Strategic Management

Strategic management is the process of developing and executing a series of competitive

moves to enhance the success of the organization both in the present and in the future.
These competitive moves are derived from the demands of the external environment in
which the firm operates as well as the internal capabilities which it has developed or can
reasonably hope to build or acquire. While managers may follow somewhat different
strategic management routines, a sound process should include an analysis of the current
business situation, the formulation of objectives and strategies based on that analysis, and
an implementation and evaluation procedure that ensures progress toward each strategy
and objective. This article focuses on the formulation of appropriate strategic objectives
based on a sound understanding of the internal and external environments faced by the
firm. A brief discussion of implementation is included though this topic is covered in
greater detail in other entries.

Situational Analysis

In order to create appropriate strategic objectives, organizations work to understand their

internal capabilities as well as the environment in which they operate. Further, they also
seek to clarify their purpose or mission. The situation analysis firmly focuses
management's attention on these issues, allowing it to create a fit between its resources
and the demands of the competitive situation.

The steps to be taken in a situational analysis are largely agreed upon, though there does
exist some debate as to whether one starts with a mission statement or with an analysis of
the state of the organization. Those who believe that a mission statement is the logical
starting point argue that management must first think carefully and creatively about the
future direction of the company if they are to create and implement effective objectives
(Thompson and Strickland, 1998). In this way, managers can choose their own vision of
what the company ought to be rather than be unduly affected by company history or
industry exigencies. On the other hand, managers may want to have a keen understanding
of the history and current performance of a company as well as important industry factors
so as to craft a strategic vision that is attainable in terms of organizational competencies
and industry dynamics. While both sides have merit, this article discusses the state of the
organization first.

State of the Organization

In analyzing the state of the organization, managers take a candid measure of its recent
performance. Typically, they consider such issues as profitability, stock price
performance, market share, revenue growth, customer satisfaction, product innovation,
and so forth. These measures can vary from industry to industry. Product innovation, for
example, is important to the pharmaceutical industry, while the number of new
distributors signed may be a more important measure in the multilevel marketing
industry.
In addition to this performance review, managers typically examine a company's
(s)trengths, (w)eaknesses, (o)pportunities, and (t)hreats by conducting a (SWOT)
analysis. Strengths consist of those things that a company does particularly well relative
to its competition and that provide it with some competitive advantage. Strengths can be
found in many different areas, including people, such as a particularly competent sales
force; systems, such as Federal Express's information systems; locations, like that
occupied by a restaurant with sweeping ocean views; and intangible assets, such as a
strong brand name. These strengths provide the competitive advantage needed to succeed
in the marketplace.

Weaknesses, on the other hand, diminish the competitiveness of a company. They, too,
can be found in many different areas, including outdated equipment, a poor
understanding of customers, or a high cost structure.

Strengths and weaknesses are typically internal to a company and, therefore, largely
under a company's control. Opportunities and threats, on the other hand, are usually
derived from the external market situation and require some response from a company if
it is to perform well. Opportunities can arise in many areas, including geographical
expansion, new technologies, and changing customer preferences and tastes. Only when a
firm has (or can hope to acquire) the specific skills needed to seize upon some option
does it become an opportunity for the company.

While opportunities are chances to be seized, threats can be thought of as concerns that
are largely outside of the organization's control but have the potential to disrupt its
operations. Probably the biggest threat to many companies is their competition. Other
sources of threats include foreign economic crises such as the "Asian flu" that began in
the latter part of the 1990s, government regulations, natural disasters, and so forth. In
creating strategic objectives, management prepares contingency plans to minimize the
impact of its most serious threats.

In addition to conducting a SWOT analysis and candid performance review, the

executive team may use several other tools to acquire a better understanding of its current
situation. They may, for example, identify those forces in the industry that are causing the
nature of competition to change for all competitors. One example would be the
publicizing of the link between cholesterol and heart disease that made many consumers
more aware of the amount of fat in foods. This change made it important for many food
manufacturers to either lower the amount of fat in their products or to introduce fat-free
or low-fat versions of those products. These forces that change the nature the way
companies compete in an industry are known as driving forces.

Another tool used by managers in conducting a state-of-the-organization review is an

analysis of key success factors. In this analysis managers examine those things that all
companies within a given industry must do well if they are to survive. These might
include rapid service for the fast-food industry, producing large numbers of vehicles so as
to offset the high cost of specialized equipment in the automotive industry, or having
skilled designers in the fashion industry. By understanding such factors, managers are in
a position to better allocate resources so as to perform well in the future.

In addition to these tools, managers may also conduct other types of analyses, including
ones focused on customers, economic characteristics of the industry, supplier
relationships, and so forth. These analyses constitute a first step in the strategic
management process as organizational leaders attempt to understand the organization's
current situation so as to later be able to identify those strategic objectives most likely to
improve performance.

Mission Statements

Having thoroughly understood an organization's internal and external environment,

managers establish a mission statement to create a five-to ten-year vision of the company.
A mission statement documents the service or product the company provides to the
marketplace and the unique way in which it distinguishes itself from other companies. It
also indicates the target group of customers that the company serves.

An example of this type of mission statement is provided by Courtyard by Marriott. It

indicates that Courtyard by Marriott is serving economy-and quality-minded frequent
business travelers with a premier, moderate-priced lodging facility that is consistently
perceived as clean, comfortable, well maintained, attractive, and staffed by friendly,
attentive, and efficient people. This mission statement indicates the product and service
provided to the target customers and the way in which it will be done.

Mission statements serve several purposes in strategic management. First, they provide
direction for the organization. As a firm engages in its strategic planning process it
compares its objectives with the path it has set for itself. If any of the goals suggest a
deviation from the purpose of the organization, managers must decide if the goal is
sufficiently important to warrant a change in the mission statement. Otherwise, the
objective might be dropped. With this in mind managers are typically careful to write
mission statements that are broad enough to encourage growth but specific enough to
give direction.

A second purpose of mission statements is to create a shared sense of purpose and

inspiration among employees. In some organizations, employees are required to
memorize the mission statement so that they will understand what is appropriate behavior
and what is not. For this reason, most mission statements are relatively short so that the
purpose of the company remains clearly in the minds of its employees. Further, many
companies seek the input of their employees in creating a mission statement so as to
create a document that is owned by all.

Finally, mission statements are also external documents. They communicate to the
outside world the values and goals of the organization. Unfortunately, some companies
create mission statements as a marketing document and then fail to live up to that vision
of themselves. For a mission statement to be effective, it must be a living document that
motivates behavior.

External Environment Review

Once a company has carefully and frankly understood its situation and has spent time
considering the appropriateness of its mission statement, it may choose to do a more
thorough review of the external environment. This environment consists of industry,
government, competitive, economic, political, and other factors that the organization
cannot control but which may have an important impact on the company.

Much of this analysis may be done within the State of the Organization report, but some
companies choose to address it as a third step in the strategic planning process so as to
assure that they are not caught off guard by these important factors. While the
organization cannot control these forces, it can formulate responses that will minimize
the potential damage or even put the firm in a better competitive position should the
eventuality actually occur.

Key Objectives and Strategies

Having conducted the previous three steps, managers have sufficient information to
choose objectives that are most likely to match the internal capabilities of the firm with
the exigencies of the external environment. Thompson and Strickland (1998) state that
"objectives represent a managerial commitment to achieving specific performance targets
within a specific time frame" . While drawing heavily on the previous three steps in the
process, objectives rely even more particularly on the SWOT analysis in enhancing
certain strengths, overcoming specific weak nesses, capitalizing on opportunities, and ad
dressing the threats. By creating such a fit between the demands of the industry and the
skills and competencies of the organization, a firm in creases its ability to compete
successfully in the marketplace.

Firms may set specific objectives including such things as increasing market share,
decreasing customer complaints, cutting costs by 10 per cent, or creating a more effective
food preparation facility. These broad objectives are then broken down into specific
strategies that may, in turn, be broken down into even more specific action steps. It is
important that objectives be written in a way that clearly indicates the nature of what is to
be achieved, the single individual responsible for the objective, a committee to work on
the project, funding assigned, and date to be completed. Based on these requirements, an
objective for a rural hospital might take the following form:

Implementation

Having created detailed objectives and strategies, an organization may find that some
internal adjustments in the way a firm is organized or in the competencies of its workers
are required to achieve those objectives. These adjustments may be as simple as sending
an employee to a seminar to better understand a new information process software or as
complex as creating a new international division to take advantage of overseas
opportunities. This process requires the identification of those individual and
organization competencies needed to facilitate the accomplishment of the stated
objectives.

In addition to serving as a guide to the form of the organization, the objectives also serve
as the basis of the year's budgets and performance standards. Having set the funding
requirements for each objective, these monies are added to the normal operating budget
for each division so that they can fulfill these goals. Further, these objectives and
strategies are added to the existing performance standards for each division or department
and become an integral part of the performance evaluation of the individuals assigned to
each task. In this way the progress of each objective is tracked throughout the year and a
specific and agreed-upon measuring stick exists for each employee's performance.

Finally, it should be mentioned that in any strategic management process, but particularly
in those taking place in dynamic environments, situations change and strategic plans
require modification. While five-year plans may remain relatively unchanged in some
industries, other industries may make major modifications monthly. For this reason, most
firms consider strategic management to be an ongoing process characterized by periodic
progress evaluations and major plan analysis on a yearly basis. Such updates allow a firm
to continually reconfigure its internal process and capabilities to create a better fit with
the demands of the competitive situation.

SWOT Analysis
A tool that identifies the trengths, eaknesses, pportunities andhreats of an organization.
Specifically, SWOT is a basic, straightforward model that assesses what an organization
can and cannot do as well as its potential opportunities and threats. The method of SWOT
analysis is to take the information from an environmental analysis and separate it into
internal (strengths and weaknesses) and external issues (opportunities and threats). Once
this is completed, SWOT analysis determines what may assist the firm in accomplishing
objectives, and what obstacles must be overcome or minimized to achieve desired results.
When using SWOT analysis, be realistic about the strengths and weaknesses of your
organization. Distinguish between where your organization is today, and where it could
be in the future. Also remember to be specific by avoiding gray areas and always analyze
in relation to the competition (i.e. are you better or worse than competition?). Finally,
keep your SWOT analysis short and simple, and avoid complexity and over-analysis
since much of the information is subjective. Thus, use it as a guide and not a prescription.

Situational Analysis

Examination of the internal strengths (S), weaknesses (W), external opportunities (O),
and threats (T) affecting an organization. Also called SWOT Analysis, a situational
analysis is a basic element of the marketing plan and is used to make projections for the
proposed marketing activities. Typically the analysis seeks to answer two general
questions: Where is the organization now? and, In what direction is the organization
headed? Factors studied in order to answer these questions are the social and political
developments impacting on marketing strategy, competitors, technological advances, and
other industry developments that may affect the marketing plan.

SWOT analysis

SWOT Analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture. It involves
specifying the objective of the business venture or project and identifying the internal and
external factors that are favorable and unfavorable to achieving that objective. The
technique is credited to Albert Humphrey, who led a research project at Stanford
University in the 1960s and 1970s using data from Fortune 500 companies.
Strategic and Creative Use of S.W.O.T Analysis
Strategic Use: Orienting SWOTs to An Objective

Illustrative diagram of SWOT analysis

If SWOT analysis does not start with defining a desired end state or objective, it runs the
risk of being useless. A SWOT analysis may be incorporated into the strategic planning
model. An example of a strategic planning technique that incorporates an objective-
driven SWOT analysis is SCAN analysis. Strategic Planning, including SWOT and
SCAN analysis, has been the subject of much research.

If a clear objective has been identified, SWOT analysis can be used to help in the pursuit
of that objective. In this case, SWOTs are:

• Strengths: attributes of the organization that are helpful to

achieving the objective.
• Weaknesses: attributes of the organization that are harmful to
achieving the objective.
• Opportunities: external conditions that are helpful to achieving the
objective.
• Threats: external conditions that are harmful to achieving the
objective.

Identification of SWOTs is essential because subsequent steps in the process of planning

for achievement of the selected objective are to be derived from the SWOTs.

First, the decision makers have to determine whether the objective is attainable, given the
SWOTs. If the objective is NOT attainable a different objective must be selected and the
process repeated.
Creative Use of SWOTs: Generating Strategies

If, on the other hand, the objective seems attainable, the SWOTs are used as inputs to the
creative generation of possible strategies, by asking and answering each of the following
four questions, many times:

1. How can we Use each Strength?

2. How can we Stop each Weakness?
3. How can we Exploit each Opportunity?
4. How can we Defend against each Threat?

Ideally a cross-functional team or a task force that represents a broad range of

perspectives should carry out the SWOT analysis. For example, a SWOT team may
include an accountant, a salesperson, an executive manager, an engineer, and an
ombudsman.

Evidence on the Use of SWOT

SWOT analysis may limit the strategies considered in the evaluation. "In addition, people
who use SWOT might conclude that they have done an adequate job of planning and
ignore such sensible things as defining the firm's objectives or calculating ROI for
alternate strategies." [1] Findings from Menon et al. (1999) [2] and Hill and Westbrook
(1997) [3] have shown that SWOT may harm performance. As an alternative to SWOT, J.
Scott Armstrong describes a 5-step approach alternative that leads to better corporate
performance.[4]

These criticisms are addressed to an old version of SWOT analysis that precedes the
SWOT analysis described above under the heading "Strategic and Creative Use of
S.W.O.T. Analysis." This old version did not require that SWOTs be derived from an
agreed upon objective. Examples of SWOT analyses that do not state an objective are
provided below under "Human Resources" and "Marketing."

Internal and external factors

The aim of any SWOT analysis is to identify the key internal and external factors that are
important to achieving the objective. SWOT analysis groups key pieces of information
into two main categories:

• Internal factors – The strengths and weaknesses internal to the

organization.
• External factors – The opportunities and threats presented by the
external environment.

The internal factors may be viewed as strengths or weaknesses depending upon their
impact on the organization's objectives. What may represent strengths with respect to one
objective may be weaknesses for another objective. The factors may include all of the
4P's; as well as personnel, finance, manufacturing capabilities, and so on. The external
factors may include macroeconomic matters, technological change, legislation, and socio-
cultural changes, as well as changes in the marketplace or competitive position. The
results are often presented in the form of a matrix.

SWOT analysis is just one method of categorization and has its own weaknesses. For
example, it may tend to persuade companies to compile lists rather than think about what
is actually important in achieving objectives. It also presents the resulting lists
uncritically and without clear prioritization so that, for example, weak opportunities may
appear to balance strong threats.

It is prudent not to eliminate too quickly any candidate SWOT entry. The importance of
individual SWOTs will be revealed by the value of the strategies it generates. A SWOT
item that produces valuable strategies is important. A SWOT item that generates no
strategies is not important.

Avoiding Errors
1. Conducting a SWOT analysis before defining and agreeing upon an objective (a
desired end state). SWOTs should not exist in the abstract. They can exist only
with reference to an objective. If the desired end state is not openly defined and
agreed upon, the participants may have different end states in mind and the results
will be ineffective.
2. Opportunities external to the company are often confused with strengths internal
to the company. They should be kept separate.
3. SWOTs are sometimes confused with possible strategies. SWOTs are descriptions
of conditions, while possible strategies define actions. This error is made
especially with reference to opportunity analysis. To avoid this error, it may be
useful to think of opportunities as "auspicious conditions".

Examples of SWOTs
Strengths and weaknesses

• Resources: financial, intellectual, location

• Cost advantages from proprietary know-how and/or location
• Creativity (ability to develop new products)
• Valuable intangible assets: intellectual capital
• Competitive capabilities
• Effective recruitment of talented individuals

Opportunities and threats

• Expansion or down-sizing of competitors

• Market trends
• Economic conditions
• Expectations of stakeholders
• Technology
• Public expectations
• All other activities or inactivities by competitors
• Criticisms by outsiders
• Changes in markets

• All other environmental conditions

Use of SWOT Analysis

The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT
analysis may be used in any decision-making situation when a desired end-state
(objective) has been defined. Examples include: non-profit organizations, governmental
units, and individuals. SWOT analysis may also be used in pre-crisis planning and
preventive crisis management.

Corporate planning

As part of the development of strategies and plans to enable the organization to achieve
its objectives, then that organization will use a systematic/rigorous process known as
corporate planning. SWOT alongside PEST/PESTLE can be used as a basis for the
analysis of business and environmental factors.[5]

• Set objectives – defining what the organisation is intending to do

• Environmental scanning
o Internal appraisals of the organisations SWOT, this needs
to include an assessment of the present situation as well as a
portfolio of products/services and an analysis of the
product/service life cycle
 • Analysis of existing strategies, this should determine relevance
from the results of an internal/external appraisal. This may include gap
analysis which will look at environmental factors
• Strategic Issues defined – key factors in the development of a
corporate plan which needs to be addressed by the organization
• Develop new/revised strategies – revised analysis of strategic
issues may mean the objectives need to change
• Establish critical success factors – the achievement of objectives
and strategy implementation
• Preparation of operational, resource, projects plans for strategy
implementation
• Monitoring results – mapping against plans, taking corrective
action which may mean amending objectives/strategies.[6]

Human resources

A SWOT carried out on a Human Resource Department may look like this:

Strengths Weaknesses Opportunities Threats

Developed techniques Reactive rather than New management HR contribution not
for dealing with major pro-active; needs to team, wanting to recognised by top
areas of HR, job be asked rather than improve overall management who by-
evaluation, developing organizational pass it by employing
psychometric testing unsolicited ideas effectiveness through external consultants
and basic training organizational
development and
cultural management
programmes

A SWOT carried by an individual manager could look like this:

Strengths Weaknesses Opportunities Threats

Enthusiasm, energy, Not good at achieving More general De-centralisation
imagination, expertise results through management having the effect of
in subject area, undirected use of opportunities removing departments
excellent track record personal energies, requiring where the individual
in specialized area trouble at expressing development of new is employed and
themselves orally and managers eliminating middle
on paper – may have management layers to
ideas but these come form flatter structure
over as incoherent, of organization
management
experience and
expertise limited
Marketing management
In competitor analysis, marketers build detailed profiles of each competitor in the market,
focusing especially on their relative competitive strengths and weaknesses using SWOT
analysis. Marketing managers will examine each competitor's cost structure, sources of
profits, resources and competencies, competitive positioning and product differentiation,
degree of vertical integration, historical responses to industry developments, and other
factors.

Marketing management often finds it necessary to invest in research to collect the data
required to perform accurate marketing analysis. As such, they often conduct market
research (alternately marketing research) to obtain this information. Marketers employ a
variety of techniques to conduct market research, but some of the more common include:

• Qualitative marketing research, such as focus groups

• Quantitative marketing research, such as statistical surveys
• Experimental techniques such as test markets
• Observational techniques such as ethnographic (on-site)
observation
• Marketing managers may also design and oversee various
environmental scanning and competitive intelligence processes to help
identify trends and inform the company's marketing analysis.

Using SWOT to analyse the market position of a small management consultancy with
specialism in HRM.[7]

Strengths Weaknesses Opportunities Threats

Reputation in Shortage of Well established Large consultancies
marketplace consultants at position with a well operating at a minor
operating level rather defined market niche. level
than partner level
Expertise at partner Unable to deal with Identified market for Other small
level in HRM multi-disciplinary consultancy in areas consultancies looking
consultancy assignments because other than HRM to invade the
of size or lack of marketplace
ability
Track record –
successful
assignments

strength- market related , finance related , operational related , research and development
related, hr related

market related- product quality, packaging , advertisement, service, distribution channel

finance related- optimum debt/equity ratio, number of share holders, inventory size ,
optimum use of the financial resources, low cost of borrowings proper investment of the
financial products
operational related- low cost , higher productivity , excellent quality , modernized
technology,

Strategic Management
Strategic management is the art and science of formulating, implementing and
evaluating cross-functional decisions that will enable an organization to achieve its
objectives[1]. It is the process of specifying the organization's objectives, developing
policies and plans to achieve these objectives, and allocating resources to implement the
policies and plans to achieve the organization's objectives. Strategic management,
therefore, combines the activities of the various functional areas of a business to achieve
organizational objectives. It is the highest level of managerial activity, usually formulated
by the Board of directors and performed by the organization's Chief Executive Officer
(CEO) and executive team. Strategic management provides overall direction` to the
enterprise and is closely related to the field of Organization Studies.

“Strategic management is an ongoing process that assesses 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.” (Lamb, 1984:ix)[2]

Processes
Strategic management is a combination of three main processes which are as following:

Strategy formulation

• Performing a situation analysis, self-evaluation and competitor analysis: both

internal and external; both micro-environmental and macro-environmental.
• Concurrent with this assessment, objectives are set. This involves crafting vision
statements (long term view of a possible future), mission statements (the role that
the organization gives itself in society), overall corporate objectives (both
financial and strategic), strategic business unit objectives (both financial and
strategic), and tactical objectives.
• These objectives should, in the light of the situation analysis, suggest a strategic
plan. The plan provides the details of how to achieve these objectives.

This three-step strategy formulation process is sometimes referred to as determining

where you are now, determining where you want to go, and then determining how to get
there. These three questions are the essence of strategic planning. SWOT Analysis: I/O
Economics for the external factors and RBV for the internal factors.
Strategy implementation

• Allocation of sufficient resources (financial, personnel, time, technology support)

• Establishing a chain of command or some alternative structure (such as cross
functional teams)
• Assigning responsibility of specific tasks or processes to specific individuals or
groups
• It also involves managing the process. This includes monitoring results,
comparing to benchmarks and best practices, evaluating the efficacy and
efficiency of the process, controlling for variances, and making adjustments to the
process as necessary.
• When implementing specific programs, this involves acquiring the requisite
resources, developing the process, training, process testing, documentation, and
integration with (and/or conversion from) legacy processes.

Strategy evaluation

• Measuring the effectiveness of the organizational strategy.

General approaches
In general terms, there are two main approaches, which are opposite but complement
each other in some ways, to strategic management:

• The Industrial Organization Approach

o based on economic theory — deals with issues like competitive rivalry,
resource allocation, economies of scale
o assumptions — rationality, self discipline behaviour, profit maximization
• The Sociological Approach
o deals primarily with human interactions
o assumptions — bounded rationality, satisfying behaviour, profit sub-
optimality.
o Strategic management techniques can be viewed as bottom-up, top-down,
or collaborative processes. In the bottom-up approach, employees submit
proposals to their managers who, in turn, funnel the best ideas further up
the organization. This is often accomplished by a capital budgeting
process. Proposals are assessed using financial criteria such as return on
investment or cost-benefit analysis. The proposals that are approved form
the substance of a new strategy, all of which is done without a grand
strategic design or a strategic architect. The top-down approach is the most
common by far. In it, the CEO (such as Don Sheelen, Jeff Bezos and
Samuel J. Palmisano) possibly with the assistance of a strategic planning
team, decides on the overall direction the company should take. Some
organizations are starting to experiment with collaborative strategic
planning techniques that recognize the emergent nature of strategic
decisions.
The strategy hierarchy
In most (large) corporations there are several levels of strategy. Strategic management is
the highest in the sense that it is the broadest, applying to all parts of the firm. It gives
direction to corporate values, corporate culture, corporate goals, and corporate missions.
Under this broad corporate strategy there are often functional or business unit strategies.

Functional strategies include marketing strategies, new product development strategies,

human resource strategies, financial strategies, legal strategies, and information
technology management strategies. The emphasis is on short and medium term plans and
is limited to the domain of each department’s functional responsibility. Each functional
department attempts to do its part in meeting overall corporate objectives, and hence to
some extent their strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to
organize activities so they have reengineered according to processes or strategic business
units (called SBUs). A strategic business unit is a semi-autonomous unit within an
organization. It is usually responsible for its own budgeting, new product decisions,
hiring decisions, and price setting. An SBU is treated as an internal profit centre by
corporate headquarters. Each SBU is responsible for developing its business strategies,
strategies that must be in tune with broader corporate strategies.

The “lowest” level of strategy is operational strategy. It is very narrow in focus and
deals with day-to-day operational activities such as scheduling criteria. It must operate
within a budget but is not at liberty to adjust or create that budget. Operational level
strategy was encouraged by Peter Drucker in his theory of management by objectives
(MBO). Operational level strategies are informed by business level strategies which, in
turn, are informed by corporate level strategies. Business strategy, which refers to the
aggregated operational strategies of single business firm or that of an SBU in a
diversified corporation refers to the way in which a firm competes in its chosen arenas.

Corporate strategy, then, refers to the overarching strategy of the diversified firm. Such
corporate strategy answers the questions of "in which businesses should we compete?"
and "how does being in one business add to the competitive advantage of another
portfolio firm, as well as the competitive advantage of the corporation as a whole?"

Since the turn of the millennium, there has been a tendency in some firms to revert to a
simpler strategic structure. This is being driven by information technology. It is felt that
knowledge management systems should be used to share information and create common
goals. Strategic divisions are thought to hamper this process. Most recently, this notion of
strategy has been captured under the rubric of dynamic strategy, popularized by the
strategic management textbook authored by Carpenter and Sanders [1]. This work builds
on that of Brown and Eisenhart as well as Christensen and portrays firm strategy, both
business and corporate, as necessarily embracing ongoing strategic change, and the
seamless integration of strategy formulation and implementation. Such change and
implementation are usually built into the strategy through the staging and pacing facets.
Historical development of strategic management
Birth of strategic management

Strategic management as a discipline originated in the 1950s and 60s. Although there
were numerous early contributors to the literature, the most influential pioneers were
Alfred D. Chandler, Jr., Philip Selznick, Igor Ansoff, and Peter Drucker.

Alfred Chandler recognized the importance of coordinating the various aspects of

management under one all-encompassing strategy. Prior to this time the various functions
of management were separate with little overall coordination or strategy. Interactions
between functions or between departments were typically handled by a boundary
position, that is, there were one or two managers that relayed information back and forth
between two departments. Chandler also stressed the importance of taking a long term
perspective when looking to the future. In his 1962 groundbreaking work Strategy and
Structure, Chandler showed that a long-term coordinated strategy was necessary to give a
company structure, direction, and focus. He says it concisely, “structure follows
strategy.”[3]

In 1957, Philip Selznick introduced the idea of matching the organization's internal
factors with external environmental circumstances.[4] This core idea was developed into
what we now call SWOT analysis by Learned, Andrews, and others at the Harvard
Business School General Management Group. Strengths and weaknesses of the firm are
assessed in light of the opportunities and threats from the business environment.

Igor Ansoff built on Chandler's work by adding a range of strategic concepts and
inventing a whole new vocabulary. He developed a strategy grid that compared market
penetration strategies, product development strategies, market development strategies and
horizontal and vertical integration and diversification strategies. He felt that management
could use these strategies to systematically prepare for future opportunities and
challenges. In his 1965 classic Corporate Strategy, he developed the Gap analysis still
used today in which we must understand the gap between where we are currently and
where we would like to be, then develop what he called “gap reducing actions”.[5]

Peter Drucker was a prolific strategy theorist, author of dozens of management books,
with a career spanning five decades. His contributions to strategic management were
many but two are most important. Firstly, he stressed the importance of objectives. An
organization without clear objectives is like a ship without a rudder. As early as 1954 he
was developing a theory of management based on objectives.[6] This evolved into his
theory of management by objectives (MBO). According to Drucker, the procedure of
setting objectives and monitoring your progress towards them should permeate the entire
organization, top to bottom. His other seminal contribution was in predicting the
importance of what today we would call intellectual capital. He predicted the rise of what
he called the “knowledge worker” and explained the consequences of this for
management. He said that knowledge work is non-hierarchical. Work would be carried
out in teams with the person most knowledgeable in the task at hand being the temporary
leader.

In 1985, Ellen-Earle Chaffee summarized what she thought were the main elements of
strategic management theory by the 1970s:[7]

• Strategic management involves adapting the organization to its business

environment.
• Strategic management is fluid and complex. Change creates novel combinations
of circumstances requiring unstructured non-repetitive responses.
• Strategic management affects the entire organization by providing direction.
• Strategic management involves both strategy formation (she called it content) and
also strategy implementation (she called it process).
• Strategic management is partially planned and partially unplanned.
• Strategic management is done at several levels: overall corporate strategy, and
individual business strategies.
• Strategic management involves both conceptual and analytical thought processes.

Growth and portfolio theory

In the 1970s much of strategic management dealt with size, growth, and portfolio theory.
The PIMS study was a long term study, started in the 1960s and lasted for 19 years, that
attempted to understand the Profit Impact of Marketing Strategies (PIMS), particularly
the effect of market share. Started at General Electric, moved to Harvard in the early
1970s, and then moved to the Strategic Planning Institute in the late 1970s, it now
contains decades of information on the relationship between profitability and strategy.
Their initial conclusion was unambiguous: The greater a company's market share, the
greater will be their rate of profit. The high market share provides volume and economies
of scale. It also provides experience and learning curve advantages. The combined effect
is increased profits.[8] The studies conclusions continue to be drawn on by academics and
companies today: "PIMS provides compelling quantitative evidence as to which business
strategies work and don't work" - Tom Peters.

The benefits of high market share naturally lead to an interest in growth strategies. The
relative advantages of horizontal integration, vertical integration, diversification,
franchises, mergers and acquisitions, joint ventures, and organic growth were discussed.
The most appropriate market dominance strategies were assessed given the competitive
and regulatory environment.

There was also research that indicated that a low market share strategy could also be very
profitable. Schumacher (1973),[9] Woo and Cooper (1982),[10] Levenson (1984),[11] and
later Traverso (2002)[12] showed how smaller niche players obtained very high returns.

By the early 1980s the paradoxical conclusion was that high market share and low market
share companies were often very profitable but most of the companies in between were
not. This was sometimes called the “hole in the middle” problem. This anomaly would be
explained by Michael Porter in the 1980s.

The management of diversified organizations required new techniques and new ways of
thinking. The first CEO to address the problem of a multi-divisional company was Alfred
Sloan at General Motors. GM was decentralized into semi-autonomous “strategic
business units” (SBU's), but with centralized support functions.

One of the most valuable concepts in the strategic management of multi-divisional

companies was portfolio theory. In the previous decade Harry Markowitz and other
financial theorists developed the theory of portfolio analysis. It was concluded that a
broad portfolio of financial assets could reduce specific risk. In the 1970s marketers
extended the theory to product portfolio decisions and managerial strategists extended it
to operating division portfolios. Each of a company’s operating divisions were seen as an
element in the corporate portfolio. Each operating division (also called strategic business
units) was treated as a semi-independent profit center with its own revenues, costs,
objectives, and strategies. Several techniques were developed to analyze the relationships
between elements in a portfolio. B.C.G. Analysis, for example, was developed by the
Boston Consulting Group in the early 1970s. This was the theory that gave us the
wonderful image of a CEO sitting on a stool milking a cash cow. Shortly after that the
G.E. multi factoral model was developed by General Electric. Companies continued to
diversify until the 1980s when it was realized that in many cases a portfolio of operating
divisions was worth more as separate completely independent companies.

The marketing revolution

The 1970s also saw the rise of the marketing oriented firm. From the beginnings of
capitalism it was assumed that the key requirement of business success was a product of
high technical quality. If you produced a product that worked well and was durable, it
was assumed you would have no difficulty selling them at a profit. This was called the
production orientation and it was generally true that good products could be sold without
effort. encapsulated in the saying "Build a better mousetrap and the world will beat a path
to your door." This was largely due to the growing numbers of affluent and middle class
people that capitalism had created. But after the untapped demand caused by the second
world war was saturated in the 1950s it became obvious that products were not selling as
easily as they had been. The answer was to concentrate on selling. The 1950s and 1960s
is known as the sales era and the guiding philosophy of business of the time is today
called the sales orientation. In the early 1970s Theodore Levitt and others at Harvard
argued that the sales orientation had things backward. They claimed that instead of
producing products then trying to sell them to the customer, businesses should start with
the customer, find out what they wanted, and then produce it for them. The customer
became the driving force behind all strategic business decisions. This marketing
orientation, in the decades since its introduction, has been reformulated and repackaged
under numerous names including customer orientation, marketing philosophy, customer
intimacy, customer focus, customer driven, and market focused.
The Japanese challenge

By the late 70s people had started to notice how successful Japanese industry had
become. In industry after industry, including steel, watches, ship building, cameras,
autos, and electronics, the Japanese were surpassing American and European companies.
Westerners wanted to know why. Numerous theories purported to explain the Japanese
success including:

• Higher employee morale, dedication, and loyalty;

• Lower cost structure, including wages;
• Effective government industrial policy;
• Modernization after WWII leading to high capital intensity and productivity;
• Economies of scale associated with increased exporting;
• Relatively low value of the Yen leading to low interest rates and capital costs, low
dividend expectations, and inexpensive exports;
• Superior quality control techniques such as Total Quality Management and other
systems introduced by W. Edwards Deming in the 1950s and 60s.[13]

Although there was some truth to all these potential explanations, there was clearly
something missing. In fact by 1980 the Japanese cost structure was higher than the
American. And post WWII reconstruction was nearly 40 years in the past. The first
management theorist to suggest an explanation was Richard Pascale.

In 1981 Richard Pascale and Anthony Athos in The Art of Japanese Management
claimed that the main reason for Japanese success was their superior management
techniques.[14] They divided management into 7 aspects (which are also known as
McKinsey 7S Framework): Strategy, Structure, Systems, Skills, Staff, Style, and
Subordinate goals (which we would now call shared values). The first three of the 7 S's
were called hard factors and this is where American companies excelled. The remaining
four factors (skills, staff, style, and shared values) were called soft factors and were not
well understood by American businesses of the time (for details on the role of soft and
hard factors see Wickens P.D. 1995.) Americans did not yet place great value on
corporate culture, shared values and beliefs, and social cohesion in the workplace. In
Japan the task of management was seen as managing the whole complex of human needs,
economic, social, psychological, and spiritual. In America work was seen as something
that was separate from the rest of one's life. It was quite common for Americans to
exhibit a very different personality at work compared to the rest of their lives. Pascale
also highlighted the difference between decision making styles; hierarchical in America,
and consensus in Japan. He also claimed that American business lacked long term vision,
preferring instead to apply management fads and theories in a piecemeal fashion.

One year later The Mind of the Strategist was released in America by Kenichi Ohmae, the
head of McKinsey & Co.'s Tokyo office.[15] (It was originally published in Japan in 1975.)
He claimed that strategy in America was too analytical. Strategy should be a creative art:
It is a frame of mind that requires intuition and intellectual flexibility. He claimed that
Americans constrained their strategic options by thinking in terms of analytical
techniques, rote formula, and step-by-step processes. He compared the culture of Japan in
which vagueness, ambiguity, and tentative decisions were acceptable, to American
culture that valued fast decisions.

Also in 1982 Tom Peters and Robert Waterman released a study that would respond to
the Japanese challenge head on.[16] Peters and Waterman, who had several years earlier
collaborated with Pascale and Athos at McKinsey & Co. asked “What makes an excellent
company?”. They looked at 62 companies that they thought were fairly successful. Each
was subject to six performance criteria. To be classified as an excellent company, it had
to be above the 50th percentile in 4 of the 6 performance metrics for 20 consecutive
years. Forty-three companies passed the test. They then studied these successful
companies and interviewed key executives. They concluded in In Search of Excellence
that there were 8 keys to excellence that were shared by all 43 firms. They are:

• A bias for action — Do it. Try it. Don’t waste time studying it with multiple
reports and committees.
• Customer focus — Get close to the customer. Know your customer.
• Entrepreneurship — Even big companies act and think small by giving people the
authority to take initiatives.
• Productivity through people — Treat your people with respect and they will
reward you with productivity.
• Value oriented CEOs — The CEO should actively propagate corporate values
throughout the organization.
• Stick to the knitting — Do what you know well.
• Keep things simple and lean — Complexity encourages waste and confusion.
• Simultaneously centralized and decentralized — Have tight centralized control
while also allowing maximum individual autonomy.

The basic blueprint on how to compete against the Japanese had been drawn. But as J.E.
Rehfeld (1994) explains it is not a straight forward task due to differences in culture.[17] A
certain type of alchemy was required to transform knowledge from various cultures into a
management style that allows a specific company to compete in a globally diverse world.
He says, for example, that Japanese style kaizen (continuous improvement) techniques,
although suitable for people socialized in Japanese culture, have not been successful
when implemented in the U.S. unless they are modified significantly.

Gaining competitive advantage

The Japanese challenge shook the confidence of the western business elite, but detailed
comparisons of the two management styles and examinations of successful businesses
convinced westerners that they could overcome the challenge. The 1980s and early 1990s
saw a plethora of theories explaining exactly how this could be done. They cannot all be
detailed here, but some of the more important strategic advances of the decade are
explained below.
Gary Hamel and C. K. Prahalad declared that strategy needs to be more active and
interactive; less “arm-chair planning” was needed. They introduced terms like strategic
intent and strategic architecture.[18][19] Their most well known advance was the idea of
core competency. They showed how important it was to know the one or two key things
that your company does better than the competition.[20]

Active strategic management required active information gathering and active problem
solving. In the early days of Hewlett-Packard (H-P), Dave Packard and Bill Hewlett
devised an active management style that they called Management By Walking Around
(MBWA). Senior H-P managers were seldom at their desks. They spent most of their
days visiting employees, customers, and suppliers. This direct contact with key people
provided them with a solid grounding from which viable strategies could be crafted. The
MBWA concept was popularized in 1985 by a book by Tom Peters and Nancy Austin.[21]
Japanese managers employ a similar system, which originated at Honda, and is
sometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, which translate into “actual
place”, “actual thing”, and “actual situation”).

Probably the most influential strategist of the decade was Michael Porter. He introduced
many new concepts including; 5 forces analysis, generic strategies, the value chain,
strategic groups, and clusters. In 5 forces analysis he identifies the forces that shape a
firm's strategic environment. It is like a SWOT analysis with structure and purpose. It
shows how a firm can use these forces to obtain a sustainable competitive advantage.
Porter modifies Chandler's dictum about structure following strategy by introducing a
second level of structure: Organizational structure follows strategy, which in turn follows
industry structure. Porter's generic strategies detail the interaction between cost
minimization strategies, product differentiation strategies, and market focus
strategies. Although he did not introduce these terms, he showed the importance of
choosing one of them rather than trying to position your company between them. He also
challenged managers to see their industry in terms of a value chain. A firm will be
successful only to the extent that it contributes to the industry's value chain. This forced
management to look at its operations from the customer's point of view. Every operation
should be examined in terms of what value it adds in the eyes of the final customer.

In 1993, John Kay took the idea of the value chain to a financial level claiming “ Adding
value is the central purpose of business activity”, where adding value is defined as the
difference between the market value of outputs and the cost of inputs including capital,
all divided by the firm's net output. Borrowing from Gary Hamel and Michael Porter,
Kay claims that the role of strategic management is to identify your core competencies,
and then assemble a collection of assets that will increase value added and provide a
competitive advantage. He claims that there are 3 types of capabilities that can do this;
innovation, reputation, and organizational structure.

The 1980s also saw the widespread acceptance of positioning theory. Although the theory
originated with Jack Trout in 1969, it didn’t gain wide acceptance until Al Ries and Jack
Trout wrote their classic book “Positioning: The Battle For Your Mind” (1979). The
basic premise is that a strategy should not be judged by internal company factors but by
the way customers see it relative to the competition. Crafting and implementing a strategy
involves creating a position in the mind of the collective consumer. Several techniques
were applied to positioning theory, some newly invented but most borrowed from other
disciplines. Perceptual mapping for example, creates visual displays of the relationships
between positions. Multidimensional scaling, discriminant analysis, factor analysis, and
conjoint analysis are mathematical techniques used to determine the most relevant
characteristics (called dimensions or factors) upon which positions should be based.
Preference regression can be used to determine vectors of ideal positions and cluster
analysis can identify clusters of positions.

Others felt that internal company resources were the key. In 1992, Jay Barney, for
example, saw strategy as assembling the optimum mix of resources, including human,
technology, and suppliers, and then configure them in unique and sustainable ways.[22]

Michael Hammer and James Champy felt that these resources needed to be restructured.
[23]
This process, that they labeled reengineering, involved organizing a firm's assets
around whole processes rather than tasks. In this way a team of people saw a project
through, from inception to completion. This avoided functional silos where isolated
departments seldom talked to each other. It also eliminated waste due to functional
overlap and interdepartmental communications.

In 1989 Richard Lester and the researchers at the MIT Industrial Performance Center
identified seven best practices and concluded that firms must accelerate the shift away
from the mass production of low cost standardized products. The seven areas of best
practice were:[24]

• Simultaneous continuous improvement in cost, quality, service, and product

innovation
• Breaking down organizational barriers between departments
• Eliminating layers of management creating flatter organizational hierarchies.
• Closer relationships with customers and suppliers
• Intelligent use of new technology
• Global focus
• Improving human resource skills

The search for “best practices” is also called benchmarking.[25] This involves determining
where you need to improve, finding an organization that is exceptional in this area, then
studying the company and applying its best practices in your firm.

A large group of theorists felt the area where western business was most lacking was
product quality. People like W. Edwards Deming,[26] Joseph M. Juran,[27] A. Kearney,[28]
Philip Crosby,[29] and Armand Feignbaum[30] suggested quality improvement techniques
like Total Quality Management (TQM), continuous improvement, lean manufacturing,
Six Sigma, and Return on Quality (ROQ).
An equally large group of theorists felt that poor customer service was the problem.
People like James Heskett (1988),[31] Earl Sasser (1995), William Davidow,[32] Len
Schlesinger,[33] A. Paraurgman (1988), Len Berry,[34] Jane Kingman-Brundage,[35]
Christopher Hart, and Christopher Lovelock (1994), gave us fishbone diagramming,
service charting, Total Customer Service (TCS), the service profit chain, service gaps
analysis, the service encounter, strategic service vision, service mapping, and service
teams. Their underlying assumption was that there is no better source of competitive
advantage than a continuous stream of delighted customers.

Process management uses some of the techniques from product quality management and
some of the techniques from customer service management. It looks at an activity as a
sequential process. The objective is to find inefficiencies and make the process more
effective. Although the procedures have a long history, dating back to Taylorism, the
scope of their applicability has been greatly widened, leaving no aspect of the firm free
from potential process improvements. Because of the broad applicability of process
management techniques, they can be used as a basis for competitive advantage.

Some realized that businesses were spending much more on acquiring new customers
than on retaining current ones. Carl Sewell,[36] Frederick Reicheld,[37] C. Gronroos,[38] and
Earl Sasser[39] showed us how a competitive advantage could be found in ensuring that
customers returned again and again. This has come to be known as the loyalty effect
after Reicheld's book of the same name in which he broadens the concept to include
employee loyalty, supplier loyalty, distributor loyalty, and shareholder loyalty. They also
developed techniques for estimating the lifetime value of a loyal customer, called
customer lifetime value (CLV). A significant movement started that attempted to recast
selling and marketing techniques into a long term endeavor that created a sustained
relationship with customers (called relationship selling, relationship marketing, and
customer relationship management). Customer relationship management (CRM) software
(and its many variants) became an integral tool that sustained this trend.

James Gilmore and Joseph Pine found competitive advantage in mass customization.[40]
Flexible manufacturing techniques allowed businesses to individualize products for each
customer without losing economies of scale. This effectively turned the product into a
service. They also realized that if a service is mass customized by creating a
“performance” for each individual client, that service would be transformed into an
“experience”. Their book, The Experience Economy,[41] along with the work of Bernd
Schmitt convinced many to see service provision as a form of theatre. This school of
thought is sometimes referred to as customer experience management (CEM).

Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent years
conducting empirical research on what makes great companies. Six years of research
uncovered a key underlying principle behind the 19 successful companies that they
studied: They all encourage and preserve a core ideology that nurtures the company.
Even though strategy and tactics change daily, the companies, nevertheless, were able to
maintain a core set of values. These core values encourage employees to build an
organization that lasts. In Built To Last (1994) they claim that short term profit goals, cost
cutting, and restructuring will not stimulate dedicated employees to build a great
company that will endure.[42] In 2000 Collins coined the term “built to flip” to describe
the prevailing business attitudes in Silicon Valley. It describes a business culture where
technological change inhibits a long term focus. He also popularized the concept of the
BHAG (Big Hairy Audacious Goal).

Arie de Geus (1997) undertook a similar study and obtained similar results. He identified
four key traits of companies that had prospered for 50 years or more. They are:

• Sensitivity to the business environment — the ability to learn and adjust

• Cohesion and identity — the ability to build a community with personality,
vision, and purpose
• Tolerance and decentralization — the ability to build relationships
• Conservative financing

A company with these key characteristics he called a living company because it is able
to perpetuate itself. If a company emphasizes knowledge rather than finance, and sees
itself as an ongoing community of human being, it has the potential to become great and
endure for decades. Such an organization is an organic entity capable of learning (he
called it a “learning organization”) and capable of creating its own processes, goals, and
persona.

Jordan Lewis finds competitive advantage in alliance strategies.[43] Rather than seeing
distributors, suppliers, firms in related industries, and even competitors as potential
threats or targets for vertical integration, they should be seen as potential assistants or
partners. He explains how mutual respect and trust is the cornerstone of this approach and
describes how this can be fostered at the interpersonal relationship level.

The military theorists

In the 1980s some business strategists realized that there was a vast knowledge base
stretching back thousands of years that they had barely examined. They turned to military
strategy for guidance. Military strategy books such as The Art of War by Sun Tzu, On
War by von Clausewitz, and The Red Book by Mao Tse Tung became instant business
classics. From Sun Tzu they learned the tactical side of military strategy and specific
tactical prescriptions. From Von Clausewitz they learned the dynamic and unpredictable
nature of military strategy. From Mao Tse Tung they learned the principles of guerrilla
warfare. The main marketing warfare books were:

• Business War Games by Barrie James, 1984

• Marketing Warfare by Al Ries and Jack Trout, 1986
• Leadership Secrets of Attila the Hun by Wess Roberts, 1987

Philip Kotler was a well-known proponent of marketing warfare strategy.

There were generally thought to be four types of business warfare theories. They are:
 • Offensive marketing warfare strategies
• Defensive marketing warfare strategies
• Flanking marketing warfare strategies
• Guerrilla marketing warfare strategies

The marketing warfare literature also examined leadership and motivation, intelligence
gathering, types of marketing weapons, logistics, and communications.

By the turn of the century marketing warfare strategies had gone out of favour. It was felt
that they were limiting. There were many situations in which non-confrontational
approaches were more appropriate. The “Strategy of the Dolphin” was developed in the
mid 1990s to give guidance as to when to use aggressive strategies and when to use
passive strategies. A variety of aggressiveness strategies were developed.

In 1993, J. Moore used a similar metaphor.[44] Instead of using military terms, he created
an ecological theory of predators and prey (see ecological model of competition), a sort
of Darwinian management strategy in which market interactions mimic long term
ecological stability.

Strategic change

In 1970, Alvin Toffler in Future Shockdescribed a trend towards accelerating rates of

change.[45] He illustrated how social and technological norms had shorter lifespans with
each generation, and he questioned society's ability to cope with the resulting turmoil and
anxiety. In past generations periods of change were always punctuated with times of
stability. This allowed society to assimilate the change and deal with it before the next
change arrived. But these periods of stability are getting shorter and by the late 20th
century had all but disappeared. In 1980 in The Third Wave, Toffler characterized this
shift to relentless change as the defining feature of the third phase of civilization (the first
two phases being the agricultural and industrial waves).[46] He claimed that the dawn of
this new phase will cause great anxiety for those that grew up in the previous phases, and
will cause much conflict and opportunity in the business world. Hundreds of authors,
particularly since the early 1990s, have attempted to explain what this means for business
strategy.

In 1997, Watts Waker and Jim Taylor called this upheaval a "500 year delta."[47] They
claimed these major upheavals occur every 5 centuries. They said we are currently
making the transition from the “Age of Reason” to a new chaotic Age of Access. Jeremy
Rifkin (2000) popularized and expanded this term, “age of access” three years later in his
book of the same name.[48]

In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity to describe the
way change forces disruptions into the continuity of our lives.[49] In an age of continuity
attempts to predict the future by extrapolating from the past can be somewhat accurate.
But according to Drucker, we are now in an age of discontinuity and extrapolating from
the past is hopelessly ineffective. We cannot assume that trends that exist today will
continue into the future. He identifies four sources of discontinuity: new technologies,
globalization, cultural pluralism, and knowledge capital.

In 2000, Gary Hamel discussed strategic decay, the notion that the value of all strategies,
no matter how brilliant, decays over time.[50]

In 1978, Dereck Abell (Abell, D. 1978) described strategic windows and stressed the
importance of the timing (both entrance and exit) of any given strategy. This has led
some strategic planners to build planned obsolescence into their strategies.[51]

In 1989, Charles Handy identified two types of change.[52] Strategic drift is a gradual
change that occurs so subtly that it is not noticed until it is too late. By contrast,
transformational change is sudden and radical. It is typically caused by discontinuities
(or exogenous shocks) in the business environment. The point where a new trend is
initiated is called a strategic inflection point by Andy Grove. Inflection points can be
subtle or radical.

In 2000, Malcolm Gladwell discussed the importance of the tipping point, that point
where a trend or fad acquires critical mass and takes off.[53]

In 1983, Noel Tichy recognized that because we are all beings of habit we tend to repeat
what we are comfortable with.[54] He wrote that this is a trap that constrains our creativity,
prevents us from exploring new ideas, and hampers our dealing with the full complexity
of new issues. He developed a systematic method of dealing with change that involved
looking at any new issue from three angles: technical and production, political and
resource allocation, and corporate culture.

In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless change requires that
businesses continuously reinvent themselves.[55] His famous maxim is “Nothing fails like
success” by which he means that what was a strength yesterday becomes the root of
weakness today, We tend to depend on what worked yesterday and refuse to let go of
what worked so well for us in the past. Prevailing strategies become self-confirming. In
order to avoid this trap, businesses must stimulate a spirit of inquiry and healthy debate.
They must encourage a creative process of self renewal based on constructive conflict.

In 1996, Art Kleiner (1996) claimed that to foster a corporate culture that embraces
change, you have to hire the right people; heretics, heroes, outlaws, and visionaries[56].
The conservative bureaucrat that made such a good middle manager in yesterday’s
hierarchical organizations is of little use today. A decade earlier Peters and Austin (1985)
had stressed the importance of nurturing champions and heroes. They said we have a
tendency to dismiss new ideas, so to overcome this, we should support those few people
in the organization that have the courage to put their career and reputation on the line for
an unproven idea.

In 1996, Adrian Slywotsky showed how changes in the business environment are
reflected in value migrations between industries, between companies, and within
companies.[57] He claimed that recognizing the patterns behind these value migrations is
necessary if we wish to understand the world of chaotic change. In “Profit Patterns”
(1999) he described businesses as being in a state of strategic anticipation as they try to
spot emerging patterns. Slywotsky and his team identified 30 patterns that have
transformed industry after industry.[58]

In 1997, Clayton Christensen (1997) took the position that great companies can fail
precisely because they do everything right since the capabilities of the organization also
defines its disabilities.[59] Christensen's thesis is that outstanding companies lose their
market leadership when confronted with disruptive technology. He called the approach
to discovering the emerging markets for disruptive technologies agnostic marketing, i.e.,
marketing under the implicit assumption that no one - not the company, not the customers
- can know how or in what quantities a disruptive product can or will be used before they
have experience using it.

A number of strategists use scenario planning techniques to deal with change. Kees van
der Heijden (1996), for example, says that change and uncertainty make “optimum
strategy” determination impossible. We have neither the time nor the information
required for such a calculation. The best we can hope for is what he calls “the most
skillful process”.[60] The way Peter Schwartz put it in 1991 is that strategic outcomes
cannot be known in advance so the sources of competitive advantage cannot be
predetermined.[61] The fast changing business environment is too uncertain for us to find
sustainable value in formulas of excellence or competitive advantage. Instead, scenario
planning is a technique in which multiple outcomes can be developed, their implications
assessed, and their likeliness of occurrence evaluated. According to Pierre Wack,
scenario planning is about insight, complexity, and subtlety, not about formal analysis
and numbers.[62]

In 1988, Henry Mintzberg looked at the changing world around him and decided it was
time to reexamine how strategic management was done.[63][64] He examined the strategic
process and concluded it was much more fluid and unpredictable than people had
thought. Because of this, he could not point to one process that could be called strategic
planning. Instead he concludes that there are five types of strategies. They are:

• Strategy as plan - a direction, guide, course of action - intention rather than actual
• Strategy as ploy - a maneuver intended to outwit a competitor
• Strategy as pattern - a consistent pattern of past behaviour - realized rather than
intended
• Strategy as position - locating of brands, products, or companies within the
conceptual framework of consumers or other stakeholders - strategy determined
primarily by factors outside the firm
• Strategy as perspective - strategy determined primarily by a master strategist

In 1998, Mintzberg developed these five types of management strategy into 10 “schools
of thought”. These 10 schools are grouped into three categories. The first group is
prescriptive or normative. It consists of the informal design and conception school, the
formal planning school, and the analytical positioning school. The second group,
consisting of six schools, is more concerned with how strategic management is actually
done, rather than prescribing optimal plans or positions. The six schools are the
entrepreneurial, visionary, or great leader school, the cognitive or mental process school,
the learning, adaptive, or emergent process school, the power or negotiation school, the
corporate culture or collective process school, and the business environment or reactive
school. The third and final group consists of one school, the configuration or
transformation school, an hybrid of the other schools organized into stages,
organizational life cycles, or “episodes”.[65]

In 1999, Constantinos Markides also wanted to reexamine the nature of strategic planning
itself.[66] He describes strategy formation and implementation as an on-going, never-
ending, integrated process requiring continuous reassessment and reformation. Strategic
management is planned and emergent, dynamic, and interactive. J. Moncrieff (1999) also
stresses strategy dynamics.[67] He recognized that strategy is partially deliberate and
partially unplanned. The unplanned element comes from two sources: emergent
strategies (result from the emergence of opportunities and threats in the environment)
and Strategies in action (ad hoc actions by many people from all parts of the
organization).

Some business planners are starting to use a complexity theory approach to strategy.
Complexity can be thought of as chaos with a dash of order. Chaos theory deals with
turbulent systems that rapidly become disordered. Complexity is not quite so
unpredictable. It involves multiple agents interacting in such a way that a glimpse of
structure may appear. Axelrod, R.,[68] Holland, J.,[69] and Kelly, S. and Allison, M.A.,[70]
call these systems of multiple actions and reactions complex adaptive systems. Axelrod
asserts that rather than fear complexity, business should harness it. He says this can best
be done when “there are many participants, numerous interactions, much trial and error
learning, and abundant attempts to imitate each others' successes”. In 2000, E. Dudik
wrote that an organization must develop a mechanism for understanding the source and
level of complexity it will face in the future and then transform itself into a complex
adaptive system in order to deal with it.[71]

Information and technology driven strategy

Peter Drucker had theorized the rise of the “knowledge worker” back in the 1950s. He
described how fewer workers would be doing physical labour, and more would be
applying their minds. In 1984, John Nesbitt theorized that the future would be driven
largely by information: companies that managed information well could obtain an
advantage, however the profitability of what he calls the “information float” (information
that the company had and others desired) would all but disappear as inexpensive
computers made information more accessible.

Daniel Bell (1985) examined the sociological consequences of information technology,

while Gloria Schuck and Shoshana Zuboff looked at psychological factors.[72] Zuboff, in
her five year study of eight pioneering corporations made the important distinction
between “automating technologies” and “infomating technologies”. She studied the effect
that both had on individual workers, managers, and organizational structures. She largely
confirmed Peter Drucker's predictions three decades earlier, about the importance of
flexible decentralized structure, work teams, knowledge sharing, and the central role of
the knowledge worker. Zuboff also detected a new basis for managerial authority, based
not on position or hierarchy, but on knowledge (also predicted by Drucker) which she
called “participative management”.[73]

In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, borrowed
de Geus' notion of the learning organization, expanded it, and popularized it. The
underlying theory is that a company's ability to gather, analyze, and use information is a
necessary requirement for business success in the information age. (See organizational
learning.) In order to do this, Senge claimed that an organization would need to be
structured such that:[74]

• People can continuously expand their capacity to learn and be productive,

• New patterns of thinking are nurtured,
• Collective aspirations are encouraged, and
• People are encouraged to see the “whole picture” together.

Senge identified five components of a learning organization. They are:

• Personal responsibility, self reliance, and mastery — We accept that we are the
masters of our own destiny. We make decisions and live with the consequences of
them. When a problem needs to be fixed, or an opportunity exploited, we take the
initiative to learn the required skills to get it done.
• Mental models — We need to explore our personal mental models to understand
the subtle effect they have on our behaviour.
• Shared vision — The vision of where we want to be in the future is discussed and
communicated to all. It provides guidance and energy for the journey ahead.
• Team learning — We learn together in teams. This involves a shift from “a spirit
of advocacy to a spirit of enquiry”.
• Systems thinking — We look at the whole rather than the parts. This is what
Senge calls the “Fifth discipline”. It is the glue that integrates the other four into a
coherent strategy. For an alternative approach to the “learning organization”, see
Garratt, B. (1987).

Since 1990 many theorists have written on the strategic importance of information,
including J.B. Quinn,[75] J. Carlos Jarillo,[76] D.L. Barton,[77] Manuel Castells,[78] J.P.
Lieleskin,[79] Thomas Stewart,[80] K.E. Sveiby,[81] Gilbert J. Probst,[82] and Shapiro and
Varian[83] to name just a few.

Thomas Stewart, for example, uses the term intellectual capital to describe the
investment an organization makes in knowledge. It is comprised of human capital (the
knowledge inside the heads of employees), customer capital (the knowledge inside the
heads of customers that decide to buy from you), and structural capital (the knowledge
that resides in the company itself).

Manuel Castells, describes a network society characterized by: globalization,

organizations structured as a network, instability of employment, and a social divide
between those with access to information technology and those without.

Stan Davis and Christopher Meyer (1998) have combined three variables to define what
they call the BLUR equation. The speed of change, Internet connectivity, and intangible
knowledge value, when multiplied together yields a society's rate of BLUR. The three
variables interact and reinforce each other making this relationship highly non-linear.

Regis McKenna posits that life in the high tech information age is what he called a “real
time experience”. Events occur in real time. To ever more demanding customers “now” is
what matters. Pricing will more and more become variable pricing changing with each
transaction, often exhibiting first degree price discrimination. Customers expect
immediate service, customized to their needs, and will be prepared to pay a premium
price for it. He claimed that the new basis for competition will be time based
competition.[84]

Geoffrey Moore (1991) and R. Frank and P. Cook[85] also detected a shift in the nature of
competition. In industries with high technology content, technical standards become
established and this gives the dominant firm a near monopoly. The same is true of
networked industries in which interoperability requires compatibility between users. An
example is word processor documents. Once a product has gained market dominance,
other products, even far superior products, cannot compete. Moore showed how firms
could attain this enviable position by using E.M. Rogers five stage adoption process and
focusing on one group of customers at a time, using each group as a base for marketing to
the next group. The most difficult step is making the transition between visionaries and
pragmatists (See Crossing the Chasm). If successful a firm can create a bandwagon effect
in which the momentum builds and your product becomes a de facto standard.

Evans and Wurster describe how industries with a high information component are being
transformed.[86] They cite Encarta's demolition of the Encyclopedia Britannica (whose
sales have plummeted 80% since their peak of $650 million in 1990). Many speculate
that Encarta’s reign will be short-lived, eclipsed by collaborative encyclopedias like
Wikipedia that can operate at very low marginal costs. Evans also mentions the music
industry which is desperately looking for a new business model. The upstart information
savvy firms, unburdened by cumbersome physical assets, are changing the competitive
landscape, redefining market segments, and disintermediating some channels. One
manifestation of this is personalized marketing. Information technology allows marketers
to treat each individual as its own market, a market of one. Traditional ideas of market
segments will no longer be relevant if personalized marketing is successful.
The technology sector has provided some strategies directly. For example, from the
software development industry agile software development provides a model for shared
development processes.

Access to information systems have allowed senior managers to take a much more
comprehensive view of strategic management than ever before. The most notable of the
comprehensive systems is the balanced scorecard approach developed in the early 1990's
by Drs. Robert S. Kaplan (Harvard Business School) and David Norton (Kaplan, R. and
Norton, D. 1992). It measures several factors financial, marketing, production,
organizational development, and new product development in order to achieve a
'balanced' perspective.

The psychology of strategic management

Several psychologists have conducted studies to determine the psychological patterns
involved in strategic management. Typically senior managers have been asked how they
go about making strategic decisions. A 1938 treatise by Chester Barnard, that was based
on his own experience as a business executive, sees the process as informal, intuitive,
non-routinized, and involving primarily oral, 2-way communications. Bernard says “The
process is the sensing of the organization as a whole and the total situation relevant to it.
It transcends the capacity of merely intellectual methods, and the techniques of
discriminating the factors of the situation. The terms pertinent to it are “feeling”,
“judgement”, “sense”, “proportion”, “balance”, “appropriateness”. It is a matter of art
rather than science.”[87]

In 1973, Henry Mintzberg found that senior managers typically deal with unpredictable
situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. He says,
“The job breeds adaptive information-manipulators who prefer the live concrete situation.
The manager works in an environment of stimulous-response, and he develops in his
work a clear preference for live action.”[88]

In 1982, John Kotter studied the daily activities of 15 executives and concluded that they
spent most of their time developing and working a network of relationships from which
they gained general insights and specific details to be used in making strategic decisions.
They tended to use “mental road maps” rather than systematic planning techniques.[89]

Daniel Isenberg's 1984 study of senior managers found that their decisions were highly
intuitive. Executives often sensed what they were going to do before they could explain
why.[90] He claimed in 1986 that one of the reasons for this is the complexity of strategic
decisions and the resultant information uncertainty.[91]

Shoshana Zuboff (1988) claims that information technology is widening the divide
between senior managers (who typically make strategic decisions) and operational level
managers (who typically make routine decisions). She claims that prior to the widespread
use of computer systems, managers, even at the most senior level, engaged in both
strategic decisions and routine administration, but as computers facilitated (She called it
“deskilled”) routine processes, these activities were moved further down the hierarchy,
leaving senior management free for strategic decions making.

In 1977, Abraham Zaleznik identified a difference between leaders and managers. He

describes leadershipleaders as visionaries who inspire. They care about substance.
Whereas managers are claimed to care about process, plans, and form.[92] He also claimed
in 1989 that the rise of the manager was the main factor that caused the decline of
American business in the 1970s and 80s. Lack of leadership is most damaging at the level
of strategic management where it can paralyze an entire organization.[93]

According to Corner, Kinichi, and Keats,[94] strategic decision making in organizations

occurs at two levels: individual and aggregate. They have developed a model of parallel
strategic decision making. The model identifies two parallel processes both of which
involve getting attention, encoding information, storage and retrieval of information,
strategic choice, strategic outcome, and feedback. The individual and organizational
processes are not independent however. They interact at each stage of the process.

Reasons why strategic plans fail

There are many reasons why strategic plans fail, especially:

• Failure to understand the customer

o Why do they buy
o Is there a real need for the product
o inadequate or incorrect marketing research
• Inability to predict environmental reaction
o What will competitors do
 Fighting brands
 Price wars
o Will government intervene
• Over-estimation of resource competence
o Can the staff, equipment, and processes handle the new strategy
o Failure to develop new employee and management skills
• Failure to coordinate
o Reporting and control relationships not adequate
o Organizational structure not flexible enough
• Failure to obtain senior management commitment
o Failure to get management involved right from the start
o Failure to obtain sufficient company resources to accomplish task
• Failure to obtain employee commitment
o New strategy not well explained to employees
o No incentives given to workers to embrace the new strategy
• Under-estimation of time requirements
o No critical path analysis done
• Failure to follow the plan
 o No follow through after initial planning
o No tracking of progress against plan
o No consequences for above
• Failure to manage change
o Inadequate understanding of the internal resistance to change
o Lack of vision on the relationships between processes, technology and
organization
• Poor communications
o Insufficient information sharing among stakeholders
o Exclusion of stakeholders and delegates

Criticisms of strategic management

Although a sense of direction is important, it can also stifle creativity, especially if it is
rigidly enforced. In an uncertain and ambiguous world, fluidity can be more important
than a finely tuned strategic compass. When a strategy becomes internalized into a
corporate culture, it can lead to group think. It can also cause an organization to define
itself too narrowly. An example of this is marketing myopia.

Many theories of strategic management tend to undergo only brief periods of popularity.
A summary of these theories thus inevitably exhibits survivorship bias (itself an area of
research in strategic management). Many theories tend either to be too narrow in focus to
build a complete corporate strategy on, or too general and abstract to be applicable to
specific situations. Populism or faddishness can have an impact on a particular theory's
life cycle and may see application in inappropriate circumstances. See business
philosophies and popular management theories for a more critical view of management
theories.

In 2000, Gary Hamel coined the term strategic convergence to explain the limited scope
of the strategies being used by rivals in greatly differing circumstances. He lamented that
strategies converge more than they should, because the more successful ones get imitated
by firms that do not understand that the strategic process involves designing a custom
strategy for the specifics of each situation.[95]

Ram Charan, aligning with a popular marketing tagline, believes that strategic planning
must not dominate action. "Just do it!", while not quite what he meant, is a phrase that
nevertheless comes to mind when combatting analysis paralysis.

Gap Analysis
For gap analysis in wildlife conservation, see Gap analysis (conservation)

In business and economics, gap analysis is a business resource assessment tool enabling
a company to compare its actual performance with its potential performance.

If a company or organization is under-utilizing resources it currently owns or is forgoing

investment in capital or technology then it may be producing or performing at a level
below its potential. This concept is similar to the base case of being below one's
production possibilities frontier.

This goal of the gap analysis is to identify the gap between the optimized allocation and
integration of the inputs and the current level of allocation. This helps provide the
company with insight into areas that have room for improvement. The gap analysis
process involves determining, documenting and approving the variance between business
requirements and current capabilities. Gap analysis naturally flows from benchmarking
and other assessments. Once the general expectation of performance in the industry is
understood it is possible to compare that expectation with the level of performance at
which the company currently functions. This comparison becomes the gap analysis. Such
analysis can be performed at the strategic or operational level of an organization.

'Gap analysis' is a formal study of what a business is doing currently and where it wants
to go in the future. It can be conducted, in different perspectives, as follows:

1. Organization (e.g., human resources)

2. Business direction
3. Business processes
4. Information technology

Gap analysis provides a foundation for measuring investment of time, money and human
resources required to achieve a particular outcome (e.g. to turn the salary payment
process from paper based to paperless with the use of a system).

Note that 'GAP analysis' has also been used as a means for classification of how well a
product or solution meets a targeted need or set of requirements. In this case, 'GAP' can
be used as a ranking of 'Good', 'Average' or 'Poor'. This terminology does appear in the
Prince2 project management publication from the OGC.

Gap analysis and new products

The need for new products or additions to existing lines may have emerged from the
portfolio analyses, in particular from the use of the Boston Growth-share matrix or the
need will have emerged from the regular process of following trends in the requirements
of consumers. At some point a gap will have emerged between what the existing products
offer the consumer and what the consumer demands. That gap has to be filled if the
organization is to survive and grow.
To identify the gap in the market, the technique of gap analysis can be used. Thus an
examination of what profits are forecast to be for the organization as a whole compared
with where the organization (in particular its shareholders) 'wants' those profits to be
represents what is called the planning gap: this shows what is needed of new activities in
general and of new products in particular.

The planning gap may be divided into four main elements:

Usage gap

This is the gap between the total potential for the market and the actual current usage by
all the consumers in the market. Clearly two figures are needed for this calculation:

• market potential
• existing usage

Market potential

The most difficult estimate to make is that of the total potential available to the whole
market, including all segments covered by all competitive brands. It is often achieved by
determining the maximum potential individual usage, and extrapolating this by the
maximum number of potential consumers. This is inevitably a judgment rather than a
scientific extrapolation, but some of the macro-forecasting techniques may assist in
making this `guesstimate' more soundly based.

The maximum number of consumers available will usually be determined by market

research, but it may sometimes be calculated from demographic data or government
statistics. Ultimately there will, of course, be limitations on the number of consumers. For
guidance one can look to the numbers using similar products. Alternatively, one can look
to what has happened in other countries. It is often suggested that Europe follows patterns
set in the USA, but after a time-lag of a decade or so. The increased affluence of all the
major Western economies means that such a lag can now be much shorter.

The maximum potential individual usage, or at least the maximum attainable average
usage (there will always be a spread of usage across a range of customers), will usually
be determined from market research figures. It is important, however, to consider what
lies behind such usage.

Existing usage

The existing usage by consumers makes up the total current market, from which market
shares, for example, are calculated. It is usually derived from marketing research, most
accurately from panel research such as that undertaken by A.C. Nielsen but also from 'ad
hoc' work. Sometimes it may be available from figures collected by government
departments or industry bodies; however, these are often based on categories which may
make sense in bureaucratic terms but are less helpful in marketing terms.
The 'usage gap' is thus:

usage gap = market potential – existing usage

This is an important calculation to make. Many, if not most marketers, accept the
'existing' market size, suitably projected over the timescales of their forecasts, as the
boundary for their expansion plans. Although this is often the most realistic assumption,
it may sometimes impose an unnecessary limitation on their horizons. The original
market for video-recorders was limited to the professional users who could afford the
high prices involved. It was only after some time that the technology was extended to the
mass market.

In the public sector, where the service providers usually enjoy a `monopoly', the usage
gap will probably be the most important factor in the development of the activities. But
persuading more `consumers' to take up family benefits, for example, will probably be
more important to the relevant government department than opening more local offices.

The usage gap is most important for the brand leaders. If any of these has a significant
share of the whole market, say in excess of 30 per cent, it may become worthwhile for the
firm to invest in expanding the total market. The same option is not generally open to the
minor players, although they may still be able to target profitably specific offerings as
market extensions.

All other `gaps' relate to the difference between the organization's existing sales (its
market share) and the total sales of the market as a whole. This difference is the share
held by competitors. These `gaps' will, therefore, relate to competitive activity.

Product gap

The product gap, which could also be described as the segment or positioning gap,
represents that part of the market from which the individual organization is excluded
because of product or service characteristics. This may have come about because the
market has been segmented and the organization does not have offerings in some
segments, or it may be because the positioning of its offering effectively excludes it from
certain groups of potential consumers, because there are competitive offerings much
better placed in relation to these groups.

This segmentation may well be the result of deliberate policy. Segmentation and
positioning are very powerful marketing techniques; but the trade-off, to be set against
the improved focus, is that some parts of the market may effectively be put beyond reach.
On the other hand, it may frequently be by default; the organization has not thought about
its positioning, and has simply let its offerings drift to where they now are.

The product gap is probably the main element of the planning gap in which the
organization can have a productive input; hence the emphasis on the importance of
correct positioning.
Competitive gap

What is left represents the gap resulting from the competitive performance. This
competitive gap is the share of business achieved among similar products, sold in the
same market segment, and with similar distribution patterns - or at least, in any
comparison, after such effects have been discounted. Needless to say, it is not a factor in
the case of the monopoly provision of services by the public sector.

The competitive gap represents the effects of factors such as price and promotion, both
the absolute level and the effectiveness of its messages. It is what marketing is popularly
supposed to be about.

Market gap analysis

In the type of analysis described above, gaps in the product range are looked for. Another
perspective (essentially taking the `product gap' to its logical conclusion) is to look for
gaps in the 'market' (in a variation on `product positioning', and using the
multidimensional `mapping'), which the company could profitably address, regardless of
where its current products stand.

Many marketers would, indeed, question the worth of the theoretical gap analysis
described earlier. Instead, they would immediately start proactively to pursue a search for
a competitive advantage.

Benchmarking

Benchmarking is a process of comparing an organization's or company's performance to

that of other organizations or companies using objective and subjective criteria. The
process compares programs and strategic positions of competitors or exemplary
organizations to those in the company reviewing its status for use as reference points in
the formation of organization decisions and objectives. Comparing how an organization
or company performs a specific activity with the methods of a competitor or some other
organization doing the same thing is a way to identify the best practice and to learn how
to lower costs, reduce defects, increase quality, or improve outcomes linked to
organization or company excellence.

Organizations and companies use benchmarking to determine where inputs, processes,

outputs, systems, and functions are significantly different from those of competitors or
others. The common question is, What is the best practice for a particular activity or
process? Data obtained are then used by the organization or company to introduce change
into its activities in an attempt to achieve the best practice standard if theirs is not best.
Comparison with competitors and exemplary organizations is helpful in determining
whether the organization's or company's capabilities or processes are strengths or
weaknesses. Significant favorable input, process, and output benchmark variances
become the basis for strategies, objectives, and goals. Often, a general idea that
improvement is possible is the reason for undertaking benchmarking. Benchmarking,
then, means looking for and finding organizations or companies that are doing something
in the best possible way and learning how they do it in order to emulate them.
Organizations or companies often attempt to benchmark against the best in the world
rather than the best in their particular industry.

A problem with benchmarking is it may restrict the focus to what is already being done.
By emulating current exemplary processes, benchmarking is a catch-up managerial tool
or technique rather than a way for the organization or company to gain managerial
dominance or marketing share. Benchmarking can foster new ideas or processes when
management uses noncompetitive organizations or companies outside its own industry as
the basis of benchmarking. What if new ideas are not generated? It is possible that no one
in some other organization or company has had a great idea that is applicable to the input,
process, or outcome that the organization is attempting to improve or change by
benchmarking.

Benchmarking is not a competitive analysis. Benchmarking is the basis for change. It is

about learning. The organization performing the benchmark analysis uses the information
found in the process to establish priorities and target process improvements that can
change business or manufacturing practices. Benchmarking commonly takes one of four
forms.

Generic benchmarking investigates activities that are or can be used in most businesses.
This type of benchmarking makes the broadest use of data collection. One difficulty is in
understanding how processes translate across industries. Yet generic benchmarking can
often result in an organization's drastically altering its ideas about its performance
capability and in the reengineering of business processes.

Functional benchmarking looks at similar practices and processes in organizations or

companies in other industries. This type of benchmarking is an opportunity for
breakthrough improvements by analyzing high-performance processes across a variety of
industries and organizations.

Competitive benchmarking compares the organization's processes to those of direct

competitors. In competitive benchmarking, a consultant or other third party rather than
the organization itself collects and analyzes the data because of its proprietary nature.

Internal benchmarking compares processes or practices within the organization or

company over time in light of established goals. Advantages of internal benchmarking
include the ease of data collection and the definition of areas for future external
investigations. The primary disadvantage of internal benchmarking is a lower probability
that it will yield significant process improvement breakthroughs.

Each form of benchmarking has advantages and disadvantages, and some are simpler to
conduct that others. Each benchmarking approach can be important for process analysis
and improvement. Breakthrough improvements are generally attributed to the functional
and generic types of benchmarking.

Eight steps are typically employed in the benchmarking process.

1. Identify processes, activities, or factors to benchmark and their primary

characteristics.
2. Determine what form is to be used: generic, functional, competitive, or internal.
3. Determine who or what the benchmark target is: company, organization, industry,
or process.
4. Determine specific benchmark values by collecting and analyzing information
from surveys, interviews, industry information, direct contacts, business or trade
publications, technical journals, and other sources of information.
5. Determine the best practice for each benchmarked item.
6. Evaluate the process to which benchmarks apply and establish objectives and
improvement goals.
7. Implement plans and monitor results.
8. Recalibrate internal base benchmarks.

A recurring problem that must be addressed during the eight steps is the determination of
criteria to ensure that inaccuracies or inconsistencies do not occur that will make any
comparison meaningless.

The eight steps of the benchmarking process can be summarized as an improvement

analysis. That is, the organization investigates another organization to find out what it
does and how it is done. During the investigation, what goes right and what goes wrong is
determined. This information is then used for the improvement of activities or processes.
When the activities and processes of the organization making the investigation are equal
to or better than the measurements found during the investigation, no change is warranted
because the investigating organization has the better practice.

Another view of benchmarking is as an organization gap analysis. The organization deter

mines what it lacks in terms of what it knows and how it does things. The shortfalls that
initiate the gap analysis can be activities and processes or they can be tactics and
strategies. The organization must then determine what other organization is good at doing
those things that can be improved or changed for the better. A very systematic
investigation is made of the organization with the best practices to discover what is done,
how it is done, how it is implemented, and how it fits into the organization's operations.
The findings of the systematic investigation then become the basis of revision or
modification for the organization doing the investigation.

Benchmarking efforts typically collect information on responsibilities, program design,

operating facilities, technical know-how, brand images, levels or integration, managerial
talent, and cost or financial performance. Financial or cost data are often the category of
greatest concern because these are factors in the input, pro cessing, and output activities
of the organization or company.
Benchmarking is frequently referred to as a "wake-up call." Organizations and companies
benchmark for many reasons: They want to determine where they spend their time and
how much value they add, or they are curious about how they stack up against others.
Through the knowledge gained by benchmarking, organizations and companies redefine
their roles, add more value, reduce costs, and improve performances.

The electronics industry has a unique style of benchmarking. Here benchmarking

involves running a set of standard tests on a system to compare its performance with that
of others. That is, it is a tool for measuring the power and performance of hardware and
software systems and applications as well as the capacity of a system. There are four
categories of benchmarking in the electronics industry:

• An application-based benchmark runs real applications or parts of applications

either in full or modified versions.
• A synthetic benchmark emulates applications activity.
• A playback test uses logs of one type of system call (e.g., disk calls) and plays the
calls back in isolation.
• An inspection test exercises a system or component to emulate an application
activity.

The synthetic and playback benchmarks are used to get a rough idea of how a system or
component performs. If application-based benchmarks are available that match the
application, they are used to refine the evaluation. The inspection benchmarks are used to
determine whether a system or component is functioning properly. These benchmarks use
a well-defined testing methodology based on real-world use of a computer system. They
measure performance in a deterministic and reproducible manner that allows the system
administrator to judge the performance and capacity of the system. Benchmarks provide a
means of determining tuning parameters, reliability, bottlenecks, and system capacity that
can provide marketing and buying information.

Although benchmarking in the electronics industry is a testing mechanism or process, it,

too, is a technique for learning, change, and process improvement. Benchmarking is an
effective way to ensure continuous improvement or progress toward strategic goals and
organizational priorities. A real benefit of benchmarking comes from the understanding
of processes and practices that permit a transfer of best practices or performances into the
organization. At its best, benchmarking stresses not only processes, quality, and output
but also the importance of identifying and understanding the drivers of the activities.

Benchmarking (also "best practice benchmarking" or "process benchmarking") is a

process used in management and particularly strategic management, in which
organizations evaluate various aspects of their processes in relation to best practice,
usually within their own sector. This then allows organizations to develop plans on how
to adopt such best practice, usually with the aim of increasing some aspect of
performance. Benchmarking may be a one-off event, but is often treated as a continuous
process in which organizations continually seek to challenge their practices.

A process similar to benchmarking is also used in technical product testing and in land
surveying. See the article benchmark for these applications.

Advantages of benchmarking
Benchmarking is a powerful management tool because it overcomes "paradigm
blindness." Paradigm Blindness can be summed up as the mode of thinking, "The way we
do it is the best because this is the way we've always done it." Benchmarking opens
organizations to new methods, ideas and tools to improve their effectiveness. It helps
crack through resistance to change by demonstrating other methods of solving problems
than the one currently employed, and demonstrating that they work, because they are
being used by others.

Collaborative benchmarking
Benchmarking, originally invented as a formal process by Rank Xerox, is usually carried
out by individual companies. Sometimes it may be carried out collaboratively by groups
of companies (eg subsidiaries of a multinational in different countries). One example is
that of the Dutch municipally-owned water supply companies, which have carried out a
voluntary collaborative benchmarking process since 1997 through their industry
association.

Procedure
1. Identify your problem areas - Because benchmarking can be applied to any
business process or function, a range of research techniques may be required.
They include: informal conversations with customers, employees, or suppliers;
exploratory research techniques such as focus groups; or in-depth marketing
research, quantitative research, surveys, questionnaires, reengineering analysis,
process mapping, quality control variance reports, or financial ratio analysis.
2. Identify other industries that have similar processes - For instance if one were
interested in improving handoffs in addiction treatment s/he would try to identify
other fields that also have handoff challenges. These could include air traffic
control, cell phone switching between towers, transfer of patients from surgery to
recovery rooms.
3. Identify organizations that are leaders in these areas - Look for the very best
in any industry and in any country. Consult customers, suppliers, financial
analysts, trade associations, and magazines to determine which companies are
worthy of study.
4. Survey companies for measures and practices - Companies target specific
business processes using detailed surveys of measures and practices used to
identify business process alternatives and leading companies. Surveys are
 typically masked to protect confidential data by neutral associations and
consultants.
5. Visit the "best practice" companies to identify leading edge practices -
Companies typically agree to mutually exchange information beneficial to all
parties in a benchmarking group and share the results within the group.
6. Implement new and improved business practices - Take the leading edge
practices and develop implementation plans which include identification of
specific opportunities, funding the project and selling the ideas to the organization
for the purpose of gaining demonstrated value from the process.

Cost of benchmarking
Benchmarking is a moderately expensive process, but most organizations find that it
more than pays for itself. The three main types of costs are:

• Visit costs - This includes hotel rooms, travel costs, meals, a token gift, and lost
labor time.
• Time costs - Members of the benchmarking team will be investing time in
researching problems, finding exceptional companies to study, visits, and
implementation. This will take them away from their regular tasks for part of each
day so additional staff might be required.
• Benchmarking database costs - Organizations that institutionalize benchmarking
into their daily procedures find it is useful to create and maintain a database of
best practices and the companies associated with each best practice now.

Strategic Planning
Determination of the steps required to reach an objective that makes the best use of
available resources. In marketing, a strategic plan involves selecting a target market
segment or segments and a position within the market in terms of product characteristics,
price, channels of distribution, and sales promotion. For example, consider the case of a
firm or manufacturer that decides to select the New York gourmet delicatessen market.
The firm's strategic plan would include a gourmet-quality product line that is high-priced,
that is purchased from New York area wholesale distributors and sold in various small
retail outlets in wealthy areas of the city, and that is promoted in local shoppers and
regional publications or on local TV. The company's long-term strategy might include
diversifying into the direct-mail business with a gourmet-food gift catalog.

Part of a strategic plan involves deciding whether to enter a new untapped market, to
grow an existing market, to dominate an existing market, or to dominate a small segment
of an existing market by replacing competitors or by filling an unmet need. Advertising
plans are an important part of strategic planning that must support the overall objective of
the seller. For example, the firm or manufacturer in our example would not profit from
purchasing commercial television time on a national basis but might benefit greatly from
a regular spot on a local talk show or from a local newspaper advertisement.
Wikipedia: strategic planning

Strategic planning is an organization's process of defining its strategy, or direction, and

making decisions on allocating its resources to pursue this strategy, including its capital
and people. Various business analysis techniques can be used in strategic planning,
including SWOT analysis and PEST analysis.

The outcome is normally a strategic plan which is used as guidance to define functional
and divisional plans, including Technology, Marketing, etc.

Definition
Strategic Planning is the formal consideration of an organization's future course. All
strategic planning deals with at least one of three key questions:

1. "What do we do?"
2. "For whom do we do it?"
3. "How do we excel?"

In business strategic planning, the third question is better phrased "How can we beat or
avoid competition?". (Bradford and Duncan, page 1).

In many organizations, this is viewed as a process for determining where an organization

is going over the next year or more -typically 3 to 5 years, although some extend their
vision to 20 years.

In order to determine where it is going, the organization needs to know exactly where it
stands, then determines where it wants to go and how it will get there. The resulting
document is called the "strategic plan".

It is also true that strategic planning may be a tool for effectively plotting the direction of
a company; however, strategic planning itself cannot foretell exactly how the market will
evolve and what issues will surface in the coming days in order to plan your
organizational strategy. Therefore, strategic innovation and tinkering with the 'strategic
plan' have to be a cornerstone strategy for an organization to survive the turbulent
business climate. ( Ziaur Rahman, IITM, iitmbd.org, Dhaka)

Vision, mission and values

Vision: Defines where the organization wants to be in the future. It reflects the optimistic
view of the organization's future.
Mission: Defines where the organization is going now, basically describing the purpose,
why this organization exists.

Values: Main values protected by the organization during the progression, reflecting the
organization's culture and priorities.

Strategic planning saves time, every minute spent in planning saves ten minutes in
execution.

The purpose of individual strategic planning is for you to increase your return on energy,
the return on the mental, emotional, physical and spiritual capital you have invested in
your life and career.

Every minute an individual spends planning their goals, activities and time in advance
saves ten minutes of work in the execution of those plans. Careful advance planning
gives you a return of ten times, or 1,000% , on your investment of mental, emotional and
physical energy.

Methodologies
There are many approaches to strategic planning but typically a three-step process may
be used:

• Situation - evaluate the current situation and how it came about.

• Target - define goals and/or objectives (sometimes called ideal state)
• Path - map a possible route to the goals/objectives

One alternative approach is called Draw-See-Think

• Draw - what is the ideal image or the desired end state?

• See - what is today's situation? What is the gap from ideal and why?
• Think - what specific actions must be taken to close the gap between today's
situation and the ideal state?
• Plan - what resources are required to execute the activities?

An alternative to the Draw-See-Think approach is called See-Think-Draw

• See - what is today's situation?

• Think - define goals/objectives
• Draw - map a route to achieving the goals/objectives

In other terms strategic planning can be as follows:

• Vision - Define the vision and set a mission statement with hierarchy of goals
• SWOT - According to the desired goals conduct analysis
• Formulate - Formulate actions and processes to be taken to attain these goals
 • Implement - Implementation of the agreed upon processes
• Control - Monitor and get feedback from implemented processes to fully control
the operation

Situational analysis
When developing strategies, analysis of the organization and its environment as it is at
the moment and how it may develop in the future, is important. The analysis has to be
executed at an internal level as well as an external level to identify all opportunities and
threats of the new strategy.

There are several factors to assess in the external situation analysis:

1. Markets (customers)
2. Competition
3. Technology
4. Supplier markets
5. Labor markets
6. The economy
7. The regulatory environment

It is rare to find all seven of these factors having critical importance. It is also uncommon
to find that the first two - markets and competition - are not of critical importance.
(Bradford "External Situation - What to Consider")

Analysis of the external environment normally focuses on the customer. Management

should be visionary in formulating customer strategy, and should do so by thinking about
market environment shifts, how these could impact customer sets, and whether those
customer sets are the ones the company wishes to serve.

Analysis of the competitive environment is also performed, many times based on the
framework suggested by Michael Porter.

Goals, objectives and targets

Strategic planning is a very important business activity. It is also important in the public
sector areas such as education. It is practiced widely informally and formally. Strategic
planning and decision processes should end with objectives and a roadmap of ways to
achieve those objectives.
The following terms have been used in Strategic Planning: desired end states, plans,
policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap and
fail to achieve clarity. The most common of these concepts are specific, time bound
statements of intended future results and general and continuing statements of intended
future results, which most models refer to as either goals or objectives (sometimes
interchangeably).

One model of organizing objectives uses hierarchies. The items listed above may be
organized in a hierarchy of means and ends and numbered as follows: Top Rank
Objective (TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the
objective in a lower rank answers to the question "How?" and the objective in a higher
rank answers to the question "Why?" The exception is the Top Rank Objective (TRO):
there is no answer to the "Why?" question. That is how the TRO is defined.

People typically have several goals at the same time. "Goal congruency" refers to how
well the goals combine with each other. Does goal A appear compatible with goal B? Do
they fit together to form a unified strategy? "Goal hierarchy" consists of the nesting of
one or more goals within other goal(s).

One approach recommends having short-term goals, medium-term goals, and long-term
goals. In this model, one can expect to attain short-term goals fairly easily: they stand just
slightly above one's reach. At the other extreme, long-term goals appear very difficult,
almost impossible to attain. Strategic management jargon sometimes refers to "Big Hairy
Audacious Goals" (BHAGs) in this context.) Using one goal as a stepping-stone to the
next involves goal sequencing. A person or group starts by attaining the easy short-term
goals, then steps up to the medium-term, then to the long-term goals. Goal sequencing
can create a "goal stairway". In an organizational setting, the organization may co-
ordinate goals so that they do not conflict with each other. The goals of one part of the
organization should mesh compatibly with those of other parts of the organization.

Mission statements and vision statements

Organizations sometimes summarize goals and objectives into a mission statement
and/or a vision statement:

While the existence of a shared mission is extremely useful, many strategy specialists
question the requirement for a written mission statement. However, there are many
models of strategic planning that start with mission statements, so it is useful to examine
them here.

• A Mission statement: tells you what the company is now. It concentrates on

present; it defines the customer(s), critical processes and it informs you about the
desired level of performance.

• A Vision statement: outlines what a company wants to be. It concentrates on

future; it is a source of inspiration; it provides clear decision-making criteria.
Many people mistake vision statement for mission statement. The Vision describes a
future identity and the Mission describes why it will be achieved. A Mission statement
defines the purpose or broader goal for being in existence or in the business. It serves as
an ongoing guide without time frame. The mission can remain the same for decades if
crafted well. Vision is more specific in terms of objective and future state. Vision is
related to some form of achievement if successful.

A mission statement can resemble a vision statement in a few companies, but that can be
a grave mistake. It can confuse people. The vision statement can galvanize the people to
achieve defined objectives, even if they are stretch objectives, provided the vision is
SMART (Specific, Measurable, Achievable, Relevant and Timebound). A mission
statement provides a path to realize the vision in line with its values. These statements
have a direct bearing on the bottomline and success of the organization.

Which comes first? The mission statement or the vision statement? That depends. If you
have a new start up business, new program or plan to re engineer your current services,
then the vision will guide the mission statement and the rest of the strategic plan. If you
have an established business where the mission is established, then many times, the
mission guides the vision statement and the rest of the strategic plan. Either way, you
need to know where you are, your current resources, your current obstacles, and where
you want to go - the vision for the future. [citation needed]

Features of an effective vision statement may include:

• Clarity and lack of ambiguity

• Paint a vivid and clear picture, not ambiguous
• Describing a bright future (hope)
• Memorable and engaging expression
• Realistic aspirations, achievable
• Alignment with organizational values and culture, Rational
• Time bound if it talks of achieving any goal or objective

To become really effective, an organizational vision statement must (the theory states)
become assimilated into the organization's culture. Leaders have the responsibility of
communicating the vision regularly, creating narratives that illustrate the vision, acting as
role-models by embodying the vision, creating short-term objectives compatible with the
vision, and encouraging others to craft their own personal vision compatible with the
organization's overall vision.

PEST analysis
PEST analysis stands for "Political, Economic, Social, and Technological analysis" and
describes a framework of macroenvironmental factors used in environmental scanning. It
is also referred to as the STEP, STEEP, PESTEL, PESTLE or LEPEST (or Political,
Economic, Socio-cultural, Technological, Legal, Environmental). Recently it was even
further extended to STEEPLE and STEEPLED, including ethics and demographics.

PEST/PESTLE alongside SWOT and SLEPT can be used as a basis for the analysis of
business and environmental factors. [1] PEST analysis is a useful strategic tool for
understanding market growth or decline, business position, potential and direction for
operations.

It is a part of the external analysis when doing market research and gives a certain
overview of the different macroenvironmental factors that the company has to take into
consideration. Political factors include areas such as tax policy, employment laws,
environmental regulations, trade restrictions and tariffs and political stability. The
economic factors are the economic growth, interest rates, exchange rates and inflation
rate. Social factors often look at the cultural aspects and include health consciousness,
population growth rate, age distribution, career attitudes and emphasis on safety. The
technological factors also include ecological and environmental aspects and can
determine barriers to entry, minimum efficient production level and influence
outsourcing decisions. It looks at elements such as R&D activity, automation, technology
incentives and the rate of technological change. Technological can also affect hoovers in
the business.

The PEST factors combined with external microenvironmental factors can be classified
as opportunities and threats in a SWOT analysis.

Management By Objective (MBO)

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System of performance appraisal having the following characteristics: (1) each manager
is required to take certain prescribed actions and to complete certain written documents;
and (2) the manager and subordinates discuss the subordinate's job description, agree to
short-term performance targets, discuss the progress made towards meeting these targets,
and periodically evaluate the performance and provide the feedback.

Management by Objectives

Management by Objectives (MBO) is a process in which a manager and an employee

agree upon a set of specific performance goals, or objectives, and jointly develop a plan
for reaching them. The objectives must be clear and achievable, and the plan must
include a time frame and evaluation criteria. For example, a salesperson might set a goal
of increasing customer orders by 15 percent in dollar terms over the course of a year.
MBO is primarily used as a tool for strategic planning, employee motivation, and
performance enhancement. It is intended to improve communication between employees
and management, increase employee understanding of company goals, focus employee
efforts upon organizational objectives, and provide a concrete link between pay and
performance. An important factor in an MBO system is its emphasis on the results
achieved by employees rather than the activities performed in their jobs.

Implementing an Mbo Program

To be successful, an MBO program should be part of a small business's overall system of

planning and goal setting. The first step in implementing MBO is to establish long-range
company goals in such areas as sales, competitive positioning, human resource
development, etc. A small business owner may find it helpful to begin by defining the
company's current business and looking for emerging customer needs or market trends
that may require adaptation. Such long-range planning provides a framework for charting
the company's future staffing levels, marketing approaches, financing needs, product
development focus, and facility and equipment usage.

The next step in establishing an MBO system is to use these long-range plans to
determine company-wide goals for the current year. Then the company goals can be
broken down further into goals for different departments, and eventually into goals for
individual employees. As goal-setting filters down through the organization, special care
must be taken to ensure that individual and department goals all support the long-range
objectives of the business. Ideally, a small business's managers should be involved in
formulating the company's long-range goals. This approach may increase their
commitment to achieving the goals, allow them to communicate the goals clearly to
employees, and help them to create their own short-range goals to support the company
goals.

At a minimum, a successful MBO program requires each employee to produce five to ten
specific, measurable goals. In addition to a statement of the goal itself, each goal should
be supported with a means of measurement and a series of steps toward completion.
These goals should be proposed to the employee's manager in writing, discussed, and
approved. It is the manager's responsibility to make sure that all employee goals are
consistent with the department and company goals. The manager also must compare the
employee's performance with his or her goals on a regular basis in order to identify any
problems and take corrective action as needed.

Formulating goals is not an easy task for employees, and most people do not master it
immediately. Small business owners may find it helpful to begin the process by asking
employees and managers to define their jobs and list their major responsibilities. Then the
employees and managers can create a goal or goals based upon each responsibility and
decide how to measure their own performance in terms of results. In the Small Business
Administration publication Planning and Goal Setting for Small Business, Raymond F.
Pelissier recommended having employees create a miniature work plan for each goal. A
work plan would include the goal itself, the measurement terms, any major problems
anticipated in meeting the goal, a series of work steps toward meeting the goal (with
completion dates), and the company goal to which the personal goal relates.

Small business owners may also find it helpful to break down employee goal setting into
categories. The first category, regular goals, would include objectives related to the
activities that make up an employee's major responsibilities. Examples of regular goals
might include improving efficiency or the amount and quality of work produced. The
second category, problem-solving goals, should define and eliminate any major problems
the employee encounters in performing his or her job. Another category is innovation,
which should include goals that apply original ideas to company problems. The final
category is development goals, which should include those goals related to personal
growth or the development of employees. Dividing goal setting into categories often
helps employees think about their jobs in new ways and acts to release them from the
tendency to create activity-based goals.

Another requirement for any successful MBO program is that it provide for a regular
review of employee progress toward meeting goals. This review can take place either
monthly or quarterly. When the review uncovers employee performance that is below
expectations, managers should try to identify the problem, assign responsibility for
correcting it, and make a note in the MBO files.

Small Business Owner Involvement

Given that MBO represents an unusual way of thinking about job performance for many
employees, small business owners may find it best to introduce MBO programs gradually
and to include a formal training component. A small business's managers can be
introduced to MBO through a classroom seminar taught by the small business owner or
by an outside consultant. Either way, it is important that the managers be allowed to
express any doubts and reservations they may have, and that the training include
preparation of an actual goal by each participant. When MBO is brought back to the
small business, it may be best to start slowly, with each employee only preparing a few
goals. This approach will allow employees to learn to prepare goals that are achievable,
develop ways to measure their own performance, and anticipate problems that will
prevent them from attaining their goals.

Another factor determining the success of MBO programs is the direct involvement of
the small business owner. Pelissier noted that the small business owner needs to
champion the MBO system from the beginning, as well as set an example for the
company's managers, in order for it to succeed. Since managers have a natural tendency
to focus their attention upon their own functions rather than on the goals of the overall
organization, it can be difficult to educate them about MBO. It is also important for the
small business owner to remain patient during the implementation phase: in fact, Pelissier
claimed that it may take three to four years before an MBO program creates quantifiable
results in a small business. As David Dinesh and Elaine Palmer indicated in their article
for Management Decision, partial implementation is one of the major potential problems
associated with MBO programs.
Implemented correctly, however, MBO can provide a number of benefits to a small
business. For example, MBO may help employees understand how their performance will
be evaluated and measured. In addition, by allowing them to contribute to goal setting, it
may increase the motivation and productivity of a small business's employees. MBO also
stands to provide a small business's employees with the means to prioritize their work on
a daily basis. Although employee performance evaluation is still a complex task under an
MBO system, MBO can also provide an objective basis for evaluation. However, it is
important to note that an employee's failure to meet preestablished goals can be attributed
to many things besides personal failure. For example, the failure to meet goals could
result from setting the wrong objectives, not taking into account company restrictions that
may impinge upon performance, establishing an improper measures of progress, or a
combination of all of these factors.

Overall, establishing an MBO system in a small business may be difficult, but it is

usually worth it. The most difficult aspect of implementing MBO may be simply getting
people to think in terms of results rather than activities. Even when an MBO system is
implemented well, a small business may encounter problems. For example, employees
may set low goals to ensure attainment. Similarly, managers' objectives may focus on the
attainment of short-term rather than long-term goals. Finally, employees and managers
alike may fall victim to confusion and frustration. Some of the most common reasons for
the failure of an MBO program include a lack of involvement among the top management
of a small business, inadequate goal setting on a company-wide basis, implementation of
an MBO system that occurs too rapidly, or the failure to instruct a company's managers
and employees in the basics of MBO. But even though establishing an MBO program
may be problematic, it can also offer significant rewards to small businesses.

Management by Objectives

'Management by Objectives (MBO) is a process of agreeing upon objectives within an

organization so that management and employees agree to the objectives and understand
what they are.

The term "management by objectives" was first popularized by Peter Drucker in his 1954
book 'The Practice of Management'.

Domains and levels

Objectives can be set in all domains of activities (production, services, sales, R&D,
human resources, finance, information systems etc.).

Some objectives are collective, for a whole department or the whole company, others can
be individualized.
Rationale
It is all too easy for managers to fail to outline, and agree with their employees, what it is
that everyone is trying to achieve. MBO substitutes for good intentions a process that
requires rather precise written description of objectives for the period ahead and timelines
for their monitoring and achievement. The process requires that the manager and the
employee agree to what the employee will attempt to achieve in the period ahead, and
(importantly) that the employee accepts and agrees to the objectives (otherwise
commitment will be lacking).

For example, whatever else a manager and employee may discuss and agree in their
regular discussions, let us suppose that they feel that it will be sensible to introduce a key
performance indicator to show the development of sales revenue in a part of the firm.
Then the manager and the employee need to discuss what is being planned, what the
time-schedule is and what the indicator might or might not be. Thereafter the two of them
should liaise to ensure that the objective is being attended to and will be delivered on
time.

Organizations have scarce resources and so it is incumbent on the managers to consider

the level of resourcing and to consider whether the objectives that are jointly agreed
within the firm are the right ones and represent the best allocation of effort.

Practice
MBO is often achieved using set targets. MBO introduced the SMART criteria:
Objectives for MBO must be SMART (Specific, Measurable, Achievable, Realistic, and
Time-Specific).[1]

Several managers have employed this management technique and have applied it to their
company. These managers include Mukesh Ambani, Don Sheelen and Steve Jobs.

Objectives need quantifying and monitoring. Reliable management information systems

are needed to establish relevant objectives and monitor their "reach ratio" in an objective
way.

Pay incentives (bonuses) are often linked to results in reaching the objectives

Limitations
However, it has been reported in recent years that this style of management receives
criticism in that it triggers employees' unethical behaviour of distorting the system or
financial figures to achieve the targets set by their short-term, narrow bottom-line, and
completely self-centered thinking.[2]