Strategic Management and Business Policy

Basic Concepts of Strategic Management

How does a company become successful and stay successful?

Certainly not by playing it safe and following the traditional ways of doing business! Taking a strategic risk is what General Electric (GE) did when it launched its Ecomagination strategic initiative in 2005. According to Jeffrey Immelt, Chairman and CEO:Ecomagination is GE’s commitment to address challenges, such as the need for cleaner,more efficient sources of energy, reduced emissions, and abundant sources of clean water.And we plan to make money doing it. Increasingly for business, “green” is green.1Immelt announced in a May 9, 2005, conference call that the company planned to more than double its spending on research and development from $700 million in 2004 to $1.5 billion by 2010 for cleaner products ranging from power generation to locomotives to water processing. The company intended to introduce 30 to 40 new products, including more efficient lighting and appliances, over the next two years. It also expected to double revenues from businesses that made wind turbines, treat water, and reduce greenhouse-emitting gases to at least$20 billion by 2010. In addition to working with customers to develop more efficient power generators, the company planned to reduce its own emission of greenhouse gases by 1% by 2012and reduce the intensity of those gases 30% by 2008.2In 2006, GE’s top management informed the many managers of its global business units that in the future they would be judged not only by the usual measures, such as return on capital, but that they would also be accountable for achieving corporate environmental objectives. Ecomagination was a strategic change for GE, a company that had previously been condemned by environmentalists for its emphasis on coal and nuclear power and for polluting the Hudson and House a tonic rivers with polychlorinated biphenyls (PCBs) in the 1980s. Over the years, GE had been criticized for its lack of social responsibility and for its emphasis on profitability and financial performance over social and environmental objectives. What caused GE’s management to make this strategic change?In the 18 months before launching its new environmental strategy, GE invited managers from companies in various industries to participate in two-day “dreaming sessions” during which they were asked to imagine life in 2015—and the products they, as customers, would need from GE. The consensus was a future of rising fuel costs, restrictive environmental regulations, and growing consumer expectations for cleaner technologies, especially in the energy industry. Based on this conclusion, GE’s management made the strategic decision to move in a new basic concepts of Strategic Management

Strategic management is a 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 or long-range 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. Originally called business policy, strategic management incorporates such topics as strategic planning, environmental scanning, and industry analysis

PHASES OF STRATEGIC MANAGEMENT

Many of the concepts and techniques that deal with strategic management have been developed and used successfully by business corporations such as General Electric and the Boston Consulting Group. Over time, business practitioners and academic researchers have expanded and refined these concepts. Initially, strategic management was of most use to large corporations operating in multiple industries. Increasing risks of error, costly mistakes, and even economic ruin are causing today’s professional managers in all organizations to take strategic management seriously in order to keep their companies competitive in an increasingly volatile environment.As managers attempt to better deal with their changing world, a firm generally evolves through the following four phases of strategic management:


Phase 1—Basic financial planning: Managers initiate serious planning when they are re-quested to propose the following year’s budget. Projects are proposed on the basis of very little analysis, with most information coming from within the firm. The sales force usu-ally provides the small amount of environmental information.

Phase 2—Forecast-based planning:
As annual budgets become less useful at stimulating long-term planning, managers attempt to propose five-year plans. At this point they consider projects that may take more than one year. In addition to internal information, managers gather any available environmental data—usually on an ad hoc basis—and extrapolate current trends five years into the future. This phase is also time consuming, often involving a full month of managerial activity to make sure all the proposed budgets fit together


Phase 3—Externally oriented (strategic) planning:
Frustrated with highly political yet ineffectual five-year plans, top management takes control of the planning process by initiating strategic planning. The company seeks to increase its responsiveness to changing markets and competition by thinking strategically. Planning is taken out of the hands of lower-level managers and concentrated in a planning staff whose task is to develop strategic plans for the corporation.

Phase 4—Strategic management:
Realizing that even the best strategic plans are worth lesswithout the input and commitment of lower-level managers, top management forms planning groups of managers and key employees at many levels, from various departments and work groups. They develop and integrate a series of strategic plans aimed at achieving the company’s primary objectives. Strategic plans at this point detail the implementation, evaluation, and control issues. Rather than attempting to perfectly forecast the future,the plans emphasize probable scenarios and contingency strategies.

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