategy is formulated after scanning all the opportunities. Further, a good strategic management also envisages modification of the strategy when changes in the environment call for it.
6. Yet another criticism which is very akin to the above is that it makes the whole approach very rigid. Against this, it may be pointed out that a good strategic management system provides for required flexibility and modifications. Strategic control and contingency planning impart the plans some amount of adaptability to the unforeseen developments.
7. An important limitation of the strategic management is that if the implementation of the strategy is not effective, even an excellent strategy would not produce expected results. Effective implementation demands many things  resource allocation, leadership implementation, right structure, and effective evaluation and control. The reason for the failure of many strategies is the implementation failure.

Along with strategic planning, mission and vision statements are among the most widely used tools, and consistently rank above average in satisfaction.

A Mission Statement defines the company’s business, its objectives and its approach to reach those objectives. A Vision Statement describes the desired future position of the company. Elements of Mission and Vision Statements are often combined to provide a statement of the company’s purposes, goals and values. However, sometimes the two terms are used interchangeably.

Typically, senior managers will write the company’s overall Mission and Vision Statements. Other managers at different levels may write statements for their particular divisions or business units. The development process requires managers to:

• Clearly identify the corporate culture, values, strategy and view of the future by interviewing employees, suppliers and customers
• Address the commitment the firm has to its key stakeholders, including customers, employees, shareholders and communities
• Ensure that the objectives are measurable, the approach is actionable and the vision is achievable
• Communicate the message in clear, simple and precise language
• Develop buy-in and support throughout the organization

 Importance of Mission Vision in Organizational Strategy

Regardless of whether you’re running a small one-person operation or a large corporation, having a company mission and vision help to provide employees with a purpose. The mission and vision of an organization are integral to the company’s strategy because they are used to define future goals and operational tactics. While mission and vision are terms that are often interchanged, they actually refer to two separate aspects of the company.

1. Understanding Mission Statements

The mission statement of the organization outlines the company’s business, its goals and its strategy for reaching those goals. It focuses more on where the company is at the present time and the tactical steps it wants to use to achieve its objectives. The mission statement of a company can be used to shape the culture of the organization.

When establishing a mission statement for your company, outline what it is your business does, who you serve and how you serve them. Those are the three most critical elements of a business’ mission statement. For example, Amazon’s mission statement is, “We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience.”

If a small business sells handcrafted baby clothes, for example, its mission statement might be, “We offer new parents beautiful clothes for their babies that are handmade with love.” This includes what the business does, who their audience is and how they serve them. It provides employees with a clear goal.

2. Understanding Vision Statements

While the mission statement focuses on more tactical aspects of the business, the vision statement looks to the future of the company. The vision statement provides the direction in the which the company wants to go. Together with the mission statement, it helps to create the organizational strategy for the business.

When drafting a vision statement for your business, answer questions about what your hopes and dreams are. What kind of future do you want to see, and how does the company play a part in making that happen? Are you aspiring to make some kind of change, and how will you make it? Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.” It provides a clear direction for employees.

For the small business that makes handcrafted baby clothes, a vision statement might be “to be the first choice for new parents looking to outfit their babies in artisanal handmade clothing that is designed and crafted with the utmost attention to detail.” It shows exactly where the company wants to go in the future and how it intends to attain that status. It also contains their key selling point.

3. Applying Mission and Vision Statements to Your Organizational Strategy

The mission and vision statements of a company help direct the organizational strategy. Both provide purpose and goals, which are necessary elements of a strategy. They outline the audience for the business, and what that audience finds important. By identifying these elements, the business executives can develop a more step-by-step strategy that helps the company achieve its mission in the short term, and its vision in the long term.

Mission and vision statements help businesses to outline performance standards and metrics based on the goals they want to achieve. They also provide employees with a specific goal to attain, promoting efficiency and productivity.

Mission and vision statements aren’t only necessary for employees and business owners when it comes to the organizational strategy. They also apply to external stakeholders like customers, partners and suppliers. The mission and vision statements can be used as a public-relations tools to attract media attention, engage specific audience segments and develop business partnerships with like-minded companies.

Companies use Mission and Vision Statements to:

Internally

• Guide management’s thinking on strategic issues, especially during times of significant change
• Help define performance standards
• Inspire employees to work more productively by providing focus and common goals
• Guide employee decision making
• Help establish a framework for ethical behavior

Externally

• Enlist external support
• Create closer linkages and better communication with customers, suppliers and alliance partners
• Serve as a public relations tool

Organizational environment consists of both external and internal factors. Environment must be scanned so as to determine development and forecasts of factors that will influence organizational success. Environmental scanning refers to possession and utilization of information about occasions, patterns, trends, and relationships within an organization’s internal and external environment. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategy formulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another.

Internal analysis of the environment is the first step of environment scanning. Organizations should observe the internal organizational environment. This includes employee interaction with other employees, employee interaction with management, manager interaction with other managers, and management interaction with shareholders, access to natural resources, brand awareness, organizational structure, main staff, operational potential, etc. Also, discussions, interviews, and surveys can be used to assess the internal environment. Analysis of internal environment helps in identifying strengths and weaknesses of an organization.

As business becomes more competitive, and there are rapid changes in the external environment, information from external environment adds crucial elements to the effectiveness of long-term plans. As environment is dynamic, it becomes essential to identify competitors’ moves and actions. Organizations have also to update the core competencies and internal environment as per external environment. Environmental factors are infinite, hence, organization should be agile and vigile to accept and adjust to the environmental changes. For instance – Monitoring might indicate that an original forecast of the prices of the raw materials that are involved in the product are no more credible, which could imply the requirement for more focused scanning, forecasting and analysis to create a more trustworthy prediction about the input costs. In a similar manner, there can be changes in factors such as competitor’s activities, technology, market tastes and preferences.

While in external analysis, three correlated environment should be studied and analyzed:

• Immediate / industry environment
• National environment
• Broader socio-economic environment / macro-environment

Examining the industry environment needs an appraisal of the competitive structure of the organization’s industry, including the competitive position of a particular organization and it’s main rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization on competition within the industry. Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment. Analysis of macro-environment includes exploring macro-economic, social, government, legal, technological and international factors that may influence the environment. The analysis of organization’s external environment reveals opportunities and threats for an organization.

Strategic managers must not only recognize the present state of the environment and their industry but also be able to predict its future positions.

Internal environment is a component of the business environment, which is composed of various elements present inside the organization that can affect or can be affected with, the choices, activities and decisions of the organization.

It encompasses the climate, culture, machines/equipment, work and work processes, members, management and management practices.

In other words, the internal environment refers to the culture, members, events and factors within an organization that has the ability to influence the decisions of the organization, especially the behaviour of its human resource. Here, members refer to all those people which are directly or indirectly related to the organization such as owner, shareholders, managing director, board of directors, employees, and so forth.

Factors Influencing Internal Environment

The factors which are under the control of the organization, but can influence business strategy and other decisions are termed as internal factors. It includes:

1. Value System

Value system consists of all those components that are a part of regulatory frameworks, such as culture, climate, work processes, management practices and norms of the organization. The employees should perform the activities within the purview of this framework.

The value system of an organization is also known as the philosophy of an organization. The value system of an organization contains work processes, culture, norms, climate, and work processes of an organization.

The value system of an organization defines the way it works or treats its employees and customers. In addition to this, the value system of an organization also determines how the employees of the organization should perform their duties. They should do their work by remaining within the value system.

2. Vision, Mission and Objectives

The company’s vision describes its future position, mission defines the company’s business and the reason for its existence and objectives implies the ultimate aim of the company and the ways to reach those ends.

The mission and objectives of an organization play an essential role in deciding the future position of the organization and its place in the market. The business plan is developed and resources are used to achieve the objectives of the organization’s internal environment.

3. Organizational Structure

The structure of the organization determines the way in which activities are directed in the organization so as to reach the ultimate goal. These activities include the delegation of the task, coordination, the composition of the board of directors, level of professionalization, and supervision. It can be matrix structure, functional structure, divisional structure, bureaucratic structure, etc.

Organizational structure means the way information follows in an organization. An organizational structure of an organization defines the composition of the board of directors, management, and shareholders. The structure of an organization influences the decision-making capacity of an organization. The more level of management in the organization means more delays in decision making.

For example, if an organization has three levels of management, then it will take more time to provide a solution to the problem faced by laborers as compared to an organization with a lesser number of management levels. The ability to make quick decisions is essential for an organization.

The role of the board of directors is vital in all critical decision making. Practical managerial skills are required to run an organization smoothly and to achieve the goals of the organization. In addition to this, the board of directors plays an essential role in designing policies for an organization.

Further, these policies influence the decisions taken regarding the growth and functioning of the organization. The professionalism and decision-making ability of management is very crucial for the success of an organization.

4. Corporate Culture

Corporate culture or otherwise called an organizational culture refers to the values, beliefs and behaviour of the organization that ascertains the way in which employees and management communicate and manage the external affairs.

5. Human Resources

Human resource is the most valuable asset of the organization, as the success or failure of an organization highly depends on the human resources of the organization.

6. Physical Resources and Technological Capabilities

Resources mean the machinery, tools, and all other tangible assets of an organization. The physical resources are significant for the success of an organization. A company with better and more modern physical resources has a competitive edge over its competitors.

For example, an organization with an automation machine can produce more in a given period as compared to an organization with machinery which requires manual handling. Because of this reason, companies always look for better mechanisms and updates it frequently to produce more and generate more profits.

Physical resources refers to the tangible assets of the organization that play an important role in ascertaining the competitive capability of the company. Further, technological capabilities imply the technical know-how of the organization.

Internal environmental factors have a direct impact on a firm. Further, these factors can be altered as per the needs and situation, so as to adapt accordingly in the dynamic business environment.

7. Company Image

Image means the reputation of an organization in the market. A company with a positive corporate image attracts the right talent in the organization.

8. Brand equity

It refers to the popularity which the company has and the proportion of customer which they receive due to this popularity.

An organizational capability is a company’s ability to manage resources, such as employees, effectively to gain an advantage over competitors. The company’s organizational capabilities must focus on the business’s ability to meet customer demand. In addition, organizational capabilities must be unique to the organization to prevent replication by competitors. Organizational capabilities are anything a company does well that improves business and differentiates the business in the market. Developing and cultivating organizational capabilities can help small business owners gain an advantage in a competitive environment by focusing on the areas where they excel.

Competitive Advantage

Organizational capabilities provide a company with an advantage in the marketplace. When an organization continues to create new capabilities and develops existing ones, it will maintain the advantage over its competitors. Capabilities that provide a competitive advantage include knowledge, product licenses and innovative designs.

Flexibility and Responsiveness

The responsiveness of an organization is its ability to change in response to customer demand. Knowledge and skilled employees are organizational capabilities that provide a company with the ability to respond to customer demands and remain flexible to changes in the business environment.

Knowledgeable Workforce

The skills and knowledge of a company’s workforce allow the organization to direct those skills to achieve the business’s goals. Training programs, education assistance and effective recruiting and hiring programs are organizational capabilities that ensure a knowledgeable workforce. To maintain the capability, companies should ensure the workforce has the resources available to improve continuously. Managing a talented workforce is an organizational capability that provides a competitive advantage in the marketplace.

Improved Customer Relationships

Good customer relationships ensure the continued growth and competitiveness in the market. The relationship between the organization and its customers is an organizational capability that affects sales, reputation and loyalty for future business. Maintaining existing relationships with customers as well as developing new ones ensures the company will grow and thrive in the future. A lean manufacturing environment is an organizational capability that focuses on the voice of the customer and meeting demand. This organizational capability improves the relationship with the customer for the business.

Organizational Appraisal

An Organizational Appraisal is a process which can look at an organization and appraise it in a given context. Some tools appraise an organization in preparation of an award (for example, EFQM, Business Excellence, Baldridge, Investors in People etc.) others look at the performance of an organization in preparation for a buy-out/ buy-in, raising venture capital etc.

An Organizational Appraisal tool with the purpose of identifying developmental opportunities for the business or organization as a whole.

The Term Organizational Appraisal is the activity and the Business Improvement Review (BIR) is a tool to deliver an appraisal.