After reading this article you will learn about:- 1. Meaning of Strategy 2. Features of Strategy 3. Styles of Making Strategy 4. Levels/Types 5. Evaluation.
Meaning of Strategy:
Strategy implies a course of action that defines and achieves organisation’s objectives and implements its missions. Strategy is a means to achieve the goals. In a broader perspective, it represents organisation’s responses to its environment over a period of time.
Schendel and Hatten define strategy as “the basic goals and objectives of the organisation, the major programmes of action chosen to reach these goals and objectives, and major patterns of resource allocation used to relate the organisation to its environment.” Strategy is “large-scale future-oriented plans for competing in designated products and markets to achieve organisation’s objectives.”
“Strategy creates a unified direction for the organisation in terms of its many objectives, and it guides the deployment of the resources used to move the organisation towards those objectives.” It provides a framework for top managers to exploit environmental opportunities, overcome threats, make full use of their strengths and offset the weaknesses to make corporate decisions.
“While strategy is a comprehensive plan that accomplishes an organisation’s goals, effective strategies are those that promote a superior alignment between the organisation and its environment and the achievement of strategic goals.”
Strategy, thus, defines relationship between a firm and its environment. Determining a strategy involves answering a number of questions like what will be the target group of customers, what are their needs, what market segment do they represent, etc. The process of formulating a strategy to compete in the changing environment is called strategic planning.
Features of Strategy:
Strategy has the following features:
1. It is generally long-run in nature. It discounts the future to analyse its impact on present activities. However, strategies can be made for shorter periods also.
2. The effectiveness of a strategy cannot be known in near future. Non-achievement of goals in the immediate future should not render the strategies ineffective.
3. It is an action plan and more specific than objectives.
4. It is a single-use plan made for non-repetitive activities. It provides direction to goals. Other plans move towards this direction.
5. It is formulated by top-level managers and provides a guide for middle and lower-level managers to make sub-strategies.
6. It coordinates organisation’s internal environment with the external environment. It focuses on systems approach to management where the organisation is part of the social system in terms of receiving inputs and giving them back to the society in the form of outputs. Interaction of business with the environment is, thus, an important aspect of strategy.
7. It allocates scarce organisational resources over different areas for their optimum utilisation.
8. It enables the firm to outperform the competitors.
9. It is pervasive and required at each level in each functional area.
Styles of Making Strategy:
Mintzberg describes three styles/modes of making strategies.
1. Entrepreneurial mode:
This strategy applies to risk-seeking organisations. Top-level executives frame strategies based on their experience and judgment. The strategy aims at growth of the organisation by seeking environmental opportunities, accepting them and moving the organisation to a new direction. The entrepreneur aims at growth-oriented strategies by looking for new opportunities in the environment based purely on personal estimates of future and not rational estimates of environmental threats or opportunities.
2. Adaptive mode:
While entrepreneurial mode of strategy-making is offensive in nature, the adaptive mode is defensive in nature. It aims at making strategies in areas where organisations do not want to take risks, do not look forward to changes in the environment but accept the changes as they occur. It aims at making strategies where organisations adapt to the changing environment.
3. Planning mode:
This is similar to entrepreneurial mode but is more scientific and systematic in nature. The organisation anticipates changes in environment and makes plans to face them when they occur. It is, thus, a future-oriented mode of strategy-making where organisations are prepared to face the future challenges. The estimates of future are based on structured, systematic and rational analysis of environmental threats and opportunities.
Choice of Style:
One style of making strategies does not suit all the organisations. The choice of a particular style depends upon factors like maturity level of the organisation, nature of organisation, the product being marketed, leadership styles of managers etc. A new organisation, headed by young entrepreneurs may adopt the entrepreneurial mode of making strategies while those at the maturity stage prefer the planning mode. The entrepreneurial mode is appropriate during periods of crisis while planning mode is more useful in stable situations.
Levels/Types of Strategies:
Strategies are made at three levels:
1. Corporate-level strategy,
2. Business-level strategy, and
3. Functional-level strategy.
Corporate-level strategy is made for the company as a whole. It is made for companies that produce more than one product. Business-level strategy is made for each business carried by the corporate enterprise (strategic business unit). It is a sub-strategy of corporate strategy. Strategy made for each functional area; production, marketing etc. is called functional-level strategy. It is the sub-strategy of business-level strategy.
1. Corporate Level Strategy:
This strategy is made for the enterprise as a whole. It is related to companies which produce more than one product. This strategy helps in deciding the best business lines so that limited resources can be optimally allocated to those lines. It emphasises on the entire organisation and co-ordinates the activities of different business lines to attain the overall goals. It is formulated by top management, though managers at other levels assist the top manager in making strategies.
At this level of strategy, management is mainly concerned with the following questions:
(a) What actions should be taken to achieve the objectives of the company?
(b) What kind of business should the company be in?
(c) How should resources be allocated to those businesses?
(d) How to coordinate strategies of various strategic business units?
A corporate strategy is “a type of strategy that addresses what businesses the organisation will operate, how the strategies of those businesses will be coordinated to strengthen the organisations’ competitive position, and how resources will be allocated among the businesses.”
Corporate-strategies can be of the following types:
(a) Growth strategy,,
(b) Stability strategy,
(c) Defensive or retrenchment strategy, and
(d) Combination strategy.
(a) Growth strategy:
Growth strategy is made when organisations want to expand along some major dimension like sales, profits, markets, etc.
Growth strategies are pursued when firms:
(i) Operate in a volatile, competitive environment,
(ii) Want to improve the overall corporate activities,
(iii) Want to raise the level of objectives, and
(iv) Perceive growth as a measure of organisational efficiency.
(b) Stability strategy:
This strategy is suitable for firms which are satisfied with their products or market growth. The companies do not risk into new ventures but survive in the existing markets. They do not want to change their operations as they are satisfied with the present situation. This strategy is adopted by firms that operate in a stable environment. Satisfaction with past performance continues to be the basis for future performance. Firms in the maturity stage of their life cycle usually adopt this strategy.
(c) Defensive strategy:
This strategy is adopted by organisations when they want to restructure their businesses. It is adopted during recessionary conditions when they want to revive their operations in order to survive in the declining markets. They are also called retrenchment strategies where non-essential expenditure is curtailed and wasteful assets (non-earning assets) are sold off. The purpose of the strategy is to change the direction of company’s operations.
Defensive strategies can be:
When future market for existing products is unprofitable, organisations maximise their short-run profits and use them to enter into new businesses with better prospects.
It aims to turn the loss-making units into profit-making units by cutting the loss-making operations or costs. This may be done through retrenchment of surplus staff, better debt collection policies, better inventory management techniques etc.
It involves selling or disinvesting part of the business which is loss making and using sale proceeds to strengthen the remaining business operations.
If a company is unable to repay its debts because assets are less than the liabilities, it can seek the status of a ‘bankrupt organisation’ from the court of law till it becomes financially sound to pay its debts.
When the above measures fail to help the organisation come out of financial crisis, it finally adopts the strategy of liquidation, i.e., sell the assets, wind up its affairs and pay creditors out of the sale proceeds.
(d) Combination strategy:
Since corporate level strategies are made by companies engaged in different lines of business, there can be growth in one business and loss in the other. A combination of growth and defensive strategies is adopted in such a case.
This strategy is a combination of different strategies adopted along different business activities. A firm that has diversified operations in textiles and pharmaceuticals may adopt growth strategy for the profit-making textile division and defensive strategy for the loss-making pharmaceutical division.
2. Business Level Strategy:
While corporate-level strategy is formulated for different lines of business, business-level strategy is formulated for single line of business. Organisation has different businesses and each business operates in a different environment. The nature of businesses vary in terms of customers, competitors, technology, marketing channels etc.
For instance, TATA group of industries has different business units like automobiles, watches, jewellery, mobile phones, salt etc. All these businesses operate in different business environment and, therefore, strategy is required for each business unit. Each unit is treated as strategic business unit.
Strategy for each unit can be termed as sub-strategy of corporate strategy where separate strategy is formulated for each line of business regarding its objectives, allocation of resources, coordination amongst functional areas for each unit etc.
Business level strategy is “formulated by business managers to oversee the interests and actions of a particular business in such a way as to accomplish its long-term objectives.” It aims at strengthening a business in the changing environment. For companies producing a single-line product, corporate and business level strategies are the same.
Prof. Michael E. Porter suggests the following strategies for different businesses:
(a) Cost leadership strategy:
In this strategy, firm increases market share by lowering the cost of products. This reduces the selling price and increases the sales volume. High profits are earned by increasing sales in the present market by cutting the costs (production, research and development, advertising etc.).
(b) Differentiation strategy:
In this strategy, firm increases market share by keeping the prices of products same or even more than those of competitors. It changes product features like colour, shape, design or size and creates appeal for its products. Since product features are different from those of competitors, it creates brand loyalty amongst customers and without reducing the costs, the firm increases sales volume and profits.
(c) Focus strategy:
In this strategy, firm increases the market share, sales volume and profits by focusing on a section rather than the entire market. The focus may be on a group of customers (males or females), a specific product (only one product rather than the whole product line) or a specific area (only northern region rather than the whole country). The aim is to sell more in a narrower market. This can be done through cost reduction (lower prices), product differentiation (customer appeal) or both.
3. Functional-level Strategy:
As business-level strategy supports corporate-level strategy, functional-level strategy supports business-level strategy. Strategies for functional areas are called functional-level strategies. They are made for each functional area — production, marketing, advertising, finance, personnel, R&D etc. These strategies are more specific than business level strategies.
For example, business strategy that wants to expand market through product differentiation seeks the support of Research and Development department and marketing department to sell products with a distinct customer appeal. There is, thus, need to develop strategies for R&D and marketing departments. These are called functional level strategies.
Objectives are framed for each functional area, resources are allocated and coordination is maintained amongst all the functional areas.
Strategies for each function also include strategies for their operations or sub-functions. For instance, finance strategy can be sub-divided into strategies for capital budgeting decisions (investment in fixed assets), working capital, financing decision and dividend decisions. These sub-function strategies contribute to functional strategy which further contribute to the goals of strategic business units which further contribute to the goals of corporate as a whole.
Overall objectives of the organisation are framed in the corporate level strategy, long-run objectives are catered through business level strategies and specific short-term objectives are achieved through functional level strategies.
The levels of strategies can be understood as follows:
Evaluation of Strategies:
Implementation of strategy is not enough. The results should be constantly reviewed to assess whether or not the strategy has contributed to organisational goals. It requires periodic evaluation of the strategy and reassessment of future.
The following criteria help to evaluate a strategy:
A strategy must be consistent with the internal resources and external environment. Internal consistency ensures that strategy is supported by policies and budgets to achieve the goals. Lack of resources to implement the strategies will result in organisational rifts and conflicts. External consistency ensures that strategy conforms to environmental variables.
It enhances organisation’s adaptability to the environment in the interests of stakeholders (shareholders, customers, suppliers etc.). If organisation is not able to cope with the environment, strategies should be modified. Consistency in strategies is ensured through flexibility.
2. Company profile:
A company should analyse its resource position in terms of its strengths and weaknesses. Environmental opportunity is not sufficient for a firm to make strategies unless it has strengths to exploit that opportunity. Company’s profile must match the environmental profile.
Strategies have a long-time horizon and, therefore, element of risk is there. Since strategies are related to environmental issues, they cannot be risk free. However, the magnitude of risk should not endanger survival of the firm.
Risk should be within the limits of acceptance. Risk-averse companies make defensive strategies to react to changes and risk-seeking companies make offensive strategies to anticipate changes. The degree of risk is less if companies have a strong resource base and a committed work force. Strategies should maintain balance between risk and return.
Strategies may be constrained by time factor with respect to :
(a) Length of period for which strategies are made.
(b) Time available for making strategies.
Though strategies are meant for future, very long periods can make the strategies ineffective. Forecasts for very long periods can go wrong and strategies based on such forecasts can also deviate from targets. Very short period is also not appropriate for making strategies. Balance should be maintained between the time span (long and short) and strategies should be made for periods where forecasts match organisation’s internal profile with the external environment.
Time available for making strategies is also important. If companies have very little time to make strategies, they will not be able to collect enough information for making strategies and also not generate alternatives for proper selection and implementation. Sufficient time should be devoted in developing strategies.
Strategy must be workable. A strategy that cannot be implemented is as bad as not having a strategy. After planning the strategy, organisations should ensure their effective implementation. This may require hiring new people with specialised skills, transferring present workforce to new positions, laying off some of the employees, building and managing effective teams, top management leadership and a motivated workforce to carry out specific strategies.