Unit IV
Competitive
Strategies
We will now discuss the generic strategies given by
Porter and the generally found marketing warfare strategies.
Generic
Strategies
According to Porter there are three potentially
successful generic strategies (see Figure 7-3) to cope up with the five
competitive forces as well as gain advantage (See Figure 7-2and Table 7-
3). These are:
·
Overall cost leadership
·
Differentiation and
·
Focus
Three Generic Strategies
Differentiation
|
Overall Cost Leadership
|
FOCUS
|
|
Overall Cost
Leadership
In this strategy company makes all
possible attempts to achieve the lowest costs in production and marketing. The
aim is to gain a large market share. Efficiency is the keyword guiding all
decisions to keep the costs low.
Differentiation
Here the aim is to achieve class leadership by creating
something, which is perceived as
unique. Creating highly differentiated products
and marketing programmes-like design or brand image, customer service
or dealer network, or any other feasible
dimension can achieve it.
Companies pursuing this strategy have major
strengths in R&D
design, quality control and marketing.
Chiragh Din Shirts, Bata Shoes, OTIS
Elevators, Cini Fans are some examples where this strategy seems to be the
dominant guiding force.
Focus
The underlying assumption in ‘Focus’ is that a firm should
be
able to serve a narrow
strategic target effectively and efficiently.
As a result the firm achieves
either differentiation from meeting the
need of a particular target,
on both.
Genteel’, a liquid detergent for
expensive clothes by Swastik, and Ponds Talcum Powder are some handy examples
for this strategy.
Formulating
the Strategy
Strategy making is not just a task for
senior executives. In large enterprises, decisions about what business
approaches to take and what new moves to initiate involve senior executives in
the corporate office, heads of business units and product divisions, the heads
of major functional areas within a business or division (manufacturing,
marketing and sales, finance, human resources, and the like), plant managers,
product managers, district and regional sales managers, and lower-level
supervisors. In diversified enterprises, strategies are initiated at four
distinct organization levels.
1)
Corporate strategy
2)
Business strategy
3)
Functional strategy
4)
Operational strategy
1)
Corporate Strategy: Corporate strategy is the overall managerial game plan for a
diversified company; it extends companywide - an umbrella over all a
diversified company's businesses. Corporate strategy consists of the moves made
to establish business positions in different industries and the approaches used
to manage the company's group of businesses.
2)
Business Strategy: The term business strategy (or business-level strategy) refers to the
managerial game for a single business. It is mirrored in the pattern of
approaches and moves crafted by management to produce successful performance is
one specific line of business.
3)
Functional Strategy: The term functional strategy refers to the managerial game plan for a
particular functional activity, business process, or key department within a
business. A company needs a functional strategy for every major business
activity and organizational unit. Functional strategy, while narrower in scope
than business strategy, adds relevant detail to the overall business game plan.
It aims at establishing or strengthening specific competencies calculated to
enhance the company's market position.
4)
Operating Strategy : Operating strategy concerns the even narrower strategic initiatives
and approaches for managing key operating units (plans, sales districts,
distribution centers) and for handling daily operating tasks with strategic
significance (advertising campaigns, materials purchasing, inventory control,
maintenance, shipping).
Factors Shaping Company's Strategy
Many situational considerations enter into crafting
strategy. Figure below depicts the primary factors that shape a company's
strategic approaches. The interplay of these factors and the influence that
each has on the strategy-making process vary from situation to situation.
This is why carefully sizing-up all the various
situational factors, both external and internal, is the starting point in
crafting strategy.
1)
Societal, Political, Regulatory, and Citizenship
Considerations: All organizations
operate within the broader community of society. What an enterprise can and
cannot do strategy-wise is always constrained by what is legal, by what complies
with government policies and regulatory requirements, by what is considered
ethical, and by what is in accord with societal expectations and the standards
of good community citizenship. Outside pressures also come from other sources -
special - interest groups, the glare of investigative reporting, a fear of
unwanted political action, and the stigma of negative opinion.
2)
Competitive Conditions and Overall Industry
Attractiveness: An industry's
competitive conditions and overall attractiveness are big strategy -
determining factors. A company's strategy has to be tailored to the nature and
mix of competitive factors in play - price, product quality, performance
features, service, warranties, and so on. When competitive conditions intensify
significantly, a company must respond with strategic actions to protect its position.
3)
Company's Market Opportunities and External Threats: The particular business opportunities open to a
company and the threatening external developments that it faces are key
influences on strategy. Both point to the need for strategic action. A
company's strategy needs to be deliberately aimed at capturing its best growth
opportunities, especially the ones that hold the most promise for building
sustainable competitive advantage and enhancing
profitability. Likewise, strategy should provide a defense against external
threats to the company's well-being and future performance.
4)
Company Resource Strengths, Competencies, and
Competitive Capabilities: One of the
most pivotal strategy-shaping internal considerations is whether a company has
or can acquire the resources, competencies, and capabilities needed to execute
a strategy proficiently. These are the
factors that can
enable an enterprise
to capitalize on particular opportunity, give the firm a competitive edge in the marketplace, and become a cornerstone
of the enterprise's strategy.
5)
Personal Ambitions, Business Philosophies and Ethical
Beliefs of Managers: Managers do not
dispassionately assess what strategic course to steer. Their choices are
typically influenced by their own vision of how to compete and how to position
the enterprise and by what image and standing they want the company to have.
Both casual observation and formal studies indicate that manager's ambitions,
values, business philosophies, attitudes toward risk, and ethical beliefs have
important influences on strategy. Sometimes the influence of a manager's
personal values, experiences, and emotions is conscious and deliberate; at
other times it may be unconscious.
Attitudes toward risk also have a big influence on
strategy.
6)
Influence of Shared Values and Company Culture on
Strategy: An organization's policies,
practices, traditions, philosophical beliefs and ways of doing things combine
to create a distinctive culture. Typically, the stronger a company's culture,
the more that culture is likely to shape the company's strategic actions,
sometimes even dominating the choice of strategic moves.
Strategic
Analysis and Choice (SAC)
Strategy Analysis and Choice (SAC) seeks to determine
alternative courses of action that could best enable the firm to achieve its
mission and objectives. The firm's present strategies, objectives and mission
coupled with information gathered through external and internal analysis
provide a basis for generating and evaluating feasible alternative strategies.
SAC tries to find out the answers to three basic questions:
How effective has the existing strategy been?
How effective will that strategy be in the future?
What will be the effectiveness of selected alternative
strategies (or changes in the existing strategy carried out using certain
tools) in the future?
SAC largely involves making subjective decisions based
on objective information.
The analytical tools employed in SAC such as BCG
Matrix, DPM, SPACE etc. can significantly enhance the quality of strategic
decisions. However, these should be used to pick up appropriate strategies
after a careful examination of behavioral, cultural and political factors
influencing strategy generation and selection.
Process of
Strategic Choice
The process of strategic choice is essentially a
decision - making process. Decision-making
consists of setting
objectives, generating alternatives, choosing one or more
alternatives that will help the organization achieve its objectives in the best
possible manner, and finally, implementing the chosen alternative. To make a
choice from among the alternatives, a decision - maker has to set certain on
which to accept or reject alternatives. These criteria are the selection
factors. They act as guides to decision - making and considerably simplify the
process of selection which would otherwise be a very difficult task. Strategic
choice could be defined as "the decision to select from among the grand
strategies considered, the strategy which will best meet the enterprise's
objectives. The decision involves focusing on a few alternatives, considering
the selection factors, evaluating the alternatives against these criteria, and
making the actual choice."
Since choice of a strategy is a decision - making
process, it goes through the various steps involved in it as shown in figure
below:
1)
Focusing on Alternatives: The aim of focusing on a few alternatives is to
narrow down the choice to a manageable number of feasible strategies. Gap
Analysis: Focusing on alternatives could be done by visualizing a future state
and working backwards from it. This is done through gap analysis. Company’s
sets objectives for a future period of time, say three to 5 years, and then
work backward to find out where it can reach through the present level of
efforts. By analyzing the difference between the projected and desired
performance, a gap could be found.
2)
Evaluation of Strategic Alternatives: Selection factors are the criteria on which a final
choice of strategy has to be based. Narrowing the choice leads to a few
alternatives, each one of which has to be evaluated for its capability to help
the organization achieve its objectives. Evaluation of strategic alternatives
basically involves bringing together the results of the analysis carried out on
the basis of the objective and subjective factors. Successive iterative steps
for analyzing the different alternatives on the basis of selection factors lie
at the heart of such an evaluation.
3)
Considering the Selection Factors: Narrowing down the strategic choice to a few
feasible alternatives is facilitated by considering the business definition and
a thorough gap analysis. These alternatives have to be subjected to further
analysis. Such an analysis
has to rely
on certain factors. These factors
are termed as selection factors. They determine the criteria on which the
evaluation of strategic alternatives can be based.
The selection factors can be broadly divided into
two groups:
i)
Objective
Factors: Objective factors are based on analytical techniques and are hard
facts or data used to facilitate a strategic choice. They could also be termed
as rational, normative, or prescriptive factors.
ii)
Subjective
Factors: Subjective factors are based on one's personal judgment and collective
or descriptive factors. For the present, it is important to note that the
alternatives that are generated in the first step have to be subjected to
analysis on the basis of these selection factors.
4)
Making the
Strategic Choice: An evaluation of strategic choice should lead to a clear
assessment of which alternative is the most suitable under the existing
conditions. The final step, therefore, is to make the strategic choice. One or
more strategies have to be chosen for implementation. A blueprint that will
describe the strategies and the conditions under which they would operate has
to be made. This blueprint is the strategic plan.
Identifying
Alternative Strategies
The
basic objective of identification of strategic alternatives is two fold:
1)
The Manager
should the aware about the various courses of action available to them;
2)
Even if, large
numbers of possible alternative actions are available, they should be in a
position to limit themselves to various relevant alternatives so that
unnecessary exercises are not taken up. From this point of view, how far an
organization goes, for searching strategic alternatives depends on the approach
it adopts for strategic decision-making.
Grand Strategy
Characteristics and Scope of Expansion Strategy-
Difference between intensification and diversification strategy
Type of Diversification strategy
Reasons Underlying Growth Strategies
Reasons for Adopting Diversification Strategy
Different Types of Diversification Strategies
Concentric diversification may be of three types :
ii)
Unrelated Diversification
Action Plans for Turnaround
Divestment Strategy: Characteristics and Scope
Business
Portfolio Analysis
Models of Portfolio Analysis
Grand Strategy
A grand strategy is one which provides guidance for
major actions for the purpose of meeting long-them objectives. These provide a
basic direction for strategic action in line with major corporate objectives of
a company. These grand strategies are thus a blue print for action. Selection
of grand strategies has been limited for their application due to the following
reasons:
1)
Traditional
managers usually build their action plans from status quo, which leads to
myopic attitudes towards growth, which is incremental in nature and not with
quantum improvements. Thus a treasure of potential grand strategies remains
unexplored by them.
2)
Strategy managers
who are aware of grand strategies lack the knowledge and experience of
selecting and implementing grand strategies. Thus, managers must be trained not
only on available grand strategies but also on ways and means of implementing them.
Broadly speaking, the major options in strategy
formation may be divided into four categories:
1.
Stability strategy;
2.
Growth strategy;
3.
Retrenchment
strategy,
4. Combination strategy.
These alternatives are sometimes called grand strategy
alternatives. Within each category,
again, the strategic planners may consider several sub-options or
sub-strategies. A bird's-eye view of the four grand strategies before the details
of each of these is as follows:
1)
STABILITY STRATEGIES: The stability grand strategy is adopted by an organization when it
attempts at an incremental improvement of its functional performance by
marginally changing one or more of its business in terms of their respective
customer groups, customer functions, and alternative technologies - either
singly or collectively.
Examples: In order to understand how stability
strategies work, here are three examples to illustrate how organizations could
aim at stability in each of the three dimensions of customer groups, customer
functions, and alternative technologies, respectively.
·
A packaged-tea
company provides a special service to its institutional buyers, apart from its
consumer sales through market intermediaries, in order to encourage bulk buying
and thus improve its marketing efficiency.
·
A copier machine
company provides better after-sales service to its existing customers to
improve its company and product image, and increase the sale of accessories and
consumables.
·
A steel company
modernizes its plant to improve efficiency and productivity.
Note that all the three companies here do not go
beyond what they are presently doing; they serve the same markets with the
present products using the existing technology.
Characteristics and Scope of Stability Strategy-
1)
A firm opting for
stability strategy stays with the same business, same product-market posture
and functions, maintaining same level of effort as at present.
2)
The endeavor is
to enhance functional efficiencies in an incremental way, through better
deployment and utilization of resources. The assessment of the firm is t hat
the desired income and profits would be forthcoming through such incremental
improvements in functional efficiencies.
3)
Naturally, the
growth objective of firms employing this strategy will be quite modest.
Conversely, only firms with modest growth objective will vote for this strategy.
4)
Stability
strategy does not involve a redefinition of the business of the corporation.
5)
It is basically a
safety-oriented, status quo-oriented strategy.
6)
It does not
warrant much of fresh investments.
7)
The risk is also less.
8)
It is a fairly
frequently employed strategy.
9)
With the
stability strategy, the firm has the benefit of concentrating its resources and
attention on the existing businesses / products and markets. But the strategy
does not permit the renewal process of bringing in fresh investments and new
products and markets for the firm.
2)
GROWTH / EXPANSION STRATEGIES : The expansion grand strategy is followed when an
organization aims at high growth by substantially broadening the scope of one
or more of its businesses in terms of their respective customer
groups, customer functions, and
alternative technologies - singly or jointly - in order to improve its
overall performance.
Examples: Given below are three examples to show how
company’s cam aim at expansion either in terms of customer groups, customer
functions, or alternative technologies.
·
A chocolate
manufacturer expands its customer groups to include middle- aged and old
persons among its existing customers comprising of children and adolescents.
·
A stockbroker's
firm offers personalized financial services to small investors apart from its
normal functions of dealing in shares
and debentures in order to increase the scope of its business and spread its
risks.
·
A printing firm
changes from the traditional letter-press printing to desk- top publishing in
order to increase its production and efficiency.
In each of the above cases, the company moved in one
or the other direction is as to substantially alter its present business
definition.
A growth strategy signifies something different from stable growth strategy or stability strategy. When a
firm increases the level of objectives higher than what it has achieved in the
immediate past, in terms of (say) market share, sales revenue, etc., or
strategic decision centre round increased functional performance in major
respects, we have typical cases of growth strategy. Another kind of growth
strategy is typically found when new products are added to the existing line,
or dissimilar products are taken up for production and sale, or business
activities are expanded through acquisition, merger, or amalgamation of firms.
In a sense, growth strategy differs from stability strategy in that the former
implies exponential growth while the latter implies an extrapolation of growth
based on past performance.
Characteristics and Scope of Expansion Strategy-
1)
Expansion
strategy is the opposite of stability strategy. Wile in stability strategy.
While in stability strategy, rewards are limited; in expansion strategy they
are very high. In the matter of risks, too, the two are the opposites of each other.
2)
Expansion
strategy is the most frequently employed generic strategy.
3)
Expansion
strategy is the true growth strategy. A firm with a mammoth growth ambition can
meet its objective only through the expansion strategy.
4)
Expansion
strategy involves a redefinition of the business of the corporation.
5)
The process of
renewal of the firm through fresh investments and new businesses/products/markets
is facilitated only by expansion strategy.
6)
Expansion
strategy is a highly versatile strategy; it offers several permutations and
combinations for growth. A firm opting for the expansion strategy can generate
many alternatives within the strategy by altering its propositions regarding
products, markets and functions and pick the one that suits it most.
7)
Expansion
strategy holds within its fold two major strategy routes:
·
Intensification,
·
Diversification.
Both of them are growth strategies; the difference
lies in the way in which the firm actually pursues the growth
Difference between intensification and diversification strategy
With intensification strategy, the firm pursues growth
by working with its current businesses. Intensification, in turn, encompasses
three alternative routes:
i.
Market
penetration strategy,
ii.
Market
development strategy,
iii.
Product
development strategy.
Diversification strategy involves expansion into new
businesses that are outside the current businesses and markets. There are three
broad types of diversification:
i.
Vertically
integrated diversification,
ii.
Concentric diversification,
iii.
Conglomerate diversification.
Vertically integrated diversification involves going
into new businesses that are related to the current ones. It has two components
- forward integration and backward integration. The firm remains vertically
within the given product-process sequence; the intermediaries in the chain
become new businesses. In concentric diversification, too, the new products are
connected to the firm's existing process / technology. But the new products are
not vertically linked to the existing ones. They are not intermediates. They
serve new functions in new markets. A new business is shinned - off from the
firm's existing facilities. In conglomerate diversification too, a new business
is added to the firm's portfolio. But, it is disjointed from the existing
businesses; in process / technology / function, there is no connection between
the new business and the existing ones. It is unrelated diversification.
Variants
of Growth Strategy
1.
Intensification
Strategy (Internal Growth)
Internal growth, which consists of increasing the
sales revenue, profits and market share
of the existing product line or services, is generally known as, intensive
growthstrategy.
When a firm selects the intensification strategy, it
means that the firm is opting to go deeper in its existing business. As the
very word denotes, in intensification, the firm is intensifying, i.e.,
deepening and strengthening its involvement and position in its existing
business. In the first place, it finds additional opportunities in that
business and secondly, it consciously
commits itself to exploiting these opportunities. It is ready to put in more
investment in the existing business, seeking a new position therein.
Thus, intensification basically means product-market
expansion in existing businesses. And,
intensification strategies provide ways to intensify the firm's position in
existingbusinesses.
Type
of Intensification strategy
i.
Market penetration
ii.
Market development
iii.
Product development
i)
Market
Penetration Strategy: Under market penetration strategy the firm tries to
achieve growth through existing products in existing markets. The firm opts to
penetrate the existing markets deeper, using the existing products. In other
words, it tries to increase its market share through penetrating the market
further, staying with the same products and same markets.
ii)
Market
Development Strategy: Market Development strategy tries to achieve growth
through existing products in new markets. There might be limits to penetrating
the existing market; so, the firm decides to locate and tap new market and/or
new market segments. As in market penetration strategy, here too, the firm
stays with the same product, but moves on to new markets/ market segments/new uses.
iii)
Product
Development Strategy: Product development strategy tries to achieve growth
through new products in existing markets. The new products in this context are
not intrinsically new products, but improved products or substitutes serving
the same need and carrying the same product mission. The firm develops improved
products for marketing in the same markets; these products are not really
distinct from the existing products.
It involves concentration of resources in a
high-growth product or market segment and is a widely used growth strategy. If
the product is not in the maturity stage of the life-cycle, this is a
particularly attractive strategy. It is often suited to firms with a small
market share irrespective of whether the product is in the high-growth stage or
maturity stage of its life-cycle.
2.
Diversification Strategy
At some point of time in the process of intensive
growth, it is no longer possible for a firm to expand in the basic product
market. It is not able to grow any more through market penetration. Then is
must consider adding new products or markets to its existing business line.
This approach toward growth is known as diversification. Diversification
Strategy is thus defined as a strategy in which the growth objective is ought
to be achieved by adding new products or services to the existing product or
service line.
Type of Diversification strategy
a. Related
i.
Vertical
integration: Backward integration Forward integration
ii.
Concentric
diversification
b. Unrelated
Conglomerate diversification
Reasons Underlying Growth Strategies
1)
Growth is often a
cherished cultural value. A company tat is not expanding is said to be falling
behind; a stigma is associated with the failure to grow. On the other hand, a
growth company is better known and attracts better management. It is a source
of strength.
2)
In industries,
which are subject to frequent changes in technology and other external
conditions, growth is necessary for survival. Opportunities must be availed of
and threats must be overcome so as to survive.
3)
Growth strategy
is associated with strong managerial motivation in its favor. Expansion is a
rewarding phenomenon in several ways. Larger size means higher executive
compensation. It satisfies power and recognition needs. To seize market share
from competitors or to enter challenging new fields is not only exciting and
satisfying but also leads to a sense of achievement
Reasons for Adopting Diversification Strategy
i)
Diversification
strategies are adopted to minimize risk by spreading it over several businesses.
ii)
Diversification
may be used to capitalize on organizational strengths or minimize weaknesses.
iii)
Diversification
may be the only way out if growth in existing businesses is blocked due to
environmental and regulatory factors.
Different Types of Diversification Strategies
i)
Related Strategy
Ø Vertical Integration:Vertical
diversification, commonly described
as vertical integration, is a type of growth strategy wherein new products or
services are added which are complementary to the existing products or service
line. It is characterized by the extension of the firm's business definition in
two possible directions from the present - backward or forward. In other works,
vertical integration is a growth strategy that involves the expansion of
business by moving backward or forward from the present products or services
establishing linkages of products, processes or distribution system. Thus,
vertical integration may be of two types: Backward Vertical Integration or
Forward Vertical Integration.
·
Vertical Backward Integration: Also known as 'upstream development', backward
integration strategy involves addition of activities to ensure the supply of a
firm's present inputs. It is aimed at moving lower on the production process
scale so that; the firm is able to supply its own raw materials or basic
components. Many sugar mills in India have developed sugarcane farming. T.V.
manufactures may produce picture tubes and other components. Steel plants have
set up their own coke ovens and acquired mining rights to secure the supply of
coal and coke. All these are instances of backward vertical integration.
.
·
Vertical Forward integration: Forward integration is a type of diversification strategy
which involves the entry of a firm into the business of finishing,
distributing, or selling of some of
its present outputs. It is sometimes
described as 'downstream' expansion and refers to moving higher up in the
production / distribution process towards the end consumer. Many a firm in
India which started business with a spinning mill has later added loom sheds to
produce fabrics. Large textile mills (DCM, Mafatlal, Binny, National Textile
Corporation, and other) have set up their own retail distribution systems.
These are examples of forward integration.
Ø Concentric
Diversification: When an organization
takes up an activity in such a manner that it is related to the existing
business definition of one or more of a firm's businesses, either in terms of
customer groups, customer functions or alternative technologies, it is called
concentric diversification.
Concentric diversification may be of three types :
·
Marketing-Related Concentric Diversification: When a similar type of product is offered with the
help of unrelated technology, for example, a company in the sewing machine
business diversifies into kitchenware and household appliances, which are sold
to housewives through a chain of retail stores.
·
Technology-Related Concentric Diversification: When a new type of product or service is provided
with the help of related technology, for example, a leasing firm offering
hire-purchase services to institutional customers also starts consumer
financing for the purchase of durables to individual customers.
·
Marketing and Technology Related Concentric
Diversification : When a similar type
of product (of service) is provided with the help of related technology, for
example, a raincoat manufacturer makes other rubber- based items, such as,
waterproof shoes and rubber gloves, sold through the same retailoutlets.
ii)
Unrelated Diversification
a)
Conglomerate Diversification: When an organization adopts a strategy
which requires taking up those activities which are unrelated to the
existing business definition of one or more its businesses, either in terms of
their respective customer groups, customer functions or alternative
technologies, it is called conglomerate diversification. There are several
examples of Indian companies, which have adopted a path of growth and expansion
through conglomerate diversification. The classic examples are of ITC, a
cigarette company diversifying into the hotel industry. Some other examples are
those of the Essar Group (shipping, marine construction, oil support services,
and iron and steel) ; Shriram FibersLtd. (nylon industrial yarn, synthetic
industrial fabrics, nylon tyre cords, fluorochemicals, fluorocarbon refrigerant
gases, ball and needle bearings, auto-electrical, hire-purchase and leasing,
and financial services); the Polar group (fans, marbles, and granite), and the
TTK group (pressure cooker, chemicals, pharmaceuticals, hosiery,
contraceptives, publishing etc.).
3)
RETRENCHMENT STRATEGIES : A retrenchment grand strategy is followed when an
organization aims at a contraction of its activities through substantial
reduction or the elimination of the scope of one or more of its businesses, in
terms of their respective customer groups, customer function, or alternative
technologies - either singly or jointly - in order to improve is overall performance.
Examples: Retrenchment involves a total or partial
withdrawal from either a customer group, customer function, or the use of an
alternative technology in one or more of a firm's businesses, as can be seen
from the situations given below:
·
A pharmaceutical
firm pulls out from retail selling to concentrate on institutional selling in
order to reduce the size of its sales force and increase marketing efficiency.
·
A corporate
hospital decides to focus only on specialty treatment ad realize higher
revenues by reducing its commitment to general cases which are typically less
profitable to deal with.
·
A training
institution attempts to serve a large clientele through the distance learning
system and to discard its face-to-face interaction methodology or training in
order to reduce its expenses and use the existing facilities and personnel more
efficiently.
In this manner, retrenchment attempts to 'trim the
fat' resulting in a 'slimmer' organization bereft of unprofitable customer
groups, customer functions or alternative technologies.
A strategic option, which involves reduction of any
existing product or service line along with the level of objectives set below
the past achievement, is known as, retrenchment strategy. It is essentially a
defensive strategy adopted as a reaction to operating problems stemming from
either internal mismanagement, unanticipated actions by competitors, or changes
in market conditions.
1)
Poor Performance:
When a firm suffers from poor performance in terms of lower earnings and
profits, and is unable to recover its position by any other means, it may be required
to shut down units of activity or segments of business, which continue to be a
drag on total performance.
2)
Threat to
Survival: When the survival of a firm is threatened by unanticipated problem in
the product market, the management may be under pressure from shareholders and
employees to improve performance by all means including cutback of operation.
3)
Redeployment of
Resources: When alternative investment opportunities promise higher returns,
some of the existing business units or segments of activity may be shed and
resources thus released utilized for increased profitability and growth.
4)
Insufficiency of
Resources: To sustain and develop satisfactory earning position in a
product-market, it may be necessary to deploy large financial resources. If the
firm is not in a position to provide adequate funds for that purpose, the best
thing to do may be divestment of the particular product-market for better use
of the finances released there by.
5)
To secure better
Management and improved Efficiency: It may be necessary to cut down some of the
existing operations to simplify the range of enterprise activities and thus
secure high efficiency of operations.
Variants of Retrenchment Strategy-
1)
Turnaround Strategies: Retrenchment may be done either internally or
externally. For internal retrenchment to take place, emphasis is laid on
improving internal efficiency. This usually takes the form of an operating
turnaround strategy. In contrast, a strategic turnaround is a more serious form
of external retrenchment and leads to divestment or liquidation. Turnaround
strategies derive their name from the action, involved, that is, reversing a
negative trend.
Action Plans for Turnaround
For turnaround strategies to be successful, it is
imperative to focus on the short-and long-term financing needs (as banks and
financial institutions do) as well as on strategic issues. A workable action
plan for a turnaround should include:
i)
Analysis of
product, market, production processes, competition, and market segment positioning
ii)
Clear thinking
about the market place and production logic
iii) Implementation of plans by target setting, feedback
and remedial action.
2)
Divestment Strategic: Divestment (also called divestiture or cutback) strategy involves the
sale or liquidation of portion of business, or a major division, profit centre
or SBU. Divestment is usually a part of rehabilitation or restructuring plan
and is adopted when a turnaround has been attempted but has proved to be
unsuccessful. The option of a turnaround may even be ignored if it is obvious
that divestment is the only answer.
Divestment Strategy: Characteristics and Scope
i) Divestment strategy involves retrenchment of some of
the activities in a given business of the firm or sell-out of some of the
businesses as such.
ii) Divestment is to be viewed as an integral part of
corporate strategy without any stigma attached.
iii) Like expansion strategy, divestment, too, involves a
redefinition of the business of the corporation.
iv) Compulsions for business can be many and varied, such as:
i)
Obsolescence of
product /process.
ii)
Business be coming
unprofitable.
iii)
High competition.
iv)
Industry over capacity.
v)
Failure of strategy.
3)
Liquidation Strategies: A retrenchment strategy, which is considered the most
extreme and unattractive, is the liquidation strategy, which involves closing
down a firm and selling its assets. It is considered as the last resort because
it leads to serious consequences such as loss of employment of workers and
other employees, termination of opportunities where a firm could pursue any
future activities, and the stigma of failure.
Firm opt for Retrenchment Strategy under the following
conditions /circumstances:
i)
A firm considers
divestment strategy when it finds that some of its businesses have become
unattractive, unprofitable and unviable.
ii)
Obsolescence of
product / process can be another setting for divestment.
iii)
High competition
can be another setting; firms that are unable to compete successfully, whatever
the reason, may consider divestment.
iv)
When the industry
as a whole is in dire straits, firms may consider divestment. Industry
overcapacity can be one of the settings in this category.
v)
When a business
is in the decline stage of the PLC, more attempts at divestment are usually seen.
vi)
When a firm
perceives some environmental threats, it sometimes turns towards divestment
strategy. As a general rule, in times of environmental flux more moves are seen
on the divestment front.
4)
COMBINATION STRATEGIES: The combination grand strategy is followed when an
organization adopts a mixture of stability, expansion, and retrenchment, either
at the same time in its different businesses, or at different times in the same
business with the aim of improving its performance. Combination strategies are
the complex solutions that strategists have to offer when faced with the
difficulties of real-life business. Combination strategy is not an independent
classification but it is a combination of different strategies - stability,
growth, retrenchment - in various forms. This is usually followed by
organizations having different business portfolios with each business facing
different problems. Thus the possible combinations of strategies for such
organizations at a time may be:
1)
Stability in some
businesses and growth in other businesses;
2)
Stability in some
businesses and retrenchment in other businesses;
3)
Growth in some
businesses and retrenchment in other businesses;
4)
Stability growth
and retrenchment in different businesses.
Stability
Strategy: Firms prefer stability
strategy under the following conditions circumstances:
i)
When the firm's
assessment indicates that it enjoys a comfortable position in its present
business, that an acceptable level of income and profits would be forthcoming
by staying with the present business and that its future well being, too, would
be ensured by staying with the present business.
ii)
When the firm's
growth ambitions are very modest and the firm is content with incremental growth.
iii)
When the industry
concerned is mature and the firm is currently in a comfortable position in the industry.
iv)
When
environmental turbulence is minimal and the firm does not foresee any major
threat to itself and the industry concerned as a whole.
v)
In general, small
firms it a useful strategy, as by relying on it, they can reduce their risks and
protect their hard earned positions.
Business
Portfolio Analysis
Business portfolio analysis should incorporate current
as well potential businesses. The analysis should address the following two issues:
·
What businesses
will the organization be in?
·
How will the
organization allocate its resources among the businesses? These two issues give
rise to the following fundamental strategy
challenges:
·
How attractive is the group of businesses the organization
is in?
·
If the
organization retains its current businesses, how good is its performance
outlook in the future?
·
How can the
organization strengthen its business portfolio?
Models of Portfolio Analysis
Business portfolio models or matrices are a technique for categorizing businesses and ranking them on the basis of
attractiveness. Portfolio analysis enables the organization to identify the
strategic options that can help in strengthening
its business portfolio in order to enhance performance. The following matrices
are among the most popularly used portfolio models.
1. The Growth-Share Matrix. Also known as the Boston
Consulting Group
·
Market or
industry growth refers to the rate at which industry sales are growing.
·
Relative market
share refers to the ratio of the organization’s market share to that of the
biggest rival in the industry.
·
In this 2 x 2 matrix, various businesses
are plotted accordingly depending on their market growth and the organization’s
relative market share
·
The matrix
suggests the following strategy prescriptions or options:
§
Stars
·
Best businesses
in portfolio
·
Strong businesses
in good markets
·
Businesses
generating and using a lot of cash
·
Strategy should
defend and grow such businesses
§
Question Marks
·
Heavy net cash users
·
Need cash from
other businesses
·
Today’s question
marks are likely to be tomorrow’s stars
·
These businesses
need investment and growth strategies
§
Cash cows
·
Cash-rich businesses
·
The cash can be used to develop
businesses with better future prospects
e.g. Question marks.
·
These businesses
need strategies that will maintain them so that
the organization can continue to ‘milk’ them for cash.
§
Dogs
·
Weak businesses
in low growth markets.
·
Such businesses
need strategies that will drain them for cash.
·
Eventually
divestment and liquidation strategies are needed.
·
Proceeds of
liquidation may be used for strengthening other businesses.
STRATEGY
IMPLEMENTATION
Strategy implementation is fundamentally different
from strategy formulation. The latter requires conceptual and abstract skills
on the part of management. The former requires concrete application and
performance management skills. Strategy implementation requires attention to four different aspects of organizational activity:
·
The acquisition
and deployment of organizational
resources
·
The development of an appropriate organization structure
·
The establishment
of appropriate organizational systems, and
·
The development of a strategy-supportive
culture
These strategies are then converted into specific actions plans that are
implemented and assessed using relevant measures. This entire process needs to
be accompanied by a complete risk
analysis and the development of appropriate contingency plans.
OVERVIEW
OF STRATEGICCONTROL
A
STRATEGY EVALUATION FRAMEWORK:
Activity
1: Review the strategy and assumptions on which it was based
Activity
2: Measure organizational performance:
Activity
3: Take corrective action
IMPLEMENTING STRATEGIC CONTROLS:
Types
of controls:
Budgets
as Strategy-Control Mechanism:
Strategic Evaluation and Control
OVERVIEW
OF STRATEGICCONTROL
The success of any organization is determined by its ability to achieve its fundamental purpose and live its stated
values effectively. Both of these are
stipulated in the mission statement.
In practice, however, it is seldom wise to make the
mission statement the focus of strategy evaluation because the dimensions it
contains are usually too general to be of much use. For successful strategy
evaluation, specific control procedures must apply:
1. Setting standards
2. Measuring performance
3. Comparing performance with standards
4. Taking corrective action
Without a clear and defined focus for the activity, a
great deal of discussion might occur with
little effective assessment and control eventuating. For these reasons,
it is essential that an evaluation framework be established that meets the
needs of the organization rather than those of individuals. The framework must
be able to locate and deal with performance issues wherever they might occur in
the strategic management process
A
STRATEGY EVALUATION FRAMEWORK:
Strategy evaluation is the final stage in the commonly
applied “plan-do-check-act” quality management cycle.
The choice of strategy assessment tools can vary
between organizations, but basis strategy- evaluation frameworks generally
consist of three distinct activities: These
are:
Activity
1: Review the strategy and assumptions on which it was based
During the evaluation process, it is important that
these underlying assumptions are questioned and sources of variance evaluated.
For example, as competitors react to the
organization’s strategy, different opportunities and threats will emerge in the
environment.
What was previously an organizational strength might
be considered a weakness due to changing consumer tastes. Where major changes
have occurred concerning original strategies, then modifications may be
essential.
There are different processes of reviewing strategy
among them:
i)
A continuous
watching brief: This process is required when potential problem areas must be
identified before they become a major issue.
ii)
A series of
regular formal reviews: This is the most common process for strategy review,
especially where strategy is implemented project by project. For example,
performance reports can be generated on a weekly, monthly, quarterly and annual
basis to provide a formal monitoring process for key performance indicators.
iii)
Reviews at the end of each critical path element and end phase: For example, if the organization has a
stated objective of achieving 15% market share within twelve months, a review
of market share and related issues should be conducted at the end of the
twelve-month period.
Activity
2: Measure organizational performance:
The key objective is to ascertain the extent to which
strategies have been applied and achieved. This must be done in a specific
manner. Major tools used to avoid ambiguity are: market share, profit margins,
asset growth, sales growth and return on investments.
Likewise, qualitative reports, qualitative criteria
such as managerial assessment of risk should be used to evaluate performance.
Criteria for
Evaluating Strategy: Rummelt (1996)
has outlined four criteria that can be
used to evaluating any strategy. These are:
·
Consistency:
Strategy must not present mutually inconsistent goals or goals are consistent
with the organization’s overall strategic direction.
·
Consonance: This
refers to the need to consider strategy within the context of sets of trends rather than individually
against single trends. A change in consumer
behavior is rarely the result of a single trend; rather, it usually represents
the outcome of a combination oftrends.
·
Feasibility: This
refers to the extent to which the strategy can be implemented without putting
the organization’s resources under undue strain.
·
Advantage:
Strategies should provide for or maintain
the organization’s competitive advantage relative to the competition. Such a
strategy should be evaluated on the basis of its contribution to the unique position of the company in
the marketplace.
Characteristics
of effective strategy-evaluation systems:
The success of the evaluation process depends of the
systems used and how they are used. Effective strategy evaluation systems
should have the following characteristics:
·
Economical; Too
much information is a bad as too little.
·
Meaningful; Strategy-evaluation
activities must be meaningful and relate directly to the organization’s objectives
·
Timely:
Strategy-evaluation activities should provide timely information.
·
Contextual:
Strategy-evaluation activities should provide information that is contextual
and designed to show a true
picture of what is happening.
·
Action-oriented:
Information from strategy evaluation activities should be
action- oriented rather than information oriented and should be directed at those individuals in the
organization who are responsible for taking the relevant action
·
Cooperation: The
strategy evaluation process should facilitate cooperation between departments during decision making to foster mutual understanding rather than dominated activities.
Activity
3: Take corrective action
Key criteria to consider when developing and
implementing a plan of corrective
action to close any gaps between anticipated performance and actual performance
are:
i)
Adaptiveness:
To what extent is the organization
able to adapt its current strategies to reflect changes in the environment? Is it possible for the gaps to be closed
through incremental adaptation of existing programs, or is a major rethinking of strategy required?
ii)
Responsiveness:
To what extent is the organization
able to respond to changes and unexpected
developments in a timely and efficientway?
iii)
Efficiency: Is the organization able to make the required changes in an
efficient manner?
IMPLEMENTING STRATEGIC CONTROLS:
The control of a strategy should be the concern of all
staff involved in the development and implementation.
Some principles for effective strategic control
process are:
1. Establish “loose/tight” controls. That is, allow no
variation to control processes for all critical elements of performance, but allow lower – level
managers to develop and implement
their own “local controls”.
2. Remain objective in assessing strategic, even those
that senior management had a major part in establishing.
3.
Select carefully
the composition of important committees/teams in the assessment process. The assessment group
needs to be qualified, objective and
well balanced in terms of representation from across the
organization.
Types
of controls:
There are three basic types of control:
1. Steering
controls: There are designed to
detect deviations from set standards before a sequence of events commences. For
example, checking the specifications of inputs/raw
materials before allowing them to enter the production line or running a check
on a computer system before allowing it to operate
in an actual situation.
2. Screening
controls: These are controls that
occur during processing and provide
tests that must be passed before
the process can continue for example, quality control inspections on production
line.
3. Output
controls: These measure the results of a completed activity – for example,
customer satisfaction surveys or an analysis of
the impact of an advertising campaign.
Budgets
as Strategy-Control Mechanism:
A budget is a formal
statement of the financial resources set aside for carrying out specific
activities in a given period of time
e.g. a month or year. Budgets control
are the
most encountered management controls.
Strategic Evaluation and Control
The process of evaluation basically deals with four
steps:
1.
Setting standards of performance-Standards refer to performance expectations.
2.
Measurement of performance-Measurement of actual
performance or results
requires appraisal based on standards.
3.
Analyzing variances- The comparison
between standards and results gives variances.
4.
Taking corrective
action-The identifications of undesirable variances prompt managers
to think about ways of corrective
them.
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