Abstract
In the current business environment, success cannot be realized without strategic thinking. As a result, strategic management dominates the business world today. Numerous strategic management theories have been provided. Most of these theories and models focus on organizational objectives and the logic of achieving those objectives.
The most dominant theories of strategic management are Resource based theory and dynamic capability theory. The two theories focus on strategies that can give companies a competitive edge in the industry. This paper will explore different strategic management theories and principles. The paper will also analyze the benefits and pitfalls of strategic management through a case study analysis.
Introduction
The term ‘strategy’ is very common in the business world today (Hubbard & Beamish, 2011, p. 3). However, the word ‘strategy’ has been broadly used that it has lost a clear meaning (Mintzberg, 1987, p. 3). Despite the significance of strategy, there is astoundingly little consensus on what it really means (Mintzberg, 1987, p. 66). Nonetheless, success cannot be achieved without a strategy (Huiru, 2011, p. 3).
According to Kalpic (2002, p. 6), strategy is an ambiguous term that is normally linked to long-term planning, prearranged goals and preferred system of creating a balance between the organizational resources and externalities.
The contemporary schools of thought in strategic management strongly suggest that strategy should be viewed as the creation of the organization’s objectives (Hubbard & Beamish, 2011, p. 3), which is realized through joint effort, regarded as a constant process and distinctive in nature (Gibbs, 1993, p. 53).
Strategic vision and core values are terms that are often used in strategic management. Strategic vision basically refers to the executive views of the company’s long-term direction (Baetz & Bart, 1996, p. 30). On the other hand, core values are the principles and norms that help in developing strategic vision (David, 2011, p. 12).
Basically, strategic management refers to the steps taken by organizations to develop and maintain competitive advantage (Mintzberg, 1988, p. 14). Strategic management incorporates two fundamental aspects: analysis of strategic objectives and the reasons why some organizations out do others (Thompson, Strickland & Gamble, 2013, p. 3).
According to Porter (1980, p. 12), strategic management entails achieving competitive advantage by offering unique product/service and having lucid and achievable objectives. Strategic management is increasingly gaining popularity in the corporate world.
Different literatures attribute it to various factors (Gemünden & Heydebreck, 1995, p. 37). The paper will explore different strategic management theories and principles. In addition, the paper will analyse the advantages and disadvantages of strategic management through a case study analysis.
Strategic Managements Theories and Principles
In the last two decades, the volume of literatures on strategic management has considerably increased (Barney & Hesterly, 2006, p. 8). Strategic management was first recognized as a distinct discipline in the mid 60s. However, the group can barely be regarded as the pioneers of strategic management (Hunger & Wheelen, 2006, p. 193). In fact, the current schools of thought are not based on their ideas and principles.
Their point of view was labelled as the classical perspective, which focused mainly on design and planning (Elfring & Volberda, 2001, p. 6). Later on, a new school of thought emerged. Nonetheless, both classical and contemporary schools of thoughts have never given a definitive viewpoint on strategic management (Elfring & Volberda, 2001, p. 4).
Over the recent past, there has been a revival of interest in firm level entrepreneurship as a result of the subjective dimensions of the firm’s resources. This has led to the development of resource-based theory of the firm. The resource based theory is one of the latest strategic management concepts (Kalpic, 2002, p. 34). This theory focuses mainly on the resource base, rather than the finished products of the firm.
A firm gains competitive advantage by suitably employing its resources in production (Kalpic, 2002, p. 35). Competitive advantage refers to the state where the firm adopts strategies of production that add value to the resources, and these strategies are not common in the competing firms (Barney & Hesterly, 2006, p. 8).
Elfring and Volberda (2001, p. 164) explain that resource base theory is based on two assumptions, that is, resource diversity and immobility. Resource diversity gains competitive advantage if the firm has quality resources that the other competing firms do not have. On the other hand, resource immobility applies to resources that cannot be acquired due to high cost.
Resource-based theory is complemented by dynamic capability theory. The latter conceptualizes a firm as a bundle of capabilities. Dynamic capability theory emphasizes on the exploitation of the market power and enhancing firm’s efficiency (Porters, 2008, p. 78).
Exploitation of the market power basically refers to embracing Porter’s five force approach. Porter’s five forces approach assist companies to establish themselves in the industry from which they can protect themselves against aggressive forces. It also helps the company to understand how the competitive forces operate at the industry level (Porters, 2008, p. 79; Hunger & Wheelen, 2006, p. 194).
Porter’s five forces approach employs the instruments of game theory to analyse the nature of rivalry between companies within an industry. It can also help to influence the behaviour and activities of rival companies and the industry as a whole. In a nutshell, it gives company power to control the market environment (Porters, 1980, p. 15).
On the other hand, efficiency refers to the minimization of waste and development of exceptional skills and capabilities. Therefore, efficiency denotes discreet use of the available resources (Kalpic, 2002, p. 34). The two theories focus on strategies that can give companies a competitive edge in the industry.
However, they are based on two different assumptions. Resource based theory is based on resource diversity and immobility, whereas dynamic capability theory is based on Porter’s five forces approach and efficiency.
Strategic Management Process
Strategic management entails three major processes, namely: strategy formation, strategy implementation and reformulation of strategy (Kalpic, 2002, p. 43). Strategy formation is further subdivided into three phases, that is, the creation of strategic identity, strategy execution analysis and formulation of strategy.
The creation of strategic identity is a cyclic process, which involves a continuous exchange of information from different life cycle. The creation of strategic identity and strategy analysis is regarded by many authors as the most difficult phase. The creation of strategic identity involves putting together the mission, vision and strategic goal. The vision and mission must be consistent with organizational values.
It also involves the identification of the core competencies and capabilities of an organization. Strategy analysis entails analysis of the industry, identification of the existing concepts and capabilities, and identification of the requisite concepts (Huiru, 2011, p. 7; Baetz & Bart, 1996, p. 532).
On the other hand, strategy implementation is subdivided into four significant phases. They include: articulation and codifying of strategy, strategy evaluation and elaboration of strategy, strategy endorsement and execution of strategy (Kalpic, 2002, p. 70). Strategy articulation refers to the externalization of the strategy and its implementation in an overt manner.
Codification, on the other hand, refers to the translation of strategies into tangible and measurable objectives (Kalpic, 2002, p. 71). Evaluation process aims for consistency, consonance, competitive advantage and viability of the strategy. Strategy elaboration encompasses transformation of strategy into executable plans (Huiru, 2011, p. 8; Kalpic, 2002, p. 73).
Strategy promotion refers to far-reaching and calculated campaigns aimed at selling the novel strategy. Last but not least, strategy execution entails strategy discharge and incessant control of strategy performance (Huiru, 2011, p. 8; Kalpic, 2002, p. 74). Owing to constant changes in the internal and external environment, strategic re-evaluation and re-formulation are very crucial.
Revaluation process may be elicited by regular reassessment process, unproductive results, disparity between the expected and actual results and changes in the top management. It should be noted that an excellent strategy does not need incessant re-formulation (Newsom, Collier & Olsen, 2009, p. 168).
Advantages of Strategic Management
Strategic management is very important in achieving sustainable growth and success (Huiru, 2011, p. 34). It encourages firms to be more proactive that reactive in shaping their destiny. In other words, it gives companies control over their future (Wright, Kroll & Parnell, 1998, p. 9).
At the moment, organizations (no matter their sizes and nature of business) are starting to recognize the benefits of strategic management (Bradutan & Sarbu, 2013, p. 1). Looking back in history, strategic management has helped many organizations in formulating and strategizing policies using systematic and rational approaches (Wright, Kroll & Parnell, 1998, p. 10).
The resource based theory essentially links itself with resource diversification. This is evident in the level of interrelationship between the performance of the firm and the degree of diversification. Great opportunities arise when a firm employs a strategy that links resources in the firm.
Diversification of the resources is related to the performance of the firm. This helps to identify the firm’s future position with regard to the level of competition in the market (Elfring & Volberda, 2001, p. 68; Huiru, 2011, p. 34).
Generally, an excellent strategy requires that all employees help in realizing the company’s goals. Therefore, the entire process is another way of empowering staff (Huffman, 2001, p. 16).
Empowerment is the process of giving the employees authority so that they can be more relevant to the business by participating in the decision making process. Psychological contract realization is positively correlated with job satisfaction, organizational commitment and performance. It is also negatively correlated to intention to quit the organization (Zajac, Kraatz & Bresser, 2000, 430).
Strategic management has both financial and non financial gains. The economic gains include improved sales, profitability and efficiency. Through excellent strategies, companies can achieve their mission and objectives and, therefore, automatic profit. Nonfinancial benefits are so many.
Others have already been discussed (Singer, 1994, p. 193; Stacey, 2003, p. 87). Strategic management, through Porter’s five forces, helps in understanding competitors’ strategies. It also helps to minimize change resistance and defining management problems without prejudice.
In addition, it offers a mechanism for coordinating and controlling business operation, thus promoting communication among the staff. Last but not least, it promotes strategic thinking (Thompson, Strickland & Gamble, 2013, p. 13; Porter, 2008, p. 79).
The Biogen Idec
Biogen Idec is a pharmaceutical company found in Cambridge, Massachusetts. The company specializes in discovering and developing drugs for clients all over the world. Some of the drugs discovered and developed by the company include Alrolix (controls and prevents bleeding incidents), Avonex for treating sclerosis and Fumaderm (treats psoriasis) among others (Biogen Idec, 2014, p. 1).
In 1994, the company developed a research-centred business model. Under the new model, the company’s scientists were only required to discover compounds that were used to develop new medicines. These compounds were to be licensed to major pharmaceutical corporations. Biogen Idec received approval from the Food and Drug Administration (FDA) (Kalpic, 2002, p. 61).
The new concept was developed because the existing delivery system was very ambiguous and costly. In the new model, the company embraced a completely new strategy in organizing and managing production and supply chain. The strategy involved working with a network of partners and stakeholders to determine the task to be performed by the company and the task to be outsourced.
The company identified five main tasks for producing drugs: formulation, mass production, packaging, storage and distribution. The company targeted corporations that were huge enough to provide room for faster growth. In addition, the company sets high standards for the performance of the network. Lastly, the company maintained firm control over the network (Kalpic, 2002, p. 62).
The new business model ensured that the company attained a competitive cost structure despite its limited scale of production and experience in the global market. The new strategy maintained low fixed assets, even during high production.
The new business model also ensured that the company only concentrated on its core competencies. In addition, the new cost structure increased the company’s revenue due to modest capital requirement. Lastly, the investment risks were shared with the partners (Kalpic, 2002, p. 63).
Disadvantages of Strategic Management
In the current business environment, success cannot be realized without strategic thinking (Hamel, 1996, p. 70). Nonetheless, strategic management has a number of pitfalls (David, 2011, p. 12). Strategic management normally involves planning and predicting the future. However, it does not offer a clear-cut and comprehensive representation of the future.
The methods used to plan and predict the future are mainly based on qualitative wishes (Bradutan & Sarbu, 2013, p. 2; Singer, 1994, p. 191).
Second, strategic management concepts and principles are general in nature and are not limited to a particular situation or set of rules. In other words, they are merely philosophical or ideological in nature. For that reason, managers and the board do interpret them in their own way (Stiles, 2001, p. 627).
Third, strategic management is very demanding and costly. It requires hard work and considerable resources to implement. Fourth, strategic management increases the probability of making mistakes during the planning process. This is brought about by short-term goals, radical change in investment directions and new business opportunities (Bradutan & Sarbu, 2013, p. 2; Stiles, 2001, p. 628).
Fifth, realization of strategic management goals usually depends on strategic planning. This may not be sufficient given that planning does not guarantee success.
As a matter of fact, most energy is spent in executing strategic plans. Last but not least, strategic management goals and objective may not be realized if individuals involved in the formulation of the strategy are left out during the implementation process. In fact, it can lead to adverse effects (Bradutan & Sarbu, 2013, p. 3; David, 2011, p. 12).
The Biogen Idec
The Biogen Idec’s research-centred business model is a huge success. However, it has experienced massive challenges since its inception. Some of the challenges were never anticipated when the model was being formulated.
For example, like many other companies, Biogen Idec never anticipated the 2008 global financial crisis. For this reason, it was not incorporated in the model. Owing to the crisis, some of the partners were forced out of the business. In addition, the crisis disrupted the foreign healthcare payment system. As a result, the company made very huge losses (Biogen Idec, 2008, p. 41).
The model was also aimed to increase the company’s presence in the global market, which is a very difficult venture. In some jurisdictions, the company experienced unfavourable intellectual property rights and statutory controls. This was not anticipated.
Moreover, Biogen Idec was not able to get necessary pricing approval of its products in China. Lastly, some of the partners poached a number of the company’s scientists and no longer required Biogen Idec’s services (Biogen Idec, 2008, p. 41).
Conclusion
In the current business environment, success cannot be realized without strategic thinking. As a result, strategic management dominates the business world today. Numerous strategic management theories have been provided.
Most of these theories and models focus on organizational objectives and the logic of achieving those objectives. The most dominant theories of strategic management are Resource based theory and dynamic capability theory. Strategic management has both financial and non financial advantages. However, it also has a number of pitfalls.
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