Strategic Management: Levels, Rational Model, and Environment
Strategic Management: Levels, Model, and Environment
Profit and Loss Account Considerations
The profit and loss account includes the operating result, which incorporates financial results. The operating result consists of revenues less expenses from the company’s core activities. This also includes the extraordinary result, typically from asset sales at a price different from book value. Financial reports cover interest received (cash or bank accounts) and interest paid (on credits).
The result is the Earnings Before Interest and Taxes (EBIT), from which company tax is paid if the result is positive.
Levels of Strategy
There are three levels of strategy, progressing from general to specific:
- Corporate Strategy: Decisions made at the highest level regarding the company’s market positioning, business operations, and activities.
- Business (Unit) Strategy: Decisions concerning how the company competes in the market, the product range, and resource utilization.
- Functional Strategies: Decisions made by executive management in each area or department, such as human resources, production, marketing, and finance.
A company’s strategy requires coherence across these three levels.
The Rational Model of Strategic Management
This theory, developed at Harvard in the 1970s and 80s, systematizes the decision-making process to minimize errors.
Phases of the Rational Model
- Strategic Analysis: Determine the problem, diagnose causes and consequences, and define objectives.
- Strategy Formulation: Define alternative strategies, evaluate costs and benefits, and choose one.
- Implementation and Control: Initiate actions, select budgets, oversee progress, analyze deviations, and propose corrective measures.
Feedback
Mechanisms are needed to ensure information flows in both directions, allowing for the detection of problems during implementation, notification of relevant parties, and redirection of actions to effectively respond to change.
The Company Environment
This involves analyzing external forces that affect the company or sector, identifying threats and opportunities. According to Professor Porter of Harvard, five forces influence the external environment:
- Potential Competitors: New entrants seeking to compete in the market.
- Substitute Products: Products with the same function manufactured by others.
- Intensity of Competition: Current competitors in the market.
- Clients: Individuals or companies that acquire and consume the company’s products. Satisfied customers can increase consumption.
- Suppliers: Providers of raw materials or services. Negotiating power can lead to better purchase conditions or delivery deadlines.