Which Forces are driving the Need for Strategic Management?

1.0 Introduction

Globalisation, trade liberalisation and advances in technology have changed the role of state actors in firms’ competitive business environment; converged consumer life styles and preferences; reduced international trade barriers and made state borders porous; and made competitive environment ever-changing and complex. Each nation and firm, regardless of size and location, is faced with intense competition within the global environment due to these forces. This implies that every firm and nation must strive to achieve global competitiveness since the world economy is globalised and highly competitive. Therefore, there is need for appropriate strategies to develop strategic capabilities that will bring sustainable competitive advantage and superior performance.

Section 2.0 identifies and explains the forces that are driving the need for strategic management in a global environment. From this, conclusion is made in section 3.0. Then references are provided at the end of the article.

2.0 The Need for Strategic Management in a Global Environment

Strategy and strategic management are interrelated concepts. Strategy can be defined as the means for facilitating change and achieving long-term goals amidst competitive pressures, complexity and uncertainty.

Strategic management

can be described as a process of determining where a firm is, how it got there, where it needs to be and how it will get there amidst resource constraints and competitive pressures. This means that the firm will need to analyse its past, present, and the future; and formulate and implement an appropriate strategy for achieving sustainable competitive advantage and attaining its goals—strategy to enable it reach where it wants to be. Such a strategy should therefore enable the firm to utilise its strengths and minimise its weaknesses such that it can exploit opportunities and neutralise threats in the global environment. This shows a need for SWOT analysis. The analysis precedes formulation, implementation, and evaluation of strategy—stages of strategic management process. This implies that strategic management and strategy are inseparable. Therefore, the forces that drive the need for one are the forces that drive the need for the other in a global environment. Such forces are identified and explained next.

Market Liberalisation

Almost every country has liberalised its market to increase participation of private firms in economic activities thus changing the role of government in a mixed economy: governments no longer take a significant role in production of goods and services. Government’s role is to provide a favourable environment for a market economy with reduced participation in it (privatising most state enterprises) and deregulating it. Market liberalisation is seen as a policy that facilitates globalisation. Globalisation can be described as the removal of barriers to trade across national borders to enable increased integration of production processes and capital markets, and flow of financial resources, technical innovation/technology, knowledge, labour, cultures, goods and services among different nations thus expanding international trade and economic growth. This implies that in globalising and liberalising markets, protection of national firms from foreign competitors is reduced by removing international trade barriers to allow free trade/competition. This has intensified competition across borders and forced firms to formulate strategies that favour lowering of costs through exploiting opportunities across borders. For example, the US faced shrinking of job opportunities in 2012 because investors were “reallocating industries to low wage developing countries” (Siddiqui, 2017, p.514). Therefore, government’s role is to formulate policies that facilitate competition and discourage monopoly of any firm in any sector, for example, controlling mergers and acquisition transactions. This implies that countries still have different policies thus firms need to formulate appropriate strategies for each country with in the global environment.

Emergence of Economic Trade Blocks

There is increased tendency for regions to sign regional trade agreements to increase trade and competitiveness, and attempt to have a free trade system (barriers to trade removed) to facilitate regional economic growth. For example, Eastern Europe has European Union (EU); The United States, Canada and Mexico have North American Free Trade Agreement (NAFTA); and East African countries have East African Community. However, for such regional trade agreements to bring positive benefits, the following should be in place: participating states should have minimal political differences and their fiscal and monetary policies must be coordinated; firms should have cross border value chains that are not imposed on them, and they should experience regulated transaction costs. This would mean that regional/global markets are homogeneous and firms should have regional/global strategies. This would be the case if state cultures and consumption styles and preferences converged due to increase in trade liberalization and formation of trading blocs. However, cultures remain heterogeneous thus hindering such homogeneity within trade blocks. This makes firms have a huge task of formulating strategies in ways that cater for the trade blocs in general while recognising the differences within them.

Advances in Technology

Advances in technology, for example, the internet and social media technology are rapidly changing what and how production processes for goods and services are carried out. This has made it difficult to create value that offers a sustainable competitive advantage since change is rapid and unpredictable, and the competitive environment is turbulent. For example, “business leaders and policy-makers must keep track of more than 60 technologies and philosophies impacting production systems today” (Kearney, 2017, p.4). This implies that firms must continually rethink their strategies and adapt them to the changing competitive environment. Similarly, technological developments have led to intercountry differences in income, economic growth, production costs and international competitiveness. This means that firms must adapt their strategies to national business environments within a global environment. The need to utilise technology to compete favourably is even true for countries. Therefore, both countries and firms need technology strategies that lead to innovation and achieving sustainable competitive advantage and superior performance. For example, a firm that perceives its technological advantage as unsustainable and susceptible to imitation by rivals may decide to use a licensing strategy to ensure that its innovation accesses global markets as quickly as possible.

Integration of Worldwide Financial Markets

There has been growth in international capital transactions due to financial market liberalization and deregulation, and technological innovations enabling financial transactions across national borders. Integration of financial markets makes competitive environment ever-changing and complex thus making strategy formulation and decision making difficult. Rapid advancements in technology (already discussed) have led to financial globalisation. Such globalisation is a source of increased human wealth and improved welfare though it can lead to volatility of financial markets and create costly currency crises. This makes multinational firms experience uncertainty and losses in case currency crises are not in their favour. This confirms a need for a national competitive strategy that recognises trends in the global environment. This is because investors elsewhere consider stock valuations globally especially those trying to diversify their stock portfolios to reduce risk and increase liquidity.

Convergence of Consumer Behaviour

Over decades, advances in technology, and increased bilateral trade and foreign direct investment (FDI) have facilitated convergence of consumer behaviour (life styles and preferences) thus making the global market look like a homogeneous single market. However, for a given product/service, there can be convergence of consumer behaviour within certain countries but not in all countries—there is market convergence but cultural heterogeneity still exists, and culture influences consumer behaviour. Therefore, a firm does not only need to analyse key market trends to formulate global marketing strategy but also carry out market segmentation in order to adapt competitive strategies appropriately and keep ahead of its rivals. This shows that there is a need for both standardisation and adaptation marketing strategies.

Economic Development and Modernisation

Globalisation, trade liberalisation and economic growth increase competitiveness and modernisation of a given country. As countries strive to facilitate economic development and global competitiveness, they formulate different competition policies which depend on their level of development and governance model. This means that as firms struggle to modernise processes to follow competition policies that intensify competition, the need for appropriate strategies increases. In response to high competition intensity, firms must update their databases and equipment, retrain and motivate their employees, and lower transaction costs if they are to remain competitive in a modern society—society with: competitive democracy; the market economy; mass consumption; and the welfare state. To lower transaction costs, they need to make appropriate resource allocation decisions, for example, relocating production to countries that have low minimum wages to reduce labour costs. This shows a need for using strategic management tools and frameworks to determine each country’s competitiveness such as Porter’s Diamond.

3.0 Conclusion

Strategic management process involves SWOT analysis prior to formulation, implementation, and evaluation of strategy. The need for such a process in a global environment has been driven by: market liberalisation, advances in technology, integration of worldwide financial markets, convergence of consumer behaviour, and economic development and modernisation. Therefore, each nation and firm, regardless of size and location, is faced with intense competition within the global environment due to these forces. As a result, there is need for appropriate strategies to develop strategic capabilities that will bring sustainable competitive advantage and superior performance.

The above mentioned article is a concise version of the full academic article that is available exclusively to the iQualify UK students in our Teaching Zone.

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The article is based on:

LRN Level 7 Diploma in Business Management (603/1359/6)

Unit: Business Strategy, Planning and Management

1.2.1 Identify and explain the forces driving the need for strategic business management in a global environment.