The Importance of Strategic Management

by Nigel Kendall

The world in 2012

At a time of great global change and even greater volatility, the importance of strategic management lies in the ability to revalidate corporate goals and update the resulting strategy. Seldom in modern times has this been as necessary as it is today. We seem to be living at a time when the tectonic plates of global commerce are shifting. China and India may be quite rapidly moving into a position to challenge the dominance of the West. Russia under its newly re-elected president, Mr Putin, may start to take a more aggressive stance towards Europe and America. Brazil is still expanding rapidly and may represent a major Latin American influence on Western policy. On the other hand, China and India may in different ways succumb to political turmoil, Russia may be hit by lower oil prices and Brazil may go ex-growth. Strategic management has never been more important.

What is Strategic Management?

Strategic management is the process of administering a company or business such that it continuously formulates, adjusts and implements strategies. Our holistic approach to corporate governance stresses an inclusive approach to strategy which embraces the interests of all key stakeholders.

Case Studies in the importance of strategic management

Examples of where it goes wrong..

The best way to illustrate the importance of strategic management in business is to show what happens when the strategic management process is allowed to slip.

High growth company
Here is an case study drawn from the writer’s own client experience:A previously successful business in the photographic display market went into receivership through the failure of its parent company. It was bought back by the management team and, driven in a single-minded way by a balanced team, recovered from receivership and rapidly achieved its goal of UK dominance in its field, generating significant cash and profits.

Its ambitious operations director pushed his way into the CEO seat and set a new goal: to try to consolidate the fragmented market in the US. After a highly cautious post-receivership approach to financing, he was persuaded by bankers to borrow to fund very rapid expansion by acquisition, and soon reached revenues of c£150m. In the process, he took his eye off the cash position and the borrowing risk. His strategy lagged behind his goal and he overstretched his management resources. Trading went flat as he ran into recession, he ran out of cash and the banks called his loans in. The banks refused to accept his work-out plan and forced the break-up of the company, taking a big write-down in the process.

However, the now ex-CEO bought back a couple of the group companies, set a more limited goal with a strategy to match and by refocusing in his earlier manner, soon generated a new business which was more profitable than his previous one.

Taking a large company into new markets
There are lots of well-known examples where large organisations have failed to keep revalidating their corporate goals and updating their strategies accordingly. These include the attempt to transform the UK’s GEC, a long-standing, successful and cash-generating engineering group into an electronic group under the Marconi banner, by an acquisition programme funded by GEC’s amassed cash pile of over £1.5bn. In a few short years it had all gone. The goal was probably infeasible and the importance of strategic management (in its absence) illustrated by the management pursuing the discredited goal until all the money had gone.

..And right

On the other hand, famously, Apple was transformed in fifteen years under the leadership of Steve Jobs from a nearly bust supplier of personal computers to the most valuable company in the world. As everyone knows, he achieved this by a single-minded consumer focus as he introduced a succession of market-winning products.

Clearly Apple’s strategy was tightly linked to his changing goals as the new products came on stream, and the manufacturing and distribution resources were in place to support the extraordinary sales growth. Similarly, their premium pricing strategy was linked to an outstanding degree of consumer satisfaction with the products which enabled it to be successful.

Not many businesses change goals and are able to create a successful strategy to achieve the new goal. One of the (ultimately) successful companies to do this was IBM, which, after a dalliance with PCs in the 1980s, revised its goals under Lou Gerstner and built a large and profitable software and services business. The importance of strategic management in IBM was evidenced by its ability to revise its earlier goal and through a new strategy, maintain a focus on building the new businesses to serve its new customers.

Engagement with investors

A recent conference at Cass Business School in the City of London discussed Management, Governance and Regulation in a Changing Investor Landscape. Many of the speakers referred to the growing importance of strategic management in their relationships with the boards of the companies in which they had invested.

Private equity and venture capital
The British Venture Capital Association (BVCA) had conducted research in late 2010 into around five thousand investments worldwide by their Private Equity and Venture Capital members. The research embraced corporate revenues of £21bn and of the 208 respondents, 43% said they exercised heavy influence over strategy, 35% exercised moderate influence.

Larger investing institutions
Stephen Hadrill, Chief Executive Officer of the Financial Reporting Council (FRC) said that there was growing support for the recently introduced Stewardship Code which encourages investing institutions to engage regularly with their investees. Investors were showing more interest in strategy, and he exhorted them to “use their powers or lose them”.

The key importance of strategic management is, of course, emphasised by the growing power of active investors who will target organisations which seem to have lost their way.

The head of corporate governance (Europe) at one of the largest asset managers in the world, told the conference that in their engagement meetings with company chairmen they split into two teams: the A team discussed corporate governance and the B team discussed strategy.

A good note to finish on is the view expressed by the co-head of the Responsible Investment Team of one of the UK’s largest pension funds. He felt strongly the need to broaden the definition of Corporate Governance so management could identify where investors were coming from and tie Corporate Governance into the fund management process – exactly what our holistic definition of corporate governance is all about.

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