Strategic Management: It’s Characteristics, Formulation, Types and Other Details!
Strategic management has now become invincible. It involves creating organizations which generate value even in turbulent environment over a sustained period of time.
To manage for the present and continue to change so that the firm continues to prosper, in a global, uncertain world, strategic management undertakes three steps of formulation, implementation and control of strategies. In this chapter we are concerned with the first aspect, i.e., Strategy Formulation.
Concept of Strategy:
Before pondering over the process of strategy formulation, we must first understand as to what the term strategy implies. The term strategy has been borrowed from military. Today the competition, a business faces, is similar to a war and every business wants to be one step up over its nearest rivals.
Strategy is a common theme of strategic decisions through which an organisation tries to relate itself with the environment which involves major resources commitment to develop certain advantages which help in achieving its vision and mission.
Characteristics of Strategy:
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.
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 organisation 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.
9. 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.
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:
|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 organisation||Specific and situational guidance to specific section of 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, 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.
What Business Are We In?
If someone asks any businessperson to define his business, almost everyone sill give a manufacturing definition. Ask anyone who is manufacturing readymade garments, about his business and his answer will be readymade garments manufacturing. Ask a railway company the reply will be in railway business. Normally, the way people define their business has been termed by a marketing scholar as marketing myopia.
Businesspersons must always view their business from customer’s view, not production. Always define your business on the basis of core need being fulfilled. A core need always remains in vogue and shall remain in vogue.
The way to satisfy that need may change, and business will opt the new methods. Indian cinema industry always thought they were in cinema business until 1980 when VCR created a revolution and the industry lost huge business. It then realized that they were in entertainment business. Always update yourself about customers’ needs and technology.
What businesses following are in? Idea is not a telephone company, it is in the business of connectivity; Tata Tea is not in fruit juice, tea, or water business, it is in hydration business; Colgate is not in tooth paste business, but in oral healthcare business; and a cinema hall is in the business of entertainment.
Types of Strategies:
In the last chapter we have already mentioned about corporate, strategic Business Unit strategies, and functional Strategies. Now we will see them into more specifics.
1. Corporate Strategies or Grand Strategies:
There can be four types of strategies a corporate management pay pursue: Growth, Stability, Retrenchment, and Combination.
Growth strategy can be put to use by way of:
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.
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:
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.
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).
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:
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.
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.
It means marketing product/service beyond national market.
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).
It includes computerization, electronisation, and digitalization (conversion of analogue electrical signals into digital signals).
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.
In times of crisis and recession- as the JK Papers did during recent recession); Pause or proceed-with-caution strategy (when getting into non-core business, like Hindustan Unilever selling shoes).
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 ).
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.
The SWOT Analysis:
No discussion on strategy formulation will be complete without a discussion of SWOT Analysis. It involves a systematic analysis of the internal strengths and weaknesses (financial, managerial, marketing, or technological) and of external opportunities and threats (like change in demand, law, or technologies.
It is an internal evaluation to be in fit with external world. Strengths refer to competencies, weaknesses refer to constraints, opportunities refer to favourable condition in the business environment of the firm, and threat means an unfavourable condition in the firm’s environment creating a risk.
|Gradual Political & Economic Reforms Political Stability||Terrorism Regional stability Corruption Inflation|
Non-convertibility of currency Barriers to repatriation of profits
|Excess production capability (can be used for exports)|
New sources of inexpensive raw materials & parts
|High prices of imports|
Deficiency of bilingual employees
Poor knowledge of local culture, consumer behaviour, and educational system
SWOT analysis will be useful as under:
(a) To eliminate weaknesses those expose the firm to external threats.
(b) To highlight the strengths, which the company would try to exploit.
(c) To convert threat or weaknesses into an advantage.
(d) To expose present shortcomings in the company’s resources and skills.
(e) To match the strength to opportunity to exploit it.
Barriers to Strategy Formulation:
1. Lack of Information:
Lack of sufficient information for strategy formulation is the most common. The quality of financial analysis is generally very poor. Where future is unknown such an analysis is impossible. And in such situations strategic decisions rely mainly on judgment and intuition.
2. Too Much Data:
Sometimes strategy formulation may suffer due to too much data but not enough information. In this age of information explosion, too much of data is a big problem.
3. Confusion and Dilution:
It is true that we treat the CEO as the person responsible for formulating strategy. In actual practice, there are many managers who participate in policy formulation.
These managers have their own values. Many managers come and many managers go away from the task of formulation. Thus there is confusion as to who made the decision and at all if any decision has been made. Sometimes the chosen decision may be a compromising decision, lacking clarity or direction.
4. Old Mindset. Business runs in a cyclical mode:
There are periods of stability interrupted by periods of radical and revolutionary change. As times move, senior managers may be out of touch with the environment either because of becoming lazy or due to overconfidence.
5. Prior Bad Experience and Fire-Fighting:
If the managers had a previous bad experience with strategy, as the plans have been long, cumbersome, impractical, or inflexible or if presently it is so engrossed with the crisis management and fire-fighting that it has no time for strategy formulation any more.
6. Content with Current Success:
The firms currently doing nice currently feel no need of any more strategy formulation. To them it is merely waste of time and money.
7. Other Impediments:
Poor reward structure, fear of failure, self interest (status achieved using old strategy), fear of unknown (to undertake new roles), different perceptions of a situation and distrust in management are the other barriers to strategy formulation.