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MODULE 9
9.1. Strategy Formulation : An Overview
The corporate world is in the process of a global transformation. Mergers, acquisitions, outsourcing and downsizing are becoming common word everywhere. Privatization is allowing free enterprise to take on functions that previously were the domain of government. International boundaries are fading in importance as businesses take on a more global perspective and the technology of information age is telescoping the time it takes to communicate and make decision. Strategic management takes a panoramic view of this changing corporate terrain and attempts to show how large and small firms can be more effective and efficient not only in today's world but tomorrow as well.
Strategic management is the set of managerial decisions and action that determines the way for the long-range performance of the company. It includes environmental scanning, strategy formulation, strategy implementation, evaluation and control. It emphasizes the monitoring and evaluation of external opportunities and threats in light of corporation’s strength and weakness. Business policy has a general management orientation and tends primarily to look inward with its concern for properly integrating the corporations many functional activities. But strategic management as a field of study integrates the business policy with the environmental opportunities and threats. Therefore strategic management has tended to replace business policy as the preferred name of the field.
Why Strategic Management?
Strategic management provides the route map for the firm. It lends a framework, which can ensure that decisions concerning the future are taken in a systematic and purposeful way. Strategic management also serves as a hedge against uncertainty, a hedge against totally unexpected developments on the business horizon. It lends a frame of reference for investment decisions. It aids the concentration of resources on vital areas of best potential. It offers a methodology by which the firm could anticipate and project the future and be internally equipped to face it. It helps to develop processes, systems, mechanisms and managerial attitude that are essential for this purpose.
Defining Strategy:
Management is an art as well as science. Many of the concepts used in building management theory have been derived from the practical experience of the managers.
Chandler defined strategy as: "The determination of the basic long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out this goals".
Andrews defined strategy as: "The pattern of objectives, purposes, goals and the major policies and plans for achieving these goals stated in such a way so as to define what business the company is in or is to be and the kind of the company it is or it is to be".
Ansoff explained strategy as: "The common thread among the organization's activities and product markets, that defines the essential nature of business that the organization was or planned to be in the future"
in that area. This helps the company to concentrate its strategies in a particular area and to reduce the unnecessary expenses in non-profitable area.
Functional Strategy:
Strategy that is related to each functional area of business such as production, marketing and personnel is called functional strategy. It is designed and managed in a coordinated way so that they interrelate with each other and at the same time collectively allow the competitive strategy to be implemented properly.
Competitive Strategy:
Competitive Strategy is concerned with creating and maintaining a competitive advantage in each and every area of business.
Strategic Management Process:
Strategic management consists of four basic elements·
Environmental scanning:
If an organization understands the environment in which it operates, half the problem is solved. This requires an analysis of what is happening outside the organization and an evaluation of current resources (strength and weaknesses) and an assessment of opportunities and threats present in the environment. Environment could be classified as external and internal.
External:
The external environment consists of variables that are outside the organization and not typically within the short-run control of top management. They may be general forces and trends within the overall societal environment,
which consists of socio cultural, economic, technological, political and legal force. There may be specific forces called task environment that operates within the organization's specific which includes suppliers, employers, competitors, trade association, communities, creditors, customers, special interest groups, Government and shareholders. The method widely used to analyze the external environment is Porter’s Five-Forces Model. This method involves analyzing the threat from the new entrant, rivalry among the existing players, pressure from the buyers, pressure from the suppliers and pressure from the substitutes.
Internal:
The internal environment of a corporation consists of variables (strengths and weaknesses) that are within the organization and are not usually within the short run control of top management. This includes the corporation's culture, structure and resources. One of the widely used method for internal analysis of the firms is Value Chain analysis which assess the strengths and weaknesses that divides a business into a number of linked activities, each of which may produce value to the customers.
Strategy formulation:
Strategy formulation is the development of long range plans for the effective management of environmental opportunities and threats in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines. It begins with situational analysis. The simplest way is to analyze through is SWOT analysis. This is the method to analyze the strengths and weakness in order to utilize the threat and to overcome the threat. SWOT is the acronym for Strength, Weakness, Opportunities and Threats. The TOWS matrix
Strategies:
A strategy of a corporation forms a comprehensive master plan stating how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage.
Types of strategy:
The typical business firm considers three types of strategy:
Corporate strategy:
It describes a company's overall direction in terms of its general attitude towards growth and management of its various business and product lines. Corporate strategy deals with three key issues facing the corporation as a whole.
- Directional strategy – the firm’s overall orientation towards growth, stability and retrenchment. The two basic growth strategies are concentration and diversification. The growth of a company could be achieved through merger, acquisition, takeover, joint ventures and strategic alliances. Turnaround, divestment and liquidation are the various types of retrenchment strategy.
- Portfolio analysis – The industries or markets in which the firm competes through its products and business units. In portfolio analysis, top management views its product lines and business units as a series of portfolio investment and constantly keep analyzing for a profitable return. Two of the most popular strategies are the BCG Growth Share matrix and GE business screen
- Parenting strategy – the manner in which the management coordinates activities and transfers resources and cultivate capabilities among product lines and business units.
Business strategy:
It usually occurs at the business unit or product level and it emphasizes improvement of the competitive position of a corporation's products or services in the specific industry or marketing segment served by that business unit. It may fit within two overall categories of competitive or corporate strategies. Competitive strategy is the strategy battle against all competitors for advantage. Michael Porter developed three competitive strategies called Generic strategies. They are cost leadership, differentiation and focus. Cooperative strategy is to work with one or more competitors to gain advantage against other competitors.
Hierarchy of strategy
Corporate strategy
Business strategy
Functional
strategy
Strategy Evaluation and control:
Evaluation and control is the process in which corporate activities and performance can be compared with desired performance. Managers at all levels use the clear, prompt, unbiased information from the people below the corporation's hierarchy to take corrective action and resolve problems. It can also pinpoint weaknesses in previously implemented strategic plans and this stimulates the control of performance. The evaluation and the control of performance complete the strategic management model. Based on the performance results, management may need to make adjustments in its strategy formulation or implementation or both.
Thus, a strategic decision making process involves the following seven steps:
Evaluate current performance results in terms of return on investment, profitability in the light of current mission, objectives and policies. Scan and assess the external environment to determine the strategic factors that pose opportunities and threats. Scan and assess the internal corporate environment to determine the strategic factors that are strengths and weaknesses. Analyze strategic factors to pinpoint a) problem areas and b) review and revise the corporate missions and objectives as necessary. Generate, evaluate and select the best alternate strategy in light of the analysis conducted in step 4. Implement selected strategies via programs, budgets, and procedures. Evaluate implemented strategies via feedback systems and the control of activities to ensure their minimum deviation from plans.
9.2 PEST Analysis & Porter’s Industry Analysis
To formulate effective strategies, managers in an organization need to be aware of realities in the business environment. Strategy formulation thus begins with a scanning of the external as well as internal environment. Analysis of external environment helps to identify the possible threats and opportunities while analysis of internal environment helps to identify strengths, weaknesses and the key people within the organisation.
Characteristics Of Environment:
Environment is complex:
The environment consists of number of factors, which are not isolated but interact with each other to create a new set of influence. Hence it would be complex to comprehend the environment in totality but relatively easier to understand in parts.
Environment is dynamic:
Due to many and varied influences operating; there exists a constant dynamism in the environment and there is continuous change as well as impact.
Environment is multifaceted:
The shape and character displayed by environment depends on the perception of the observer. A similar development in an environment may be viewed as an opportunity by some company and as a threat by some other company.
Constituents of Societal Environment
Economic environment:
The economic environment consists of macro level factors related to the means of production and distribution of wealth that have an impact on the business of the organization. Some of the economic environment factors to be analyzed are:
- General economic conditions
- Economic conditions of different segments of population
- Trends in income distribution and consumer spending patterns
- Rate of growth of each sector of economy
- Rate of inflation
- Behavior of capital market
- Interest rate/exchange rate
- Tax rates
- Prices of materials/energy
- Labour scene
Regulatory Political Economic Technological Social
Mega Environment
Changes in economic environment can have an obvious impact on business activity. For example, an increase in the interest rates translates into fewer sales of major home appliances. Higher increase in interest rates results in higher mortgage rates and higher cost of buying a house. Most of the household goods are bought when people shift their houses. Higher costs of buying the house eat into the budget in appliances.
Technological environment:
The technological environment consists of the factors related to technology used in the production of goods and services that have an impact on the business of an organization. Technological factors to be considered are:
- Source of technology like company, external and foreign sources, cost of technology acquisition, collaboration and transfer of technology.
- Technological development, rate of change of technology and research and development.
- Impact of technology on human beings, the man-machine system and the environmental effects of technology.
- Communication, infrastructure and managerial technology.
For a business firm technology affects its final products by changing processes in raw material sourcing, production and distribution. Technology, when rightly used can bring about huge changes in the productivity of firms. Computer Industry is one example where the technology in the industry keeps pushing competition to the brink.
- Other policies related to PSU, SSI, sick industries, and development of backward areas and control of environmental pollution.
Businesses have to operate within the framework of the prevailing legal environment. They have to understand the general legal aspects and those particular to the industry the company is in. Businesses have to understand the implication of such legislations and adapt themselves accordingly.
Sociocultural environment:
Socio cultural environment are the forces that regulate the values, morals and customs of society. Important factors to be considered are:
- Demographic characteristics
- Social concerns
- Social attitudes
- Family structure and changes in it
- Role of women in society, position of children and adolescents in family and society
- Educational level, awareness and consciousness of rights and work ethics of members of the society. The social environment primarily affects the strategic management process within the organization in the areas of mission and objective setting and decision related to products and markets.
Task environment:
The task environment, otherwise called as microenvironment includes those elements or groups that directly affect the corporation and in turn are affected by
it. These are demand-related factors, consumer, supplier, competitors, government etc. A corporate task environment is typically the industry within which those firms operate.
Demand related factors:
By monitoring the demand related factors of one's industry a firm gather vital clues on consumption pattern, buying habits, invasion of substitute products, growth potential, attractiveness of the industry, expansion, divestment etc. The aspects to be considered are:
- Nature of demand
- Demand potential
- Current level of demand
- Changes in demand, consumption pattern, buying habits etc.
The consumer:
Monitoring the customer’s taste may result in attractive business opportunities. Hence customer analysis is very important during environmental survey. The factors that have to be monitored in relation to the customers are:
- Purchasing power
- Buying motives, attitudes and habits
- Lifestyle and need
- Brand awareness, brand loyalty and brand switching
- Reasons/motives for customer's patronage of specific brands
Industry Analysis
In order to have a better understanding of the external environment, analyzing the industry in detail is critical. In conducting an industry analysis managers need to analyze seven aspects carefully:
- General features and basic conditions of the industry: General features/basic conditions of the industry include factors such as current size of the industry, product categories/sub categories, their relative volumes, performance of the industry in recent years, etc.
- Industry environment: Industries can be classified based on their settings/environment. Porter classified industries as fragmented, emerging, matured, declining and global industries.
- Industry structure: Industry structure essentially means the underlying fundamental economic and technical forces of an industry. Each company will have its own key structural features such as number of players, market size, relative shares of the player, nature of the competition, differentiation practiced by the various players in the industry, cost structure of the players etc. These features determine the strength of competitive forces operating in the industry and thereby serve as direct indicators to the attractiveness or profitability of the industry.
- Industry attractiveness: The various determinants of industry attractiveness are industry potential, industry growth, industry profitability, future pattern of the industry barriers and forces shaping the competition in the industry.
- Industry performance: Industry performance entails looking at production, sales, profitability and technological development.
- Industry practices: Industry practices refer to what a majority of the players do in the industry with respect to essential aspects of the business such as distribution, pricing, promotion, methods of selling, service field support, R&D and legal tactics.
- Emerging trends and likely future: The emerging trends/likely future pattern of the industry can be discerned by analyzing issues such as the product life cycle, stage of the industry, rate of growth, changes of buyer needs, innovation in product/process, entry and exit of firms and emerging changes in the regulatory environment governing the industry.
Analysis Of Competition:
Usually competition analysis is done along with the industry analysis. This is so because competition and competitive forces are a part and parcel of industry structure. As a part of strategy formulation the firm must analyze and size up all the forces that shape competition in the industry. Most of the firms
