Strategic management process comprises four phases: environmental scanning, strategy formulation, strategy implementation and strategy evaluation and control. Strategic management is an ongoing process to develop and revise future-oriented strategies that allow an organization to achieve its objectives, considering its capabilities, constraints, and the environment in which it operates.
Once the environmental scanning is done the next step is strategy formulation. Formulation produces a clear set of recommendations, with supporting justification, that revise as necessary the mission and objectives of the organization, and supply the strategies for accomplishing them. In formulation, we are trying to modify the current objectives and strategies in ways to make the organization more successful. This includes trying to create "sustainable" competitive advantages -- although most competitive advantages are eroded steadily by the efforts of competitors.
THREE LEVELS OF STRATEGY FORMULATION
The following three aspects or levels of strategy formulation, each with a different focus, need to be dealt with in the formulation phase of strategic management. The three sets of recommendations must be internally consistent and fit together in a mutually supportive manner that forms an integrated hierarchy of strategy, in the order given.
Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions about the total organization's scope and direction. Basically, we consider what changes should be made in our growth objective and strategy for achieving it, the lines of business we are in, and how these lines of business fit together. It is useful to think of three components of corporate level strategy: (a) growth or directional strategy (what should be our growth objective, ranging from retrenchment through stability to varying degrees of growth - and how do we accomplish this), (b) portfolio strategy (what should be our portfolio of lines of business, which implicitly requires reconsidering how much concentration or diversification we should have), and (c) parenting strategy (how we allocate resources and manage capabilities and activities across the portfolio -- where do we put special emphasis, and how much do we integrate our various lines of business).
Business Level Strategy (often called Competitive Strategy): This involves deciding how the company will compete within each line of business (LOB) or strategic business unit (SBU).
Functional Strategy: These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity.
CORPORATE LEVEL STRATEGIES
Corporate level strategies are basically about the choice of direction that a firm adopts in order to achieve its objectives. They are basically about decisions related to allocating resources among the different businesses of a firm, transferring resources from one set of businesses to others, and managing and nurturing a portfolio of businesses in such a way that the overall corporate objectives are achieved.
Major types of grand strategies:
¨ Expansion (Growth) Strategies
¨ Stability Strategies
¨ Retrenchment Strategies
¨ Combination Strategies
GROWTH STRATEGIES
Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when an organization aims at higher growth by broadening its one or more of its business in terms of their respective customer groups, customers functions, and alternative technologies singly or jointly – in order to improve its overall performance.
E.g.: A chocolate manufacturer expands its customer groups to include middle aged and old persons among its existing customers comprising of children and adolescents.
There are five types of expansion (Growth) strategies
¨ Expansion through concentration
¨ Expansion through integration
¨ Expansion through diversification
¨ Expansion through cooperation
Expansion through concentration
It involves converging resources in one or more of firms businesses in terms of their respective customer needs, customer functions, or alternative technologies either singly or jointly, in such a manner that it results in expansions. A firm that is familiar with an industry would naturally like to invest more in known business rather than unknown business. Concentration can be done through
Market Penetration: It involves selling more products to the same market by focusing intensely on existing markets with its present products, increasing usage by existing customers and increasing market share and restructures a mature market by driving out competitors E.g.: Low pricing strategies
Market Development: It involves selling the same products to new markets by attracting new users to its existing products. Market development can be geographic wise and demographic wise. E.g.: XEROX Company educated small business entrepreneurs to create new markets.
Product Development: It involves selling new products to the same markets by introducing newer products in existing markets. E.g.: the tourism industry in
ANSOFF”S PRODUCT-MARKET MATRIX
.
| | Present | New |
| Present | Market Penetration | Product Development |
| New | Market Development | Diversification |
Advantages of concentration strategies
¨ Involves minimal organizational changes and is less threatening
¨ Enables the firm to specialize by gaining the in-depth knowledge of the businesses.
¨ Enables the firm to develop competitive advantage
¨ Decision-making can be made easily as there is a high level of productivity
¨ Systems and processes within the firm become familiar to the people in the organization.
Disadvantages of concentration strategies
¨ It is dependent on one industry if there is any worse condition in the industry the firm will be affected.
¨ Factors such as product obsolescence, fickleness of market, emergence of newer technologies are threat to concentrated firm
¨ Mangers may not be able to sustain interest and find the work less challenging
¨ It may lead to cash flow problems
Expansion through Integration
It is done where the company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers. The alternative technology of the business undergoes a change. It is combing activities related to the present activity of a firm. Such a combination may be done through value chain. A value chain is a set of interrelated activity performed by an organization right from the procurement of basic raw materials down to the marketing of finished products to the ultimate customers.
E.g.: Several process based industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm
A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers. The cost of making the items used in the manufacture of ones owns products are to be evaluated against the cost of procuring them from suppliers. If the cost of making is less that the cost of procurement then the firm moves up the value chain to make the item itself. Like wise if the cost of selling the finished products is lesser than the price paid to the sellers to do the same thing then the firm would go for direct selling.
Among the integration strategies are of two type’s vertical and horizontal integration.
Vertical Integration: when an organization starts making new products that serve its own needs vertical integration takes place. Vertical integration could be of two types Back ward and forward integration.
Backward integration means moving back to the source of raw materials while forward integration moves the organization nearer to the ultimate customer.
Generally when firms vertically integrate they do so in a complete manner that is they move backward or forward decisively resulting in a full integration but when a firm does not commit it fully it is possible to have partial vertical integration strategies too. Two such partial vertical integration strategies are ‘taper’ integration and ‘quasi’ integration. Taper integration requires firms to make a part of their own requirements and to buy the rest from outsiders. Through quasi integration strategies firm purchase most of their requirements from other firms in which they have an ownership stake. Ancillary industrial units and outsourcing through sub contracting are adapted forms of quasi integration.
Horizontal Integration: when an organization takes up the same type of products at the same level of production or marketing process, it is said to follow a strategy of horizontal integration. When a luggage company takes over its rival luggage company, it is horizontal integration. Horizontal integration strategy may be frequently adopted with a view to expand geographically by buying a competitors business, to increase the market share or to benefit from economics of scale.
Expansion through Diversification
Diversification is a much used and much talked about set of strategies. It involves a substantial change in the business definition – singly or jointly- in terms of customer groups or alternative technologies of one or more of a firm’s businesses. . There are two categories, concentric and conglomerate diversification.
DIFFERENT TYPES OF DIVERSIFICATION STRATEGIES
| | Related Technology | Unrelated Technology |
| Similar Type of Product | Marketing- technology related concentric diversification | Marketing related concentric diversification |
| New Type of Product | Technology- related concentric diversification | Conglomerate diversification |
Concentric Diversification: when an organization takes up an activity in such a manner that is related to the existing business definition of one or more of firms businesses, either in terms of customer groups, customer’s functions or alternative technologies, it is called concentric diversification. Concentric diversification may be of three types
· Marketing related concentric diversification
· Technology- related concentric diversification
· Marketing- technology related concentric diversification
Marketing related concentric diversification: when a similar type of product is offered with a help of unrelated technology for e.g., a company in the sewing machine business diversifies in to kitchen ware and household appliances, which are sold to house wives through a chain of retails stores.
Technology- related concentric diversification: when a new type of product or service is provided with the help of related technology, for e.g., a leasing firm offering hire- purchase services to institutional customers also starts consumer financing for the purchase of durable sot individual customers.
Marketing- technology related concentric diversification: when a similar type of product is provided with the help of related technology, for e.g., a rain coat manufacturer makes other rubber based items, such as water proof shoes and rubber gloves sold through the same retail outlets
Conglomerate Diversification: when an organization adopts a strategy which requires taking of those activities which are unrelated to the existing businesses definition of one or more of its businesses either in terms of their respective customer groups, customer functions or alternative technologies. Example of Indian company which have adopted apart of growth and expansion through conglomerate diversification the classic examples is of ITC, a cigarette company diversifying into the hotel industry
Expansion through Cooperation
The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefits. Cooperative strategies could be of the following types
1. Mergers
2. Takeovers
3. Joint ventures
4. Strategic alliances
Mergers Strategies: A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets and liabilities are combined and new stock is issued. For the organization, which acquires another, it is an acquisition. For the organization, which is acquired, it is a merger. If both the organization dissolves their identity to create a new organization, it is consolidation. There are different types of mergers they are horizontal merger, vertical merger, concentric merger and conglomerate merger.
Horizontal Mergers: it takes place when there is a combination of two or more organizations in the same business. E.g: A company making footwear combines with another footwear company, or a retailer of pharmaceutical combines with another retailer in the same businesses.
Vertical Mergers: It takes place when there is a combination of two or more organizations, not necessarily in the same business, which create complementarities either in terms of supply of raw materials (input) or marketing of goods and services (outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe retail stores
Concentric Mergers: It takes place when there is a combination of two or more organizations related to each other either in terms of customer functions, customer groups, or the alternative technologies used. E.g: A footwear company combining with a hosiery firm making socks or another specialty footwear company, or with a leather goods company making purse, hand bags and so on
Conglomerate Mergers: It takes place when there is a combination of two or more organizations unrelated to each other, either in terms of customer functions, customer groups, or alternative technologies used. E.g: A footwear company combining with a pharmaceutical firm.
Reasons for mergers.
Why the buyer wishes to merge:
1. To increase the value of the organization’s stock
2. To increase the growth rate and make a good investment
3. To improve stability of earning and sales
4. To balance, complete, or diversify product line
5. To reduce competition
6. To acquire needed resources quickly
7. To avail tax concessions and benefits
8. To take advantages of synergy
Why the seller wishes to merge
1. To increase the value of the owner’s stock and investment
2. To increase the growth rate
3. To acquire resources to stabilize operations
4. To benefit from tax legislation
5. To deal with top management succession problem
Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeovers are frequently classified as hostile takeovers (which are against the wishes of the acquired firm) and friendly takeovers (by mutual consent)
Friendly takeovers are where a takeover is not resisted or opposed, by the existing management or professionals. E.g: Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover.
Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the existing management or professionals
¨ Ensure management accountability
¨ Offer easy growth opportunities
¨ Create mobility of resources
¨ Avoid gestation periods and hurdles involved in new projects
¨ Offer a chance to sick units to survive
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