This article talks about the different types of strategy
that are in use in various organisations for different organisational
challenges and to address specific issues. Such challenges and issues border on
growth, market share, product development and diversification. Great and
difficult challenges such as liquidation, divestiture, retrenchment and joint
venture strategies could be applied in critical conditions.
Types
of Strategy
Strategic management and strategy formulation apply to every organisation. In a large organization, there may be
a number of interdependent areas of strategy. This is conveniently defined as
corporate strategy for the entire corporate group. It is called business
strategy for the unit of the group, usually referred to as strategic business unit (SBU) and a functional strategy for each
part of the single business unit. All these levels must be consistent with one
another in order for the entire organisation to be successful.
Corporate Strategy
It is the
sense of directions for the entire organisation. It identifies the businesses
the organisation will engage in and those that it will not. At this level,
objectives are globally defined as well as the general orientation for the
organisation. The objectives are usually growth, stability or defense
(retrenchment). Corporate strategy usually provides answers to the question
“what business (es) are we in?” It reflects the business strategy and in turn, influences the business strategy, particularly the extent of outsourcing,
diversification, scale and scope.
Business Strategy
Business strategy deals with a single SBU, how it
copes with the industry environment and successfully contributes to the corporate
strategy. Business strategy by definition should have a definable and
identifiable product range, market segment and competitor set. Porter (1985)
suggests that business strategy is either cost leadership or differentiation of
products and may encompass an entire market or be focused upon a particular
segment of it. Each SBU has its business strategy.
The business strategy is the business intent, i.e. the
way in which the business wishes to proceed. Many business organisations go too
far into the future analysis of their business. They run into problems because
the future is not known with that kind of certainty. Therefore, what is needed
by the organisation is the broad direction and not details of how to get there.
The necessary details are fashioned out by the functional strategies and
sub-strategies developed over time.
Functional
Strategy
There are usually a set of functional strategies for
each SBU. Each will aim to make the best use of the resources available in
order to contribute to business strategy so as to improve performance,
functional strategy, harness activities, skill and the available resources.
Alternative Strategic
Directions
There are numbers of strategic directions which an
organisation may pursue. These possible development strategies are shown in
Fig. 10 in which seven alternatives are suggested based upon the extent to
which new markets or new products are sought (Ansoff, 1968). In this model, the
seventh alternative which is diversification may be split into related and
unrelated business areas.
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– – – |
– |
|
– Market |
|
|
– |
Diversification – – |
On existing on new
Do Nothing
This is strategy that ensures the continuation of the existing direction, i.e. tends to maintain the status quo. On the long-term, it may not be beneficial but as a short-term approach it may be appropriate. Some growth may occur if the current market grows otherwise the resource levels and other things will remain constant.
Withdrawal
Using this strategy, the organisation has to remove itself from the industry due to an irreversible decline in demand, adverse competitive pressure and environmental changes or opportunity cost that indicates other business activities after a more appropriate strategic direction. It is a strategy of assets realisation and resources deployment.
Consolidation
This occurs when a dominant industry organisation aims at stability in order to accumulate cash reserves for future activities. Consolidation is achieved by cutting down costs and/or increase prices with the aim of obtaining better margin. It is strictly followed to maintain the current market share. A similar strategy with the intention to reduce the scale of operation is called retrenchment.
Integration
Strategies
These are the forward,
backward and horizontal integration strategies. They are sometimes collectively
called vertical integration strategies.
<
p style=”line-height: 115%; margin-bottom: 13pt; text-align: justify;”>These strategies allow
the firms to gain control over distributors, suppliers or competitions.
Forward
Integration
This involves gaining
ownership or increased control over distributors or retailers.
Backward
Integration
This is a strategy for
seeking ownership or increased control of a firm’s suppliers. The strategy is
appropriate when a company’s current suppliers are unreliable, costly or cannot
meet the company’s demand. Some firms use backward integration to gain control
over suppliers but some companies instead owe their suppliers and negotiate
with several outside suppliers.
Horizontal
Integration
It refers to a strategy of seeking ownership of or increased
control over a firm’s competitors. This is the most significant trend in
strategic management of today. It is a
growth strategy. Mergers, acquisitions
and take-overs among
competitors allow for increased economies of scale and enhance transfer of
resources and competencies.
Intensive
Strategies
Market penetration,
market development and product development are referred to as “intensive
strategies”. This is because they require intensive efforts to improve a firm’s
competitive position with existing products.
Market Penetration
This seeks to increase
market share for present products or services in present markets through
greater marketing efforts. It involves increasing the number of sales persons,
advertising expenditures, offering extensive sales promotion items and
increasing publicity efforts.
Market Development
This involves the
introduction present products or services into new geographical areas. Many
domestic firms are striving hard to carry their products abroad. Expansion into
the world market is however, no guarantee for success. It is more important to
allow greater care in quality control and consumer services.
Diversification
Strategies
Generally, there are three types of diversification
strategies, namely, concentric, horizontal and conglomerate. Diversification
strategies are becoming less popular. This is because organisations are finding
it more and to manage diverse business activities. Peters
and Waterman”s advice to firms is to
stick to the knitting and not to stray too far from the firm’s basic area of
competence.
However, diversification
is still an appropriate and successful strategy. For a company like Philip
Morris diversification makes sense because cigarette consumption is declining,
product liability suits are a risk and some investors reject tobacco stock on
principle.
Concentric
Diversification
An example is the New Zambia
Newspapers going into exercise book production. The two products have both
marketing and technological energy but may not have the same set of customers.
Horizontal Diversification
This strategy’s is not as
risky as the conglomerate diversification because the firm should be familiar
with its present customers, e.g. New Zambian Newspaper Company going into
property development and house building. These two products have neither
marketing nor technological synergy but may have the same set of customers.
The
strategy entails adding new unrelated products or services.
Conglomerate
diversification is practised partly in expectation of profit from breaking up
acquired firms and selling divisions piecemeal. This means that the company’s
assets are worth more separately than when they are together. There is a kind
of anti-synergy, the whole being worth less than the units.
Defensive Strategies
Joint Ventures
This is a strategy that
occurs when two or more companies form a temporary partnership or a consortium
for the purpose of capitalizing on some opportunities. It is considered
defensive because the firm is not undertaking the project alone. Two or more firms may have
shared equity ownership in the new entity. Other corporate arrangements include
research and development partnership, cross-distribution agreements,
cross-licensing agreements, cross-manufacturing agreements and joint bidding
consortia. Joint ventures and co-operative arrangements are being used because
they improve company communications, networking and minimize risk. Cooperative arrangements even between
competitors are on the increase.
Retrenchment
This strategy occurs when an organisation regroups through
cost and assets reduction to reverse declining sales and projects. It is
sometimes called turnaround or re-organisational strategy. Retrenchment can entail
selling off land and building to raise the needed cash, pruning product line,
closing obsolete factories or marginal business, reducing the number of
employees and instituting expenses control system. In some case, bankruptcy can
be an effective type of retrenchment strategy.
Bankruptcy can allow a
firm to avoid major debts obligations and to avoid union contracts. Bankruptcy
is a liquidation used only when a company sees no hope of being able to operate
successfully or to obtain necessary creditor agreement.
Divestiture
This is a strategy
involving the sale of a division or part of an organisation. It could be part
of an overall retrenchment strategy to rid an organisation of businesses that
are unprofitable, that require too much capital or that do not fit well with
the firms other activities.
Liquidation
Liquidation
is a strategy that involves selling all of a company”s assets or in parts,
for their tangible worth. Liquidation is a recognition of defeat and
consequently can be an emotionally difficult strategy.
However, it may be better
to ease operating than to continue losing large sums of money.
Combination of
Strategies
Many organisations pursue
a combination of two or more strategies simultaneously. However, no one
organisation can afford to pursue all the strategies that will benefit the firm
because organization, like individuals, has limited resources; difficult
decisions must be made and priorities must be established.
Therefore, organisations must choose among alternative
strategies. In large diversified companies, a combination strategy is used when
different divisions pursue different strategies. Similarly, organisations
struggling to survive may use a combination of several defensive strategies
such as divestiture, liquidation and
retrenchment simultaneously.
Requirements for
Developing Effective Strategies
Alternative strategies
are derived from the firm”s mission, objectives, external and internal
audits. They are consistent with or built upon, past strategies that have
worked well. There are many methods of developing effective strategies. The
requirements may involve:
A Routine Method
This involves looking at
what the company has been doing in the past. Caution must however; be exercised
in adopting this technique since the new challenge or problem may be a break
away from the past.
Creativity
As a strategist, you may
attempt to conceptualise a scenario of the organisation and try to develop
effective strategy.
Brainstorming
Developing effective
strategies may also require putting together many experts for a number of days
for brainstorming.
Consultant
Services
Many managers now employ
the services of consultants for developing effective company strategies.
Holistic Approach
Strategic planning should
be initiated by a company”s top management because of the broad
perspective of these executives. The strategic process works from general to
specific. This is called holistic approach to strategic planning.
Tactical Approach
Some researchers believe
that the holistic approach is inferior to a tactical approach in certain
circumstances. With the tactical approach, strategic managers work up through
the firm in their study of its potential. Strategic management process must be
a people process for it to be successful. Through the involvement in the
process, the managers and employees become committed to supporting the
organisation.
Dialogue and
participation are also essential ingredients.
Informed Employees
Fundamental to effective strategy development are fully
informed employees at all levels in the organisation. Every employee must be informed
of business objectives, the process of achieving the objectives, customers,
competitors and product plans.
Global Factors
Global factors must be
considered in developing effective strategy. The boundaries of countries can no
longer define the limits of people”s imaginations. To see the world from
the perspective of others has become a matter of survival for business. The
price and quality of a firm”s product must be competitive on a worldwide
basis not just on a local basis.
Based on past experience,
judgment and feelings, intuition is essential to making good strategic
decisions. Intuition must be integrated with analysis in decision making. This
is because analytical thinking and intuitive thinking complement each other.
Operating from the “I have already made up my mind, don”t bother me with
the facts made”, is not management by intuition; it is management by ignorance.
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