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Q.2 Define the term “Strategic Management”. What are the types of strategies?

Strategic Management
Strategic management is a systematic approach of analysing, planning and implementing the strategy in an organisation to ensure a continued success. Strategic management is a long term procedure which helps the organisation in achieving a long term goal and its overall responsibility lies with the general management team. It focuses on building a solid foundation that will be subsequently achieved by the combined efforts of each and every employee of the organisation.

Types of Strategies
1. Corporate level
The board of directors and chief executive officers are involved in developing strategies at corporate level. Corporate level strategies are innovative, pervasive and futuristic in nature.
The four grand strategies in a corporate level are:
— Stability and expansion strategy
— Retrenchment
— Corporate restructuring
— Combination strategies – concept of synergy

Stability strategy
The basic approach of the stability strategy is to maintain the present status of the organisation. In an effective stability strategy, the organisation tries to maintain consistency by concentrating on their present resources and rapidly develops a meaningful competitiveness with the market requirements.
Further classifications of stability strategy are as follows:
 No change strategy – No change strategy is the process of continuing the current operation and creating nothing new. Usually small business organisations follow no change strategy with an intention to maintain the same level of operations for a long period.

 Pause/Proceed with caution strategy – Pause/Proceed with caution strategy provides an opportunity to halt the growth strategy. It analyses the advantages and disadvantages before processing the growth strategy. Hence it is termed as pause/proceed with caution strategy.

 Profit strategy – Profit strategy is the process of reducing the amount of investments and short term discretionary expenditures in the organisation.

Expansion strategy
The organisations adopt expansion strategy when it increases its level of objectives much higher than the past achievement level. Organisations select expansion strategy to increase their profit, sales and market share. Expansion strategy also provides a significant increase in the performance of the organisation. Many organisations pursue expansion strategy to reduce the cost production per unit.

Expansion strategy also broadens the scope of customer groups, and customer functions.
Example – Prior to 1960’s most of the furniture industry did not venture into expanding their industry globally. This was because furniture got damaged easily while shipping and the cost of transport was high. Later in 1970’s a Swedish furniture company, IKEA, pioneered towards expanding the industry to other geographical areas. The new idea of transporting unassembled furniture parts lead to minimizing the costs of transport. The customers were able to easily assemble the furniture. IKEA also lowered the costs by involving customer in the value chain. IKEA successfully expanded in many European countries since customers were willing to purchase similar furniture.

The further classification of expansion strategy is as follows:
 Diversification - Diversification is a process of entry into a new business in the organisation either marketwise or technology wise or both. Many organisations adopt diversification strategy to minimise the risk of loss. It is also used to capitalise organisational strengths.
Diversification may be the only strategy that can be used if the existing process of an organisation is discontinued due to environmental and regulatory factors.

The two basic diversification strategies are:
° Concentric diversification

The organisation adopts concentric diversification when it takes up an activity that relates to the characteristics of its current business activity. The organisation prefers to diversify concentrically either in terms of customer group, customer functions, or alternative technologies of the organisation. It is also called as related strategy.
° Conglometric diversification
The organisation adopts conglometric diversification when it takes up an activity that does not relate to the characteristics of its current business activity. The organisation chooses to diversify conglometrically either in terms of customer group, customer functions, or alternative technologies of the organisation. It is also called as unrelated diversification.
 Concentration – Concentric expansion strategy is the first route towards growth in expanding the present lines of activities in the organisation. The present line of activities in an organisation indicates its real growth potential in the present activities, concentration of resources for present activity which means strategy for growth.

The two basic concentration strategies are:
° Vertical expansion
The organisation adopts vertical expansion when it takes over the activity to make its own supplies. Vertical expansion reduces costs, gains control over a limited resource, obtain access to potential customers.
° Horizontal expansion
The organisation adopts horizontal growth when it takes over the activity to expand into other geographical locations. This increases the range of products and services offered to the current markets.

Retrenchment strategy is followed by an organisation which aims to reduce the size of activities in terms of its customer groups, customer functions, or alternative technologies.
Example – A healthcare hospital decides to focus only on special treatment to obtain higher revenue and hence reduces its commitment to the treatment of general cases which is less profitable.

Different types of retrenchment strategies are:
 Turnaround – Turnaround is a process of undertaking temporary reduction in the activities to make a stronger organisation. This kind of processing is called downsizing or rightsizing. The idea behind this strategy is to have a temporary reduction of activities in the organisation to pursue growth strategy at some future point.

Turnaround strategy acts as a doctor when issues like negative profits, mismanagement and decline in market share arise in the organisation.
 Captive company strategy – Captive company strategy is a process of tying up with larger organisations and staying viable as an exclusive supplier to the large organisations. An organisation may also be taken as captive if their competitive position is irreparably weak.
 Divestment strategy – Divestment strategy is followed when an organisation involves in the sale of one or more portion of its business. Usually if any unit within the organisation is performing poorly then that unit is sold and the money is reinvested in another business which has a greater potential.
 Bankruptcy – Bankruptcy is a legal protective strategy that does not allow others to restructure the organisation’s debt obligations or other payments. If an organisation declares bankruptcy with customers then there is a possibility of turnaround strategy.
 Liquidation – Liquidation strategy is considered to be the most unattractive process in an organisation. This process involves in closing down an organisation and selling its assets. It results in unemployment, selling of buildings and equipments and the products become obsolete. Hence, most of the managers work hard to avoid this strategy.

Corporate restructuring
Corporate restructuring is the process of fundamental change in the current strategy and direction of the organisation. This change affects the structure of the organisation. Corporate restructuring involves increasing or decreasing the levels of personnel among top level, mid-level and lower level management. It is reorganising and reassigning of roles and responsibilities of the personnel due to unsatisfactory performance and poor results.

Combination strategies – concept of synergy
Combination strategy is a process of combining - stability, expansion and retrenchment strategies. This is used either at the same time in various businesses or at different times in the same business. It results in better performance of the organisation.
The effect towards the success is greater when there is a synergy between the strategies. Synergy is obtained in terms of sales, operations, investments and management in the organisation.

Example – Levis & co, a jeans manufacturing company suffered corrosion in market share in 1990. This was due to the manufacture of jeans that did not attract the younger generation. Hence there was a change in strategies laid at the corporate level with diversification of products. This led to the change in acquiring new resources, selling the current resources, changing the personnel at various levels of management and analysing the competitors in the market. With these changes the company was able to make profits and achieved success.

2. Business level
Business level strategy relates to a unit within an organisation. Mainly strategic business unit (SBU) managers are involved in this level. It is the process of formulating the objectives of the organisation and allocating the resources among various functional areas. Business level strategy is more specific and action oriented. It mainly relates to “how a strategy functions” rather than “what a strategy is” in corporate level.

The main aspects of business level strategies are related with:
— Business stakeholders
— Achieving cost leadership and differentiation
— Risk factors

Business stakeholders
Business stakeholders are a part of business. Any operation which is affected in business also affects the business stakeholders along with profit or loss of the business. Business stakeholders include employees, owners and customers. Other indirect business stakeholders are competitors, government etc. They play a very important role in ups and downs of the organisation.
Cost leadership and differentiation
Cost leadership strategy is adopted by the organisations to produce a relatively standardised products or services to the customer. It must be acceptable to the characteristics as mentioned by customers. Customers value the company if it adopts cost leadership strategy.
Differentiation strategy mainly deals with providing the products or services with unique features to the customers. Differentiated products satisfy the customer’s needs. The unique features of the product attract the customers more when compared to the traditional features of the products.
But cost leadership must be pursued in conjunction with differentiation strategy to produce a cost effective, superior quality, efficient sales and a unique collection of features in the product or services.
According to Porter’s generic strategy, the organisation that succeeds in cost leadership and differentiation often has the following internal strengths:
— The company possesses the skills in designing efficient products
— High level of expertise in the manufacturing process
— Well organised distribution channel
— Industry reputation for quality and innovation
— Strong sales department with the ability to communicate successfully the real strengths of the product

Risk factors
Risk is the probability of “good” or “bad” things that may happen in the business. Risk will impact the objectives of the organisation. The risk factors in the business strategies include two types - external and internal risks.
 External risks – External risk includes various risks experienced externally like competition with companies, political issues, interest rates, natural hazards etc.
 Internal risks – Internal risks include issues of employees, maintenance of processes, impact of changes in strategies, cash flows, security of employees and equipments.

3. Tactical of functional level
The functional strategy mainly includes the strategies related to specific functional area in the organisation such as production, marketing, finance and personnel (employees). Decisions at functional level are often described as tactical decisions.
Tactical decision means “involving or pertaining to actions for short term than those of a larger purpose”. Considering tactical decisions in functional level strategy describes involving actions to specific functional area. The aim of the functional strategy is “doing things right” whereas the corporate and business level strategy stresses on “doing the right thing”.
The different types of strategies at functional level are:
— Procuring and managing
— Monitoring and directing resources towards the goal

Procuring and managing
Procuring basically means purchasing or owning. In the management field procuring is the process of purchasing goods or services which includes ordering, obtaining transport, and storage for organisation use.

Most of the individual organisations set procurement strategy to obtain their choice of products, methods, suppliers and the procedures that are used to communicate with their suppliers.
Steps involved in procuring strategy are:
— Identify the need of purchase and the required quantity.
— Plan the cost budget of the goods or services being purchased and the procedure of contracting by checking the cost and requirements with various sellers.
— Select the seller who is matching the cost and requirement criteria as per the organisation.
— Perform the contract deal with selected seller and monitor the contract.
— Close the contract once the goods or services are acquired.
Managing is the process of monitoring the strategies that are implemented in the business. Many strategies are implemented at various levels of the business. Hence catering these strategies is termed as managing.
Managing includes completing the task effectively in every sector of the organisation. It can be managing employees, the external and internal factors of organisation, and the equipments.
An effective managing process strengthens the critical activities in the business such as marketing, manufacturing, human resource planning, performance assessment, and communications.

Monitoring and directing resources towards the goal
Monitoring and directing is the essential part of management. Monitoring means knowing “what is going on”. Monitoring is also called as measuring. In an organisation monitoring includes measuring the performance of the organisation to check whether the strategy implemented is achieved or not.
Monitoring the resources includes monitoring the employees, the equipments, and the activities being performed in the organisation.
It leads to risk if monitoring of the resources show a deviation from the true path as expected by the organisation. The directing process will make path to ensure a relevant action is performed to remove the deviation and lay all the resources on the right track. Directing process uses principles and statement of the objectives to solve the problem which was identified during monitoring process.
Monitoring and directing process of resources sets the organisation to work on the right track by removing all hurdles and produces effective outcome in reaching the goals of the organisation efficiently.

4. Operational level
Operational level is concerned with successful implementation of strategic decisions made at corporate and business level. The basic function of this level is translating the strategic decisions into strategic actions.
The basic aspects in operational level are:
— Achieving cost and operational efficiency
— Optimal utilisation of resources
— Productivity

Achieving cost and operational efficiency
Achieving cost deals with achieving greater profits by reducing the cost for various resources within the organisation to balance the expenditure and investment. Organisations must implement cost achievement in targeted operational areas like HR, supply chain, and procurement.

The operational efficiency comes into picture once the cost reduction is achieved with greater profits. It deals with minimising the waste and maximising the resource capabilities.

Optimal utilisation of resources
Optimal utilisation of resources includes usage of resources in a planned manner. The usage of resources must be cost effective. Usually the board of directors ensures that the process of optimal utilisation of resources is implemented and monitored on a regular basis.
Planning and scheduling activities in business plays a major impact on the utilisation of resources. The systematic planning and scheduling of activities result in utilisation of less budgeted resources for greater profits in an organisation.

Productivity basically means a relative measure of the efficiency of production in terms of converting the ratio of inputs to useful outputs. Productivity is a key to success of an organisation. Productivity growth is a vital factor for continuous growth of the organisation.

Q.3 Describe Porter’s five forces Model.

Porter’s Five Force model
Michael E. Porter developed the Five Force Model in his book, ‘Competitive Strategy’. Porter has identified five competitive forces that influence every industry and market. The level of these forces determines the intensity of competition in an industry. The objective of corporate strategy should be to revise these competitive forces in a way that improves the position of the organisation.

Figure below describes forces driving industry competitions.
Figure : Forces Driving Industry Competitions

Forces driving industry competitions are:
 Threat of new entrants – New entrants to an industry generally bring new capacity; desire to gain market share and substantial resources. Therefore, they are threats to an established organisation. The threat of an entry depends on the presence of entry barriers and the reactions can be expected from existing competitors. An entry barrier is a hindrance that makes it difficult for a company to enter an industry.

 Suppliers – Suppliers affect the industry by raising prices or reducing the quality of purchased goods and services.

 Rivalry among existing firms – In most industries, organisations are mutually dependent. A competitive move by one organisation may result in a noticeable effect on its competitors and thus cause retaliation or counter efforts.

 Buyers – Buyers affect an industry through their ability to reduce prices, bargain for higher quality or more services.

 Threat of substitute products and services – Substitute products appear different but satisfy the same needs as the original product. Substitute products curb the potential returns of an industry by placing a ceiling on the prices firms can profitably charge.

 Other stakeholders - A sixth force should be included to Porter’s list to include a variety of stakeholder groups. Some of these groups include governments, local communities, trade association unions, and shareholders. The importance of stakeholders varies according to the industry.


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