What is Strategic Management?
Strategic management is the dynamic administration of a company’s resources to ensure a good implementation of its strategy. In short, strategic management is about making strategy happen and doing so entails processes and systems to ensure that the organization’s goals are being achieved at any given time.
Without good implementation strategy has no meaning, and that’s why any serious effort to design a business’s strategy must take into account the organization’s ability to execute it.
Strategic management covers to major disciplines that are critical for the success of any organization and the implementation of its strategy: Execution and Capital Allocation.
This article will deep dive into the execution side of strategic management, from the formulation of a business strategy throughout its implementation, while we dedicate another full article to Capital Allocation, and they are both based on our best-selling book Strategy for Executives which now can be downloaded for free here.
Effective strategic management is implemented through a fluid process that continually challenges the fundamentals of the organization’s strategy and the system itself. This is how you add resiliency and agility to your strategy, and how you get your organization to behave like a nimble living organism codified for survival in adverse environments.
Here’s an outline of the sections that we will cover:
- Strategic Management versus Strategic Planning
- Breaking Down Strategic Management
- Strategic Management Principles
- The Strategic Management System
- Strategy Formulation
- The Role of A-Players in Strategic Management
- Nurturing a Culture of Execution
- The Best Strategy and Management Books
This article assumes that you already have a strategy ready for implementation. If that’s not the case, a quick read of our business strategy article can get you going.
But before we move on, let’s first debunk the differences between strategic management and a familiar cousin: strategic planning.
Strategic Planning: How is it different from ‘strategic management’?
Strategic planning is a classic strategy concept that has been around for decades. It became popular in the 1980s and 1990s, promoted in most part by strategy guru Michael Porter and the Boston Consulting Group (BCG).
In a nutshell, strategic planning is an orchestration of efforts aimed at defining a company’s strategic priorities followed by the definition and implementation of the company’s strategy.
It was the first attempt to create an organization’s operating system, where corporate planners would collect and synthesize a number of inputs and formulate a strategy, which would then be followed by a series of implementation stages.
Although the idea of strategic planning may still sound like a feasible solution, in reality it did not achieve the results its promoters promised.
The main pitfall of the approach was assuming that human rationale could be reduced to a series of well-delineated steps that could be executed in a sequential order based on a number of well-defined inputs and by using a set of analytical tools.
In short, the system sought to minimize human intervention in strategy planning and execution by using a series of standardized tools and processes.
Michael Porter, probably the most ferocious promoter of the strategic planning school, told The Economist in 1987 “I favor a set of analytical techniques for developing strategy”.
Porter’s words reflect a classic bias that affects many intellectuals. They truly believe that the difference between a good CEO and a bad one is a four by four matrix.
Strategy scholars promote that executive intuition can be emulated or even replaced by a set of rules. That’s the type of comment that we feel discredits the work of strategy thinkers, even if their work is good and thorough as it is in Porter’s case.
In reality, because of its linear nature, strategic planning didn’t effectively allow a reactive, discovery-driven strategy implementation where companies were able to experiment first in unknown territory, before making big commitments.
But not everything was lost with the failure of strategic planning, and for those looking for an alternative, we have provided our own take based on our own multiyear research on the subject, which is embraced by our strategic management process.
Breaking Down ‘Strategic Management’
As a leader, you must pay a great deal of attention to how your teams are executing your company’s strategy. In the end, the effective execution of your company’s strategy is the goal of strategic management.
To be successful at this implementation you must create an environment that encourages high performers and you must also provide the tools that your people need to excel at their jobs. That environment is what we call a “culture of execution”.
To create a culture of execution, there are a few traits that you, as a leader, must nurture.
First, you need to know your business inside out. Great leaders know their numbers to the cent and recognize a good opportunity for their organization when they see it.
They don’t rely on external consultants for strategy advice because they don’t need to. They know what competitors are doing, and how the game’s being played.
Second, execution-oriented leaders know their people. In fact, knowing people’s strengths and weaknesses is one of the most appreciated skills of a great leader.
Executives that succeed at execution nurture and promote A-players and put poor performers on the backburner because in the end, when it comes down to getting things done, the company is only as good as the people working in it.
As we will see later in this article, decentralization is key for good execution, but it is not possible unless the company’s different units are in the hands of high performers that its leaders can trust.
Third, to be effective, execution needs focus. Leaders cannot pursue all things at once. They must clearly distinguish what’s important from what’s urgent, and always put the long-term well-being of the organization and its people first.
Strategic Management Principles
At the highest level, leaders’ focus must be on just a handful of goals, probably three to five, clearly defined with numbers, people and timing. Those main goals must be broken down into their underlying drivers which then become the goals of other teams downstream.
In pursuing these goals, leaders must proactively follow through to ensure that things are always on track and deal with roadblocks sooner rather than later.
At the end of the day, strategic management boils down to a few basic principles:
Principle #1: Decentralization is critical for strategy.
Because each individual business unit or division resides within the realities of its own industry, each must craft its own strategy, guided by a set of rules from the mothership, but with the freedom to act according to its industry’s practices and competitive landscape.
Principle #2: Leaders must not be biased by conventional wisdom but must be guided by experience.
Leaders and their teams must have their own ideas about the realities of their markets so that they can challenge the herd, especially when things get rough and during times of confusion.
It is very easy to be biased by herd-thinking so having a strong opinion and “owning your own mind” are personal traits that as a leader you must nurture. At the same time, you still want to leverage the experience that you and the other leaders have, since in the end that experience could be one of your most valuable assets.
Principle #3: Execution must be based on “leading”, not lagging metrics.
As we will see later in this article, execution is more effective when instead of measuring results after the fact, you get into the habit of tracking the path to get to the results.
Principle #4: Good execution is flexible.
No one can predict the future, and even the most serious plan to implement a strategy must provide a way to deal with uncertainty, respond to changes and effectively “pivot” to deal with unexpected situations or outcomes.
Principle #5: Your organization must be aligned to execute its strategy.
Strategy is the result of a team effort, and your company is on a better path to succeed when your people are working with the same goals in mind. For that reason, clear communication and a compensation structure that’s aligned with the strategy are both critical to making your strategy happen.
All these pieces must work together in order to achieve an organization’s strategic goals. The next sections introduce the strategic management process and its components.
The Strategic Management System
Strategic management is about making your strategy happen, and in doing so it entails processes and systems to ensure that the organization’s aims are being achieved. Without good execution, your strategy has no meaning and that’s why any serious effort to design your company’s strategy must take into account your ability to execute it.
A good strategic management plan ensures that the right people are in the right jobs and following the right processes to achieve your business goals.
Those two components in particular, people and processes, are at the core of strategic management and are the two most important levers that execution-focused leaders act upon to achieve superior performance.
Based on our extensive research and observation of a number of organizations, we envision strategic management as a series of activities that if systematically implemented can help you ensure that your strategy is being properly executed. These activities include:
- Challenging and fine-tuning the strategy: Streamline your strategy and get it ready for execution by challenging its fundamentals and assumptions, exploring the different ways in which it could be achieved and finally selecting the best way to execute it.
- Extracting strategy priorities: Identify leadership priorities from the strategy and break those priorities down into their main underlying drivers. Those drivers will become the levers that team leaders must act upon to achieve their individual goals.
- Seizing the execution gap: Continually evaluate your organization’s ability to execute the strategy and look for gaps or missing links that could create confusion or derail your implementation efforts.
- Managing through “leading” levers: Identify the leading metrics that should be used to track execution and create a system to monitor progress. More on that later.
- Aligning the organization for execution: Create the right incentives to align individual interests with the strategy of each division or business unit.
- Following through: Keep execution in motion, continually monitor the implementation of the strategy, and quickly react to changing environments. Keep your ears on the ground for emerging opportunities.
Each of these steps is discussed in detail in the book, where we also provide other tools and examples of real-life organizations.
As we suggest in the next figure, rather than taking this system as a rigid sequence of steps that must be followed in order, it is better to envision it as a closed loop where each task is continually running and supporting the rest of activities, actively incorporating new learning and adjusting to changes in the environment that could affect the way you do things.
Your strategic management system must be a fluid process that continually challenges the fundamentals of your strategy and the system itself.
This is how you add resiliency and agility to your strategy, and how your organization becomes a nimble living organism that can survive adverse environments.
No strategy survives contact with the enemy, the old saying goes, warning strategists about the risks of unexpected events that may, and most likely will, occur.
But embracing uncertainty is part of the game of business, and the key is to develop fluid strategies that can morph as you execute and learn.
What would you do if tomorrow your company’s board asked you to propose a new strategy for your organization?
Let’s say that they are not happy with recent performance or the direction the company is taking, and they want you, as an insider, to propose the new direction.
What would your strategy look like?
You are wrong if you believe that something like that couldn’t happen, and it is in fact how William P. Stiritz got the CEO job at Ralston Purina in 1980, a case that we cover in some detail in the book.
If you are presented with a similar request (to propose a new strategy for your organization), we provide you a framework to answer such a question.
To start, realize that your job as a CEO can be broken down into two basic things you must do to be successful: protect operating businesses, and maximize earnings over the foreseeable future.
If a CEO does nothing else but to protect a company’s earnings from erosion and grow those earnings at the same level or even higher than other high-performing companies (not only industry competitors), most people (especially shareholders) would agree that the CEO has done a good job.
That’s why before thinking about new products, your growth strategy, innovation or the latest management trend, the first order of business for any CEO is a plan to protect the cash generated by the company’s operating businesses, and to do that, they must ensure that each occupies a market position that is both profitable AND
A profitable market position is not sustainable unless it is to some extent difficult to imitate or “defendable”, while a defendable position that is not profitable is just a distraction. So your market position must be both profitable and defendable in order to maximize to your company’s long term value for shareholders.
As we explained in the business strategy principles, the only way a business can find such a market position is by doing things differently from its competitors.
In plain English, that means that your company’s products and services must either serve different needs than competing alternatives or serve the same needs in different ways.
Unless you offer products that are both unique AND valuable to target customers, or that are to some extent difficult to copy, your profitability will be vulnerable to the attack of companies with similar capabilities and well-funded copycats.
With your core businesses under control, the next step is exploring possible ways to maximize growth, and to do that, we identified seven different ways that work for any business:
- Market penetration: Selling more of your existing products to your existing consumers, or targeting new consumer “segments” within the same markets.
- Market development: Selling your existing products into new markets or into new markets internationally.
- Product improvement: Improving your products and services that serve existing customers (to reduce churn, more on that later).
- Product Development: Creating new products and services to target existing customers or to enter new markets (which would qualify as a type of diversification move).
- Revenue optimization: Increasing revenue through the implementation of alternative pricing options or new business models on your existing products.
- Cost optimization: Reducing costs through the optimization of the business’s cost centers, by streamlining operations or targeting inefficient uses of cash.
- Inorganic growth: Leveraging other companies’ assets through synergistic mergers, acquisitions or strategic alliances.
Your job as a company executive is to explore how this list relates to your organization and make educated decisions about which paths you believe would deliver the most impact to your bottom line.
Now let’s quickly discuss the role of a-players in your strategic management system.
The Role of A-players in Strategic Management
A recurrent pattern we found throughout our research, was the relentless effort of top organizations to
Probably one of the most opinionated leaders about hiring only A-players was former Apple CEO
A-players on the other hand, Jobs said, only like to work with other A-players, so by hiring them you ensure that only the best people work in the company because these A-players will self-police the company and only hire and retain similar top performers.
Business evangelist Guy Kawasaki recalls his experience with Jobs as follows: “Steve Jobs has a saying that A players hire A players; B players hire C players
Another big advocate of only hiring the best is Amazon’s Jeff Bezos. In The Everything Store: Jeff Bezos and the Age of Amazon, journalist Brad Stone tells the story of Nicholas Lovejoy, a former colleague of Bezos at hedge fund firm D.E. Shaw who came to work for Bezos and wanted to move from part-time to full-time during the early days of the company.
Until then, Lovejoy, who had been with the company since its beginning working as a recruiter, had only been working thirty hours a week and enjoyed the rest of his time playing frisbee, kayaking and hanging out with his girlfriend.
Despite his insistence, Bezos couldn’t see how Lovejoy’s relaxed lifestyle would fit into his vision of Amazon’s hard-working culture and turned him down several times. Under Lovejoy’s continued insistence, Bezos asked him to find his own replacement.
Bezos was, from the earliest days of Amazon, committed to only bringing in the best people he could hire, and for years interviewed new prospects himself. Hiring the best was, in Bezos’ mind, how his vision for Amazon would be possible.
We can find this relentless, almost obsessive fight for top talent to be a pattern that repeats itself in top-performing organizations from GE, Capital Cities and Google to Netflix, McKinsey and Comcast.
Over and over again, recruiting and retaining only the best people, providing them with unique tools and knowledge, running the company on a healthy, winning culture and the existence of a performance system that ensures teams are always at the top of their game seems to be a formula for success.
That’s why small and unprepared companies can’t resist the attack of aggressive entrants that have these tools in place when they advance into their markets, like Amazon entering the food space through the acquisition of Whole Foods, and Apple entering the music industry with iTunes.
Weaker incumbents will be forced to fight back with all they have just to keep their doors open. They must streamline their business models, target different markets or face death by irrelevancy.
This is happening right now in many industries and it will keep happening more frequently as cheaper money is poured into every market and aggressive players look for new markets in their search for world domination. Only those with great people will be able to fight back, shift directions and stay afloat.
So, if you already know how this movie ends, what are you going to do about it?
Nurturing a Culture of Execution
A company’s culture characterizes the way people work in an organization and is very important for strategy, but much more so for strategic management.
While a company’s strategy sets a general direction (by defining the whats) and strategic management sets the implementation gears in motion (deploying the hows), it is the company’s culture that ultimately fuels and lubricates your efforts to get things done.
The math behind it is simple: with a positive culture you will get more for every effort your people put in, while a bad culture will drag efforts downs and even bring them to a halt.
Rather than just being a common set of beliefs, behaviors
Instead of taking it as it is, these leaders shape the culture of their organizations to achieve their goals, changing beliefs, behaviors and attitudes along the way.
We sustain that a company’s culture is one of the most powerful ways to differentiate a company from its competitors, since a thriving one is very difficult to imitate.
In our framework (remember you can now download the book for free here), we also introduce eight components that you can combine to create a successful corporate culture.
You must pay close attention to your company’s culture and persistently work to make it the right one. This is one of the hardest jobs that you will face as a leader, but that hard work is also what makes it a great differentiator.
A company will always end up having a culture, whether intentionally or not. So instead of letting it emerge by itself, embrace it and shape it in a way that works for you so that rather than getting in the way of strategy execution it helps make that execution happen.
Just like economies of scale and learning curves, a corporate culture takes time to get right but over time it can become a true competitive advantage.
The Best Business Strategy Books
The content of this article has been extracted from Strategy for Executives, a book that provides what we call “a fundamental, but practical, framework to understand and create a good strategy from scratch, applicable to the dynamic conditions that modern executives face in pretty much every market today”.
There are many great business strategy books to choose from, including our all-time favorites The Innovator Solution by Clayton Christensen and Understanding Michael Porter by Joan Magretta, or even The Rise and Fall of Strategic Planning by Henry Mintzberg,but why go through all these different frameworks and ideas, some of them outdated, when you can get a unified map to strategy that incorporates all of them in a single framework?
Strategy for Executives, which is now free to download here, is based on extensive multi-year research, where we broke down the most popular strategy frameworks of the last 40 years, extracted their core ideas, and tied them all together into a single didactical and self-contained body of knowledge.
The research was led by Sun Wu, a seasoned Fortune 500 executive with more than 15 years of real-life experience, complemented by a thorough revision of more than 300 books and research papers, and over 500 hours of videos, interviews and formal training.
The result is a combination of fundamental concepts and a concise map to the strategy choices that modern executives must make to thrive in today’s highly competitive markets.
Every concept in the book is explained from scratch so that, plain and simple, this is the only strategy book that you and your teams will ever need.
Sun Wu’s book Strategy for Executives can now be downloaded for free here.
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