PROCESS OF STRATEGY
THE PROCESS OF STRATEGY
The
process of strategy is cyclical in nature. The elements within it interact
among themselves. Figure-1 present the process for single SBU firm. The process
has to be adjusted for multiple SBU firms because there it is conducted at
corporate level as well as SBU levels as these firms insert SBU strategy
between corporate strategy and functional strategy. Initially, the process of strategy
was discussed in terms of four phases which are:
1.
Identification
phase
2.
Development
phase
3.
Implementation
phase
4.
Monitoring
phase
The process of strategy does not have the same steps as
stated by different authors.
According to C.K. Prahalad, the process comprises of five
steps. They are:
1.
Strategic
Intent
2.
Environmental
Analysis
3.
Evaluation
of strategic alternatives and choice
4.
Strategy
Implementation
5.
Strategy
Evaluation and Control
For our understanding, the process has been divided into
the following steps:
1.
Strategic
Intent
2.
Environmental
and Organizational Analysis
3.
Identification
of Strategic Alternatives
4.
Choice
of Strategy
5.
Implementation
of Strategy
6.
Evaluation
and Control
FIG-1 : STRATEGIC PROCESS
1.
STRATEGIC INTENT
Setting
of organizational vision, mission and objectives is the starting point of
strategy formulation. The organizations strive for achieving the end results
which are ‘vision’, ‘mission’, ‘purpose’, ‘objective’, ‘goals’, ‘targets’ etc.
The hierarchy of strategic intent lays the foundation for the strategic management
of any organization. The strategic intent makes clear what an organization
stands for. It is reflected through vision, mission, business definition and
objectives. Vision serves the purpose of stating what an organization wishes to
achieve in long run. The process of assigning a part of a mission to a
particular department and then further sub dividing the assignment among
sections and individuals creates a hierarchy of objectives. The objectives of
the sub unit contribute to the objectives of the larger unit of which it is a
part. From strategy formulation point of view, an organization must define
‘why’ it exists, ‘how’ it justifies that existence, and ‘when’ it justifies the
reasons for that existence. The answers to these questions lies in the
organization’s mission, business definition, objectives and goals. These terms
become the base for strategic decisions and actions.
Mission
The
vision of an organization is the expectation of the owner of the organization
and putting this vision into action is mission. Often these terms are used
interchangeably, but both are different. The dictionary meaning of mission is
that, “mission relates to that aspect for which an individual has been or seems
to have been sent into the world”. Mission is relatively less abstract,
subjective, qualitative, philosophical and non-imaginative. Mission has a
societal orientation and is a statement which reveals
what
an organization intends to do for a society. It is a public statement which
gives direction for different activities which organizations have to carry on.
It motivates employees to work in the interest of the organization.
Business Definition
The
answer to the question that ‘how’ does an organization justify its existence is
defining business of the organization. A business definition is the clear cut
statement of the business or a set of businesses, the organization engages or
wishes to pursue in the future. It also defines the scope of the organization.
An organization can face its competitors not by doing what they do but by doing
it differently. Business can be defined along three dimensions viz product,
customer and technology. In whatever dimensions, it is defined, it must reflect
two features:
v
focus
v
differentiation
Focus
of business is defined in terms of the kind of functions the business performs rather
than the broad spectrum of industry in which the organization operates. A sharp
focus on business definition provides direction to a company to take suitable
actions including positioning of the company’s business. The next feature
involved in business definition is differentiation i.e. how an organization
differentiates itself from others so that the business concentrates on achieving
superior performance in the market. Differentiation can be on several bases like
quality, price, delivery, service or any other factor which the concerned
market segment values. For example, an organization can charge comparatively
lower price as compared to its competitors in the same product quality segment,
then price is not the differentiating factor. As against this, if the
organization is charging a much lower price in the same product group excluding
quality, price becomes a differentiating factor. For example, in synthetic
detergent market, HLL and Nirma provide for such a differentiation.
Objectives and Goals
Once
the organization’s mission has been determined, its objective, desired future positions
that it wishes to reach, should be identified. Organizational objectives are defined
as ends which the organization seeks to achieve by its existence and operation.
Objectives represent desired results which the organization wishes to attain.
They indicate the specific sphere of aims, activities and accomplishments. An
organization can have objectives in terms of profitability and productivity.
Objectives provide a direction to the organization and all the divisions work
towards the attainment of the set objectives. Objectives and goals are the
terms which are used interchangeably. It is necessary for the organization to
assess the process identifying the objectives of each functional area. After
accomplishment of these objectives, the overall objectives of the organization
are achieved. Organization’s mission becomes the cornerstone for strategy.
Objectives are other factors which determine the strategy. By choosing its objectives,
an organization commits itself for these.
2.
ENVIRONMENTAL AND ORGANIZATIONAL ANALYSIS
Every
organization operates within an environment. This environment may be internal or
external. For conducting an environmental analysis, the strategic intent has to
be very clear. This clarity in definition of mission and objectives helps in
the detailed analysis of the environment. Environmental analysis, also known as
environmental scanning or appraisal, is the process through which an
organization monitors and comprehends various environmental factors and
determines the opportunities and threats that are provided by these factors.
There are two aspects involved in environmental
analysis:
Ø
Monitoring
the environment i.e. environmental search and
Ø
Identifying
opportunities and threats based on environmental monitoring i.e. environmental
diagnosis.
Environmental
analysis is an exercise in which total view of environment is taken. The environment
is divided into different components to find out their nature, function and relationship
for searching opportunities and threats and determining where they come from,
ultimately the analysis of these components is aggregated to have a total view
of the environment. Some elements indicate opportunities while others may
indicate threats.
A
large part of the process of environmental analysis seeks to explore the
unknown terrain, the dimensions of future. The analysis emphasizes on what
could happen and not necessarily what will happen. The factors which comprise
firms environment are of two types:
1.
factors
which influence environment directly including suppliers, customers and competitors,
and
2.
factors
which influence the firm indirectly including social, technological, political,
legal, economic factors etc.
The
environmental analysis plays a very important role in the process of strategy formulation.
The environment has to be analysed to determine what factors in the environment
present opportunities for greater accomplishment of organizational objectives
and what factors present threats. Environmental analysis provides time to anticipate
the opportunities and plan to meet the challenges. It also warns the
organization
about the threats. The analysis provides for elimination of alternatives which
are inconsistent with the organizations objectives. Due to the element of uncertainty,
environmental analysis provides for certain anticipated changes in the organization’s
network. The organization equips itself to meet the unanticipated changes and
face the ever increasing competition.
For
doing the environmental analysis, there can be the strategic advantage profile which
provides for analysis of internal environment, and the organization capability profile
as well. For analyzing the external environment, environmental threat and opportunity
profile could be adopted. An organization has to continuously grow in term of
its core business and develop core competencies.
Through
organizational analysis, the organization has to understand its strengths and weaknesses.
It has to identify the strengths and emphasize on them. At the same time, it
has to identify its weaknesses and unprove them or try to eliminate them. Organizational
threats and opportunities, strengths and weaknesses help in identifying the relevant
environmental factors for detailed analysis.
Therefore,
after developing the strategic intent, environmental analysis becomes the next
important step in the process of strategy formation.
3.
IDENTIFICATION OF STRATEGIC ALTERNATIVES
After
environmental analysis, the next step is to identify the various strategic alternatives.
After the identification of strategic alternatives they have to be evaluated to
match them with the environmental analysis. According to Glueck & Jauch, “strategic
alternatives revolve around the question whether to continue or change the business,
the enterprise is currently improving the efficiency or effectiveness with which
the firm achieves its corporate objectives in its chosen business sector” the process
may result into large number of alternatives through which an organization relates
itself to the environment. All alternatives cannot be chosen even if all of
these provide the same results. Obviously, managers evaluate them and limit
themselves. According to Glueck, there are basically four grand strategic
alternatives:
1.
Stability
2.
Expansion
3.
Retrenchment
4.
Combination
These
are together known as stability strategies/ basic strategies.
Stability:
In this, the company does
not go beyond what it is doing now. The company serves with same product, in
same market and with the existing technology. This is possible when environment
is relatively stable. Modernization, improved customer service and special
facility may be adopted in stability.
Expansion:
This is adopted when
environment demands increase in pace of activity. Company broadens its customer
groups, customer functions and the technology. These may be broadened either
singly or jointly. This kind of a strategy has a substantial impact on internal
functioning of the organization.
Retrenchment:
If the organization is
going for this strategy, then it has to reduce its scope in terms of customer
group, customer function or alternative technology. It involves partial or
total withdrawal from three things. For example L & T getting out of the
cement business. The objective varies from company to company.
Combination:
When all the three
strategies are taken together, this is known as combination strategy. This kind
of strategy is possible for organizations with large number of portfolios.
Apart
from these four grand strategies, different strategies which are used commonly are
as follows:
Modernization:
In this , technology is
used as the strategic tool to increase production and productivity or reduce
cost. Through modernization, the company aims to gain competitive and strategic
strength.
Integration:
The company starts
producing new products and services of its own either creating facility or
killing others. Integration can either be forward or background in terms of vertical
integration. In forward integration it gains ownership over distribution or
retailers, thus moving towards customers while in backward integration the
company seeks ownership over firm’s suppliers thus moving towards raw
materials. When the organization gains ownership over competitors, it is
engaged in horizontal integration.
Diversification:
Diversification involves
change in business definition either in terms of customer functions, customer
groups or alternative technology. It is done to minimize the risk by spreading
over several businesses, to capitalize organization strength and minimize
weaknesses, to minimize threats, to avoid current instability in profit &
sales and to facilitate higher utilization of resources. Diversification can be
either related or unrelated, horizontal or vertical, active or passive,
internal or external.
It is of the following types:
1.
Concentric
diversification
2.
Conglomerate
diversification
3.
Horizontal
diversification
Joint
Ventures: In
joint ventures, two or more companies form a temporary partnership (
consortium). Companies opt for joint venture for synergistic advantages to
share risk, to diversify and expand, to bring distinctive competences, to
manage political and cultural difficulty, to take technological advantage and
to explore unexplored market.
Strategic
Alliance: When
two or more companies unite to pursue a set agreed upon goals but remain
independent it is known as strategic alliance. The firms share the benefits of
the alliance and control the performance of assigned tasks. The pooling of resources,
investment and risks occur for mutual gain.
Mergers:
It is an external
approach to expansion involving two or more than two organizations. Companies
go for merger to become larger, to gain competitive advantage, to overcome
weaknesses and sometimes to get tax benefits. Merger takes place with mutual
consent and common goals.
Acquisition:
For the organization
which acquires another, it is acquisition and for organization which is
acquired, it is merger.
Takeovers:
In takeovers, there is a
strong motive to acquire others for quick growth and diversification.
Divestment:
In divestment, the
company which is divesting has no ownership and control in that business and is
engaged in complete selling of a unit. It is referred to the disposing off a
part of the business.
Turnaround
Strategy: When
the company is sick and continuously making losses, it goes for turnaround
strategy. It is the efforts in reversing a negative trend and it is the efforts
to keep an organization alive.
All
these alternatives are available to an organization and according to its
objectives, it can decide on the one which is most suitable.
4.
CHOICE OF STRATEGY
The
next logical step after evaluation of strategic alternatives is choice of the
most suitable alternative. For a business group, it may be possible to choose
all strategic alternatives but for a single company it is quite difficult. The
strategic alternatives has to be matched with the problem. While making a
choice, two types of factors have to be considered:
v
Objective
factors
v
Subjective
factors
Objective
factors are the ones which can be quantified while subjective factors are the ones
which cannot be quantified and are based on experience and opinion of people. Strategic
choice is like a decision making process. There are three objective ways to make
a choice:
- Corporate Portfolio Analysis
- Competitor Analysis
- Industry Analysis
Corporate Portfolio Analysis
When
the company is in more than one business, it can select more than one strategic
alternative depending upon demand of the situation prevailing in the different portfolios.
It is necessary to analyze the position of different business of the business house
which is done by corporate portfolio analysis. This analysis can be done by using
any of the seven technologies given below:
1.
Experience
curve
2.
PLC
concept
3.
BCG
Matrix
4.
GE
nine cell Matrix
5.
Space
Diagram
6.
Hofer’s
product market evaluation matrix
7.
Directional
Policy Matrix
In
the experience curve technique, the experience of the strategist enables
him to decide which businesses to enter or quit.
Depending
upon the stage of the product life cycle of the business, one can make a
strategic choice for different portfolio.
Boston
consultancy developed a matrix called BCG Matrix which is helpful to
make strategic choice. In this, the products are positioned based on various
external and internal factors to know the continuity, growth and discontinuing
product. The factors given are specific in nature and attempt has been made to
quantify them.
The GE
Nine Cell Matrix is a matrix in which nine positions are defined in terms
of business strength factors and industry attractiveness factors. The business
strength factors include market share, profit margin, ability to compete,
market knowledge, competitive position, technology, and management caliber and
the industry attractiveness factor include market size, growth rate, profit,
competition, economics of scales, technology and other environmental factors.
Nine cells are divided into three zones and depicted by different colours i.e.
green, yellow and red. Each zone of matrix presents a specific type of strategy
or set of strategies.
The strategic
position and action evaluation (SPACE) is an extension of two dimensional
portfolio analysis which helps an organization to hammer out an appropriate
strategic posture. It involves consideration of dimensions like organization’s
competitive advantage, organization’s financial strength, environmental stability
etc. Various SPACE factors are measured in terms of degrees, often quantified
from 0 to 5 with 0 indicating most unfavourable and 5 indicating most favourable.
On basis of four dimensions, organization can choose its strategy.
Hofer
and Schendel suggested the product market evaluation matrix. They constructed
a 15 cell matrix taking competitive position and stages of product / market evolution
dimensions.
The directional
policy matrix was developed by shell chemicals, U.K. It used two dimensions
– business sector prospects and company’s competitive capabilities to choose
strategies. Each dimension is further divided into unattractive, average and attractive
(for business sector prospects) and weak, average and strong (for company’s
competitive capabilities. Each quadrant shows a different strategy which the
organization may adopt.
Competitor Analysis
In
this analysis, we try to assess what the competitor has and what he does not
have. We explore everything with respect to the competitor. In competitor
analysis, focus is on external environment as one of the components of external
environment is the competitor. The difference between SWOT analysis and
competitor analysis is that in competitor analysis we are concerned with only one
component of the environment i.e. competitor while in SWOT analysis we take
about all the factors of the environment.
Industry Analysis
In
industry analysis, all the competitors belonging to the particular industry
with which the organization is associated are looked at. All the members of the
industry are considered as a whole. In competitive analysis, only the major
competitors are assessed while in industry analysis all the competitors
belonging to the industry are looked at.
The
strategic choice is a decision making process which looks into the following
steps:
1.
Focussing
on strategic alternatives
2.
Evaluating
strategic alternatives
3.
Considering
decision factors – objective factors and subjective factors.
4.
Finally,
making the strategic choice.
5. IMPLEMENTATION
OF STRATEGY
After
the evaluation of the alternatives, the choice of strategy is made. This choice
now needs to be implemented i.e. strategy is now put into action. This step of
strategy process is the implementation step. This includes the activation of
the strategic alternatives chosen. Strategy making and strategy implementation
are two different things. Strategy making requires person with vision while
strategy implementation requires a person with administrative ability. If the
strategy made is not implemented
properly
then the objectives would be lost. Strategy implementation is as good as starting
a new business. The stage requires looking at the problems and eliminating them.
In strategy implementation, one has to pass through different steps:
1.
Project
Implementation
2.
Procedural
Implementation
3.
Resource
Allocation
4.
Structural
Implementation
5.
Functional
Implementation
6.
Behavioural
Implementation
Project
implementation is a
comprehensive plan of action from acquiring land to the installation of
machinery within a time frame.
Procedural
implementation takes
place by following the “Law of the Land” i.e. the rules and regulation in terms
of wastage cost, utility etc. It involves completing all those procedural
formalities that have been prescribed by the governments both central and
state. A procedure is a series of related tasks that make up the chronological
sequence and the established way of performing the work to be
accomplished.
Procedural implementation involves different steps. These steps vary from
industry to industry. Also these may change as per the changes in the
government policies. The major procedural requirements are:
·
Licensing
Requirements
·
FEMA
Requirements
·
Foreign
Collaboration Procedure
·
Capital
Issue Requirements
·
Import
and Export requirements
·
Incentives
and benefits
After
procedural implementation there comes resource allocation. The
organization has to allocate resource both inside the company and outside the
company. It has to make decisions regarding short term and long term
allocation. The problems associated with resource allocation are the problem
involved in the process. The problems emerge because:
1.
Resources
are limited.
2.
There
are competing organizational units with each trying to have the major portion.
3.
Organization’s
past commitment.
The structural
implementation of strategy involves designing of the organization structure
and interlinking various units and sub units of the organization. It involves issues
like
·
How
the work of the organization will be divided?
·
How
will the work be assigned among various positions, groups, department, divisions,
etc.?
·
The
coordination among these for achievement of organizational objectives.
There
are basically two aspects:
·
Differentiation
and
·
Integration
Differentiation
refers to, “the
differences in cognitive and emotional orientations among managers in different
functional departments.”
Integration
refers to, “the quality
of the state of collaboration that are required to achieve unity of efforts in
the organization.”
The
organization has to emphasize on both aspects and therefore, it must design organization
structure and provide systems for integration and coordination among organization’s
parts and members.
Functional
implementation deals
with the development of policies and plans in different areas of functions
which an organization undertakes. The major functions of the organization
include:
1.
Production
2.
Marketing
3.
Finance
4.
Personnel
Each
and every function makes its own policies and plans in tune with the whole organization’s
strategy and then implements to fulfil the objectives. For example, the production
function may involve decisions relating to size and location of plants, technology
to be used, cost factor, production capacity, quality of the product, research
and development etc. Similarly marketing function may include the decisions relating
to type of products, price of products, product distribution and product promotion.
The
financial function deals with decisions like sources of funds, usage of funds
and management of earnings. Likewise, the major consideration in personnel
policies include recruitment of right personnel, development of personnel,
motivation system, retaining personnel, personnel mobility, industrial relations
etc.
Behavioural
implementation deals
with those aspects of strategy implementation that have impact on behaviour of
people in the organizations. Since human resources form an integral part of the
organization, their activities and behaviour need to be directed in a certain
way. Any departure may lead to the failure of strategy. The five issues in this
context relevant to strategy implementation are:
1.
Leadership
2.
Organization
Culture
3.
Values
and Ethics
4.
Corporate
Governance, and
5.
Organizational
Politics
6.
EVALUATION AND CONTROL
This
is the last step of the strategy making process. This is an ongoing process and
evaluation and control have to be done for future course of action as well. To
get successful results and to achieve organizational objectives, there has to
be continuous monitoring of the implementation of strategy. The evaluation and
control of strategy may result in various actions that the organization may
have to take for successful well being, such actions may involve any kind of
corrective measures concerned with any of the steps involved in the whole
process be it choice for setting mission or objectives. The process of strategy
formulation is considered as a dynamic process wherein corrective actions are
taken and change is brought in any of the factors affecting strategy.
Evaluation
of strategy is done by the top managers to determine whether their strategic choice
is implemented in a manner that it is meeting the organization’s objectives. Evaluation
emphasizes measurement of results of a strategic action. On the other hand,
control emphasizes on taking necessary action in the light of gap that exists between
intended results and actual results in the strategic action.
When
evaluation and control is carried out efficiently, it contributes in three
basic areas:
·
Measurement
of organizational process,
·
Feedback
for future actions, and
·
Linking
performance and rewards.
The
board of directors, the chief executive and other managers all play a very important
role in strategy evaluation and control. Control can be of three types:
1.
Control
of inputs that are required in an action, known as feed forward control.
2.
Control
at different stages of action process, known as concurrent control.
3.
Past
action control based on feedback from completed action known as feedback control.
Control
is exercised by mangers in the form of four steps:
1.
Setting
performance standards
2.
Measuring
actual performance
3.
Analyzing
variance
4.
Taking
corrective actions
After
evaluation and control, the strategy process continues in an efficient manner. The
effectiveness could be assessed only when the strategy helps in the fulfilment
of organizational objectives.
0 comments:
Post a Comment