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 Organizational Approach
- based on economic theory — deals with issues like competitive rivalry, resource allocation, economies of scale
- assumptions — rationality, self discipline behaviour, profit maximization
- The Sociological Approach
- deals primarily with human interactions
- assumptions — bounded rationality, satisfying behaviour, profit sub-optimality. An example of a company that currently operates this way is Google
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. Cost underestimation and benefit overestimation are major sources of error. 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, 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 corporations there are several levels of management. Strategic management is the highest of these levels in the sense that it is the broadest – applying to all parts of the firm – while also incorporating the longest time horizon. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are typically business-level competitive strategies and functional unit strategies.
Corporate strategy refers to the overarching strategy of the diversified firm. Such a corporate strategy answers the questions of “in which businesses should we compete?” and “how does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?”
Business strategy refers to the aggregated strategies of a single business firm or a strategic business unit (SBU) in a diversified corporation. According to Michael Porter, a firm must formulate a business strategy that incorporates either cost leadership, differentiation or focus in order to achieve a sustainable competitive advantage and long-term success in its chosen arenas or industries.
Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information technology management strategies. The emphasis is on short an