Strategy.docx

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Strategy Definition: Strategy is a fundamental pattern of present and planned objectives, resource deployment & interactions of an organization with markets, competitors and other environmental factors. Thus, strategy is the major programme of action chosen to reach the goals & objectives and major pattern of resource allocations used to relate the org. to it’s environment. It is a plan of purposeful action. That is, the outcome of a carefully managed process of translating a firm’s strategic intent into a systematic as well as communicated plan of action.

Strategic management Strategic management is the continuous planning, monitoring, analysis and assessment of all that is necessary for an organization to meet its goals and objectives. The strategic management process helps company leaders assess their company's present situation, chalk out strategies, deploy them and analyze the effectiveness of the implemented strategies.

Importance of strategic management Strategic management necessitates a commitment to strategic planning, which represents an organization's ability to set both short- and long-term goals, then determining the decisions and actions that need to be taken to reach those goals. The strategic management process is a management technique used to plan for the future: Organizations create a vision by developing long-term strategies. This helps identify necessary processes and resource allocation to achieve those goals. It also helps companies strengthen and support their core competencies. By determining a strategy, organizations can make logical decisions and develop new goals quickly to keep pace with the changing business environment. Strategic management can also help an organization gain competitive advantage and improve market share.

Characteristics of strategic management 1. Strategy is a systematic phenomenon: Strategy involves a series of action plans, no way contradictory to each other because a common theme runs across them. It is not merely a good idea; it is making that idea happen too. Strategy is a unified, comprehensive and integrated plan of action. 2. By its nature, it is multidisciplinary: Strategy involves marketing, finance, human resource and operations to formulate and implement strategy. Strategy takes a holistic view. It is multidisciplinary as a new strategy influences all the functional areas, i.e., marketing, financial, human resource, and operations.

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3. By its influence, it is multidimensional: Strategy not only tells about vision and objectives, but also the way to achieve them. So, it implies that the organization should possess the resources and competencies appropriate for implementation of strategy as well as strong performance culture, with clear accountability and incentives linked to performance. 4. By its structure, it is hierarchical: On the top come corporate strategies, then come business unit strategies, and finally functional strategies. Corporate strategies are decided by the top management, Business Unit level strategies by the top people of individual strategic business units, and the functional strategies are decided by the functional heads. 5. By relationship, it is dynamic: Strategy is to create a fit between the environment and the organisation’s actions. As environment itself is subject to fast change, the strategy too has to be dynamic to move in accordance to the environment. Success of Microsoft appears to be very simple as far as software for personal computers are concerned, but Microsoft strategy required continuous decisions in a turbulent and dynamic environment to remain leader. 6. The purpose of strategy is to create competence (things firm does better than competitors), synergy (between different parts of the organisation and their activities) and value creation so as to attain vision and mission. An organisation can reach its destiny (vision) only if it can create value for the firm and its stakeholders (mission). Value creation involves economic value addition (profits for the company), customer value addition (Value customers perceive in relation to competitors), people value addition (Value gained from enabling employees to be most productive resource.) so as to fulfil the needs of all concerned. 7. Strategy requires searching for new sources of advantage: To achieve sustainable long term competitive advantage the firm must invent new rules and new games to become unique and create wealth. Simply copying the leader means value is destroyed for all the firms. Thus to look different, strategy differentiation is a must. 8. Strategy is almost always the result of some type of collective decision-making process: The vision, mission, objectives, and corporate strategies are determined by top management. Business Unit strategies are decided by heads of business units and functional plans by functional heads. But the top management consent is a must. It is the senior management which resolves paradoxes between the conflicting objectives, existing functions and future activities, and the resources allocation.

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Strategy and Tactics: Often we find the two terms – strategy and tactics – being used simultaneously. However, the two terms are different as given in the Table 8.1. Table 8.1: Distinction between Strategy and Tactics: Basis

Strategy

Tactics

Who formulates?

A prerogative of top management

Lower level management

What is the scope?

Deals with many things

Narrow focus

Time horizon

Longer period

Shorter period

Timing of action

Prelude to action

During the action

Type of guidance

General guidance to whole

Specific and situational guidance to specific section of organisation

Organisation

From the above- table it should not be concluded that they are exclusive from each other. In fact the two are mutually reinforcing. It is the strategy which provides the reason to initiate tactics. If the vision is to be industry leader, increases sales is part of this strategy, but to sell in bulk to achieve the vision, the discount given to a bulk buyer is tactic.

Concept of Strategy Formulation: Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision.The process of strategy formulation basically involves of the following five steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order. a. Strategic Intent: It provides Vision – what the organisation wants to become, Mission – what business the firm is in, Values – a common set of beliefs guiding the behaviour of organisational members, and Objectives — Qualitative goals. b. Situational Analysis:The three kinds of environments need to be scanned – External,(to know of Opportunities and Threats), Internal (to know of strengths and weaknesses), and Industry (to determine competitive scenario) c. Setting Long-term Quantitative Objectives or Goals: The results expected from pursuing certain strategies. The objectives should be quantitative, understandable, challenging,

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hierarchical, obtainable, and in harmony among organisational units. The time horizon of objectives and strategies should be consistent. d. Formulation of strategic Alternatives: In its journey towards its destination the strategy formulation has to find and evaluate different strategic alternatives. e. Selection of Strategy: To create a fit between the environment and the strategic intent of the organisation, a suitable strategy has to be selected for implementation.

Types of Strategies: 1. Corporate Strategies or Grand Strategies: There can be four types of strategies a corporate management pay pursue: Growth, Stability, Retrenchment, and Combination. 1. Growth strategy can be put to use by way of: a. Concentration: It means bringing in resources into one or more of a firm’s business keeping customer needs, customer functions, alternative technologies, singly or jointly so as to expand. b. Integration: Integration means joining activities related to the present activities of a firm. Integration not only widens the scope of business but also a subset of diversification strategies. Integration can be of following types: Horizontal Integration: It means when a firm takes over the other firm operating at the same level of production or marketing. Recently ICICI Bank decided to acquire Bank of Rajasthan and Reckit Benkier of UK took over Paras of India. Vertical Integration: When a firm acquires control over another firm operating into the same value chain. It can be of two types, viz., Backward Integration – acquiring a firm engaged in raw materials (Tata steel buying a coal mine company in Indonesia); and Forward Integration — acquiring control over a firm/activity taking it nearer to the ultimate consumer (Reliance Industries, a petro refining company, also starting petrol pumps). c. Diversification: Adding a new customer function(s), customer group(s), or alternative technologies to an existing business is known as diversification. Diversification strategies can be of following types:

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Concentric diversification: Adding new, but related products or services is known as concentric diversification. It can be market-related concentric diversification (using common channels); Technology-related (a bank also selling mutual fund policies-similar procedure); and Marketing and technology related concentric diversification (Amul, selling butter, curd, Shrikhand, and buttermilk along with milk). A retailer selling kids wear also starts selling lady wears is a case of related concentric diversification. Conglomerate or unrelated diversification: If a firm takes up business not related to the existing one neither in terms of customer groups, customer functions, nor alternative technologies, it is known as conglomerate diversification – Tata Sons is a conglomerate, as it is unrelated businesses, steel, power, chemicals, hospitality, education, publishing, beverages, etc. Horizontal Diversification: It means adding new products or services for present customers. Escort Fortis Hospital may offer bank, bookstore, coffee shop, restaurant, drug store in their compound for the visitors to the hospital. d. Internationalization: It means marketing product/service beyond national market. e. Cooperation: It means cooperation among competitors. It may take the form of Mergers and Acquisitions (like Tata Motors acquired Jaguar Land Rover facilities of UK); Joint Ventures (like Indian Oil company floated an oil marketing company in Sri Lanka in collaboration with a local company), and Strategic Alliances (the two cooperating firms remain independent but cooperate for synergy). f. Digitalization: It includes computerization, electronisation, and digitalization (conversion of analogue electrical signals into digital signals). 2. Stability Strategies: When the firm wants to go for incremental improvement of its performance, it is known as stability strategy. Basic approach in the stability strategy is ‘maintain present course: steady as it goes.’ It can be No-change strategy (taking no decision is a decision too); Profit strategy (lying low and managing profit through cost cutting, price rise, etc. Pause or proceed-with-caution strategy (when getting into non-core business, like Hindustan Unilever selling shoes).

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3. Retrenchment Strategies: It means substantially reducing the scope of business activities. It includes turnaround strategy (to bring back to health through internal and external restructuring); Divestment strategy (Sell-off or hive-off – to sell off a non-core business divisions; Spin-off demerging the business activities; and Split-off – division of business into two separate ownership; Disinvestment – dilution of control through sale of equity -very recently Government of India has sold stake through FPO in Power Finance Corporation); and Liquidation Strategy (the last resort in retrenchment, Lehman Brothers of USA was finally liquidated ). 4. Combination Strategy: All the strategies discussed above can be applied simultaneously, sequentially, or in a combination. 2. Business Level Strategies: Business-level strategies are fundamentally concerned with the competition. In this regard Michael Porter has given three generic strategies, which can be converted into four. To compete successfully the first generic strategy is Cost- leadership (Microsoft produces software for PCs at such a cost that no hardware manufacturer ever thinks of producing himself); second is Differentiation (Dell computers are sold online, whereas all other manufacturers use physical distribution); and finally it is Focus. Focus may rely on either cost leadership or differentiation, but its market size is very small, where large competitors do ignore them. 3. Functional Strategies: These strategies may be Operations Strategy, Marketing Strategy, Finance Strategy, and Human Resource Strategy.

Components of strategic management: 1. Establishing the hierarchy of strategic intent: a. b. c. d.

Creating & communicating a vision Designing a mission statement Defining the business Setting objectives

2. Formulation of strategies: e. f. g. h. i. j. k. l.

Performing environmental appraisal Doing organizational appraisal Considering corporate-level strategies Considering business-level strategies Undertaking strategic analysis Exercising strategic choice Formulating strategies Preparing a strategic plan

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3. Implementation of strategies: m. n. o. p. q.

Activating strategies Designing structures & systems Managing behavioral implementation Managing functional implementation Operationalising strategies

4. Performing strategic evaluation & control: r. Performing strategic evaluation s. Exercising strategic control t. Reformulating strategies

Guidelines for crafting strategies 1. Gather the facts: To know where you’re heading, you have to know where you are right now. Before you start, review the past performance & current situation. Look at each area & determine what worked well, what could have been better & what opportunities lie ahead. The most important part of this process is involving right people to make sure you’re collecting the most relevant information. 2. Develop a vision statement: This statement should describe the future direction of business & it’s aim in the medium to long term. It’s about describe one’s purpose & values. 3. Develop a mission statement: It also outlines it’s primary objectives. This focuses on what needs done in short term to realize long term vision. For vision, where do we want to be in 5 years? For mission statement you’ll be ask ques: what do we do?, how do we do it?, whom do we do it for?, what value do we bring? 4. Identify strategic objectives: at this stage, the aim is to develop a set of high –level objectives for all areas of business. They need to highlight the priorities and inform the plans that will ensure delivery of company’s vision & mission. Objectives should be SMART( specific, measurable, achievable, realistic, time-related). 5. Tactical plans: Now it’s time to translate strategic objectives into more detailed short term plans. These will contain actions for departments & functions in your organization. You are now focusing on measurable results & communicating to shareholders what they need to do it & when. 6. Performance management: it is vital to continually review all objectives & action plans to make sure you’re still on track to achieve that overall goal. Managing & monitoring a whole strategy is a complex task, which is why managers, directors & business leaders are looking to alternative methods of handling strategies, creating , managing & reviewing a strategy requires you to capture the relevant information , breakdown large chunks of information, plan, capture relevant information & have a clear strategic vision.

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Tailoring strategies to fit specific industry: 1. Strategic avenues for competing in an emerging industry: a. b. c. d. e. f. g. h. i.

Try to win early race employing broad or focused differentiation strategy push to perfect the technology, improve the quality & product adopt dominant technology quickly form strategic alliances with suppliers acquire alliances with companies having related or complementary techno expertise try to capture first mover advantages pursue new customer groups, new user applications, entry into new geographical areas begin to shift advertisement to increase frequency of use & building brand loyalty use price reductions to attract next layer of price sensitive buyers into market

2. Strategies for competing in turbulent, high velocity markets: a. b. c. d.

invest aggressively in R & D develop quick response capability initiate fresh actions every few months- create change proactively keep company’s products & sevices fresh

3. Strategic moves in mature industries: a. more emphasis on value chain innovation b. Trimming costs c. increasing sales to present customers d. building new or more flexible capabilities e. acquiring rival firms at bargain prices

4. Strategies for firms in stagnant or declining industries: a. pursue fastest growing market segments in industry b. strive to drive cost down c. stress differentiation based on quality improvement & product innovation

5. Strategies for competing in fragmented industries: b. c. d. e.

a. .Becoming a low cost operator Specializing by customer type Focusing on limited geographical area Specializing by product type Constructing & operating formula facilities

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