What do you understand by strategic management?

Well, the better question would be why some firms perform so much better than others. The answer, in great part, is in their strategies. Strategic management consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. It gives the organization a sense of its objectives and a sense of how it will achieve these objectives. For Michael Porter, one of the leading strategy gurus, strategy is about achieving competitive advantage through being different.

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This means offering buyers a unique value, to increase their number and keep them as customers. For example, Southwest Airlines, and Ikea have developed unique, internally consistent, and difficult to imitate systems that have provided them with sustained competitive advantage.

The following graphic makes the importance of strategy clearer. When the firm has specified its objectives, it starts to analyse its situation to create a strategic plan to reach those objectives. An environmental scan is done to identify the available opportunities.

Changes in the external environment often present new opportunities and new ways to reach the objectives. The firm also must know its own capabilities and borders in order to choose the opportunities that it can pursue with a higher probability of success.

The situation analysis therefore involves an analysis of both the external and internal environment. The external environment has two aspects: the macro-environment that affects all firms and a micro-environment that affects only the firms in a particular industry.