A short introduction to Strategic Management

[Former Member]

1.What is strategy

A company’s strategy consists of a set of competitive moves and business approaches that management is employing to run the company.Strategy can thus be called as the management’s game plan to achieve the following :

• Attract and please customers
• Stake out a market position.
• Conduct operations
• Compete successfully
• Achieve organizational objectives

Thus a strategy can be defined as an action plan for deploying resources to achieve a competitive advantage in the marketplace.A competitive advantage is created when any company successfully formulates and implements a value creating strategy.Any value creating strategy can only be deemed successfully when it is sustainable and the competitors are unable to duplicate the same.

In this context we can define strategic management as a process by which managers choose a set of strategies for the enterprise to pursue its vision.Strategic management is this both the art and science of formulating,implementing,evaluating cross functional decisions that enable any organization to achieve its objectives.The three facets of strategic management are :

• Strategy formulation
• Strategy implementation
• Strategy evaluation

2. Benefits of Strategy management.

The following are the tangible and intangible benefits of strategic management

• Strategy formulation activities enhance the organization’s ability to prevent problems.
• Group based strategic decisions are likely to be drawn from the best available alternatives
• The involvement of employees in strategy formulation improves their understanding of the productivity-reward relationship in every strategic decision and heightens their motivation.
• Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies the differences and responsibilities of roles.
• Resistance to change is reduced.

3. Risks in Strategic management.

The following can be some of the risks in strategic management

• The time managers spend on strategic management process can have a negative impact on operational activities
• If the formulators of strategy are not intimately involved in the implementation,they may shirk the responsibility for the decision reached.
• Strategic managers must be trained to respond and anticipate to the disappointment of participating subordinates over unattained expectations and results.
• Managers may try to opportunistic and try to implement value destroying strategies that enhance their own personal wealth and powers.Corporate governance and ethics needs to be established to prevent such opportunistic behavior.

4. Dimensions of strategic decisions.

The following are some of the key dimensions of strategic decisions :

• Requires top management decisions and actions
• Requires large amount of the firm’s resources
• Often affects the firm’s long term prosperity
• Future oriented
• Usually have multi-functional or multi-business consequences
• Requires consideration of the firm’s external environment.

5. The three levels of strategy.

The following are the three levels of strategy implemented in an organization.

• Corporate level strategy :: At this level the fundamental task is to develop a balanced portfolio of businesses which will achieve the goals of the organization and satisfy its stakeholders.
• Business level Strategy : At this level ,the business or set of activities is given and the major task for strategic planner at this level is for business to succeed against competitors and also satisfy corporate success criteria.
• Functional level Strategy :At this level the major task is to provide appropriate functional strategies(Finance and accounting,marketing,R&D ,HR etc) for SBU or corporate level strategy.

6. Business level strategy.

A business level strategy is an integrated and coordinated set of commitments and actions that the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.The fundamental tenet of a business level strategy is to “Compete for advantage”.The firms need to answer the following questions:

• Who
• What
• How

There are three generic business level strategies which are used across industry  segments :

• Low cost leadership
• Differentiation
• Focus

Successful businesses use their competitive advantages to develop one of these generic business strategies.Organizations also combine these strategies to achieve further benefits.Most of the big corporations in today’s world follow a combination of these strategies in varied scales.

Cost Leadership Strategy.

This strategy is an integrated set of actions designed to produce or deliver goods and services at the lowest cost relative to competitors with features that are acceptable to consumers.The features can be :

• Relatively standardized products
• Features acceptable to many customers
• Lowest possible price.

Firms that succeed in cost leadership strategy has usually the following advantages :

• Access to low cost capital  and resources
• Building efficient facilities
• Skill in designing products for efficient manufacturing
• High level of expertise in manufacturing process engineering
• Efficient distribution channels
• Tight control systems with focus on quantitative targets.

Cost leadership results in the following advantages :

• Economies of scale
• Vertical integration
• Corporate inter-relationships
• Location advantage

The following can be some of the risks of cost leadership :

• Other firms may also be able to lower their costs as well.
• Firms following a focus strategy and targeting various narrow markets may be able to archieve a even lower cost within their segments and thus can gain significant market share.

Differentiation Strategy.

The differentiation strategy is an integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive adding value.The features can be as follows :

• Price may exceed standard offering
• Non-commodity products
• Customers value differentiated features than than they value low cost.

Some differentiation themes can be as follows :

• Unique taste
• Multiple features
• Wide selection and one-stop shopping
• Reliable,superior service
• Service network availability

Firms that succeed in the differentiation strategy has got the following strengths :

• Access to leading scientific research
• Highly skilled and creative product development team
• Focus on quality
• Strong sales team with ability to successfully communicate the perceived strengths of the product
• Corporate reputation for quality and innovation

The following can be some of the risks in this strategy :

• Imitation by competitors
• Changes in the customer tastes
• Various firms pursuing focus strategies may be able to achieve even greater differentiation

Focus Strategy.

This strategy focuses on a narrow segment and within that segment attempts to achieve either cost advantage or differentiation. Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.

Because of their narrow market focus,firms pursuing a focus strategy have lower volumes and therefore less bargaining powers with their suppliers.However firms pursuing a differentiated-focus strategy may be able to pass higher costs on to the customers since close substitute products do not exist.

Some of the risks involved in pursuing focus strategies can be as follows :

• Target segment becomes unattractive
• Demand disappears
• Large competitors may set their sights on the niche market.

In addition to the above strategies some firms also pursue an integrated cost leadership-differentiation strategy.The advantages of such an approach can be :

• Adapt quickly to environmental changes
• Learn new skills and technologies more quickly
• Efficiently leverage its core competencies while competing against the rivals.

The major risks in the above approach can be :

• An integrated cost/differentiation strategy often involves compromises(neither the lowest cost nor the most differentiated item)
• The firm may become “stuck” in the middle lacking the strong commitment and expertise that accompanies firms following the cost leadership or differentiation strategies.

7. Corporate level strategy.

A corporate strategy is an action taken to gain a competitive advantage through a selection and management of a mix of businesses competing in several industries or product markets.Corporate strategy is mostly concerned with the broad and long term questions of :

• What business(es) the organization is in or what to be in.
• What is wants to do with those businesses.

The tasks involved in corporate strategy can be as follows :

• Moves to enter new businesses
• Actions to boost combined performance of businesses
• Ways to capture synergy among related businesses
• Establishing investment priorities and steering corporate resources into most attractive units.

Corporate level strategies thus enable firms to decide on diversification and divestitures.

Levels and Types of diversification

Firms can be classified based on the levels of diversification within the firm into the following :

• Low levels of diversification
• Single business
• Dominant business
• Moderate  levels of diversification
• Related constrained
• Related linked
• Very high levels of diversification
• Unrelated

Reasons for diversification : Firms diversify for value-creating,value-neutral and value-reducing reasons.

• Value creating diversification

      1.Achieving economies of scope(related diversification)

      2.Increased market power(related diversification)

      3.Achieving financial economies(unrelated diversification)

• Value neutral diversification

      1.Anti trust regulations

      2.Tax laws

      3.Low performance

      4.Uncertain future cash flows

      5.Risk reduction for firm.

      6.Tangible resources

      7.Intangible resources

• Value reducing diversification

      1.Diversifying managerial employment risk

      2.Increasing managerial compensation.

Value creating diversification : Related corporate strategies :

Related constrained and Related linked are two corporate level strategies followed by organizations to create value.Both these strategies exploit and develop the economies of scope between the businesses.The economies of scope can be defined as cost savings a firm creates by successfully by sharing some of its resources or capabilities or transferring one or more corporate level competencies that were developed in one of its businesses to another of its businesses.The former is called related constrained strategy and the latter is called related linked strategy.

In this context we need to understand the terms operational relatedness and corporate relatedness concepts.Operational relatedness is used in related constrained strategies while corporate relatedness is used in related linked strategies.

• Operational relatedness
• Corporate relatedness

Related corporate strategies are also used by firms to create market power.A market power exists when a firm is able to sell its products above the existing competitive level or to reduce costs of primary and support activities below the competitive level or both.Market power can also be increased by :

• Multi-point competition
• Vertical integration

Value creating diversification : Unrelated corporate strategy :

Unrelated corporate strategy create value through financial economies.Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.The financial economies are achieved by the firms through :

• Efficient internal capital market allocation.In this case corporate office distributes capital to business divisions to create value for overall company.
• Restructuring of acquired assets.In this case a firm creates value by buying and selling other firms assets in the external market.

It has been seen that generally conglomerates that follow the unrelated diversification corporate strategy have a fairly short life cycle because financial economies are more easily duplicated by competitors than are gains from operational or corporate relatedness.