0.8. Define corporate strategies. What are its major types and options available in each type?
Ans. Corporate Strategies: In the present business world companies are facing the continuous competition and therefore need to develop effective strategies to achieve their targets. Corporate strategy describes how the corporation intends for its business to be conducted in today’s competitive environment. Corporate strategies are concerned with assessment of current anticipated factors associated with customers and competitors. In other words it is an action-oriented response to the external as well internal situation that a company faces. More specifically, corporate strategy answers the following questions:
1 Does the firm have a definite interest or an exact strategic advantage in some business?
2.Does the firm wish to concentrate on single particular product line, or does it look for
multiple product lines?
3. Will the organisation be innovative or threatening?
4. Is it necessary for the organisation to expand, stabilise, defend itself, turn around, or reduce
There are four major types of corporate strategies (stability, growth diversification and retrenchment) as shown in figure. Each of these has specific applications and if used incorrectly, will have a negative effect. Therefore, the application or these corporate strategies requires careful analysis to determine the best fit in relation to the corporate goals.
When firms are satisfied with their current rate of growth and profits, they may decide to use a stability strategy. This strategy is essentially a continuation of existing are typically found in industries having relatively stable environments. The firm is often making a comfortable income operating a business that they know and see no need to make the psychological and financial investment that would be required to undertake a growth strategy.
The following are options available in stability strategy:
1. Consolidation: In this option, companies try to initiate a lot internal actions like cost cutting, quality improvement, which will definitely result in a positive payoff. Typically, it is applied when company is unsure of external markets and waiting and watching for the right moment to undertake some other strategy.
2. Small Exploration: This is applied when companies try to determine new products and markets, where they will explore tentatively by small test markets, launches to judge the reaction of the customers. This is normally done before an expansion strategy. It could be also to gear up the entire company in the new direction.
3. Hold Strategy: In this option, company maintains its position and do not employ any new approach. In other words, there is no strategy at all. If the environment is stable with no market competition, this may work. Nevertheless, companies use this approach in a rare situation, in current markets, where competition is quite intense and dynamic, it is not recommended to apply such approach.
Growth or Expansion Strategy
Growth strategies are designed to expand an organisation’s performance, usually as measured by sales, profits, product mix, market coverage, market share, or other accounting and market-based variables.
Through this approach, the company attempts to achieve greater market penetration by becoming highly efficient at servicing its market with a limited product line (e.g: McDonalds in fast foods). Concentration involves converging resources in one or more of a company’s businesses in terms of their respective customer needs and demands, or technology alternations. Concentration strategy involves investment of larger resources in a product line for an identified market with the help of proven technology. This may be achieved by various means.
Some advantages of concentration strategy:
(a) It is easy to develop systems and procedures. (b) It is less threatening staying with present business.
(C) Decision making is achieved with high level of predictability.
(d) Extreme focus on resources provides direction to company to attain a competitive advantage.
(e) It also helps company to narrow down the differentiation by having in-having in-depth knowledge of business.
Diversification strategy focuses on moving into different markets or add m . This strategy is suitable for organisations seeking to add new products that have technological and/or marketing synergies with the existing product lines. Most large companies have diversified beyond a single focus. A company may diversify in several ways.
1. Vertical Diversification: This is one type of diversification that moves forward on the vertical chain from raw material supplier to end consumer. Backward vertical integration occurs when an organisation seeks ownership or increased control of its supply systems secures the now of raw materials. In result years, this strategy was pursued to ensure the quality of the raw material for companies adopting (TQM) Total Quality Management. Forward vertical integration occurs when an organisation seeks ownership of, or increased control over, competitors by securing more channels of distribution or more activities in the delivery of goods to the ultimate consumer. In recent years, companies have adopted this strategy to be closer to the customers to better assess their needs.
Some companies follow the both forward and backward vertical integration, such as oil companies who explore, produce, transport, refine and market their own products. This usually happens with related product diversification. Companies choose such a strategy to have more control over their needed raw materials and to be close to their customer to better assess customer’s needs and to eliminate the market cost involved. For example, IBM spent $3.5 billion trying to vertically integrate into personal computer software by acquiring Lotus Development Corporation. Disneys $20 billion acquisition of capital cities can be considered as vertical integration move into the entertainment industry.
2. Horizontal Diversification: It involves expanding the existing business within its current product-market structure, for example, adding more outlets in additional geographic areas. A corporation can further increase its sales volumes by penetrating both domestically and internationally. A company can also increase the range of products or services offered to current markets. The company will also benefit from synergy, a situation in which the combination of two or more business units or products lines result in greater efficiency than the total yielded by those businesses or products when they are operated separately. A problem with this approach is raising the administrative costs. For example, Philip Morris’s acquisitions in the brewry industry. Coca-Cola tried to acquire Dr. Pepper Company. Such mergers could have led to market power for these companies.
3. Conglomerate Diversification: It requires an addition of new products that have no relationship to the company’s current technology, products, or markets. This type of diversifica also tends to be less profitable in the long run than the other types. Peter Lynch, the manager Stellar Magellan Mutual Fund, calls diversification such because managers’ energies are was too many directions.
Few reasons why company adopt diversification strategy are:
(a) They minimize risk by spreading it over several businesses.
(b) Used to capitalize on organizational strengths or minimize weaknesses.
(c) This may be the only way out if growth in exiting businesses is blocked due to environmental and regulatory factors.
Retrenchment strategy involves a reduction in the scope of a corporation’s activities, which also generally necessitates a reduction in number of employees, sale of assets associated with discontinued product or service lines, possible reformation of dept through bankruptcy proceedings and in the most extreme cases, liquidation of the firm. Retrenchment is usually a temporary effort. Following are the main strategies which are used in this category:
- Turnaround Strategy: Firms follows this strategy by undertaking a temporary reduction in operations in an effort to make the business stronger and more viable in the future. These moves are popularly called downsizing or rightsizing. The hope is that going through a temporary belt-tightening will allow the firm to pursue a growth strategy at some future point.
- Divestment Decision: this occurs when a firm elects to sell one or more of the businesses in its corporate portfolio. Typically, a poorly performing unit is sold to another company and the money is reinvested in another business within the portfolio that has greater potential.
- Bankruptcy: Involves legal protection against creditors or other allowing the firm to restructure its debt obligation or other payments, typically in a way that temporarily increase cash flow. Such reformation allows the firm borrow time to attempt a turnaround strategy. For example, since the airline hijackings and the subsequent tragic events of September 11, 2001, many of the airlines based in the U.S. have filed for bankruptcy to avoid liquidation as a result of stymied demand for air travel and rising fuel prices. At least one airline has asked the courts to allow into permanently suspend payments to its employee pension plan to free up positive cash flow.
- Liquidation: it is the most extreme form of retrenchment. Liquidation involves the selling or closing of the entire operation. There is no future for the firm. Employees are released, buildings and equipment are sold and customers no longer have access to the product or service. This is a strategy of last resort and one that most managers work hard to avoid.
- Combination Strategy: This strategy is needed when two or more types o businesses are use in combination. It involves using more than one strategy at the same time in different segments of the business. Companies must be alert to the possibility of redefining their business strategies. Businesses and their environments change over time and therefore strategic variables change as well. They also must continually reconsider the basic actions in which they engage to create value for customers in order to competitive. To be competitive. Business portfolios need to be managed better and given the necessary autonomy. Studies indicate the change that had SBUs been left independent, their individual profitability would have been greater. Therefore, strategies should include measures for autonomy. Managers need to bring skills and assets to acquisitions to increase the change of reaching greater heights than they would have achieved when SBU stayed independent.
Q. 9. What do you mean by strategy choice and implementation? Explain the process of strategy choice and implementation.
Ans. Strategy choice and Implementation: Analysis of various corporate strategies and choosing the right strategy from the variety of alternate strategies is a critical process. Decision makers need to decide what is the best choice of strategy from the various options available to them. Once strategy type is decided the company then has to implement its choice of strategies within the parameters identified by the process of strategic analysis, dominating context of the structure, the relationship architecture, the competencies and decisions or resource applications that have been established by the company.
Decisions on strategy choice and on implementation are closely related to company’s capability, to generate customer value and to its source of comparative or competitive advantage. Strategy choice is also closely related to company’s understanding of its critical success and its limiting factors and to its understanding of the nature of the constraints imposed by the relevant external and competitive environments.
Strategy choice and implementation may be determined by the process of environmental scanning, value assessment, strategy design, performance evaluation and gap analysis.
Environmental Scanning: This element of strategy formulation is one of the two continuous processes. Consistently scanning its surroundings serves the distinct purpose of allowing a company to survey a variety of constituents that affect its performance and which are necessary in order to conduct subsequent pieces of the planning process. There are several specific areas that should be considered, including the overall environment, the specific industry itself the competition and the internal environment of he firm. The resulting consequence on regular inspection of the environment is that an organization readily notes changes and is able to adapt its strategy accordingly. This leads to the development of a real advantage in the form of accurate responses to internal and external stimuli so as to keep pace with the competition.
Values Assessment: All business decisions are fundamentally based on some set of values, whether they are personal or organizations value. The implication here is that since the strategic personal and organizational values. To delve even further, a value assessment should include and in-depth analysis of several elements; personal values, organizational values, operation philosophy, organization and how it factions as a whole.
Strategic planning that does not integrate a value assessment into the process is sure to encounter severe implementation and functionality problem if not outright failure.. Briefly put., form follows function; the form of the strategic plan must follow the functionality of the organization, which is a direct result of organizational values and culture. If any party feels that his or her values have been neglected, he or she will not adopt the plan into daily work procedures and the benefits will not be obtained.
Strategy Design: This section involves the preliminary layout of the detailed paths by which the company plans to fulfill its mission and vision. This step involves four major elements; identification of the major lines of Businesses (LOBs), establishment of Critical Success Indicators (CSIs), identification fo strategic thrusts to pursue and the determination of the necessary culture.
A line of business is an activity that produces either dramatically different products or services or that are geared towards very different markets. When considering the addition of a new line of business, it should be based on exiting core competencies of the organization, its potential contribution to the bottom line and it fit with the firm’s value system.
In designing strategy, it is necessary to determine the necessary culture with which to support the achievement of the lines of business, critical success indicators and strategic thrusts. Harrison and stokes (1992) defined four major types of organizational cultures.
- Power Orientation: it is based on the inequality of access to resources and leadership is based on strength from those individuals who control the organization from the top.
- Role Orientation: it defines the roles and duties of each member of he organization, it is a bureaucracy.
- Achievement Orientation: The achievement orientation aligns people with a common vision or purpose. It uses the mission to attract and release the personal energy of organizational members in the pursuit of common goals.
- Support Orientation: With a support orientation, the organizational climate is based on mutual trust between the individual and the organization. More emphasis is placed on people being valued more as human beings rather than employees.
Typically, and organization will choose some mixture of these or other predefined culture roles that it feels is suitable in helping it to achieve its mission and the other components of strategy design.
Q.10. Why organisation conducts the performance evaluation? Explain in detail.
Ans. Performance Evaluation: Conducting a performance evaluation allows the organisation to take inventory of what its current state is. The main idea of this stage of planning is to take an in-depth look at the company’s internal strengths and weaknesses and its external opportunities and threats. This is commonly called a SWOT analysis.
Developing a clear understanding of resource strengths and weaknesses, an organisation’s best opportunities and it les and its external threats allows the planning team to draw conclusion about how to use best resources in light of the firm’s internal and external situation. This also roduces strategic thinking about how to best strengthen the organisation’s resource base for the future.
Looking internally, there are several key areas that must be analysed and addressed. This includes identifying the status of each existing line of
business and unused resources for prospective additions, identifying the status .of current tracking systems defining the organisation’s strategic
profile, listing the available resources for implementing the strategic thrusts that have been selected For achieving the newly, defined mission and examining the current organisational culture.
The external investigation should look closely at competitors.
suppliers, markers and customers, economic trends, labour-market conditions and governmental regulations. In conducting this query the information gained and used must reflect a current state of affairs as well as directions for the future. The result of a performance audit should be the establishment of a performance gap, that is the resultant gap between the current performances of the organisation in relation to its performance targets. To close this gap, the planning team must conduct what is known as a gap analys step in the strategic planning process.
Gap Analysis: A gap analysis is a simple tool by which the planning team can identify methods with which to close the identified performance gaps. All too often, however, planning teams make the mistake of making this step much more difficult than need be. Simply, the planning team must look at the current state and the desired future state shown in figure. The first question that must be addressed is whether or not the gap can feasibly be closed. If so, there are two simple questions to answer. ‘What are we doing now that we need to stop doing?’ and ‘What do we need to do that we are not doing?’ In answering these questions and reallocating resources from activities to be ceased to the activities to be started, the performance gap is closed. If there is a doubt that the initial gap cannot be closed, then the feasibility of the desired future state must be reassessed.