14 Jun Designing the Strategies for the company (Explain the proper rationale and benefits of using the strategies) (huawei) 1-Corporate Level Strategy 2-Business Strategy
Designing the Strategies for the company (Explain the proper rationale
and benefits of using the strategies) (huawei)
1-Corporate Level Strategy
2-Business Strategy
3-International Strategy
500-700 words
CHAPTER 3: STRATEGIC BUSINESS PLANNING_
Outcome 3 : Identify key elements in business planning and performance
measurement.
Rao, P. Subba. Strategic Management, Global Media, 2009. ProQuest Ebook Central,
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1
Strategic Business Planning
.
An approach to decision-making about issues which are fundamental and of crucial importance to its continuing long term effectiveness. According to Scott
Long range strategy is designed to provide information about an organization's vision, mission, purpose, direction. and objectives
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Strategic Plan_
Strategic plan provides a means to deal explicitly and systematically with matters of fundamental importance.
Strategic plan is, "the process of selecting an organization's goals, determining the policies and strategic programmes necessary to achieve specific objectives enroute to the goals and establishing the methods necessary to assure that the policies and strategic programmes are achieved.".
Business planning is derived from strategic planning and strategy.
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Exhibit 3.1: Differences Between Operational Planning and
Strategic Planning
| Operational Planning | Strategic Planning | |
| Focus | Operational Problems | Long term, survival and Developmental |
| Objectives | Present Profit | Future profit |
| Constraints | Present Resources, Environment | Future Resources, Environment. |
| Rewards | Efficiency, Stability | Development of future potential |
| Information | Present Business | Future opportunities |
| Organization | Bureaucratic / stable | Entrepreneurial/Flexible |
| Leadership | Conservative | Inspires Radical changes |
| Problem-solving | Relies on pas experiences | Anticipates, finds new approaches |
| Low Risk | High Risk |
4
Source: Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305.
Created from momp on 2019-04-21 03:02:42
Rao, P. Subba. Strategic Management, Global Media, 2009. ProQuest Ebook Central,
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Created from momp on 2018-12-26 23:43:18.
Strategic Planning Process
The Steps Involved in Strategic Planning Process:
1. Establishing verifiable goals or set of goals to be achieved: The business plan is based on the enterprise objectives.
2. Establishing planning premises: Planning premises include certain assumptions about the future on the basis of which the plan will be ultimately formulated. Planning premises include:
Internal and external premises
Tangible and intangible premises
Controllable and non-controllable premises.
5
Source: Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305.
Created from momp on 2019-04-21 03:02:42
Rao, P. Subba. Strategic Management, Global Media, 2009. ProQuest Ebook Central,
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Created from momp on 2018-12-26 23:43:18.
Planning Premises
Internal premises
sales forecasts, policies and programmes ofthe organization, capital investment, managerial competency, human resource skills, other organizational resources.
The gap-filling analysis: The firms should achieve high performance in order to fill the gap.
Tangible and Intangible Premises
The premises which can be quantifiable are called tangible premises. The tangible premises include population growth, product demand, past sales, capital invested etc
The intangible premises are those which cannot be measured quantitatively. These premises include political factors, social factors, technological factors, natural factors etc.
Controllable and Uncontrollable Premises
Business plans are to be modified and sometimes reformulated due to the presence of and interaction of uncontrollable premises.
Uncontrollable premises include strikes, lockouts, wars natural calamities, emergency situations etc.
Controllable premises include company's labour policy, investment policy, advertising policy, level of technology competency of managerial personnel, quality of human resources, availability of financial resources etc.,
6
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Fig. 3.1 Broader Aspects of Business Planning
7
3. Deciding the Planning Period: The plan of the period should be based on the nature of the business, the vision and mission of the company.
4. Finding Alternative Courses of Action: After formulating the business plans, the top-level management should find out the alternative courses of actions available in order to accomplish the company's mission.
5. Evaluating the Alternative Plans and Selecting a Course of Action: The management has to evaluate the available courses of action through SWOT analysis and rank the alternatives.
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6. Developing Derivative Plans: The management after selecting the· best business plan, it should formulate the other policies and plans which are the sub-plans to the main plan.
7. Implementation of the Business Plans: After the development and selection of the plans and derivative plans, management has to take initiative to implement the business plan.
8. Measuring and Controlling: After the business plan is put into action, the management has to measure the progress of the plan and compare it with the standards, observe the deviations, if any and correct the deviations.
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9
Corporate Level Strategies
After analyzing the environment & assessing the internal environment, the next step in the strategic planning process is to develop strategic alternatives to help the organization in achieving its objectives.
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Kinds of Grand Strategies
| Stability Strategies | Growth Strategies | Retrenchment Strategies | Restructuring Strategies |
| • Maintenance of Status Quo | Internal Growth Concentration strategies | Turnaround Captive Company Transformation Divestment Liquidation | Portfolio Restructuring |
| • Sustainable Growth | Mergers Takeover/ Acquisition Horizontal Integration Conglomerate Diversification Vertical Integration Joint Ventures |
Fig.3.2 Different Kinds of Grand Strategy Alternatives
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Stability Strategies_
Firms attempt to maintain their size, level of production and sales, serving almost the same customer groups, performing the same customer functions, produces with same technologies and operate the current lines of business.
These firms do not attempt to grow either through increased sales or through the development of new products or markets.
This strategy can be of two types viz., maintenance of status quo and sustainable growth.
Maintenance of Status Quo
Firms adopting this strategy maintain the same level of operations.
Small business firms desire satisfactory level of operations rather than growth.
Sustainable Growth:
Slow growth is more desired rather than maintenance of status quo.
In fact, it is very difficult to maintain status quo.
Therefore, a sustainable growth strategy is more optimistic than the zero growth.
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Reasons for Adopting Stability Strategies:
Satisfactory level of profits rather than increased profits.
Maintenance of status quo involves less risk than a more growth strategy.
Change of any form may disrupt the current working relationships and the consequences may be detrimental to the organization.
Change may upset the smooth operations and result in poor performance especially, for successful firm with the present level of operations.
Changing operations to pursue a more aggressive growth strategy usually requires an increased investment and managerial support.
Some executives maintain with the stability strategy due to inertia for change.
In some cases, firms are forced to adopt stability strategy, if they operate in a low-growth or no-growth industry.
Sometimes, firms may find that the cost of growth is more than the benefits of the same.
Firms that dominate its industry through their superior size and competitive advantage may pursue stability to reduce their chances of being prosecuted for engaging in monopolistic practices, and
Smaller firms that concentrate on specialised products or services may choose stability because of their concern that growth will result in reduced quality and customer service.
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13
Growth Strategies
Organizations may select a growth strategy:
To increase their profits, sales and/or market share.
To reduce cost of production per unit
Expansion Strategies
Some firms prefer this strategy to the strategy of external growth as internal growth preserves their efficiency, quality and image unlike in external growth.
Merger Strategy
When the firms of similar objectives and similar strategies combine into one firm, such combinations are called mergers.
"A merger is a combination of two or more businesses in which one acquires the assets and liabilities of the other in exchange for stock or cash or both
Horizontal Integration
Many companies expand by creating other firms in their same line of business. Horizontal integration strategy aims at related diversification.
In other words, diversification occurs, when the existing firm creates- another business unit in the same industry.
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The reasons for engaging in this process of horizontal integration are:
To increase the market share
To reduce the cost of operations per unit of business through the large scale economies
To get greater leverage to deal with the customers and suppliers
To' promote the products and services more efficiently to a larger audience
To have greater access to channels of distribution
To enjoy increased operational flexibility
Finally, to take the advantage of the benefits of synergy.
Conglomerate Diversification
Firms may also expand through unrelated or conglomerate diversification.
In other words, firms create new business units that are unrelated to its original business. For example, ABC Gas Ltd., created another business unit i.e., ABC Finance Company Ltd.
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Vertical Integration
Another growth strategy is vertical integration, in which new products and/ or services, which are complementary to the existing product and/or service lines, are added. Vertical integration is characterised by the extension of the company's business definition in three possible directions from the existing business:
backward integration
forward integration
both backward and forward integrations
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Backward vertical integration occurs when the firms acquire or create the company that supply the firm the raw materials or components and other inputs.
Forward vertical integration occurs when the firms acquire or create the company that purchases its products and/or services.
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Figure 3.3 Shows Both Backward and Forward Linkages.
Fig. 3.3: Backward and Forward Linkages of Petroleum Refining Company
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Forward Integration:
Many firms start their operation in a limited fashion, and later expand them vertically, when they accumulate enough financial resources.
The firms develop forward integration due to the advantages.
In brief, there are many reasons for pursuing a diversification strategy and many different means to achieve that diversification.
Joint Ventures
Joint ventures are partnerships in which two or more firms carry out a specific project or corporate in a selected area of business.
Joint ventures can be temporary, disbanding after the project is finished, or long-term. Ownership of the' firms remains unchanged.
"Even a successful joint venture may not last forever. Nor does the collapse of a joint venture always imply failure.
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18
RETRENCHMENT STRATEGIES
The third major class of strategic alternatives available to a firm is retrenchment strategies.
Turnaround strategies
Captive company strategy
Divestment strategy
Transformation strategy
Liquidation strategy
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Reasons for Adopting Retrenchment Strategies:
The firm's poor performance is the major reason for adopting retrenchment strategies more specific, the reasons include:
Prevalence of poor economic conditions.
Competitive pressures may also cause firms to curtail their operations.
Operating and production inefficiencies may also cause firms to pursue retrenchment strategies.
Inability of the firm to implement latest technology caused by technological revolution.
The company is not doing well or perceives itself as doing poorly.
The company has not met its objectives and there is pressure from shareholders, customers or others to improve performance.
The external environment poses threats and internal strengths are insufficient to face the threats.
Better opportunities in the environment are perceived in other area of business/other markets where a firm's strengths can be utilised.
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1. Turnaround Strategy
Improving internal efficiency can be done by adopting turnaround strategy.
The aim of turnaround strategy is to transform the organisation into a leaner and more effective business.
Turnaround means reverse the negative trend.
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Indicators of Adopting Turnaround Strategy:
Adoption of turnaround strategy is necessary during the adverse conditions of the firm. Specifically, the indicators include:
Incurring losses continuously
Declining demand for product and/or services
Increasing cash outflows and/or declining cash inflows
Declining sales and declining market share
Declining production and/or productivity
Increasing debt and debt service
Continuous problems of working capital
High rate of employee turnover and employee job dissatisfaction
Significant decrease in the market price of the share.
(Turnaround strategy should aim at setting a reverse trend to this declining or negative situation)
Approaches of Turnaround Strategy:
Concentrate on the diagnosing the problem accurately and adopt a right approach. The approaches of the strategy include:
Surgical
Human Resource Development
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a. Surgical Approach:
The surgical approach is mostly mechanic and requires tough attitude of the top executive.
The executive issues direction for change, fires employees, close down divisions/plants, drops the product lines, replaces the machinery, issues production, marketing and finance controls, fixation of accountability for results.
This approach continues until the firm is turned around.
b. Human Resource Development (HRD) Approach: Human resource development approach involves:
Chief executive conducts a series of meetings, encourages the managers to be open, understand each other, understand the problems and diagnose the root cause for poor performance of the firm.
He encourages the employees to suggest methods of turning around, policies, detailed program through a thorough participation, involvement and active discussions in the form of brain-storming sessions.
He encourages employees to decide the technique, acquire skills and knowledge, modify their behaviour etc.
He encourages the managers and employees to implement the solutions' offered by them in a highly coordinated, committed team spirit.
This team spirit is continued at least until the firm is turnaround.
This approach, though difficult, gives effective results.
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Activities of Turnaround Process
The management should carefully undertake different activities of turnaround process.
Diagnosing the problem accurately.
Analyzing the products, its quality, design, configuration, uses, suitability to the changing customer tastes, needs etc. against competitors'
Analyzing production process, technology, competition, competitors' strategies, market segment positioning etc.
Analyzing the financial position, cost of capital, cost control etc.
Feedforward of information to various decision areas and control areas.
Take up activities systematically, feedback and control the deviations through action research.
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2. Captive Company Strategy
This strategy is pursued when a firm sells the majority of its products to one customer (wholesaler/dealer) who in turn performs some of the functions normally done by an independent firm.
Companies may undertake a captive strategy as one means of reducing labor costs and reducing the size of employees.
The firms with marketing problems and the small companies who cannot launch the full range of marketing activities on their own may adopt a captive strategy.
The major limitation of this strategy is that the company is limited by the activities of its captor.
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3. Transformation Strategy
A transformation occurs when a firm makes a major change in its outlook and operations, usually including moving from one kind of business to another.
These strategies are difficult to implement because they require a great deal of flexibility on the part of the entire organisation.
Companies may undertake this strategy when:
Returns on current operations are lower than desired.
Opportunities in other areas are especially attractive.
Investments needed in the current operations exceed when the firm is willing or able to spend.
A strong, flexible management team exists.
The firm has a strong financial base to support its transformation.
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Divestment Strategy
Divestment is another form of retrenchment strategy. Company sells or 'spins off one of its business units under the divestment strategy.
Divestment strategy is usually adopted when the company is performing poorly or when it no longer fits the company's strategic profile.
Causes for Adopting Divestment Strategy
When the firm wants to increase the efficiency of a strategic business unit or major operating division or product line which has failed to achieve the desired results.
When their market share is negligible to be competitive or when the market size is small to earn desired profit.
When there is availability of better alternatives to divest. The limited resources often force the firms to divest from less profitable business to more profitable business.
The need for increased investment at later stages in providing safety facilities, infrastructure facilities without additional funds.
When some parts of businesses they have acquired may not fit in the original business of the firm.
Continuous increase in the cash outflows more than that of cash inflows from a particular unit force .
Firm's inability to meet the competition.
The technological change and inability of the firm to invest additional financial resources.
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27
Liquidation Strategy
The liquidation strategy is generally considered the most extreme retrenchment strategy.
This strategy involves closing down a business organization and selling its assets.
This is the last alternative strategy as its consequences are severe. The consequences include: loss of jobs of all employees and termination of the opportunities of the firm.
Adoption of this strategy implies the total failure of the firm.
Reasons for Adopting Liquidation Strategy
When one or more partners/shareholders want to withdraw from the business.
When the sole trader wants to withdraw or retire or take-up another job, unless one of his family members runs the firm.
When one of the partners has to withdraw and all other partners express their inability to buy the withdrawing partner's share.
When a firm is worth more as closed down than surviving. In other words, the value of assets of the firm are more worthwhile than the rate of return earned by the firm.
Sometimes, owners may receive a "Godfather offer," for their business.
The owners may receive a highly attractive offer and they feel that liquidating the business is more worthwhile. Then the owners will adopt the liquidation strategy.
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28
PORTFOLIO RESTRUCTURING
This strategy is the combination of stability, growth and retrenchment strategies.
Combination strategies may involve implementation of two or more strategies.
Firms may liquidate one unit, develop another unit and allow the third unit to survive simultaneously to improve the efficiency of the business and maximize the profitability.
Once the company's profitability is satisfactory, it may adopt growth strategy. This strategy is common for large scale organizations with multiple units, diversified products and national or global markets.
Combination may be either simultaneous or sequential. This strategy is also called portfolio restructuring strategy as it is the mix and percentage makeup of the different types of businesses in the portfolio.
It involves both divestment and acquisition/takeover.
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Fig. 3.4: An Integrative Model of Strategic Alternatives
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Source: Modified version from Joe G. Thompson, op. cit., p. 227.
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Strategic Business Unit Strategies
Business unit strategy is a critical complement to corporate strategy.
If corporate strategy is about determining the optimal allocation of capital across a portfolio of strategic business units, the objective of business unit strategy is to decide how best to deploy that capital to create value.
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Strategic Business Unit Strategies
Competitive strategy includes all the moves and approaches, such as:
To attract buyers
To withstand competitive pressures
To improve its market position
There would be countless strategies that the firms adopt in different situations. But, all these strategies can be broadly divided into the following three categories:
Striving to be the overall low-cost producer in the industry (a low-cost leadership strategy).
Seeking to differentiate one's product offering from rival's products (a differentiation strategy).
Focusing on a narrow portion of the market rather than the whole market (a focus or niche strategy).
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A low-cost leadership strategy
The low-cost leader's basis for competitive advantage is lower overall costs than competitors where the customers are price sensitive. The purposes of striving to be a low cost producer are:
to fix the price for the
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