Strategic Management and Business Policy
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Strategic management is a systematic approach of analyzing, planning and implementing the strategy in an organization to ensure a continued success. Strategic management is a long term procedure which helps the organization 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 organization. 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
— Corporate restructuring
— Combination strategies – concept of synergy
The basic approach of the stability strategy is to maintain the present status of the organization. In an effective stability strategy, the organization 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 organizations 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 organization. Expansion strategy
The organizations adopt expansion strategy when it increases its level of objectives much higher than the past achievement level. Organizations select expansion strategy to increase their profit, sales and market share. Expansion strategy also provides a significant increase in the performance of the organization. Many organizations 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 organization either marketwise or technology wise or both. Many organizations adopt diversification strategy to minimize the risk of loss. It is also used to capitalize organizational strengths. Diversification may be the only strategy that can be used if the existing process of an organization is discontinued due to environmental and regulatory factors. The two basic diversification strategies are:
° Concentric diversification
The organization adopts concentric diversification when it takes up an activity that relates to the characteristics of its current business activity. The organization prefers to diversify concentrically either in terms of customer group, customer functions, or alternative technologies of the organization. It is also called as related strategy. ° Conglometric diversification
The organization adopts conglometric diversification when it takes up an activity that does not relate to the characteristics of its current business activity. The organization chooses to diversify conglometrically either in terms of customer group, customer functions, or alternative technologies of the organization. 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 organization. The present line of activities in an organization 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 organization 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 organization 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
Retrenchment strategy is followed by an organization 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 organization. This kind of processing is called downsizing or rightsizing. The idea behind this strategy is to have a temporary reduction of activities in the organization 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 organization. — Captive company strategy – Captive company strategy is a process of tying up with larger organizations and staying viable as an exclusive supplier to the large organizations.
An organization may also be taken as captive if their competitive position is irreparably weak. — Divestment strategy – Divestment strategy is followed when an organization involves in the sale of one or more portion of its business. Usually if any unit within the organization 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 organization’s debt obligations or other payments. If an organization 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 organization. This process involves in closing down an organization 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 organization. This change affects the structure of the organization. Corporate restructuring involves increasing or decreasing the levels of personnel among top level, mid-level and lower level management. It is reorganizing 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 organization. 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 organization. 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 analyzing 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 organization. Mainly strategic business unit (SBU) managers are involved in this level. It is the process of formulating the objectives of the organization 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 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 organization. Cost leadership and differentiation
Cost leadership strategy is adopted by the organizations to produce a relatively standardized 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 organization 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 organized 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 organization. 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 organization 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 organization use. Most of the individual organizations 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 organization. — 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 organization. It can be managing employees, the external and internal factors of organization, 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 organization monitoring includes measuring the performance of the organization 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 organization. It leads to risk if monitoring of the resources show a deviation from the true path as expected by the organization. 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 organization to work on the right track by removing all hurdles and produces effective outcome in reaching the goals of the organization 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 utilization of resources
Achieving cost and operational efficiency
Achieving cost deals with achieving greater profits by reducing the cost for various resources within the organization to balance the expenditure and investment. Organizations 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 minimizing the waste and maximizing the resource capabilities. Optimal utilization of resources
Optimal utilization 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 utilization of resources is implemented and monitored on a regular basis. Planning and scheduling activities in business plays a major impact on the utilization of resources. The systematic planning and scheduling of activities result in utilization of less budgeted resources for greater profits in an organization. Productivity
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 organization. Productivity growth is a vital factor for continuous growth of the organization.
2) Describe Porter’s five forces 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 organization. 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 organization. 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, organizations are mutually dependent. A competitive move by one organization may result in a noticeable effect on its competitors and thus cause retaliation or counter
— 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.
3) Define the term “Business policy”. Explain its importance.
Business policies are the instructions laid by an organization to manage its activities. It identifies the range within which the subordinates can take decisions in an organization. It authorizes the lower level management to resolve their issues and take decisions without consulting the top level management repeatedly. The limits within which the decisions are made are well defined. Business policy involves the acquirement of resources through which the organizational goals can be achieved. Business policy analyses roles and responsibilities of top level management and the decisions affecting the organization in the long-run. It also deals with the major issues that affect the success of the organization.
Importance of Business Policies
A company operates consistently, both internally and externally when the policies are established. Business policies should be set up before hiring the first employee in the organization. It deals with the constraints of real-life business. It is important to formulate policies to achieve the organizational objectives. The policies are articulated by the management. Policies serve as a guidance to administer activities that are repetitive in nature. It channels the thinking and action indecision making. It is a mechanism adopted by the top management to ensure that the activities are performed in the desired way. The complete process of management is organized by business policies. Business policies are important due to the following reasons:
Reliable policies coordinate the purpose by focusing on organizational activities. This helps in ensuring uniformity of action throughout the organization. Policies encourage cooperation and promote initiative.
— Quick decisions
Policies help subordinates to take prompt action and quick decisions. They demarcate the section within which decisions are to be taken. They help subordinates to take decisions with confidence without consulting their superiors every time. Every policy is a guide to activities that should be followed in a particular situation. It saves time by predicting frequent problems and providing ways to solve them.
— Effective control
Policies provide logical basis for assessing performance. They ensure that the activities are synchronized with the objectives of the organization. It prevents divergence from the planned course of action. The management tends to deviate from the objective if policies are not defined precisely. This affects the overall efficiency of the organization. Policies are derived objectives and provide the outline for procedures.
Well defined policies help in decentralization as the executive roles and responsibility are clearly identified. Authority is delegated to the
executives who refer the policies to work efficiently. The required managerial procedures can be derived from the given policies. Policies provide guidelines to the executives to help them in determining the suitable actions which are within the limits of the stated policies. Policies contribute in building coordination in larger organizations.
4) What, in brief, are the types of Strategic Alliances and the purpose of each? Supplement your answer with real life examples.
Strategic alliances constitute a viable alternative in addition to Strategic Alternatives. Companies can develop alliances with the members of the strategic group and perform more effectively. These alliances may take any of the following forms. Following are the different types of strategic Alliances:
— Product and/or service alliance: Two or more companies may get together to synergies their operations, seeking alliance for their products and/or services. A manufacturing company may grant license to another company to produce its products. The necessary market and product support, including technical know-how, is provided as part of the alliance. Example: – Coca-cola initially provided such support to Thumb Up.
Two companies may jointly market their products which are complementary in nature. Example: – 1) Chocolate companies more often tie up with toy companies. 2) TV Channels tie-up with Cricket boards to telecast entire series of cricket matches live.
Two companies, who come together in such an alliance, may produce a new product altogether. Example: – Sony Music created a retail corner for itself in the ice-cream parlors of Baskin-Robbins.
— Promotional alliance: Two or more companies may come together to promote their products and services. A company may agree to carry out a promotion campaign during a given period for the products and/or services of another company. Example: – The Cricket Board may permit Coke’s products to be displayed during the cricket matches for a period of one year.
— Logistic alliance: Here the focus is on developing or extending logistics support. One company extends logistics support for another company’s products and services. Example:- The outlets of Pizza Hut, Kolkata entered into a logistic alliance with TDK Logistics Ltd., Hyderabad, to outsource the requirements of these outlets from more than 30 vendors all over India – for instance, meat and eggs from Hyderabad etc.
— Pricing collaborations: Companies may join together for special pricing collaborations. Example: – It is customary to find that hardware and software companies in information technology sector offer each other price discounts. Companies should be very careful in selecting strategic partners. The strategy should be to select such a partner who has complementary strengths and who can offset the present weaknesses.
5) Explain the concept, need for and importance of a Decision Support System.
Decision support systems constitute a class of computer-based information systems including knowledge-based systems that support decision-making activities.
It is also explained as a class of information systems (including but not limited to computerized systems) that support business and organizational decision-making activities. A properly designed DSS is an interactive software-based system intended to help decision makers compile useful information from a combination of raw data, documents, personal knowledge, or business models to identify and solve problems and make decisions.
Typical information that a decision support application might gather and present are:
• an inventory of all of your current information assets (including legacy and relational data sources, cubes, data warehouses, and data marts),
• comparative sales figures between one week and the next,
• Projected revenue figures based on new product sales assumptions.
Need: Many companies in developing countries have a very detailed reporting system going down to the level of a single product, a single supplier, a single day. However, these reports – which are normally provided to the General Manager – should not be used by them at all. They are too detailed and, thus, tend to obscure the true picture. A General Manager must have a bird’s eye view of his company. He must be alerted to unusual happenings, disturbing financial data and other irregularities.
As things stand now, the following phenomena could happen:
• That the management will highly leverage the company by assuming excessive debts burdening the cash flow of the company.
• That a false Profit and Loss (PNL) picture will emerge – both on the single product level – and generally. This could lead to wrong decision-making, based on wrong data.
• That the company will pay excessive taxes on its earnings.
• That the inventory will not be fully controlled and appraised centrally.
• That the wrong cash flow picture will distort the decisions of the management and lead to wrong (even to dangerous) decisions.
Importance: A decision system has great impact on the profits of the company. It forces the management to rationalize the depreciation, inventory and inflation policies. It warns the management against impending crises and problems in the company. It specially helps in following areas:
▪ The management knows exactly how much credit it could take, for how long (for which maturities) and in which interest rate. It has been proven that without proper feedback, managers tend to take too much credit and burden the cash flow of their companies.
▪ A decision system allows for careful financial planning and tax planning. Profits go up, non cash outlays are controlled, tax liabilities are minimized and cash flows are maintained positive throughout.
The decision system is an integral part of financial management in the West. It is completely compatible with western accounting methods and derives all the data that it needs from information extant in the company.
So, the establishment of a decision system does not hinder the functioning of the company in any way and does not interfere with the authority and functioning of the financial department
6) Write short notes on:
Corporate social responsibility:
Corporate social responsibility (CSR), also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance, is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its adherence to law, ethical standards, and international norms. Business would embrace responsibility for the impact of their activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, business would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality.
Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honoring of a triple bottom line: People, Planet and Profit.
The practice of CSR is subject to much debate and criticism. Proponents argue that there is a strong business case for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits. Critics argue that CSR distracts from the fundamental economic role of businesses; others argue that it is nothing more than superficial window-dressing; others yet argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations. Corporate Social Responsibility has been redefined throughout the years. However, it essentially is titled to aid to an organization’s mission as well as a guide to what the company stands for and will uphold to its consumers.
A business plan is a detailed description of how an organization intends to produce market and sell a product or service. Whether the business is housing, commercial or some other enterprise, a good business plan describes to others and to your own board of directors, management and staff the details of how you intend to operate and expand your business.
A solid business plan describes who you are, what you do, how you will do it, your capacity to do it, what financial resources are necessary to carry it out, and how you intend to secure those resources. A well-written plan will serve as a guide through the start-up phase of the business. It can also establish benchmarks to measure the performance of your business venture in comparison with expectations and industry standards. And most important, a good business plan will help to attract necessary financing by demonstrating the feasibility of your venture and the level of thought and professionalism you bring to the task.
A well-written plan will serve as a guide through the start-up phase of the business. It can also establish benchmarks to measure the performance of your business venture in comparison with expectations and industry standards. And most important, a good business plan will help to attract necessary financing by demonstrating the feasibility of your venture and the level of thought and professionalism you bring to the task. A good business plan will help attract necessary financing by demonstrating the feasibility of your venture and the level of thought and professionalism you bring to the task. A good business plan serves the following purposes:
— Revenue Generation – Your organization may hope to create a business that will generate sufficient net income or profit to finance other programs, activities or services provided by your organization.
— Employment Creation – A new business venture may create job opportunities for community residents or the constituency served by your organization.
— Neighborhood Development Strategy – A new business venture might serve as an anchor to a deteriorating neighborhood commercial area, attract additional businesses to the area and fill a gap in existing retail services. You may need to find a use for a vacant commercial property that blights a strategic area of your neighborhood. Or your business might focus on the rehabilitation of dilapidated single family homes in the community.
— Establish Goals- Once you have identified goals for a new business venture, the next step in the business planning process is to identify and select the right business. Many organizations may find themselves starting at this point in the process. Business opportunities may have been dropped at your doorstep. Depending on the goals you have set, you might take several approaches to identify potential business opportunities.
— Local Market Study- Whether your goal is to revitalize or fill space in a neighborhood commercial district or to rehabilitate vacant housing stock; you should conduct a local market study. A good market study will measure the level of existing goods and services provided in the area, and assess the capacity of the area to support existing and additional commercial or home-ownership activity. A bad or insufficient market study could encourage your organization to pursue a business destined to fail, with potentially disastrous results for the organization as a whole. Through a market study you will be able to identify gaps in existing products and services and unsatisfied demand for additional or expanded products and services.
— Analysis of Local and Regional Industry Trends- Another method of investigating potential business opportunities is to research local and regional business and industry trends. You may be able to identify which business or industrial sectors are growing or declining in your city, metropolitan area or region. The regional or metropolitan area planning agency for your area is a good source of data on industry trends.
— Internal Capacity- The board, staff or membership of your organization may possess knowledge and skills in a particular business sector or industry. Your organization may wish to draw upon this internal expertise in selecting potential business opportunities.
— Internal purchasing needs / Collaborative Procurement- Perhaps, the organization frequently purchases a particular service or product. If nearby affiliate organizations also use this service or product, this may present a business opportunity. Examples of such products or services include printing or copying services, travel services, transportation services, property management services, office supplies, catering services, and other products.