In the present globalization era, an organization is required to face several challenges for capturing the opportunities. The world seems to be limitless, where presently very fast technological developments are taking place. Under this environment, the organization is required to adopt several strategies to become a successful organization. The automation process, education and training, quality improvement in the management practices, and redesigning of the organizational structure are some of the methods which the organizational management is required to practice to save the organization from failure. However, these methods have high costs and sometimes they are even not efficient.
The organizational management, for ensuring success of the organization, is to be careful in designing and implementing suitable operating models for the organizational strategy which suit both the internal and external environments of the organization. The organization of fit theory states that organizational strategy is to be compatible with other factors in order to achieve improved organizational performance. Hence, for ensuring that the organization has a continuously increasing performance, it is necessary that the organization has strategies which are aligned to the organizational structure and work processes.
Strategy is concerned with deciding the nature, domain, and scope of the organizational activities (essentially, what it is like, its values, the areas it covers, and the direction it is going in), and the way its success is going to be evaluated. The pattern of activities in strategy arises because of the acquisition, allocation, and commitment of a set of resources and capabilities of the organization, which are an effective match with the challenges of its environment, and the management of the network of relationships with and between the stake-holders. Strategy is the path and scope of the organization over the long-term which achieves benefit in a changing environment through its configuration of resources and competences with the aim of fulfilling anticipations of the stake-holders.
Johnson et al. have described organizational strategy as the direction and scope of the organization over the long-term which helps it to attain benefit through its configuration of resources within a challenging environment aimed at meeting market needs and fulfilling stake-holder expectations. Bartol and Martin have added that strategies are large scale action plans for relating with the environment in order to accomplish long-term goals. Also, Bateman and Zeithamal suggested that strategy is a form of actions and resource apportionments designed to accomplish the goals of the organization. Kavale viewed strategy as the long-term goals and objectives determination, the adoption of courses of action and associated allocation of resources needed to achieve goals.
Gareth mentioned that strategy is an indispensable tool for the success of an organization, since as it helps the organization to be more proactive than reactive in moulding its own future. It makes the organization to initiate and affect activities so that it can exert control over its own purpose. Bower opined that strategy generates high commitment to achieve objectives, to implement strategies, to work hard since strategy well implemented aids improvement in sales, profitability, and productivity. It can also improve understanding of competitors strategies. However, a good SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis can help the organization to understand the difference with its competitors, including the awareness of threats. It helps to reduce resistance to change and to objectively define management issues. Armstrong has concluded that strategy provides a framework for the organization to coordinate and control its activities and improves communication among the employees and the management. Strategy can be defined in several ways. Some of the definitions of strategy are given below.
“Strategy is the pattern of activities to be followed by an organization in pursuit of its long-term purpose, including its ‘placing’ within the movement. In simple terms it is ‘where we are now, where we want to go and how we intend to get there”.
‘Strategy is an agreed-upon course of action and direction that helps manage the relationship between an organization and its environment. The goal is to achieve alignment or synergy so that an optimal flow of resources to the organization is achieved.’
‘Strategy can be defined as the process of identifying, protecting, leveraging and renewing the strategic capabilities of an organisation through its definition of purpose its organisation and processes, and its choice and support of people.’
The common things in the majority of the definitions are (i) an understanding / assessment of the resources and capabilities of the organization, (ii) an understanding / assessment of the external environment, and (iii) from these, a decision on the best way to use and apply the former to achieve an agreed aim in the latter.
Johnson et al. have suggested that all managements and executives are to be able to itemize their organization’s strategy with a ‘strategy statement’. Strategy statement is the initial step in strategy formulation activity. The authors asserted that strategic statements are to possess three main themes namely (i) the relevant goals which the organization wants to achieve, which characteristically draw on the organization’s outlined mission, vision and objectives, (ii) the scope of the organization’s activities, and (iii) the particular advantages or capabilities it has to deliver all of these. Gareth and Johnson et al. mentioned the different contributing elements of a strategy statement as explained below.
The organizational mission is related to goals, and refers to the domineering purpose of the organization. Mission is frequently stated in terms of the seemingly simple but challenging statement which defines purpose of the organization. Hence, mission statement enables management to emphasize on the essential area of the organizational strategy.
The organizational vision is connected to organizational goals, and refers to the anticipated future state of the organization. Vision is an aspiration which can help mobilize the energy and passion of the employees. It states what the organization want to achieve.
The organizational objectives are described in a more clear-cut and quantifiable statement of the organizational goals over the selected time period. This can refer to different targets which the organization desires to achieve in the selected time period. Objectives introduce discipline to strategy. They state what the organization is going to accomplish in the selected time period.
A good and effective strategy provides support to the mission of the organization, it exploits organizational strengths and opportunities present in the environment, it neutralizes threats to the organization and helps to avoid or overcome weaknesses in the organization.
The concept of scope is described considering three perspectives namely (i) external activities, (ii) geographical location, and (iii) the degree of internal activities. External activities are related to customers, suppliers, contractors, financial institutions, and society etc. Internal activities can include production, research and development, quality, safety and health, and project activities etc.
The competitive advantage is that part of a strategy statement which describes how the organization is going to achieve the objectives it has set for itself in its chosen domain. For example, the competitive advantage can be how in a particular area, the organization is going to achieve its goals in the face of competition from other organizations. In order to achieve a particular goal, the organization needs to do something better than the competing organization.
Strategy formulation is an important function of the organizational management. A well-focussed and defined strategy is necessary for ensuring that optimal progress is made towards the achievement of the organizational vision and mission. It is like a route map which is needed, to ensure that the shortest and direct route is taken between too points. Also, it is vital and an effective way to monitor, review, and realign strategy in the fast-changing organizational environment.
Social and environment issues make it more difficult to determine priorities, set measurable targets and evaluate performance. This does not mean it is impossible, just that it is not easy (or frequently natural) to do this. Also, there is a marked tendency for the ‘mission driven’ to consistently broaden the organizational focus and workloads. These factors make it even more important for the organization to have a well-defined strategy.
Strategy can combine vision, mission statement, core values, goals and objectives, critical success factors which the organization is to get right to succeed in its mission, positioning (similar to brand) which means that building a valued and preferred position in the minds of the target audience, as well as a brand / reputation. This means developing and communicating powerful and meaningful differences between the organizational offerings and those of the competition. In a middle-sized to large-sized organization, the strategy, in reality, probably incorporate several sub-strategies covering its key departments e.g., operation strategy, sales and marketing strategy, human resource strategy, financial strategy, purchase and stores strategy, research and development strategy, quality strategy, and safety and health strategy etc.
Operational planning is agreeing the practical plans for implementing organizational strategy. There is a big inconsistency in the different terms (e.g., strategic issue, goal, and objective) which are being used. Strategic issue is an issue or opportunity which the organization wishes to address or to take advantage of. Goal is specific, measurable statements of what is to be done to address strategic issues. Objective is an activity which helps the organization to accomplish a goal. Objectives, sometimes called tactics, are framed in action plans which are detailed with respect to responsibility, timeline, resources, and assessment / evaluation.
In the context of an organization, it is vital that strategy includes boundaries and limits, and aims for focus and prioritization. The temptation is to include every issue and problem (which can be potentially addressed). However, this is likely to be counter-productive in practice. The underlying objective is to maximize mission fulfilment, given available resources, and this does not mean tackling everything. It means harnessing resources and leveraging them for achieving the best effect.
An organization is both an articulated purpose and an established mechanism for achieving it. Majority of the organizations engage in an ongoing process of evaluating their purposes, questioning, verifying, and redefining the manner of interaction with their environments. Effective organizations carve out and maintain a viable market for their products or services. Ineffective organizations fail the task of market-alignment. Organizations also constantly modify and refine the mechanism by which they achieve their purposes, rearranging their structure of roles, and relationships, and their managerial processes. Efficient organizations establish mechanisms which complement their strategy, whereas inefficient organizations struggle with these structural and process mechanisms.
For the majority of the organizations, the dynamic process of adjusting to the environmental change and uncertainty, and of maintaining an effective alignment with the environment while managing internal inter-dependencies, is enormously complex which encompasses innumerable decisions and behaviours at several organizational levels. But the complexity of the adjustment process can be penetrated by searching for patterns in the behaviour of in the organization. In fact, a person can describe and even predict the process of organizational adaptation.
The organization is to create strategies which produce sustainable competitive advantage by using the strategy-making process consisting of assessing the need for strategic change, conducting a situational analysis, and choosing strategic alternatives. In the past, it had been thought that strategy making was something which only large organization can do well. It was believed that small organizations do not have the time, knowledge, or man-power to do a good job of strategy making. However, two meta-analyses indicate that strategy making can improve the profits, sales growth, and return on investment of both big and small organizations.
There is a 72 % chance that the large organizations which engage in the strategy-making process are going to be more profitable than the large organizations which do not engage in the strategy-making process. Not only strategy making improves the profits, but it also helps the organizations to grow. Specifically, there is a 75 % chance that the large organizations which engage in the strategy-making process is going to have higher sales and earnings growth than the large organizations which do not engage in the strategy-making process. Hence, in practical terms, the strategy-making process can make a considerable difference in the profits and growth a large organization.
Strategy making can also improve the performance of small organizations. There is a 61 % chance that small organizations which engage in the strategy-making process have more sales growth than small organizations which do not engage in the strategy-making process. Likewise, there is a 62 % chance that small organizations which engage in the strategy-making process are going to have a larger return on investment than the small organizations which do not engage in the strategy-making process. Hence, in practical terms, the strategy-making process can also make a considerable difference in the profits and growth of a small organization.
Model for strategy process – Fig 1 shows typical model for the process of organizational strategy. An important aspect highlighted by the model is that strategy is formulated after consideration of a broad range of factors, including the views of the stakeholders. Once a strategy has been formulated, it becomes necessary to manage stakeholder expectations and educate the stakeholders about the adopted strategy. When mission fulfilment is the over-riding concern, it is clearly not possible to satisfy all the expectations of the stakeholders. However, where possible, stakeholders need to be brought along, and given the opportunity to appreciate the reason for the chosen strategy and the opportunity it provides to maximize gains for the organization.
Fig 1 Typical model for the process of organizational strategy
The two typologies of competitive organizational strategy as proposed by Miles et al are prospector, and defender. The prospector strategy has characteristics such as it (i) always wants to be a pioneer in the creation of new products / services, (ii) emphasizes innovation and creativity, (iii) does not care with the efficiency, (iv) finds and earns external resources expansively, and (v) high environmental uncertainty. The defender strategy has characteristics namely (i) concern with efficiency, (ii) maintain and protect market share from new competitors, (iii) need formalities and centralization, (iv) rarely to innovate and (v) environmental uncertainty which is easy to predict.
These two typologies of organizational strategy have secure characteristics so they can be used to deal with the demands of external environment. The two of internal organizational variables which are to be aligned with organizational strategy are the organizational structure and work processes within the organization.
Basic elements of organizational strategy – The basic elements of organizational strategy include (i) environmental scanning both external and internal, (ii) strategy formulation including strategic or long-range planning, (iii) strategy implementation, and (iv) evaluation and control.
Environmental scanning consists of observing, assessing, and communicating adequately information from both external and internal environments of the organization to major stakeholders within the organization. The purpose of such scanning involves identification of strategic elements which consist of the external and internal factors which are going to define the future of the organization. The external elements are opportunities and threats in the operating environment of the organization, such as macro-economic, social, government, statutory, international, and technological factors which can affect the activities of the organization. It also includes the internal analysis, e.g., strengths and weaknesses within the organization itself such as the organizational structure, culture, and the resources.
Strategy formulation consists of making long-range plans for the proper management of the opportunities and threats in the environment after considering the organizational strengths and weaknesses. Strategy formulation involves conducting studies, integrating investigation with analysis and making decision. Strategy formulation enables the organization to take advantage of perceived market needs and to cope with attendant risks.
Strategy implementation is putting the plan into action. This involves procedures, financial plans, and programmes which aid the strategies and policies to become an action properly executed. These activities can involve an all-inclusive change process of structure, culture, and the organization management system. It also involves establishment of short-term objectives, developing policies and allocating resources.
For properly ascertaining the connection between organizational strategy and organizational structure, the management first defines the organizational strategy and once it is known, shifts focus to the implementation. Strategy implementation is an activity of putting strategy and policies into concrete actions in the short term. Strategy implementation means putting the result of planning into real life activity. This shows that strategy implementation means running the plans which have been formulated. It comprised of two main variables namely structure, and managerial skills. Structure provides the framework in which the organization operates effectively. A good strategy offers the basic route or path for strategic actions. It serves as the foundation of organized and sustained efforts focused toward attaining long-range organizational goals. It specifies the time period over which long-range goals are to be accomplished. Hence, a strategy can be described as an all-inclusive normal approach which regulates the major activities of the organization.
The focus of evaluation and control is to see that the organization achieves the goal it has set out by comparing the actual with the expected performance. It involves examining the underlying basics of the strategy of the organization, comparing expected results with actual results, taking corrective actions for ensuring that the performance conforms to the plans. Control can include altering long range direction of the organization, redefining the organizational activities, raising or lowering performance objectives, modifying the strategy, and improving strategy implementation.
As shown in Fig 2, organizational managements can utilize techniques such as strategy cluster, or / and strategy selection matrix to design the means which is going to be implemented for the accomplishment of the long-range goals of the organization. The major strategies are described after Fig 2.
Fig 2 Model for strategy cluster and strategy selection matrix
Concentrated growth strategy – It involves focusing on increasing market share in existing markets. This strategy is also sometimes referred to as concentration or market dominance strategy. In a stable environment where demand is growing, concentrated growth is a low-risk strategy. Concentration can involve increasing the rate of use of a product by the present customers, attracting customers of the competitors, and / or attracting non-users / new customers.
Market development strategy – This strategy means selling present products or services in new markets. In this strategy, management takes such actions as targeting promotions, opening new sales outlets, and creating alliances to operationalize a market development strategy.
Product development strategy – Under this strategy, management makes changes in the present products and introduces new products for the markets which are presently being served by the organization. The focus is normally on the products or services which have to do with the existing market. This can involve frequent changes in quality, size, or model of the products. As part of this strategy, organization management ensures that the products move to the market on time, comes up with cheaper products, or develops a product with very good quality in terms of product reliability as well as performance. This strategy sometimes faces budget constraints.
Horizontal integration strategy – This strategy has to do with buying over competitor organizations which are in the same market served by the organization or in a new market. This strategy can support the concentrated growth strategy.
Vertical integration strategy – This strategy has to do with taking over those organizations which supply the organization with input materials or are customer for its products. This can consist of buying of shares, and purchase of assets etc. This strategy involves both backward and forward integration. Backward integration has to do with acquisition of those organizations which are located in the earlier stage of the value chain, while forward integration is the acquisition of those organizations which are located in the later stage of the value chain.
Concentric diversification strategy – This strategy involves the creation of a portfolio of related organizations. The portfolio is normally established by acquisition rather than by internal new operation creation. Product-market synergies are a major issue in creating the portfolio of related strategic organizational units.
Conglomerate diversification strategy – This involves using the financial performance standard as a base for the acquisition of a portfolio of organizations.
Innovation strategy – This strategy is because of the result of study, research, and experiment which leads to formation of a new product, equipment, or new process. This strategy involves new ideas, new processes, and higher levels of research and development than the product development strategy. This strategy is normally supported by other strategies. Innovative strategy is a profitable strategy for the organization, and hence, the organization seeks to realize the initial high profits which goes with the acceptance of the customer of a new improved product. After this, instead of facing stiff competition as the basis of profitability changes from innovation to production or marketing competence, the organization seeks another original idea.
Turnaround strategy – It is a kind of strategy adopted by financially struggling organizations. It involves cost savings as well as reduction of asset. This can be done through laying off of some of the employees, leasing instead of actual purchase of equipment, and reduction of expenditure on marketing as well as research and development (R&D). Sometimes, there can be disposal of the organizational asset for the purpose of getting capital for entering new area of operation, or the asset after being disposed of, can be leased back to the organization again by the buyer of such asset so that the organization can have funds. However, the capital raised is to be used for diversification into some other venture for the turnaround strategy process to be completed.
Joint ventures – This strategy involves two or more organizations coming together to create competitive advantage in the industry in which they are operating in. This coming together involves pulling up the resources, management skills, and other assets together for the purpose of creating such an advantage.
Divestiture strategy – This strategy involves the sale of part of the organization or the entire organization normally to another organization. At times, such organization can enter into an entirely new area of operation which is normally the case.
Liquidation strategy – This strategy involves the sale of part of the organization or the entire organization normally to individual or corporate buyers of its physical asset value. The purpose of this sale is not to operate the acquisition as an ongoing area of operation as in the case of divestiture.
Competitive advantage – The objective of the majority of the organizational strategies is to create and then sustain a competitive advantage. A competitive advantage becomes a sustainable competitive advantage when the competing organizations cannot duplicate the value, the organization is providing to the customers. Sustainable competitive advantage is not the same as a long-lasting competitive advantage, though the organization wants clearly a competitive advantage to last for a long time. Instead, a competitive advantage is sustained, if competitors have tried unsuccessfully to duplicate the advantage and have, for the time being, stopped efforts trying to duplicate it. Fig 3 shows four conditions which are to be met if the organizational resources are to be used to achieve a sustainable competitive advantage. The resources are to be valuable, rare, imperfectly imitable, and non-substitutable.
Fig 3 Four requirements for sustainable competitive advantage
Valuable resources allow organizations to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. For sustained competitive advantage, valuable resources are also to be rare resources. An organization cannot sustain a competitive advantage if all of its competitors have similar resources and capabilities. Rare resources are those resources which are not controlled or possessed by several competing organizations. They are necessary to sustain a competitive advantage.
Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also non-substitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage. Non-substitutable resource is a resource which produces value or competitive advantage and has no equivalent substitutes or replacements.
Strategy-making process – Organizations use a strategy-making process to create strategies which produce sustainable competitive advantage. Fig 4 shows the three steps of the strategy making process which are (i) assess the need for strategic change, (ii) conduct a situational analysis, and (iii) choose strategic alternatives. These three steps are described after the figure.
Fig 4 Three steps of the strategy making process
Assessing the need for strategic change – The external organizational environment is much more turbulent than it used to be. With the needs of the customers constantly growing and changing, and with competitors working harder, faster, and smarter to meet those needs, the first step in strategy making is determining the need for strategic change. In other words, the organization is to determine whether it needs to change its strategy to sustain a competitive advantage.
Determining the need for strategic change sometimes seems easy to do, but in reality, it is not. There is a great deal of uncertainty in strategic environments of the organization. Also, the actions of the management are frequently slow to recognize the need for the strategic change, especially at successful organizations which have created and sustained competitive advantages. Since they are extremely aware of the strategies which make their organizations successful, they continue to rely on those strategies, even as the competition changes. In other words, success frequently leads to competitive inertia i.e., a reluctance to change strategies or competitive practices which have been successful in the past.
Hence, besides being aware of the dangers of competitive inertia, what the management can do to improve the speed and accuracy with which they determine the need for strategic change. One of the methods is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between an intended strategy and the strategic actions the managements take when actually implementing the strategy. Also, while the strategic dissonance can indicate that management is not doing what it is required to do to carry out the organizational strategy, it can also mean that the intended strategy is out of date and needs to be changed.
Conduct situational analysis – A situational analysis can also help the management to determine the need for strategic change. A situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in the internal environment of the organization and the opportunities and threats in its external environment. The SWOT analysis helps the organization to determine how to increase internal strengths and minimize internal weaknesses while maximizing external opportunities and minimizing external threats.
Core capabilities are the less visible, internal decision-making routines, problem-solving processes, and organizational cultures which determines how efficiently inputs can be turned into outputs. A distinctive competence is something which the organization can make, do, or perform better than its competitors. Whereas distinctive competencies are tangible, e.g., a product or service is faster, cheaper, or better, the core capabilities which produce distinctive competencies are not. Distinctive competence cannot be sustained for long without superior core capabilities.
After examining internal strengths and weaknesses, the second part of a situational analysis is to look outside the organization and assess the opportunities and threats in the external environment. Environmental scanning involves searching the environment for important events or issues which can affect the organization. With environmental scanning, the management normally scan the environment to stay up-to-date on important factors in the environment, such as pricing trends and technology changes in the industry.
In a situational analysis, however, management use environmental scanning to identify specific opportunities and threats which can either improve or harm the organizational ability to sustain its competitive advantage. Identification of strategic groups and formation of shadow-strategy task forces are two ways to do this.
Strategic groups are not ‘actual’ groups of people. They are organizations, normally competitors, which managements closely follow. More specifically, a strategic group is a group of other organizations within an industry which the management choose for comparing, evaluating, and bench-marking the organizational strategic threats and opportunities.
Bench-marking involves identifying outstanding practices, processes, and standards at other organizations and adapting them to the organization. Typically, the management includes organizations as part of their strategic group if they compete directly with those organizations for customers or if those organizations use strategies similar to the strategies of the organization.
In fact, when scanning the environment for strategic threats and opportunities, management tends to categorize the different organization in the industry as core, secondary, and transient organizations. Core organizations are the central organizations in a strategic group. When the management scan the organizational environments for strategic threats and opportunities, they concentrate on the strategic actions of core organizations and not unrelated organizations.
Secondary organizations are the organizations which use strategies related to but somewhat different from those of core organizations. Transient organizations are organizations whose strategies are changing from one strategic position to another.
Since the management tends to limit the attention to the core organizations in the strategic group, some organizations have started using shadow-strategy task forces to more aggressively scan their environments for strategic threats and opportunities. A shadow-strategy task force is a committee within the organization which analyzes the weaknesses of the organization to determine how the competitors can exploit them for the competitive advantage.
The shadow-strategy task force actively seeks out the organizational weaknesses and then, thinking like a competitor, determines how other organizations can exploit them for competitive advantage. Also, for making sure that the task force challenges conventional thinking, its members are to be independent-minded, come from a variety of the functions and levels of the organization, and have the access and authority to question the present strategic actions and intent of the organization.
In short, a situational analysis has two basic parts. The first is to examine internal strengths and weaknesses by focusing on distinctive competencies and core capabilities. The second is to examine external opportunities and threats by focusing on environmental scanning, strategic groups, and shadow-strategy task forces.
Choose strategic alternatives – After determining the need for strategic change and conducting a situational analysis, the last step in the strategy-making process is to choose strategic alternatives which help the organization to create or maintain a sustainable competitive advantage.
As per the strategic reference point theory, management chooses between two basic alternative strategies. They can choose a conservative, risk-avoiding strategy which aims to protect an existing competitive advantage, or they can choose an aggressive, risk-seeking strategy which aims to extend or create a sustainable competitive advantage. The choice to be risk seeking or risk avoiding typically depends on whether the management views the organization as falling above or below strategic reference points.
Strategic reference points are the targets which the management uses to measure whether the organization has developed the core competencies which it needs to achieve a sustainable competitive advantage.
As shown in Fig 5, when the organization is performing above or better than its strategic reference points, the management is typically satisfied with the strategy of the organization. Ironically, this satisfaction tends to make the management conservative and risk-averse. After all, since the organization already has a sustainable competitive advantage, the worst thing which can happen is to lose it. As a result, new issues or changes in the external environments of the organization are viewed as threats. In contrast, when the organization is performing below or worse than its strategic reference points, the management is typically dissatisfied with the strategy of the organization. In this case, management is much more likely to choose a daring, risk-taking strategy. After all, if the present strategy is producing sub-standard results, the organization has nothing to lose by switching to risky new strategies in the hopes that it can create a sustainable competitive advantage. Hence, the management in this situation views new issues or changes in external environments as opportunities for potential gain.
Fig 5 Strategic reference points
Strategic reference point theory, however, is not deterministic. Management is not predestined to choose risk-averse or risk-seeking strategies for the organization. Indeed, one of the most important elements of the theory is that management can influence the strategies chosen by the organization by actively changing and adjusting the strategic reference points the management uses to judge strategic performance. For example, if an organization has become complacent after consistently surpassing its strategic reference points, then the management can change from a risk-averse to a risk-taking orientation by raising the standards of performance (i.e., strategic reference points).
Hence, even when the organization has achieved a sustainable competitive advantage, the management is required to adjust or change strategic reference points to challenge itself and the employees to develop new core competencies for the future. In the long run, an effective organization frequently revises the strategic reference points to better focus the attention of the management on the new challenges and opportunities which occur in the ever-changing organizational environments.
As seen, the first step in strategy making is determining whether a strategy needs to be changed to sustain a competitive advantage. Since uncertainty and competitive inertia make this difficult to determine, management can improve the speed and accuracy of this step by looking for differences between the intended strategy of the management and the strategy actually implemented at the lower-level of the organization employees (i.e., strategic dissonance).
The second step is to conduct a situational analysis which examines internal strengths and weaknesses (distinctive competencies and core capabilities), as well as external threats and opportunities (environmental scanning, strategic groups, and shadow-strategy task forces).
In the third step of strategy making, the strategic reference point theory suggests that when the organization is performing better than its strategic reference points, the management typically chooses a risk-averse strategy. When performance is below strategic reference points, risk-seeking strategies is more likely to be chosen. However, it is important that the management can influence the choice of strategic alternatives by actively changing and adjusting the strategic reference points it uses to judge strategic performance.
Corporate-level, organization-level and industry-level strategies – For the formulation of effective strategies, the organization is required to consider these three basic issues (i) the type of the operations the organization is doing, (ii) how the organization is to compete in the industry with similar operations, and (iii) which are the competitors, and how the organization is to respond to them. These simple, but powerful issues are at the heart of corporate-level, organization-level and industry-level strategies. The management is to be able to explain the different kinds of corporate-level strategies, explain the components and kinds of organization-level strategies, and describe the different kinds of industry-level strategies.
Corporate-level strategy is the overall organizational strategy which addresses the issue what is the type of operation, the corporate is doing and whether it should be doing. The two major approaches to corporate-level strategy which the organizations use to decide which types of operations they are doing are (i) portfolio strategy, and (ii) grand strategies. Fig 6 gives corporate level strategies and Boston consulting group (BCG) matrix.
Fig 6 Corporate level strategies and Boston consulting group matrix.
Portfolio strategy – One of the standard strategies for stock market investors is diversification, i.e., to buy stocks in a variety of organizations in different industries. The purpose of this strategy is to reduce risk in the overall stock portfolio (i.e., the entire collection of stocks). The basic idea is simple, i.e., if a person invests in ten organizations in ten different industries, the person does not lose the entire investment if one of the organizations performs poorly. Also, since the organizations are in different industries, one organization’s losses are likely to be offset by another organization’s gains. Portfolio strategy is based on the same ideas.
Diversification is a strategy for reducing risk by buying a variety of items (stocks or, in the case of an organization, types of operations) so that the failure of one stock or one organization does not doom the entire portfolio.
Portfolio strategy is a corporate-level strategy which minimizes risk by diversifying investment among different operations or product lines. Just as a diversification strategy guides an investor who invests in a variety of stocks, portfolio strategy guides the strategic decisions of organizations which compete in a variety of products. Also, just as investors consider the mix of stocks in their stock portfolio when deciding which stocks to buy or sell, managements following portfolio strategy try to acquire organizations which fit well with the rest of their corporate portfolio and to sell those which do not. Portfolio strategy provides the following guidelines to help them to do this.
First, according to portfolio strategy, the more products in which the organization competes, the smaller its overall chances of failing. If an organization is considered as a stool and its products as the legs of the stool, then the more legs or products added to the stool, the less likely it is to tip over. Using this analogy, portfolio strategy reduces 3M’s (man, material, and machine) risk of failing since the survival of the organization depends on essentially seven different product sectors. Since the emphasis is on adding ‘legs to the stool’, managements who use portfolio strategy are frequently on the lookout for acquisitions, i.e., buying of other organization.
Second, beyond adding new products to the organizational portfolio, portfolio strategy predicts that organizations can reduce risk even more through unrelated diversification, i.e., creating or acquiring organizations in completely unrelated product areas. As per the portfolio strategy, when products are unrelated, losses in one organization or industry have minimal effect on the performance of other organizations in the portfolio. Since majority of the internally grown operations tend to be related to existing products or services, portfolio strategy suggests that acquiring new organizations is the preferred method of unrelated diversification.
Third, investing the profits and cash flows from mature, slow-growth operations into newer, faster-growing operations can reduce long-term risk. The best-known portfolio strategy for guiding investment of the organization’s operations is the Boston consulting group (BCG) matrix (Fig 6b). The BCG matrix is a portfolio strategy which managements use to categorize the organizations by growth rate and relative market share, helping them decide how to invest the funds. The matrix separates organizations into four categories based on how fast the market is growing (high-growth or low-growth) and the size of the organization’s share of that market (small or large).
Stars are organizations which have a large share of a fast-growing market. To take advantage of a star’s fast-growing market and its strength in that market (large share), substantial investment is to be made in it. The investment is normally worthwhile, however, since several stars produce sizable future profits. Question marks are the organizations which have a small share of a fast-growing market. If the investments are made in these organizations, they can eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars. Cash cows are the organizations which have a large share of a slow-growing market. Organizations in this situation are frequently highly profitable, hence the name ‘cash cow’. Finally, dogs are the organizations which have a small share of a slow-growing market. As the name ‘dogs’ suggests, having a small share of a slow-growth market is frequently not profitable.
Since the idea is to redirect investment from slow-growing to fast-growing organizations, the BCG matrix starts by recommending that while the substantial cash flows from cash cows last, they are to be reinvested in stars (arrow 1 in Fig 6b) to help them grow even faster and achieve even more market share. Using this strategy, current profits help produce future profits. Over time, as their market growth slows, some stars can turn into cash cows (arrow 2). Cash flows are also to be directed to some question marks (arrow 3). Though riskier than stars, question marks have high potential because of their fast-growing market. Management is to decide which question marks are most likely to turn into stars, and hence warrant further investment, and which ones are too risky and are to be sold. Over time, hopefully some questions marks become stars as their small markets become large ones (arrow 4). Finally, since dogs lose money, the organization is to ‘find them new owners’ or ‘take them to the pound’. In other words, dogs are either to be sold to other organizations or to be closed down and liquidated for their assets (arrow 5).
Although the BCG matrix and other forms of portfolio strategy are relatively popular among managements, portfolio strategy has some drawbacks. The most significant is that contrary to the predictions of portfolio strategy, the evidence does not support the usefulness of acquiring unrelated businesses. As shown in Fig 7, there is a U-shaped relationship between diversification and risk. The left side of the curve shows that single product with no diversification are extremely risky (if the single product fails, the whole organization fails).
Fig 7 Diversification and risk relationship
Hence, in part, the portfolio strategy of diversifying is correct i.e., competing in a variety of different products can lower risk. However, portfolio strategy is also partly wrong, i.e., the right side of the curve shows that conglomerates composed of completely unrelated products are even riskier than single, undiversified product.
A second set of issues with portfolio strategy has to do with the dysfunctional consequences which occur when organizations are categorized as stars, cash cows, question marks, or dogs. Contrary to expectations, the BCG matrix frequently yields incorrect judgments about the future potential of the organization. This is since it relies on past performance (i.e., previous market share and previous market growth), which is a notoriously poor predictor of future performance of the organization.
Also, using the BCG matrix can also weaken the strongest performer in the organizational portfolio, the cash cow. As funds are redirected from cash cows to stars, management essentially take away the resources needed to take advantage of the cash cow’s new market opportunities. As a result, the cash cow becomes less aggressive in seeking new product or in defending its present products.
Finally, labelling a top performer as a cash cow can harm employee morale. Cash cow employees realize that they have inferior status and that instead of working for themselves, they are now working to fund the growth of stars and question marks. So, the kind of portfolio strategy which does the best job of helping management to decide which organizations to buy or to sell. The U-shaped curve in Fig 7 indicates that, contrary to the predictions of portfolio strategy, the best approach is probably related diversification, in which the different organizational units share similar products, manufacturing, marketing, technology, or cultures. The key to related diversification is to acquire or create new organizations with core capabilities which complement the core capabilities of organizations already in the organizational portfolio.
Grand strategy is a broad organizational-level strategic plan which is used to achieve strategic goals and guide the strategic alternatives which the managements of individual organizations or sub-units can use. The grand strategy is a broad strategic plan used to help the organization to achieve its strategic goals. Grand strategies guide the strategic alternatives which the managements of individual organizations or sub-units can use in deciding which of the products they are to produce. There are three kinds of grand strategies namely (i) growth, (ii) stability, (iii) and retrenchment / recovery.
A growth strategy is a strategy which focuses on increasing the profits, revenues, market share, or the number of places (stores, offices, locations) in which the organization carries out its operations. Organizations can grow in several ways. They can grow externally by merging with or acquiring other organizations in the same or different fields. Another way to grow is internally, directly expanding the organizational existing operations or creating and growing new fields of operations. Growth is a huge challenge, but it is the right thing to do.
A stability strategy is a strategy which focuses on improving the way in which the organization sells the same products or services to the same customers. The purpose of a stability strategy is to continue doing what the organization has been doing, but just do it better. Hence, the organizations following a stability strategy try to improve the way in which they sell the same products or services to the same customers. Organizations frequently choose a stability strategy when their external environment does not change much or after they have struggled with periods of explosive growth.
A retrenchment strategy is strategy which focuses on turning around very poor organizational performance by shrinking the size or scope of the organization, or, if the organization is in multiple fields of operations, by closing or shutting down some of the lines of operation. The first step of a typical retrenchment strategy can include making considerable cost reductions by laying off employees, closing poorly performing stores, offices, or manufacturing plants, or closing or selling entire lines of products or services.
Recovery is the strategic actions taken by the organization after retrenchment to return to a growth strategy. After cutting costs and reducing the organizational size or scope, the second step in a retrenchment strategy is recovery. The two-step process of cutting and recovery is analogous to pruning roses. Prior to each growing season, roses are to be cut back to two-thirds their normal size. Pruning does not damage the roses, instead it makes them stronger and more likely to produce beautiful, fragrant flowers. The retrenchment-and-recovery process is similar. Cost reductions, lay-offs, and plant closings are sometimes necessary to restore organizations to ‘good health’. But like pruning, those cuts are intended to allow organizations to eventually return to growth strategies (i.e., recovery). Hence, when the performance of the organization drops considerably, a strategy of retrenchment and recovery can help the organization to return to a successful growth strategy.
Corporate-level strategies, such as portfolio strategy and grand strategies, help the management to determine the fields of the operations of the organizations. Portfolio strategy focuses on lowering operational risk by being in multiple, unrelated fields of operations and by investing the cash flows from slow-growth areas into faster-growing areas. One portfolio strategy, the BCG matrix, suggests that cash flows from cash cows are to be reinvested in stars and in carefully chosen question marks. Dogs are to be sold or liquidated.
However, portfolio strategy has several issues. Acquiring unrelated organizations actually increases risk rather than lowering it. The BCG matrix is frequently wrong when predicting organizational future potential (i.e., dogs, cash cows, etc.). And redirecting cash flows can seriously weaken cash cows. The most successful way to use the portfolio approach to corporate strategy is to reduce risk through related diversification.
The three kinds of grand strategies are growth, stability, and retrenchment / recovery. Organizations can grow externally by merging with or acquiring other organizations, or they can grow internally through direct expansion or creating new fields of operations. Organizational choose a stability strategy (selling the same products or services to the same customers) when their external environment changes very little or after they have dealt with periods of explosive growth. Retrenchment strategy, shrinking the size or scope of the organization, is used to turn around poor performance. If retrenchment works, it is frequently followed by a recovery strategy which focuses on growing the organization again.