Chapter [4]

Strategic PlanningStrategic Planning

Strategic planning is the process to determining organizational strategy.

It involves making decisions and allocating resources.

Two approaches : Top-Down and Bottom-Up

Top-down approach is adopted by the firm where corporate HQ determines mission, objectives and strategy for the company as whole and its parts.

Bottom-up approach is adopted by the company which as autonomous divisions and subsidiaries and corporate HQ is not directly responsible for all this.

Strategic PlanningStrategic Planning

Proactive v/s Reactive

A company’s strategy is a blend of – Proactive actions and decisions on the part

of managers to improve market position of

the business.

Reactions to unanticipated developments in

the market conditions.

Strategic Uncertainty Uncertainty in environment analysis which

has strategic implication is called …. It is characterized as future trends or event

which are unpredictable. Scenario analysis can help organization to

over come thus uncertainty. The amount of impact will depend on the

importance of impacted SBU.

Strategy Formulation ProcessDeveloping a strategic vision

Setting Objectives

Crafting a strategy

Implementing and Executing the strategy

Monitoring development, evaluating performance and making corrective

adjustments

Review

Step 1 : Developing a strategic vision

Road map to the future Directional path to the future Future PCMT focus of the management

Step 2 : Setting Objectives

– Milestones to be achieved.– Guidelines to the decision making– Yardsticks for performance measurement.– Set by Balanced Scorecard approach.– Set in the following areas ~

Profitability Productivity

Technology Employee development

Competitive position Public relationship

Having following qualitiesAcceptable Measurable Flexible

Motivating Suitable Achievable

Understandable Become strategic Intent when followed strongly.

Step 3 : Crafting strategy

Strategy should be developed in top-down

approach.

Selected after evaluating alternatives

Communicated to all

Step 4 : Implementing & Execution Shaping the business in strategy supportive

manner. Activities include ~

• Staffing• Developing budget• Developing policies and procedure• Installation of MIS• Motivating people• Creating supportive company culture and work

climate• Exerting internal leadership.

Step 5 : Monitoring, Evaluating and Making corrective adjustment Evaluate the company’s progress

Assess the impact of new external changes.

Find out whether causes related to poor

strategy or poor execution.

Porter’s Strategic Alternatives

GenericStrategy

CostLeadership

Differentiation Focus

Cost LeadershipCost Leadership– It emphasizes producing standardized products

at a very low per-unit cost.– The cost elements that affect the attractiveness

of this strategy are ~

• Economies of scale.• Learning and experience curve.• %age of capacity utilization.

– When• Market is full of price-sensitive buyers• There are few ways of product differentiation• Buyers do not care about differences• Buyers are having significant bargaining power.

– Advantages ~

• High efficiency Low overheads• Limited perks Intolerance of waste• Wide span of control Intensive screening of budget

– Risks ~

• Strategy imitation• Driving overall industry profit down• New technology may make strategy ineffective.• Buyer’s interest may shift to differentiating features.

– Pre-requisites ~

• Sustained capital investment• Process engineering skills• Intense supervision of labour• Low-cost distribution system• Tight cost control

Differentiation

– It emphasizes producing product considered unique industry wide.

–Advantages ~• Company can charge premium price for its product.• Unique products gain customer loyalty.

–Risks ~• The unique features may not be valued high enough

by the customer to justify the higher price.• Competitors may imitate the features.

–Pre-requisites ~

• Strong marketing abilities• Creativity skills• Strong coordination among R&D, Production and

Marketing.

Focus– It emphasizes producing product that fulfill

needs of small segment of consumer.–Although developed for small organizations but

large organization pursue it effectively along with differentiation and cost-leadership.

–When ~• Consumers have distinctive requirement.• Rival firms are not attempting to enter in the segment.

–Risks ~• Possibility that numerous competitors copy it.• Consumer’s preferences may drift towards other

products.

Best-Cost provider strategy–This combines the best features of all the 3

strategies.–Comparison of 4~

• Competitive Advantage– Cost leadership : Cost lower then competitors– Differentiation : Unique features then competitors– Focus : No competitors, low cost, product feature– Best cost : More value for the money

• Strategic Target– Cost leadership : Broad section of buyers– Differentiation : Broad section of buyers– Focus : Narrow section of buyers– Best cost : Value conscious buyers

• Market emphasis– Cost leadership : Development of low cost product

features– Differentiation : Develop Unique features, charge high price– Focus : Communicate how product features aim at

niche member taste.– Best cost : Low price – same features,

Same price – more features

• Sustaining the strategy– Cost leadership : Offer economical price,

Initiating cost cutting measures– Differentiation : Stress on regular R&D,

Communicate features to buyers, Create a brand image

– Focus : Remain totally dedicated to serving the niche

– Best cost : Develop expertise in both managing low cost and upgrading features

• Product line– Cost leadership : A good basic, standard product– Differentiation : Many product, wide selection– Focus : Limited products that appeal to niche.– Best cost : Many product with good to excellent

features

• Product innovation– Cost leadership : R&D in cost reduction– Differentiation : R&D in product superiority– Focus : R&D in tailor made product– Best cost : R&D in feature upgrading at low cost

Grand Strategy

Stability Expansion

Intensification

Market Penetration

Market Development

Product Development

Diversification

Concentric Diversificati

on

Conglomerate Diversification

Vertically Integrated

Forward

Backward

Retrenchment Combination

Stability StrategyCharacteristics ~

Same market, same product. Focus on enhancing function efficiency. Support modest growth objects. Low risk, safety oriented, status development. Not require much investment. Frequently employed strategy. Opportunity to develop operation expertise.

Expansion Strategy• Characteristics ~

– High risk – high reward strategy.– Truly a growth strategy.– Redefinition of business.

• Types ~– Intensification

• Market penetration • Market development• Product development

– Diversification• Vertically integrated Horizontally integrated• Concentric Conglomerate

• Intensification– When any one of the both, product or market, is

same. 3 types ~• Market Penetration : Same product – Same market• Market Development : Same product – New market• Product Development : New product – Same market

• Diversification – When both product and market are new. It is of 4

Types ~• Vertically integrated diversification

C

B

A Supplier of material

Current business

Distributor of goods

• Horizontally integrated diversification

• Concentric diversification (Related diversification)

• Conglomerate diversification

A B C

By-product business Complementary product

B

B

CA

D

Retrenchment Strategy

• When organization substantially reduce the scope of its activities.

• It is not a bad option to save enterprise if the nature, extent and timing of retrenchment is decided carefully.

• First, cut-back on expenditure, R&D activities and employee welfare. Second, reduce inventory level, manufacturing level and divided to shareholders. Third, withdraw from some market, some product and some branches. Fourth, sale some product, brand and factory. Last, Liquidation.

• Types ~• Turnaround• Divestment• Liquidation

[A] Turnaround• It is internal retrenchment.• Organization focus on reversing the process.• It gradually reduces scope of business activities.

– Factors to contribute ~• Continuous negative cash flow• Negative profit• Declining market share• Uncompetitive product• High turnover of employee• Changes in top management• Quick cost reduction• Neutralizing external pressures• Mobilization of resources• Better internal coordination

[B] Divestment ~– Stop investment or partial liquidation.

– Factors that contribute ~

• New business is mismatched with existing

business.• Persistent negative cash.• Severity of competition• Technological upgradation is required but it firm

has no investable funds.• A better alternative may be available.

[C] Liquidation ~• Most extreme and unattractive retrenchment

strategy.• It involves closing the firm and selling its assets.

• Why not ~– loss of employment for workers.

– Stigma of failure.

– Most asset being unusable, firm cannot except

adequate compensation.

– Management, Bank, FI, Govt., Union, supplier are not

interested .

• “Dead business is worth more than alive.”

Combination

• All the grand strategies are not mutually exclusive. It is possible to adopt a mix.

• Combination is adopted because ~

– Organization is large and composed of different businesses.

– Environment faced is complex.