PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
Chapter 2- EVOLUTION OF STRATEGIC MANAGEMENT
Learning Outcomes:
At the end of this chapter, the students are expected to:
1. Discuss the evolution of strategic management
2. Identify the different theories in strategic management
Introduction
The concept of strategy has evolved into a formal tool for managing organizations, a shift that reflects the
broader historical changes in business practices. Initially, in the late 18th century, businesses established
by family entrepreneurs like Cadbury and Rowntree were small and managed based on the intuition and
personal judgment of their owners and managers. At this early stage, business decisions and strategies
were informal, largely shaped by individual experience. However, following World War I, the increased
demand for goods—particularly in war-affected European countries—prompted rapid economic growth and
the expansion of large-scale manufacturing. This surge in business volume led to the creation of many
large companies between World War I and the Great Depression, necessitating more structured
administrative systems. As organizations grew, formal goals and objectives were established, and
administrative offices were developed to coordinate various sub-units, marking a shift from informal to
formal strategic management practices.
Origins of Strategic Management (Historical Development)
Strategic management, as a distinct discipline, evolved significantly through the 20th century in response to
the changing dynamics of business organizations.
1. Early Business Organizations (Late 18th Century): Initially, businesses were small and
operated based on the intuition and personal experience of family entrepreneurs, such as Cadbury
and Rowntree. Business goals and strategies were informal and developed from the judgment of
owners and managers.
2. Post-World War I Expansion: The demand for goods surged after World War I, leading to
increased business volumes and the creation of large-scale manufacturing industries.
Organizations grew and began formalizing their goals and administrative structures to manage this
growth.
3. Formation of Strategic Management (1950s-60s):
o Alfred Chandler (1962): Introduced the concept that a coordinated long-term strategy was
necessary for organizational structure and direction.
o Philip Selznick (1957): Emphasized aligning internal organizational factors with external
environmental conditions.
o Igor Ansoff (1965): Developed “gap analysis” to identify and bridge the gap between
current and desired performance.
o Peter Drucker (1954): Introduced Management by Objectives (MBO), focusing on setting
and achieving organizational goals.
4. Growth and Diversification (1960s-70s):
o Organizations expanded geographically and diversified into multiple products and
industries.
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
o The creation of departmental structures formalized goals and policies within different
functional areas, though strategies remained less formalized.
5. Post-War II Developments:
o Businesses diversified further and expanded internationally, leading to the creation of
multi-divisional structures.
o The formalization of goals and strategies became more pronounced during the 1970s.
6. Era of Strategic Business Units (SBUs):
o The 1970s saw increased competitive pressures and economic challenges, prompting a
shift towards conservative management practices focused on core businesses and
portfolio management.
o The concept of SBUs emerged, along with the development of corporate strategy to
integrate various functional policies for competitive advantage. Techniques like B.C.G.
Analysis were introduced to analyze and manage business portfolios.
Overall, strategic management evolved from informal, intuition-based decision-making to a formal,
disciplined approach incorporating long-term planning, goal-setting, and portfolio analysis.
GROWTH AND PORTFOLIO-THEORY
In the 1970s, strategic management focused heavily on size, growth, and portfolio theory. The
Profit Impact of Marketing Strategies (PIMS) study, initiated in the 1960s and spanning 19 years, sought to
understand the impact of market share on profitability. Conducted initially at General Electric and later at
Harvard and the Strategic Planning Institute, the study concluded that higher market share correlated with
greater profitability due to economies of scale, experience, and learning curve advantages. This finding has
influenced both academic thought and practical strategies, as highlighted by Tom Peters’ assertion that
PIMS offers robust evidence on effective business strategies.
During this period, there was significant interest in growth strategies, including horizontal and
vertical integration, diversification, franchising, mergers, acquisitions, joint ventures, and organic growth.
However, research also indicated that smaller niche players with low market share could achieve high
profitability, as demonstrated by scholars like Schumacher, Woo, Cooper, and Levenson. By the early
1980s, it became evident that both high and low market share companies could be very profitable, but
those in the middle often struggled—a phenomenon referred to as the "hole in the middle" problem, later
addressed by Michael Porter.
Managing diversified organizations led to new techniques, notably those pioneered by Alfred Sloan
at General Motors. Sloan’s approach involved decentralizing GM into semi-autonomous strategic business
units (SBUs) with centralized support functions. The concept of portfolio theory, adapted from financial
theories developed by Harry Markowitz and others, was applied to product and operating division portfolios.
Techniques like B.C.G. Analysis and the G.E. multi-factoral model helped evaluate these portfolios.
However, by the 1980s, it was recognized that some diversified portfolios might be more valuable if the
divisions were spun off as independent entities.
THE RISE OF MARKETING MANAGEMENT
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
In the 1970s, the focus of business strategy shifted from product-centered approaches to a
marketing orientation. Historically, the success of a business was thought to hinge on producing high-
quality products, reflecting a "production orientation" where it was believed that a well-made product would
naturally sell well—a notion captured by the phrase "Build a better mousetrap and the world will beat a path
to your door." This was largely effective in the early days of capitalism, when increasing affluence and a
growing middle class meant that high-quality products often sold themselves. However, as the post-World
War II boom tapered off and markets became saturated in the 1950s, businesses found it harder to sell
products without significant effort, marking the era of "sales orientation."
In the early 1970s, Theodore Levitt and others at Harvard challenged the effectiveness of this
sales-focused approach. They argued that businesses should reverse their strategy: instead of starting with
a product and then trying to sell it, companies should begin by understanding customer needs and then
develop products to meet those needs. This shift towards a marketing orientation emphasized that the
customer should be the central focus of all strategic decisions. Over time, this concept has evolved and
been expressed under various terms such as customer orientation, marketing philosophy, customer
intimacy, and market focus.
THE RISE OF JAPANESE-ORIENTED MANAGEMENT STYLE
In the latter half of the 20th century, particularly during the 1970s and 1980s, the rise of Japanese-oriented
management styles significantly influenced global business practices. This shift was driven by Japan's
remarkable economic growth and the success of Japanese companies, which introduced new approaches
to management and production that differed from Western practices.
Key Aspects of Japanese-Oriented Management Style:
1. Total Quality Management (TQM): Japanese companies, exemplified by firms like Toyota, pioneered
Total Quality Management. This approach emphasized continuous improvement, quality control at every
stage of production, and involvement from all employees. The goal was to enhance product quality and
operational efficiency through rigorous standards and incremental improvements.
2. Just-in-Time (JIT) Production: The JIT system, developed by Toyota, revolutionized inventory
management. Instead of maintaining large inventories, companies aimed to produce goods just as they
were needed, reducing waste and minimizing storage costs. This approach required precise coordination
and efficient supply chain management.
3. Lean Manufacturing: Lean principles, closely associated with Japanese management, focus on
eliminating waste and maximizing value. This includes streamlining processes, reducing unnecessary
steps, and improving productivity. Lean manufacturing became a benchmark for efficiency in production.
4. Employee Involvement and Empowerment: Japanese management practices placed a strong emphasis
on employee involvement and empowerment. Workers were encouraged to contribute ideas for
improvements and were often involved in decision-making processes. This participative approach aimed to
boost morale, enhance job satisfaction, and leverage the collective knowledge of employees.
5. Long-Term Employment and Loyalty: Japanese firms traditionally offered long-term employment,
fostering loyalty and a strong sense of job security among employees. This practice aimed to build a stable
and committed workforce, encouraging long-term relationships between employees and employers.
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
6. Consensus Decision-Making: Decision-making in Japanese companies often involved a consensus
approach, where input from various levels of the organization was considered before final decisions were
made. This approach aimed to ensure that decisions were well-rounded and supported by those who would
be affected by them.
7. Kaizen Philosophy: The Kaizen philosophy, meaning "continuous improvement," was integral to
Japanese management. It promoted small, incremental changes to enhance processes and efficiency. The
focus was on making continuous, incremental improvements rather than relying on major changes.
Impact and Adoption:
The success of Japanese companies in the global market, particularly in the automotive and electronics
industries, demonstrated the effectiveness of these management practices. Western companies began to
adopt and adapt Japanese management techniques, incorporating principles like TQM, JIT, and lean
manufacturing into their own operations. This adoption helped to drive significant improvements in
productivity and quality across various industries worldwide.
THE COMPETITIVE EDGE
In strategic management, achieving and maintaining a competitive edge is essential for a company's long-
term success. A competitive edge, or competitive advantage, allows a company to outperform its rivals and
achieve superior profitability.
Competitive Edge Defined: A competitive edge refers to the attributes or capabilities that allow a company
to outperform its competitors. It involves providing greater value to customers, whether through superior
products, services, or processes.
SOURCES OF COMPETITIVE EDGE
a. Cost Leadership: Being the lowest-cost producer in an industry.
Example: Companies like Walmart and McDonald’s use economies of scale and efficient supply chain
management to offer lower prices than competitors.
Key Factors: Economies of scale, efficient production processes, cost control measures.
b. Differentiation: Offering unique products or services that are valued by customers and perceived as
distinct from those of competitors.
Example: Apple’s innovative technology and design create a differentiated product line that commands
premium prices.
Key Factors: Innovation, quality, brand reputation, unique features.
c. Focus Strategy: Targeting a specific market niche and tailoring products or services to meet the needs of
that segment.
Example: Rolls-Royce focuses on high-end luxury vehicles, catering to a niche market.
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
Key Factors: Understanding niche market needs, specialized offerings, customer loyalty.
d. Innovation: Developing new products, services, or processes that provide a competitive advantage.
Example: Tesla’s advancements in electric vehicle technology and autonomous driving features.
Key Factors: R&D investment, creativity, ability to bring innovations to market quickly.
e. Customer Experience: Providing exceptional service and building strong relationships with customers.
Example: Amazon’s customer-centric approach with fast delivery and easy returns.
Key Factors: Quality service, customer support, personalized interactions.
SUSTAINING COMPETITIVE EDGE
a. Continuous Improvement: Regularly enhancing products, services, and processes to stay ahead of
competitors.
Example: Toyota’s implementation of lean manufacturing and Kaizen principles.
b. Strategic Flexibility: Adapting quickly to changes in the market environment or competitive landscape.
Example: Netflix’s shift from DVD rentals to streaming services in response to technological advancements
and changing consumer preferences.
c. Building Barriers to Entry: Creating obstacles for new competitors to enter the market.
Example: Patents, proprietary technology, and strong brand loyalty.
Key Factors: Intellectual property, high capital requirements, established distribution channels.
d. Leveraging Technology: Using technology to enhance efficiency, reduce costs, and create innovative
products or services.
Example: Google’s use of advanced algorithms and data analytics to maintain its lead in search engine
technology.
e. Strategic Alliances and Partnerships: Collaborating with other firms to enhance capabilities and market
reach.
Example: Microsoft’s partnerships with hardware manufacturers to expand the reach of its software
products.
4. Analyzing Competitive Edge
a. SWOT Analysis: Evaluating a company’s strengths, weaknesses, opportunities, and threats to
understand its competitive position.
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
Application: Helps identify areas where the company has a competitive advantage and areas needing
improvement.
b. Porter’s Five Forces: Analyzing industry structure to understand competitive forces and potential
profitability.
Application: Helps companies assess their competitive environment and strategic positioning.
c. Value Chain Analysis: Examining internal activities to identify areas where value is added and where
competitive advantage can be achieved.
MILITARY THEORY
Military theory has profoundly influenced strategic management, providing valuable insights and
frameworks that have been adapted to the business world. The principles of military strategy, originally
developed for warfare, are used in strategic management to understand competition, resource allocation,
and strategic positioning.
MILITARY THEORY APPLIES TO STRATEGIC MANAGEMENT:
1. Strategic Planning and Execution
a. Sun Tzu’s "The Art of War":
Sun Tzu's emphasis on knowing both oneself and the enemy has been adapted to understanding market
conditions and competitors. His ideas about strategy, such as the importance of flexibility and adapting to
changing conditions, are crucial for modern business strategy.
Key Principles: Adaptability, understanding the environment, and strategic flexibility.
b. Clausewitz’s "On War":
Clausewitz's notion of focusing on key strategic points and adapting to uncertainties is relevant for
businesses dealing with competitive pressures and market unpredictability. Understanding the difference
between ideal scenarios and real-world constraints helps in strategic planning and risk management.
Key Principles: The concept of "absolute war" versus "real war," the importance of decisive points, and the
"fog of war" (uncertainty).
2. Competitive Strategy
a. Offensive and Defensive Strategies:
Businesses employ offensive strategies (e.g., market penetration, aggressive marketing) to seize
opportunities and competitive advantages, while defensive strategies (e.g., protecting market share,
strengthening customer loyalty) help maintain existing positions and mitigate threats.
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
Key Concepts: Offensive strategies involve taking proactive measures to gain advantage, while defensive
strategies focus on protecting and consolidating existing positions.
b. Maneuver Warfare:
Application: Maneuver warfare’s emphasis on rapid, flexible responses to changing conditions and
exploiting opportunities is reflected in agile business practices and adaptive strategies that enable
companies to quickly respond to market shifts and competitor actions.
KEY CONCEPTS: FLEXIBILITY, SPEED, AND THE ELEMENT OF SURPRISE.
3. Resource Allocation and Deployment
a. The Principle of Concentration:
In business, this principle translates to focusing resources on high-impact areas, such as core
competencies or strategic initiatives, to achieve competitive advantages.
Key Concepts: Concentrating resources and efforts on key objectives for maximum impact.
b. The Principle of Economy of Force:
Application: Efficient use of resources and avoiding wasteful expenditures align with the principle of
economy of force. Businesses seek to optimize resource allocation to maximize returns and minimize
costs.
KEY CONCEPTS: USING THE MINIMUM NECESSARY FORCE TO ACHIEVE OBJECTIVES
EFFICIENTLY.
4. Strategic Positioning and Execution
a. The Importance of Terrain: In business, this concept is analogous to understanding market conditions,
customer needs, and competitive dynamics. Companies position themselves strategically to leverage their
strengths and capitalize on market opportunities.
Key Concepts: Understanding and using the physical and situational terrain to advantage.
b. Strategic Reserves: Companies maintain financial, operational, or human resource reserves to manage
risks, handle crises, and support long-term strategic goals.
KEY CONCEPTS: MAINTAINING RESERVES FOR UNFORESEEN CIRCUMSTANCES AND FUTURE
NEEDS.
5. Leadership and Command
a. Leadership and Command Principles:
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I
PALAWAN STATE UNIVERSITY CBMEC 2- STRATEGIC MANAGEMENT
COLLEGE OF BUSINESS AND ACCOUNTANCY
Military theories on leadership emphasize the importance of decisive action, clear vision, and strong
communication, which are crucial for effective business leadership and strategic management.
Key Concepts: Effective leadership, decisiveness, and clear communication.
b. Delegation and Empowerment:
Empowering team members and delegating responsibilities allows for faster decision-making and enhances
organizational agility.
Key Concepts: Delegating authority to enhance operational effectiveness and responsiveness.
6. Strategic Analysis and Decision-Making
a. SWOT Analysis:
Similar to military assessments of strengths and vulnerabilities, SWOT analysis helps businesses evaluate
their internal and external environments to inform strategic decisions.
Key Concepts: Identifying strengths, weaknesses, opportunities, and threats.
b. Scenario Planning:
Scenario planning involves anticipating various future scenarios and developing strategies to address them,
akin to military contingency planning.
Key Concepts: Preparing for multiple potential outcomes and uncertainties.
7. Case Studies and Historical Lessons
a. Historical Military Campaigns:
Business leaders’ study historical military strategies to understand successful tactics, resource
management, and adaptability, applying these lessons to contemporary business challenges.
Examples: Analyzing historical military campaigns and their strategies can provide insights into strategic
decision-making and risk management.
In summary, military theory offers valuable frameworks and principles that have been adapted to strategic
management. Concepts from military strategy, such as those from Sun Tzu and Clausewitz, inform
competitive strategy, resource allocation, and leadership in the business world. These theories provide
insights into adaptability, strategic positioning, and efficient resource use, helping companies navigate
complex and competitive environments effectively.
Prepared By: RUTCHELL C. GAURANOC, MBA
Instructor I