TOPIC 2 Give a critical consideration of five strategic management process tools and their contribution to strategic management and strategic thinking. It has been argued that management needs the resources to create core competencies to develop a strategy that has sustainable competitive advantage (Marti, 2004, p1), so the definition of a strategy as an ‘integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage’ fits this argument.
The strategic management process follows the lines of strategy, while also earning above-average returns (Hanson et al, 2008, p4, 25). Strategy, strategic management, and strategic thinking are all important factors that contribute to the reaching of goals, the gaining of competitive advantage, and the successful management of an organisation. There are many different models and tools available to organisations which support decisions by strategic managers; tools that are continuously growing and changing.
This essay will give critical consideration of five strategic management process tools: SWOT Analysis, Financial Ratio Analysis, Benchmarking, Core Competencies and Value Chain Analysis; and how these contribute to strategic management and strategic thinking in an organisation. A SWOT analysis is generally used in decisions about the direction a company is taking. It is a tool also used regularly to develop a strategic plan for an organisation.
The major focus of SWOT analysis is to ‘recognise opportunities and avoid threats, while weighing an organisations strengths and weaknesses’ (Morris, 2005, p53). It has also been explained that it ‘achieves correct interaction of business management with its internal and external environment’ (Mayer, 2008, p36) whilst emphasising the monitoring and evaluation of strengths, weaknesses, opportunities and threats in both these environments (Paquin, 2007, p28).
Strengths may include a firm having a reputable relationship with customers, whereas a weakness could be having a lacking in managerial skills within an organisation. A new and cheaper foreign product introduced into the market can be classified as a threat, whereas an opportunity may exist for a firm to expand their market share by introducing new products into the market.
While SWOT analysis is one of the four most used strategic management tools, there have been some identified faults with the approach: management find it harder to identify strengths than things seen as being wrong with the company; management does not always have the knowledge and information which enables the perception of strategic weaknesses and strengths; the insight of many managers is more operational than strategic, leading to non-useful information being listed; it is not easy for a positive to be perceived as better than it is; and some managers describe an effect as a weakness and do not get to the causes (Frost, 2003, p58-60).
Financial ratio analysis is yet another tool used in conjunction with strategic management and thinking. A ratio ‘expresses the relationship of one number to another number’. It involves analysing a company’s financial statements according to specific ratios, for example, current ratio, which is current assets divided by current liabilities; measuring a company’s ability to pay current liabilities from current assets (Horngren et al, 2008, p93-4).
The University of Newcastle’s “Accounting and Finance for Decision Making” classifies financial ratios as follows: ratios that measure the company’s ability to pay current liabilities; ratios that measure the company’s ability to sell inventory and collect receivables; ratios that measure the company’s ability to pay long-term debt; ratios that measure the company’s profitability; and ratios used to analyse the company’s shares as an investment. Using ratios and analysing financial statements is a helpful strategy for managers to adopt.
From the classifications above, a firm can discover whether or not it has enough cash or assets to pay its accounts or liabilities, whether or not the company is doing well enough for shareholders to want to invest, whether the company has made a profit or a loss over a particular period. It could then measure the results against the same period for the year before, and assess where the company is doing profiting, as well where improvement is needed. In addition, financial ratio analysis can be used to evaluate where a company is positioned against its ompetitors. Benchmarking is the ‘identification of best practices among competitors and non-competitors that make them superior performers’ (Stone, 2006, p650); ‘the practice of comparing a company to a standard set by other companies, with a view toward improvement’ (Horngren et al, 2008, p90). A large number of firms within Australia and the rest of the world are now applying benchmarking to their organisation, particularly when it comes to managing the human resources (HR).
Benchmarking serves a number of purposes: it enables managers to audit how effectively HR meets the needs of the organisation; it enables an organisation to learn from those who excel in an HR practice; it identifies HR areas where performance can be improved; and it can be used to create a need for change (Stone, 2006, p623). Benchmarking can be linked with financial statement and ratio analysis, which was discussed previously, in that by comparing it with other company’s financial statements, it can benchmark against the industry average as well as against key competitors.
By doing so, a management team can evaluate where the company is situated compared to the average in the industry, or also how it is compared to another competitor organisation. It may be difficult for a firm to gain information about a competitor firm to evaluate itself against, but once this information is gained, it is advantageous to the firm, so it can then improve its efforts in the areas highlighted. Core competencies are ‘capabilities that serve a source of competitive advantage for a firm over its rivals’ (Hanson et al, 2008, p16). This essentially sums up the major aim of strategic management and thinking.
According to Hanson et al, there are four criteria of sustainable competitive advantage, and they are: (1) valuable capabilities – these help a firm to defuse threats or utilise opportunities; (2) rare capabilities – these are not acquired by many others; (3) non-substitutable capabilities – no strategic equivalent; and (4) costly-to-imitate capabilities – these include a unique and valuable organisational culture or brand name, and the interpersonal relationships, trust and friendship among managers, suppliers and customers. By combining these four types of capabilities, results will ary from below-average returns through to above-average returns, the latter which is what strategic management is seeking. As an example, a firm that has an exceptional relationship with it’s customers is going to gain an advantage over a firm that has a reputation of dire relationships with customers. A manager’s relationship with employees is extremely important, as employees who have good working relationships are more that likely to perform better than those who have poor relationships. This provides for a more productive workplace, and eventually a higher rate of return for that company; a higher rate of return of labour.
Value chain analysis allows a firm to ‘understand the parts of its operations that create value and those that do not’ (Hanson et al, 2007, p88). It is a template that organisations use to understand their cost position, and to identify the many ways that could be used to implement chosen business strategies. An organisation’s value chain is divided into primary and support activities. The primary activities are ‘involved with a product’s physical creation, its sale and distribution to buyers and its service after the sale’ and the support activities ‘provide the assistance necessary for the primary activities to take place’.
Primary activities in the value chain include inbound and outbound logistics, operations, marketing and sales, and service whereas support activities consist of procurement, technological development, human resource management and firm infrastructure (Hanson et al, 2008, p89-90). By utilising the value chain analysis system within an organisation, it will benefit in the way that it can work on or eliminate the parts of its operations that are not creating value and bringing success to the firm. It can also accentuate those areas that do provide significant value and emphasise these in future strategic business decisions.
These five management tools: SWOT analysis, financial ratio analysis, benchmarking, core competencies and value chain analysis all relate back to strategy and strategic management; that is, exploiting capabilities of a firm and gaining competitive advantage, while also gaining above-average returns. The tools are useful in the way that they present information in many different ways so that new insight for the organisation can be gained. While all of these strategic management tools have disadvantages attached, it is safe to say that not utilising the tools would be even more of a disadvantage for an organisation.
Implementing some type of strategic management tools is more advantageous than not. By applying the above strategies, organisations will be better able to understand where the company stands, what direction it is heading, and provide room for development and improvement. ‘Strategic planning is an effective tool to enhance firm performance’ (Frost, 2003, p51). References Hanson, D. , Dowling, Peter J. , Hitt, Michael A. , Ireland, R. Duane and Hoskisson, Robert E. , (2008) Strategic Management: Competitiveness and Globalisation, Asia Pacific Third Edition, Thomas Publishing, South Melbourne, Australia. Horngren et. al. Gitman et. al. , and Atrill et. al. , (2008) Accounting and Finance for Decision Making, University of Newcastle, Pearson Education Australia Custom Book, Frenchs Forrest, Sydney, NSW. Marti, Jose Maria Viedma (2004). Strategic knowledge benchmarking system (SKBS): a knowledge-based strategic management information system for firms. Journal of Knowledge Management, 8(6), 31-49. Retrieved August 12, 2008, from ABI/INFORM Global database. (Document ID: 769492501). Mayer, P. , Vambery, R. (2008) ALIGNING GLOBAL BUSINESS STRATEGY PLANNING MODELS WITH ACCELERATING CHANGE. Journal of Global Business and Technology, 4(1), 31-48.
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