The Importance of Strategic Management

In simpler words, to ensure wise decision-making processes, it is important that strategies are in place to support the business functions and operations. Strategic management therefore entails evaluating business goals, the organisation’s vision and objectives as well as the future plans.

Why is Strategic Management important?

Strategic management adopts different methods of profit maximisation as well as ensures growth of the organization. It is also associated with leveraging the business resources for maximum gains to be made. They are an integral part of competition and improvement of performance of any firm. It helps in determining the courses of action to be followed, ideal enterprise locations, alternative forms of activities, capital limits, procurement as well as profitability. In essence, it is about the organisation of resources and allocation of resources to activities in an efficient way.

Management accounting is essential to carrying out strategic decisions effectively as a firm’s goals should be in line with their operations. This will better ensure better decision making in terms of supply chain and operations.

Strategic management determines the critical success factors, along with the consideration of their interrelationship with the strategy, as well as their functional implications for the overall organisation. The success of any organisation is dependent on how a strategy is put into practice.

Strategic management increases the profitability, effectiveness and efficiency of business operations. It enables the business to cope with changes in the competitive landscape and intensely competitive markets.

Furthermore, it offers various organisational advantages, such as:

Reduction of costs and optimisation of performance
Increase of profitability
Better strategy formulation
Coordination of various departments and teams

It is important to note that any pricing strategy should be in alignment with the overall business strategies so as to achieve the goals set. After the analysis of market and competitors, a pricing strategy should be developed based on these findings.

Marketing strategies are extremely beneficial to businesses, as they are a crucial aspect of the business in terms of expansion and success. Professionally developed marketing strategies help in realising new plans and targets, and provide better understanding of the industry and competitors.

Market segmentation is a crucial tool in ensuring effective management of the distribution of goods and services. A business can benefit from several strategies of market segmentation. Some of the business strategies that can assist a business in market segmentation include:

Cross-market segmentation strategy
Product and geographical segmentation strategy
Product-place segmentation strategy
Vertical and thematic segmentation strategy
Horizontal segmentation strategy

Once these strategies are mapped out, a firm can create totally different marketing plans for each segment identified.

Finally, in terms of finance, strategic management is key in assisting a business in capitalising on investment opportunities to ensure long-term viability. It involves structuring the financing of a business to ensure the finances are in line with requirements. It also ensures that the financing is viable and sustainable. The objective is to achieve long-term profitability, in conjunction with the growth objectives of the business.

Business Strategy: Analytical Approaches

Business strategy: an overview

Business strategy is a plan of action designed to achieve commercial objectives. Of course, long before a strategy can be formulated, there has to be a business strategy statement. It describes the plans and actions necessary to achieve the overall business objective or goals. It explains why the business exists, the goals that it intends to achieve and how the enterprise will be structured to achieve those goals. While a strategy statement covers such issues as the nature of products and services, it does not go into the specifics of how the business gets from point A to point B in terms of operations and management. It is a general vision of what the company wants to be.

Some executives have compared a business strategy statement to a roadmap of the road ahead, with its many twists and turns. However, a strategy statement only offers a general impression of the direction in which the business is headed. When combined with internal business objectives and company resources, the statement morphs into a more defined business strategy. The strategy combines the vision of where the enterprise wants to be with the knowledge of where it currently stands, and a roadmap of how it will get there.

Strategy objectives are the goals and objectives associated with each business plan. The strategy statement is closely tied to the action plans included in the strategy. It does not only describe what actions are necessary for the business, but it also usually includes the business results that will be achieved. When it does include those goals, it often uses measurements such as volume of sales or organic growth, rather than just stating what is expected.

Strategy plan overview

The organization is the most basic unit of analysis in any business strategy. Organizations have the ability to carry out three primary activities:

Business strategy identification
Resource allocation
Resource deployment.

An organization usually behaves as if it is trying to maximize the value of its assets. It does so by finding the best balance among the trade-offs among the three strategic activities, aided by those in the external environment.

Since the best way to achieve any single objective is to act in a coordinated manner, benefits may arise from organizing the enterprise around a strategic objective. Such an objective indirectly limits the trade-offs that can be made in carrying out the activities required for achieving the objective. In other words, the organization will not spend its resources in a manner that is inconsistent with the strategic objective.

All of this means that the strategic objective and the resulting strategy should be based on an analysis of the environment in which the business operates, the strengths and weaknesses of the enterprise and its resources, and the culture and norms of the organization. It is obviously easier to create a strategy if there are significant differences between the enterprise and its environment because that would suggest the enterprise is in a good position to exploit the opportunities in the environment and is in a good position to neutralize the threats.

The business strategy statement and strategic objectives constitute the strategic decision making process. The strategic decision making process allows the organization to determine the best strategic options available by comparing the costs and benefits of each strategy. The three things that the enterprise must do to create the strategy are:

Develop a business strategy statement.
Determine strategic objectives.
Focus strategies on highest priority objectives.
Benefits of Strategic Management

Business strategies are formed by analysing the past performance within a particular industry in conjunction with the future forecasts. The future growth of a firm, the economies of scale and the key sources of competitive advantage should be identified to ensure accurate decisions. Strategic management increases the profitability, effectiveness and efficiency of business operations. It enables the business to cope with changes in the competitive landscape and intensely competitive markets. Furthermore, it offers various organisational advantages, such as:

Reduction of costs and optimisation of performance
Increase of profitability
Better strategy formulation
Coordination of various departments and teams

Business strategic objectives

Business objectives should focus the desired long-term benefits from the world around an organization. The best objectives for a business are those that lead to desired results. The objectives that are most effective are those that incorporate tough performance standards that are measureable and challenging. Typically, the most effective objectives relate to overall company performance.

Several options exist within terms of selecting the objectives. If the objectives relate to short-term profitability, then the business must look at growth in terms of increased market share, new product development and customer service. If the objectives relate to long-term corporate financial survival, then the business must look at cost-cutting, improved efficiency and marketing.

The first objective is to increase profitability. In other words, the firm’s share is better than the competitors. Put it this way the business should increase its profits by evolving its market share. An increase in the market share enables the organization to invest in better technology to further increase efficiency. Another objective is to provide the best customer experience that is dependable and cost-effective. Ultimately, this increases market share due to the increased satisfaction concerning the product and the brand.

Understandably, managers and business leaders should have specific, clear and measurable (quantifiable) objectives. It does no good to have a mission statement to “achieve company objectives”. It is important for the objectives to be relevant to the actual market conditions, including the company’s strategic position relative to its competitors.

With these guidelines in mind, the manager can construct a valid framework for understanding the company’s objectives. The framework consists of the following steps:

Understanding the environment in which the firm operates
Analysis of the industry in which the organisation operates
Analysis of the company’s capabilities and its current situation and future needs
Analysis of the company’s resources and capabilities
Selection of a set of most effective objectives
Determination of the resources required to achieve the objectives

Facilitation of the members to achieve the goals defined.

It is worth noting that business objectives are directed to a wide range of stakeholders, including customers, investors, employees and other related parties, such as suppliers. Therefore, the objectives should be designed to benefit all these groups.

Customers: Objectives should be based on the desires, expectations and values of customers.

Investors: Objectives should be aimed at generating the largest amount of return for the investment of equity holders.

Employees: Objectives should address the needs of employees that enhance their welfare and their ability to grow as valuable assets to the organization.

Suppliers: Objectives should be based on the needs of business partners, such as suppliers and distributors.

The company: Objectives should enhance the capabilities of the firm to strengthen its financial standing.

The strategic objectives define the level of business performance. The appropriate balance of these objectives will depend on the industry in which the organization is operating. The objective is to determine which of the objectives is desirable for the organization. This is done by assessing the business situation in conjunction with the key competitors.

In other words the objectives should be meaningful to each individual. Organizations should consider whether the objectives give the employees direction to focus their efforts on projects that bring value to an organization. The objectives should be challenging but within the scope of the employees. The employees should know how to measure whether a performance is successful or not.

When creating a performance measurement system to measure the objectives, the situation should be taken into consideration. This is because objectives are based on the situation which may vary from business to business.

For example, a small business with less than ten employees may want to focus on the process and quality of small businesses. This is why they may not want a set target but instead want to ensure that objectives are real and achievable. They need to ensure that the objectives are meaningful to every person in the business. In large organizations, the objectives should be clear, challenging to achieve and clear for members of the business.

Whatever is decided upon, the objectives should be aligned from the top to the bottom of the business. This ensures that every level is working together toward the same goals.

Therefore, one objective is to align the company to one single objective. This should be the objective to attain the highest possible net income for the least possible cost. Another example could be to maximize the net income for each unit sold or for every dollar of sales.

The strategic decision-making process

The strategic decision-making process is a framework that provides methodologies for managing all the strategic decisions that are made during the life of the enterprise. This process includes:

The business strategy statement and strategic objectives
Identified strategic alternatives for achieving the objectives
A comparison of strategic alternatives
The development and validation of the strategic decision
The implementation of the strategic decision
The monitoring and control of the strategic decision

The strategic decision-making process provides a method for managers to thoroughly evaluate the different facets of strategic decision making. Objectives can be broken down into many different steps. What the steps are depends on what the objective is. For instance, developing a sales forecast involves the following steps:

Defining the objective
Identifying the relevant facts
Analysis of the relationships between the facts
Analysis of the relevant information
Identification of the possibilities
Formulation of the most likely scenario
Formulation of the desired scenario, and
Hypothesis testing.
Defining the objective

The objective is to consider what the business is trying to accomplish and the extent that it will advance the interests of the organisation. It is a statement that clearly defines the purpose and measures of success to be achieved. Spelling out the objectives helps to incorporate them into an organization’s decision-making process. If the objective is written down, it makes it easier to quantify the result and the value. It also helps to provide a mental map or road map for the possible outcomes.

It is important to formulate the objective with broad terms to ensure that it is applicable to the business. This way, it will be clear and concise.

Defining the objective in simple terms, which are relevant to the organisation, will help to identify what the organisation is trying to accomplish.

Identify the relevant facts

The objective then needs to be clarified. This step involves identifying the facts and information needed to accomplish the objective. It is important to understand the facts that are needed to make the most appropriate decision. These facts may include financial and performance data, as well as market information.

The relevant information should be obtained to assess the facts in analysis.

Analysis of the relationships between the facts

The facts are then analysed to determine the relationships between certain factors and the achievement of the objectives.

Factors that should be considered:

Marketing factors
Financial factors
Operational factors

In situations that require more analysis, financial and marketing factors are key to the decision, because they are the most important factors as they reflect the value of the business. For example, in a business selling different kinds of products, the marketing factors are the demand and supply, market share, competitor analysis, and the pricing strategies. On the other hand, in a business with a limited number products, such as the sale of gasoline, the marketing factors are the traffic, the distance to the nearest gasoline companies as well as the retail price of gasoline.

Financial factors include the return on investment, cost per unit, the profit margin, and total assets. Both marketing factors and the financial factors are analysed according to the objective.

Identification of the possibilities

If there are adequate facts to determine the relationships, the most likely scenario and/or the desired scenario can be determined.

If the analysis of the financial factors indicates a positive trend, then the most likely scenario is that the business will continue to grow. If the business is already generating positive cash flow, then it should be possible to expand. As a result, the most likely scenario could be for expansion.

If the analysis of the financial factors indicates a negative trend, then the business will most likely be in a state of demise. Thus, the desired scenario could be to accept the trend, and close the business down.

Formulation of the most likely and the desired scenario

Once the most likely scenario is formulated, it needs to be checked with the desired scenario. If the most likely scenario is good, then the business should plan for future objectives accordingly. This way, the business will be prepared if the future result will be better than expected.

If the most likely scenario is bad, then the business should formulate plans to try to improve the results. This would save the business if future results are better than expected.

Hypothesis testing

Hypothesis testing involves a study of whether the expected results will occur. It is a crucial part of the analysis phase. At this stage, the analyst will decide what the result will be, based on relevant results of the previous analysis.

Implementation

When the decision is made on what course of action to take, the operation has to be implemented. The implementation phase is prompted by the formulation of the decision. As soon as an objective is established, it should be implemented.

Monitoring and control

The information from the implementation should be monitored. The monitoring phase is important to ensure that the objectives are achieved. Managers should give feedback to the relevant parties, so that they will be able to adjust their performance.

The monitoring and control phase is a crucial part in the process, especially in the long-term planning. The objectives should be adjusted as these situations change. It is very possible that the objectives will no longer be relevant in the future.

It is important that managers take stock regularly to ensure that the objective is in the right direction. Managers need to identify what has and what has not worked.

Key performance indicators should be set up so that the managers and employees are on the same page. These indicators should align with the objectives. These are indicators that talk about the health of the business, such as inflation, unemployment and interest rates.

Understanding and generating internal business processes and operations

Before a business can understand its external environment, it must understand its internal environment. The way a business is run and its internal operations, must also be understood. This is why it is important to understand the internal environment and how it affects the business.

A competitive edge can be gained by understanding the internal processes of a business. It can give an advantage to the business if it is able to identify and manipulate the business processes.

For example, if the internal process of business is efficiency, then the process can be leveraged to the advantage of the company. To do so, the business processes need to be analysed and understood in order to be able to manipulate them. The efficient management of business processes can give business a competitive edge, particularly if the process is a key factor.

There are a number of important internal processes that a business should understand. These include the financial system, the hierarchy chart, marketing techniques, customer service, etc. This chapter will describe the business processes that a business should be able to understand, and how to make the business processes work for the business

Key performance indicators

Internal processes
Financial processes
Marketing processes
Customer service processes
Hierarchy
Sales
Rising star

Key performance indicators

The Key Performance Indicators form the most important indicators of the success of a business. Key performance indicators are the judging criteria for the business effectiveness. Therefore, it is important that the Key Performance Indicator framework is in place in order to determine the performance of the business.

Key Performance Indicators involve the use of benchmarks for specific measures. These can be measures such as the customer retention rate, customer churn, stock turnover rate, daily sales, etc.

To set up the Key Performance Indicators, there must be a clear definition of the purpose and the level of the objectives of the business. These are important because the key performance indicator can only be set up when it is able to deliver maximum value.

The Key Performance Indicators of the business should be aligned with the business objectives. There should be a link or relationship between the key performance indicators and the business objectives.

There should be a clear understanding of where the Key Performance Indicators are used and how it should be used.

There should be a clear understanding of the metrics that are used in the Key Performance Indicator framework. For example, if the Key Performance Indicators concern customer service, and sales is a key performance indicator, then there should be metrics to illustrate the customer service.

Businesses should be careful when using Key Performance Indicators. Where there are KPIs that concern a group of people, then there should be clear referencing of the objectives that each of the KPIs are supposed to achieve.

Analysing the Key Performance Indicators

Key Performance Indicators are indicators of the success of the business. The KPIs are the factors that measure the success of the business. Hence, it is important that the KPIs are analysed.

The KPIs should include both financial and non-financial factors. This is so that the business is able to analyse the financial aspect as well as the non-financial aspect.

A business should use the KPIs to achieve its objectives. For a business to use the KPIs, the objectives and the functions are aligned. This is so that the KPIs are able to deliver their purpose.

The business should be able to use the KPIs in its operations. This is so that the KPI is able to deliver its purpose.

The KPIs should be able to drive the business strategy. This is so that the KPIs are able to affect the operations of the business.

Transitional analysis

A key performance indicator should be able to be analysed for signs of failure. For example, if the KPI is customer churn, this indicates clearly that there are customers that are leaving the business. When customers leave the business, this will cause the revenue to decrease. Thus, there should be a correlation between the KPI and the results of the business.

A business needs to analyse the cause of a KPI. In this case, if customers are leaving the business, the business should be able to analyse the cause, so as to reduce the churn. Possible reasons why customers may leave the business include service failure, operational failure, pricing, and lack of competence.

A KPI should be able to contribute to the improvement of the business. Businesses have to ensure that its KPIs are able to contribute to the improvement of the business. This way, the business will be able to achieve its goals and objectives.

The KPIs need to be able to provide information. This is important because the business will be able to use this information in order to achieve the business objectives. For example, if the KPI is to reduce the customer churn, the business will be able to use the information to reduce the churn.

If analysing the KPIs is too difficult, then the business should be able to simplify the analysis. Businesses should be careful to simplify the KPIs in order to make it easier to analyse the data.

A business can either analyse the KPIs itself or outsource the analysis of the KPIs. This makes it easy for the business to focus on its core business.

Creating Key Performance Indicators

Key Performance Indicators are indicators that are used to determine how well the business is running and if it is able to achieve its objectives. It is important that the Key Performance Indicator is able to provide information that can be used to improve the business.

The Key Performance Indicator framework should be able to provide reliable and consistent information. This is important because a business will be able to understand the information and use it to improve the business.

The business needs to be able to show the KPIs to the management. It is crucial for the management to see the KPIs in order to be able to take effective business decisions.

Key Performance Indicators should be reinforced annually. This will help the business analyse the KPI and decide if there is a need to change the KPI. It will also help the business to formulate the different business strategies depending on the results of the business.

The Key Performance Indicators should be able to be compared to the industry standards. If the KPI is less than that of the industry standards, then the business will be able to improve through the comparison.

The financial processes

The financial processes are processes that have to do with how the internal finances of a business are operated. For example, how the cash flow of a business is handled; how the finances of the business are managed; how the inventories of a business are managed; how the projects of a business are funded; etc.

Capital Budgeting

Capital Budgeting is based on the need to invest money in the business. There are two types of capital budgeting strategies. They are the payback period approach and the discounted payback period approach. Both take into account the costs and the benefits of the investment in the business. They both are based on the actual cost of the investment and not on the perceived value.

The payback period approach is the time period that it will take for the business to recover the cost of investment. This is useful when the business is unable to predict a credible cash flow. The cost of investment is calculated by multiplying the net present value of the investment by the discount rate for the cash. The net present value of the investment is the present value of the cash flows of the investment. The present value of a present sum of money is calculated by the following formula.

Present Value (PV)- Cost of investment= Gain

PV- Initial outlay (I) = Interest

The discounted payback period approach is the time period that it will take for the business to recover the cost of investment. The cost of investment is calculated by multiplying the net present value of the investment by the discount rate of the cash flow. The net present value of the investment is the present value of the cash flows of the investment. The present value of a present sum of money is calculated by the following formula.

Present Value (PV)- Cost of investment = Gain

PV- Initial outlay (I) = Interest

The time period of payback should be consistent with other similar capital expense. The payback period should not be too short, otherwise the business will be unable to recover the cost of investment. The payback period should also not be too long, otherwise the business will not recover the cost of investment or will require additional financing. Neither the discounted payback period should be too short, otherwise the business will not benefit from the investment.

Rehabilitation

Rehabilitation is done in order to improve the conditions of an employee who has experienced a work-related injury. The employee is entitled to rehabilitation depending on the degree or extent of the injury. The extent of the injury depends on various factors, including the duration of the disability, the disability due to the injury, the physical or emotional impairment, and the medical evidence. If the rehabilitation can allow the injured employee to return to work, then the employee is entitled to rehabilitation even if the impairment resulted from self-inflicted injury. The employee is not entitled to rehabilitation if the injury resulted from the intentional conduct of the employee. The employer may require the employee to involve the insurer in the rehabilitation process.

Compensation

Compensation is the right of an employee to sustain loss when he or she has experienced a work-related injury. The employee is entitled to compensation regardless of whether the employer takes the responsibility. The exception is if the injury resulted from the intentional conduct of the employee.

The compensation is calculated based on the time that the employee was unable to work during the period the employee was injured. The compensation is calculated by the following formula.

Compensation (C) = Duration of disability (D) x Average weekly earnings (AWE)

The compensation should be calculated by an accountant. The compensation depends on the wage rate. The compensation may be reduced if the employee can work in a suitable alternative employment. The compensation should be reduced if the employee is able to work in a suitable alternative employment or if the employee has a workplace injury for which the employee is entitled to compensation. The compensation should also be reduced if the employee is not sincerely trying to get back to work. The person administering the compensation should make all reasonable efforts to secure a statement from the employee in relation to their injury. The compensation is paid to the injured person. It is not pay to the treating doctor or any other medical professional.

The employer may make a compensation claim against the insurer to recover the compensation that the employer is obliged to pay. The compensation is paid by the insurer of the employer. The insurer will have to prove that the employee did not experience the work-related injury. The insurer may have to bear the costs of the compensation if the employee was injured at the workplace. The insurer may also have to bear the costs for the compensation if the employee was injured while the employee was commuting to and from the workplace. The injured employee needs to give reasonable notice to the employer and the insurer before submitting a claim. The injured employee needs to provide to the employer and the insurer all the details and evidence that they need to make a claim for compensation. The liability to pay for the compensation is discharged by the insurer when the insurer pays for the compensation. The payment by the insurer discharges the liability of the employer in relation to the compensation.

The Importance of Strategic Management

Why is Strategic Management important?