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28 Business Policy and Strategic Management
NATURE OF STRATEGIC MANAGEMENT
Strategic management always concentrates on the anticipated aim. Future is always uncertain. Hence, strategic decisions are always incomplete and sometimes these are based on false information. It may lead to further problems. The strategic manager should always aim at achieving predetermined goal of the organization. Further, organizations have to work with brevity and variety. Thoughts should become actions. Actions will lead to results. Result-oriented action is the need of hour.
SCOPE OF STRATEGIC MANAGEMENT
Strategic management deals with the following aspects:
- Strategic decision-making with the help of strategic planning and manage- ment control
- Business policy as well as corporate strategy and social responsibility
- Corporate capability and corporate appraisal
- Corporate culture and leadership
- Core competence and stages of development
Process of Strategic Management
∑ Nature of Strategic Management ∑ Scope of Strategic Management ∑ Functional Aspects of Strategic Management ∑ Strategic Management Process ∑ Crucial Considerations ∑ Major Steps ∑ Modernization of Strategies ∑ Reasons for Modernization
∑ Strategic Alternatives ∑ Strategic Planning ∑ Dimensions of Strategic Planning ∑ Strategic Choice ∑ Crucial Considerations ∑ Influence of Subjective Factors ∑ Strategic forecasting ∑ Conclusion
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- Competitive strategy under uncertainty
- Attack and defence strategies and power games amongst competing powers
- Strategists and their role in strategic management
- Competitive environment by using environmental scanning and appraisal
- Social, technological and market environment and environmental forecast- ing
- Strategic modernization, diversification, integration
- Expansion strategies: Vertical integration, horizontal strategy
- SWOT analysis
- Corporate strategy
- Generic competitive strategies
- Value-chain analysis
- Functional strategies
- Marketing
- Production/operations
- Research & development planning and policies
- Personnel and financial plans and policies
- Strategies implementation by using different models like : Structural, func- tional, behavioural models
- Strategy alternatives can be selected by applying techniques of:
- Ansoff’s growth vector
- BCG & GE model
- Porter’s generic strategic analysis
- Structural considerations
- Strategic dimensions and structure analysis
- Strategy evaluation
- Strategic management in an international firm
- Total Quality Management (TQM)
- Enterprise resource planning
- Business process re-engineering
FUNCTIONAL ASPECTS OF STRATEGIC MANAGEMENT
The following are the major benefits of strategic management. The benefits may be treated as functional aspects or merits or pros of strategic management.
- Decision-Making: CEO is the key-man to take decisions. Thus, with the help of strategic management, CEO can select best strategy and sub- strategies. He can direct the management in a right manner.
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STRATEGIC MANAGEMENT PROCESS
Definition
Strategic management process can be defined as ‘a combination of managerial decisions and actions that determines the long-run performance of a corporation. It includes environmental observation, strategic planning, formulation, implemen- tation, evaluation and control.
CRUCIAL CONSIDERATIONS
- Demand: No businessman can expect demand forecasting for products unless he is having strategic planning for the organizational development. Hence, long-range planning is necessary to meet the demand.
- Competition: Business entities should always fight for survival. When there are new entrants in the market there will be more competition. Hence, strategic planning is necessary to face competition and to become success- ful businessman.
- Technology: Changes in technology also necessitate strategic planning. Technological advancements are useful for the development of business. More opportunities will be available to business.
- Scarcity: Scarcity of the resources always forms the basis for strategic management when products are scarce and there is increase in demand.
MAJOR STEPS
First Stage (Definitions)
- Preparation of Mission: ‘Mission’ is the purpose for which organization is established. Mission includes both a statement of organizational philoso- phy and purpose. An organizational philosophy establishes the values, beliefs, and guidelines for the manner in which the organization is going to conduct its business. The first step of strategy formulation depends on well-defined mission statement or organizational purpose. The mission may be described as the scope of the operation in terms of nature of business.
- Setting of Objectives: Objectives are defined as ends which the organi- zation seeks to achieve. Objectives may be internal or external. Internal objectives are those which define how much is expected to be achieved with the resources that the organization commands.
- Fixation of Goals: Goals are specific, and time-based points of measure- ment. Generally, goals are determined by the owner or entrepreneur of the organization. In case of large scale companies CEO (Chief Executive Officer) will determine the goals for its firm. Thus goal of the owner will be the goal of firm.
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- Policies: A policy is a definition of common purposes or organization components. The process of strategic planning sometimes encompasses the formulation of important policies. Policies help to ensure that all units of an organization operate under the same ground rules. They also facilitate coordination and communication between various organizational units. Policies of competitors also influence an organization’s policies.
- Analysis of Environment: Business environment always influences decision-making. There may be external or internal factors that influence business. Buyers, suppliers, government and competitors are likely to react in accordance with changes in environment. Thus, business also should act in the same fashion.
Second Stage (Formulation)
- Formulation of Strategies: Strategies can be formulated after diagnosing the environment. Each strategy with suitable sub-strategies and alternative strategies should be available to top management. Thus, top management always mentors the administration with strategies which can be adapted from time-to-time.
- Implementation of Strategies: This is an important stage in strategic management process. Well-designed strategies may fail in implementation. Hence, adaptability of strategies and implementation process should be clearly mentioned while formulating strategy. It is the strategist’s respon- sibility to take care of implementing strategies in accordance with the requirements of an organization.
Third Stage (Evaluation)
- SWOT Analysis: Strengths, Weaknesses, Opportunities and Threats sim- ply termed SWOT. Every organization should go through SWOT analysis. It is an important tool for evaluating organizational capabilities.
- Evaluation: This can be stated as the last stage of strategic management process. The strategist should evaluate each strategy after implementing them. The strategist should evaluate whether there is profit maximization or cost minimization or achievement of long-term or short-term goal what- ever it may be.
MODERNIZATION OF STRATEGIES
Modernization of strategies may be defined as a systematic approach of preparing modern-oriented plans for the development of business in relation to its environ- ment to ensure continued success and offer security from contingencies. An integrated approach to strategy formulation, involving all levels of management,
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of the business policies to achieve goals. There will be no change in the attitude of the management.
Steps for Stability Strategy These strategies aim at stability by causing the companies to marginally improve their performance or, at least, letting them remain in the highly competitive market. The essence of these strategies is to do something for survival in the market. The following are the important steps to be adopted as a part of stability strategies:
∑ Management should concentrate on consistency of policies and objectives. ∑ It should try to maintain present market share. ∑ It should aim to improve efficiency of functional areas. ∑ Providing special service to potential customers. ∑ Providing better after-sales service to attract more customers. ∑ Improving quality of the product. ∑ Producing different accessories for existing product. ∑ Maintaining and developing competitive advantages.
b. Growth or Expansion Strategies: Expansion or growth strategies are con- tradictory to stability strategies. Stability aims at consistency whereas growth requires dynamism. It aims to take challenging tasks for the development. Diver- sification of business—changes in the objectives, planning for growth of busi- ness—is important aspect of these strategies. Aiming for increase in market share, holding the relative position of the business are some of the adoptable strategies. These strategies can be followed when an organization substantially broadens the scope of its customers. Growth or expansion strategy is to attract all classes of customers i.e., poor, middle and rich customers. It may be aimed to attract irrespective of the size purchases made by customers viz., huge investors and small investors. The company may move to different directions and it may later amend its objective and goal of the business. Steps for Growth or Expansion Strategy ∑ Diversification of products: Launching different product lines can be treated as one of the expansion strategies. ∑ Diversification of area of market: Market segmentation is an important criterion in this regard. Expansion to south Indian market or north Indian market, etc. ∑ Increasing market share: A company may establish new machinery so that it can produce more goods to capture more shares in the market. ∑ Increase in objectives and diversification of policies : The corporate entity may increase its objectives and diversify its policies to make expansion of its business.
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∑ Applying different strategies for different types of markets: Some markets may be slow-moving, medium and some may behave as fast-mov- ing. Hence the corporate entity has to adopt different strategies for different types of markets. Different Expansion or Growth Strategies
- Internal growth strategy
- Diversification strategy: a. Horizontal diversification i. Concentric diversification ii. Conglomerate diversification b. Vertical diversification i. Forward integration ii. Backward integration
- Mergers and takeovers
- Joint ventures
c. Retrenchment Strategies: Retrenchment strategy is 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 a defensive strategy adopted as a reaction to parting problems stemming from either the internal mismanagement, unanticipated actions by com- petitors or changes in market coordination. This may be used as short-run busi- ness policy to survive in the face of economic recession, financial stringency or poor performance. It is adopted out of necessity and not by deliberate choice.
Steps for Retrenchment Strategy
- Analyzing performance of units or segments of the organization.
- Dropping or retrenching such units in case of poor performance which continued to be a drag on total performance.
- Examining problems existing in the market.
- Identifying rivals in the competitive market conditions.
- When there are unanticipated problems in the product market, the manage- ment may be under pressure to improve performance by all means includ- ing cut back of operations.
- To improve the profitability of investments, which give higher returns, some of the existing investments may be shed and resources thus released utilized for increased profitability and growth. d. Combination or Mixed Strategies: A combination strategy is one in which there is conscious use of different strategies for different units or divisions at the same time, or sequential use of different strategies over time. It is nothing but a combination of two or more basic strategic elements at the same time in the
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- Preparation of budget: Strategic plans involve budget allocation i.e., resource allocation to various aspects of a decision. Budget may be allo- cated to various sectors of production.
- Future development: Strategic plans are usually expected to have a significant impact on future prosperity of the organization. This is because there is a long-term commitment. In case of absence of long-term com- mitment, the firm cannot achieve future development.
- Orientation: Strategic planning should keep in view the competition ex- isting in the market. Sometimes firms have to face non-price competition.
- Environment: Plans are always influenced by business environment. There may be external or internal factors that influence business. Buyers, suppliers, government and competitors are likely to react in accordance with changes in the environment.
- Risk: Strategic plans mostly face the problem of risk. The plans should have risk-bearing capacity. Risk and uncertainty are two important aspects which cannot be accepted by businessman.
Strategic Planning and Control
Strategic planning is nothing but strategies for the achievement of organizational development. Strategic control is continuous evaluation of implementing strategies at various stages. Hence, strategic planning and control are nothing but prepara- tion of strategies and checking up of these strategies at various stages. The strategic planning and control are usually the responsibility of top management team such as the Board of Directors. It involves three dimensions viz., strategic, tactical and operational control. Span of control varies according to the type of control. The characteristics of these three dimensions are illustrated in the follow- ing table:
Characteristics of Dimensions
Characteristic Strategic Tactical Operational
Time frame Long-term Medium-term Short-term Aggregation High Moderate Low Scope Broad Medium Narrow Level in organization High Middle Low Complexity High Moderate Low Risk High Moderate Low
STRATEGIC CHOICE
Meaning
Strategic choice is nothing but selection of the best strategy. The main problem before a strategist is to choose from many alternatives which are suitable for the
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achievement of organizational goals. Strategic choice is nothing but decision- making. Decision-making consists of setting of aim, goal and objectives. Finding different alternatives for each decision and selection of best alternative is the primary concern of strategic choice.
Definition
Strategic choice may be defined as ‘the decision to select from among the grand strategies considered, the strategy which will best meet the enterprise’s objec- tives. The decision involves focusing on a few alternatives, considering the selec- tion factors, evaluating the alternatives against these criteria, and making actual choice’.
Vital Steps for Strategic Choice
- Alternatives: First step is the determination of alternatives for the prob- lems of organization. The strategist should always try to find all possible alternatives and select the best ones. This can be done with the help of GAP analysis i.e., finding gap between present performance and desired perfor- mance.
- Selection factors: Second step is to find selection factors. These will help to analyze and examine alternatives. These factors may be objective or subjective. Objective factors require analytical skills whereas subjective factors are based on one’s personal choice or decision.
- Evaluation: After selection of factors, applying these to evaluate alterna- tives is an important step. Evaluation process reduces the burden of the strategist while selecting the strategy.
- Making strategic choice: After a clear analysis and evaluation of choices, decision-making in accordance with the conditions of the organization is the final step. A plan of action or blueprint is made which describes strategies to be adopted by the organization.
CRUCIAL CONSIDERATIONS
- Mission: ‘Mission’ is the purpose for which an organization is established. Mission includes both a statement of organizational philosophy and a pur- pose. The first step of strategic choice depends on well-defined mission statement or organizational purpose. The mission may be described as the scope of the operation in terms of nature of business.
- Objectives: Objectives are defined as ends which an organization seeks to achieve by its existence and operation. Objectives may be internal or external. Internal objectives are those which define how much is expected to be achieved with the resources that the organization commands.
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∑ Suppliers: Bargaining power and competition among suppliers are also im- portant influencing factors for making strategic choice. Rivalry among ex- isting firms should also be considered. Suppliers have the ability to raise prices or reduce the quality of purchased goods and services. ∑ Substitutes: Strategic choice for substitutes is an important subjective fac- tor. A substitute product may have the quality of satisfying nature, but it will be in different form. Each product or service will have substitute products or services. Hence, substitutes will become a competitive force in the indus- try. For example, tea and coffee. If there is an increase in price of tea, there will be demand for coffee, vice-versa. ∑ Rivals: Rivalry among different entities will be forming as a base for deci- sion-making for strategic choice. A competitive move by one firm can be expected to have a noticeable effect on its competitors. For example, Pepsi and Thumbs Up, Horlicks and Complan, Polo and Minto are different rivals in the consumer products. ∑ Stakeholders: The stakeholders in the corporate entity also influence selec- tion alternatives among different strategies. Stakeholders are creditors, debt- ors, government, trade associations, shareholders, and trade unions. The importance of the stakeholders varies according to the nature of the industry. ∑ Government policies: Changes in government policies are also vital in making strategic choice. ∑ Attitude of top level management: CEO or top-level management’s atti- tude also becomes a subjective factor and it has a key role in decision-making and choosing the best alternative. ∑ Environment: Nature of business environment and forces of external and internal environment should also be considered while making strategic choice.
STRATEGIC FORECASTING
Meaning
Expecting future strategies for a business is called ‘strategic forecasting’. This estimate is made considering various factors like controllable and non-controllable and present and anticipated market conditions. Accurate forecasting is essential for a firm to enable it to produce the required quantities at the right time and arrange well in advance for the various factors of production viz., material, money, men, management, machinery, etc. Strategic forecasting is not specula- tion. It cannot be hundred per cent correct. But it gives a reliable information and estimation of future business. It is based on mathematical law of probability. Strategic planning is based on forecasting of business. Most of the business
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decisions depend on the expected sales in future. The success of business is also influenced by the accuracy of forecasted reports. There will be no problem of over- and under-production if the figure of sales forecasts or business forecasts is accurate. As it will reduce or have control over costs, the profits will certainly go up. Hence, the importance of forecasting more or less depends upon the nature of business.
Factors involved in Strategic Forecasting
- Time factor: Forecasting may be done for short-term or long-term. Short- term forecasting is generally taken for one year while long-term forecast- ing covers a period of 5 year, 10 year or 20 year period.
- Level factor: Strategic forecasting may be undertaken at three different levels. a. Macro level: It is concerned with business conditions over the whole economy. b. Industry level: Prepared by different industries. c. Firm level: Firm level forecasting is the most important from manage- rial view point.
- General or specific purpose factor: The firm may find either general or specific forecasting or both useful according to its requirement.
- Product: Forecasting varies according to the type of product i.e. new product or existing product or well established product.
- Nature of the product: Goods can be classified into (i) consumer goods and (ii) producer goods. Business for a product will be mainly dependent on nature of the product. Forecasting methods for producer goods and con- sumer goods will be different accordingly.
- Competition: While forecasting, market situation and the product position in a particular market should be analyzed.
- Consumer behaviour: What people think about the future, their own per- sonal prospects and about products and brands are vital factors for firms and industries.
Advantages
The following are the advantages of strategic forecasting:
- Analyzing business: Business analysis is the first and foremost applica- tion of strategic forecasting. Price of a product is the key factor which influences business for the product. Apart from price, there are several other factors which influence business for the product like income, taste, preferences, consumer behaviour, etc. Strategic forecasting will consider all the factors influencing business for the product, to estimate future business for the product.
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- Setting sales targets: Strategic forecasting helps in determining sales targets of the organization. Each sales executive has to achieve his assigned tasks as determined by forecasting department.
- Planning manpower requirements: Manpower requirements for the organization i.e., sales staff, production staff, administration staff, etc. can be determined using strategic forecasting technique.
CONCLUSION
Strategic Management Process can be defined as ‘a combination of managerial decisions and actions that determines the long-run performance of a corporate organization.’ It includes environmental observation, strategic planning, formula- tion, implementation, evaluation and control. Strategic alternatives are vital tools for increasing the profitability of the organization. There are four major strategic alternatives like stability, growth or expansion, retrenchment, combination or mixed strategies. The strategist may adopt any of these strategies or combina- tions, to solve the problems of organization. Stability strategies are required for small or medium scale entities, growth and retrenchment strategies may be adopted by large scale entities. Combination strategies are useful for enhancing profitability of the organization. However, selection of suitable strategic alternative is a crucial consideration for a strategist. Strategic choice is selection of the best strategy. The main problem before a strategist is to choose from many alternatives which suit the organization in achieving its goals. Strategic planning is a comprehensive approach to preparation of strategies. It differs from project planning, tactical planning and operational planning. Strategic planning is long-term in nature, high-risk oriented and decided by top level management. While, tactical planning is medium-term, medium-risk oriented and implemented by middle level managers. Operational planning is short- term, low-risk and followed by low-level managers.
