Concept of Strategy:

The term strategy has been borrowed from military. Today the competition, a business faces, is
similar to a war and every business wants to be one step up over its nearest rivals. Strategy is a
common theme of strategic decisions through which an organisation tries to relate itself with the
environment which involves major resources commitment to develop certain advantages which
help in achieving its vision and mission.

Characteristics of Strategy:

1. Strategy is a systematic phenomenon:

Strategy involves a series of action plans, no way contradictory to each other because a common
theme runs across them. It is not merely a good idea; it is making that idea happen too. Strategy
is a unified, comprehensive and integrated plan of action.

2. By its nature, it is multidisciplinary:

Strategy involves marketing, finance, human resource, operations and other functions to
formulate and implement strategy. Strategy takes a holistic view. It is multidisciplinary as a new
strategy influences all the functional areas, i.e., marketing, financial, human resource, and
operations etc.

3. By its influence, it is multidimensional:

Strategy not only tells about vision and objectives, but also the way to achieve them. So, it implies
that the organisation should possess the resources and competencies appropriate for
implementation of strategy as well as strong performance culture, with clear accountability and
incentives linked to performance.

4. By its structure, it is hierarchical:

On the top come corporate strategies, then come business unit strategies, and finally functional
strategies. Corporate strategies are decided by the top management, Business Unit level
strategies by the top people of individual strategic business units, and the functional strategies
are decided by the functional heads.
5. By relationship, it is dynamic:

Strategy is to create a fit between the environment and the organisation’s actions. As
environment itself is subject to fast change, the strategy too has to be dynamic to move in
accordance to the environment.

Success of Microsoft appears to be very simple as far as software for personal computers are
concerned, but Microsoft strategy required continuous decisions in a turbulent and dynamic
environment to remain leader.

6. The purpose of strategy is to create competence (things firm does better than competitors),
synergy (between different parts of the organisation and their activities) and value creation so
as to attain vision and mission.

An organisation can reach its destiny (vision) only if it can create value for the firm and its
stakeholders (mission). Value creation involves economic value addition (profits for the
company), customer value addition (Value customers perceive in relation to competitors), people
value addition (Value gained from enabling employees to be most productive resource.) so as to
fulfil the needs of all concerned.

7. Strategy requires searching for new sources of advantage:

To achieve sustainable long term competitive advantage the firm must invent new rules and new
games to become unique and create wealth. Simply copying the leader means value is destroyed
for all the firms. Thus to look different, strategy differentiation is a must.

8. Strategy is almost always the result of some type of collective decision-making process:

The vision, mission, objectives, and corporate strategies are determined by top management.
Business Unit strategies are decided by heads of business units and functional plans by functional
heads. But the top management consent is a must. It is the senior management which resolves
paradoxes between the conflicting objectives, existing functions and future activities, and the
resources allocation.
Strategy and Tactics:

Often we find the two terms – strategy and tactics – being used simultaneously. However, the
two terms are different as given in the Table 8.1.

From the above- table it should not be concluded that they are exclusive from each other. In fact
the two are mutually reinforcing. It is the strategy which provides the reason to initiate tactics. If
the vision is to be industry leader, increases sales is part of this strategy, but to sell in bulk to
achieve the vision, the discount given to a bulk buyer is tactic.

Concept of Strategy Formulation:

Strategy formulation refers to the process of choosing the most appropriate course of action for
the realization of organizational goals and objectives and thereby achieving the organizational
vision.
The process of strategy formulation basically involves of the following five steps. Though these
steps do not follow a rigid chronological order, however they are very rational and can be easily
followed in this order.

a. Strategic Intent:

It provides Vision – what the organisation wants to become, Mission – what business the firm is
in, Values – a common set of beliefs guiding the behaviour of organisational members, and
Objectives — Qualitative goals.

b. Situational Analysis:

The three kinds of environments need to be scanned – External, (to know of Opportunities and
Threats), Internal (to know of strengths and weaknesses), and Industry (to determine competitive
scenario)

c. Setting Long-term Quantitative Objectives or Goals:

The results expected from pursuing certain strategies. The objectives should be quantitative,
understandable, challenging, hierarchical, obtainable, and in harmony among organisational
units. The time horizon of objectives and strategies should be consistent.

d. Formulation of strategic Alternatives:

In its journey towards its destination the strategy formulation has to find and evaluate different
strategic alternatives.

e. Selection of Strategy:

To create a fit between the environment and the strategic intent of the organisation, a suitable
strategy has to be selected for implementation.

What Business Are We In?

If someone asks any businessperson to define his business, almost everyone sill give a
manufacturing definition. Ask anyone who is manufacturing readymade garments, about his
business and his answer will be readymade garments manufacturing. Ask a railway company the
reply will be in railway business. Normally, the way people define their business has been termed
by a marketing scholar as marketing myopia.

Businesspersons must always view their business from customer’s view, not production. Always
define your business on the basis of core need being fulfilled. A core need always remains in
vogue and shall remain in vogue.

The way to satisfy that need may change, and business will opt the new methods. Indian cinema
industry always thought they were in cinema business until 1980 when VCR created a revolution
and the industry lost huge business. It then realized that they were in entertainment business.
Always update yourself about customers’ needs and technology.

What businesses following are in? Idea is not a telephone company, it is in the business of
connectivity; Nestle is not in fruit juice, tea, or water business, it is in hydration business; Colgate
is not in tooth paste business, but in oral healthcare business; and a cinema hall is in the business
of entertainment.

Types of Strategies:

1. Corporate Strategies or Grand Strategies:

There can be four types of strategies a corporate management pay pursue: Growth, Stability,
Retrenchment, and Combination.

Growth strategy can be put to use by way of:

Concentration:

It means bringing in resources into one or more of a firm’s business keeping customer needs,
customer functions, alternative technologies, singly or jointly so as to expand.

Integration:

Integration means joining activities related to the present activities of a firm. Integration not only
widens the scope of business but also a subset of diversification strategies. Integration can be of
following types:
Horizontal Integration:

It means when a firm takes over the other firm operating at the same level of production or
marketing. FrieslandCampina took over Engro Foods and AliBaba acquired Daraz.

Vertical Integration:

When a firm acquires control over another firm operating into the same value chain. It can be of
two types, viz., Backward Integration – acquiring a firm engaged in raw materials; and Forward
Integration — acquiring control over a firm/activity taking it nearer to the ultimate consumer.

Diversification:

Adding a new customer function(s), customer group(s), or alternative technologies to an existing

business is known as diversification. Diversification strategies can be of following types:

Concentric diversification:

Adding new, but related products or services is known as concentric diversification. It can be
market-related concentric diversification (using common channels); Technology-related (a bank
also selling mutual fund policies-similar procedure); and Marketing and technology related
concentric diversification. A retailer selling kids wear also starts selling lady wears is a case of
related concentric diversification.

Conglomerate or unrelated diversification:

If a firm takes up business not related to the existing one neither in terms of customer groups,
customer functions, nor alternative technologies, it is known as conglomerate diversification –
Tata Sons is a conglomerate, as it is unrelated businesses, steel, power, chemicals, hospitality,
education, publishing, beverages, etc.

Horizontal Diversification:

It means adding new products or services for present customers. A hospital may offer bank,
bookstore, coffee shop, restaurant, drug store in their compound for the visitors to the hospital.
Internationalization:

It means marketing product/service beyond national market.

Cooperation:

It means cooperation among competitors. It may take the form of Mergers and Acquisitions; Joint
Ventures and Strategic Alliances (the two cooperating firms remain independent but cooperate
for synergy).

Digitalization:

It includes computerization, electronisation, and digitalization (conversion of analogue electrical

signals into digital signals).

Stability Strategies:

When the firm wants to go for incremental improvement of its performance, it is known as
stability strategy. Basic approach in the stability strategy is ‘maintain present course: steady as it
goes.’ It can be No-change strategy (taking no decision is a decision too); Profit strategy (lying
low and managing profit through cost cutting, price rise, etc.

Retrenchment Strategies:

It means substantially reducing the scope of business activities. It includes turnaround strategy
(to bring back to health through internal and external restructuring); Divestment strategy (Sell-
off or hive-off – to sell off a non-core business divisions; Spin-off -demerging the business
activities; and Split-off – division of business into two separate ownership; Disinvestment –
dilution of control through sale of equity) and Liquidation Strategy (the last resort in
retrenchment, Lehman Brothers of USA was finally liquidated).
Combination Strategy:

All the strategies discussed above can be applied simultaneously, sequentially, or in a

combination.

2. Business Level Strategies:

Business-level strategies are fundamentally concerned with the competition. In this regard
Michael Porter’s model is most relevant. The Michael Porter's Five Generic Strategies has a focus
on creating strategies that helps to gain competitive advantages from three different bases: Cost
leadership, Differentiation and focus. There are three main streams for the Michael Porter’s
Generic Strategies which are:

 Cost leadership
 Differentiation
 Focus

These main strategies are divided in 5 types:

1. Type 1: Low Cost -Strategy

2. Type 2: Best Value-Strategy
3. Type 3: Differentiation
4. Type 4: Focus- Low Cost
5. Type 5: Focus –Best value
3. Functional Strategies:

These strategies may be Operations Strategy, Marketing Strategy, Finance Strategy, and Human
Resource Strategy.

The SWOT Analysis:

No discussion on strategy formulation will be complete without a discussion of SWOT Analysis. It

involves a systematic analysis of the internal strengths and weaknesses (financial, managerial,
marketing, or technological) and of external opportunities and threats (like change in demand,
law, or technologies.

It is an internal evaluation to be in fit with external world. Strengths refer to competencies,

weaknesses refer to constraints, opportunities refer to favorable condition in the business
environment of the firm, and threat means an unfavorable condition in the firm’s environment
creating a risk.
SWOT analysis will be useful as under:

(a) To eliminate weaknesses those expose the firm to external threats.

(b) To highlight the strengths, which the company would try to exploit.

(c) To convert threat or weaknesses into an advantage.

(d) To expose present shortcomings in the company’s resources and skills.

(e) To match the strength to opportunity to exploit it.

Barriers to Strategy Formulation:

1. Lack of Information:

Lack of sufficient information for strategy formulation is the most common. The quality of
financial analysis is generally very poor. Where future is unknown such an analysis is impossible.
And in such situations strategic decisions rely mainly on judgment and intuition.

2. Too Much Data:

Sometimes strategy formulation may suffer due to too much data but not enough information.
In this age of information explosion, too much of data is a big problem.

3. Confusion and Dilution:

It is true that we treat the CEO as the person responsible for formulating strategy. In actual
practice, there are many managers who participate in policy formulation.

These managers have their own values. Many managers come and many managers go away from
the task of formulation. Thus there is confusion as to who made the decision and at all if any
decision has been made. Sometimes the chosen decision may be a compromising decision,
lacking clarity or direction.
4. Old Mindset. Business runs in a cyclical mode:

There are periods of stability interrupted by periods of radical and revolutionary change. As times
move, senior managers may be out of touch with the environment either because of becoming
lazy or due to overconfidence.

5. Prior Bad Experience and Fire-Fighting:

If the managers had a previous bad experience with strategy, as the plans have been long,
cumbersome, impractical, or inflexible or if presently it is so engrossed with the crisis
management and fire-fighting that it has no time for strategy formulation any more.

6. Content with Current Success:

The firms currently doing nice currently feel no need of any more strategy formulation. To them
it is merely waste of time and money.

7. Other Impediments:

Poor reward structure, fear of failure, self-interest (status achieved using old strategy), fear of
unknown (to undertake new roles), different perceptions of a situation and distrust in
management are the other barriers to strategy formulation.