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....