Archive for July, 2011

Introduction to Corporate Strategy

Strategic Management Classic EditionThe twenty fifth National Business Conference sponsored by the Harvard Business School Association in 1955 made one of the earliest attempts to discuss the concept of strategy. In 1965, Ansoff published a book “Corporate Strategy” which was based on his experiences at the Lock heed Aircraft corporation. Chandler’s historical study of the development of some of the American enterprises proposed strategy as one of the most important variables in the study of organizations. From the literature on strategic management, it is evident that strategic planning refers to the management processes in organizations through which the future impact of change is determined and current decisions are made to reach a designed future.

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Corporate Strategy: Concepts and Nature

Concepts of Corporate StrategyThe word strategy is derived from the Greek word “strategtia” which was used first around 400 B.C. This connotes the art and science of directing military forces. In business parlance, there is no definite meaning assigned to strategy. A few definitions stated below may clarify the concept of corporate strategy:

KENNETH ANDREWS(1955), “The pattern of objectives, purpose, goals and the major policies and plans for achieving these goals stated in such a way so as to define what business the company is in or is to be and the kind of company it is or is to be” This definition refers to the business definition.

Strategy Safari: A Guided Tour Through The Wilds of Strategic ManagementIGOR ANSOFF(1965) explained the concept of strategy as “the common thread among the organizations, activities and product markets, that defines the essential nature of business that the organization was or planned to be in future”. The definition stressed on the commonality of approach that exists in diverse organizational activities. 


HENRY MINTZBERG (1987) explains that “strategies are not always the outcome of rational planning. ………….a pattern in a stream of decisions and actions. The definition makes a distinction between intended strategies and emergent strategies.

ANSOFF (1984) “Basically a strategy is a set of decision making rules for the guidance of organizational behavior.

This definition has changed drastically what Ansoff had said earlier in 1965.

William Glueck defines the term strategy as “the unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designed to ensure that basic objectives of the enterprise are achieved through implementation process”

The definition lays stress on the following:

  • It is a unified, comprehensive and integrated plan
  • Challenges of the environment are seen in the context of strategic advantage
  • Strategy ensures achievement of basic objectives through proper implementation process

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4 Elements of Corporate Strategy

    The Lords of Strategy: The Secret Intellectual History of the New Corporate World
  1. It is a plan or course of action or a set of decision rules.
  2. It is derived from its policies, objectives and goals.
  3. It is related to persue those activities which move an organization from its current position to a desired future state.
  4. It is concerned with the requisite resources to implement a plan.

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Eight Aspects of Corporate Strategy

Corporate StrategyThe term “Corporate Strategy” is gaining importance in the era of privatization, globalization and liberalization. A few aspects regarding the nature of strategy are as follows:

  1. Corporate strategy is related mostly to external environment.
  2. Corporate strategy is being formulated at the higher level of management. At operational level, operational strategies are also formulated.
  3. Corporate strategy integrates three distinct and closely related activities in strategy making. The activities are strategic planning, strategic implementation and strategic evaluation and control. 
  4. Corporate strategy is related to long term.
  5. It requires systems and norms for its efficient adoption in any organization.
  6. It provides overall framework for guiding enterprise thinking and action.
  7. It is concerned with a unified direction and efficient allocation of organization resources.
  8. Corporate strategy provides an integrated approach for the organization and aids in meeting the challenges posed by environment.

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The Four Components of Corporate Strategy

Corporate Information Strategy and Management: Text and CasesThe major components of corporate strategy are purpose and objectives, vector, competitive advantage, synergy, personal values and aspirations and social obligations. Ansoff has used the term “common thread” for the purpose. According to him, the common thread is a statement of relationship between present and future product market postures. In this section, the different components of corporate strategy are discussed.

Objectives

Corporate objectives should be stated in such a way so that they may provide a clear idea about the scope of the enterprise’s business. Objectives give the direction for which action plan is formulated. Objectives are open-ended attributes denoting a future state. Objectives translate the purpose into goals. A few specific aspects about objectives are as follows: The objectives should

  •  have time frame
  • be attainable
  • be challenging
  • be understandable
  • be measurable and controllable

For having clarity in objectives, the business domain is defined specifically in terms of a product class, technology, customer group, market need or some other combination.

Vector  Corporate strategy has one more important component i.e. Vector. Vector gives the directions within an industry and across industry boundaries which the firm proposes to pursue. If an organization has the objective to maximize sales, the series of decisions will be to enhance salesman’s commission, release nationwide advertisement, introduce total quality management and introduce new product range. Vector signifies that a series of decisions are taken in the same direction to accomplish the objectives.

Competitive Advantage

Corporate strategy is relative by nature. In the formulation of corporate strategy, the management should isolate unique features of the organization. The steps to be taken must be competitively superior. While making plans, competitors may be ignored.

However, when we formulate corporate strategies, we cannot ignore competitors. If an organization does not look at competitive advantage, it cannot survive in a dynamic environment. This aspect builds internal strength of the organization and enhance the quality of corporate strategy.

Synergy  

Synergy means measurement of the firm’s capability to take advantage of a new product market move. If decisions are made in the same direction to accomplish the objectives there will be synergic impacts. The corporate strategy will give the synergy benefit.

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The Five Functions of Corporate Strategy

Corporate Level Strategy: Theory and ApplicationsCorporate strategy performs the following Five functions:

  1. It provides a dual approach to problem solving. Firstly, it exploits the most effective means to overcome difficulties and face competition. Secondly, it assists in the deployment of scarce resources among critical activities.
  2. It focuses attention upon changes in the organizational set up, administration of organizational process affecting behaviour and the development of effective leadership.
  3. It offers a technique to manage changes. The management is totally prepared to anticipate, respond and influence to look at changes. It also offers a different way of thinking.
  4. It furnishes the management with a perspective whereby, the latter gives equal importance to present and future opportunities.
  5. It provides the management with a mechanism to cope with highly complex environment characterized by diversity of cultural, social, political and competitive forces.

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The Three Levels of Corporate Strategy

Corporate strategy may exist at three levels in an organization. They may be at corporate level, business level and operating level. In this section, a brief description of these three levels of strategy is given:

Corporate-Level Strategy: Creating Value in the Multibusiness CompanyCorporate Level Strategy:- It is believed that strategic decision making is the responsibility of top management. At the corporate level, the board of directors and chief executive officers are involved in strategy making. Corporate planners and consultants may also be involved. Mostly, corporate level strategies are futuristic, innovative and pervasive in nature. Decision like spreading the range of business interests, acquisitions, diversification, structural redesigning, mergers, takeovers, liquidations come under corporate level strategies.

Obectives and Strategy (A Level Business)Business Level Strategy:- Strategic business unit (SBU) managers are involved at this level in taking strategic decisions. These strategies relate to a unit within an organization. At business level, the objectives are formulated for SBUs and resources are allocated among functional areas. These strategies operate under the defined scope of corporate level strategy. Business level strategy is more specific and action oriented. It relates mainly with “how” aspect. The corporate level strategy is related to “what” aspect of corporate strategy.

Operating Level Strategy:- This level of strategy is at the operating end of the organization. It is also known as functional level strategy. These decisions relate to training, investment in plant, advertising, sales promotion, total quality management, market segmentation etc. This decision is almost tactical. They deal with a relatively restricted plan providing objectives for specific function, allocation of resources among different operations within the functional area and coordination between them.

The following table shows distinctive characteristics of the three levels of strategy:

Statategic decisions at different levels of corporate strategy

The strategies at different levels are interrelated to each other. The interrelationship between corporate strategy and functional strategies is shown in figure A.

Figure A: Corporate and Functional Strategies in Single SBU Firms

Figure B shows the relationship between corporate, business and functional strategies.

Figure B: Corporate SBU and Functional Stratgies in Multiple SBU firms

The example of first category can be that of Reliance Industries Ltd. It is a highly integrated company producing textile yarns and a variant of petro chemical products. The second figure may be related to Ashok Leyland Ltd., which is engaged in manufacturing and selling of heavy commercial vehicles. The SBU concept was considered in this case.

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The Four Kinds of Corporate Strategy

Strategy + Business: Stability in the Storm Summer 2009 Issue 55 Strategy & Business Magazine (Single Issue)There are four grand strategic alternatives. They are stability, expansion, retrenchment and any combination of these three. These strategic alternatives are also called as grand strategies. A brief description about them are as follows:

1. Stability Strategy– It is adopted by an organization when it attempts to improve functional performance. They are further classified as follows:

  • No change strategy 
  • Profit strategy 
  • Pause/Proceed with caution strategy

2. Expansion Strategy:– It is followed when an organization aims at high growth. They operate through

  • Concentration
  • Integration
  • Diversification
  • Cooperation
  • Internationalization

Mergers, takeovers, Joint ventures and strategic alliances come under expansion through cooperation. International strategies are further classified into global strategy, transnational strategy, international strategy and multidomestic strategy.

3. Retrenchment Strategy:- It is followed when an organization aims at a contraction of its activities. It is done through turnaround, divestment and liquidation in either of the following three modes:

  • Compulsory winding up
  • Voluntary winding up
  • Winding up under supervision of the court

4. Combination Strategies:- They are followed when an organization adopts a combination of stability, expansion and retrenchment either at the same time in different businesses or at different times in the same business. The well known companies of the TTK group, based in Southern India, adopted a restructuring
plan in the late 1980s involving following strategies.

  • Merger of TTK chemicals with TTK pharma.
  • TT industries & Textiles Ltd. Planned for expansion through joint venture.
  • TTK Ltd. diversified into the field of non stick cooking utensils.
  • TTK maps & publications expanded into the general publishing business after a turnaround.

Business strategies are of three types: Cost leadership (lower cost/ broad target), differentiation (differentiation / broad target) and focus (lower cost or differentiation / narrow target).

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The Three Schools of Thought on Corporate Strategy Formation

The subject of strategic management is in the midst of an evolutionary process. In this regard, several strands of thinking are emerging. They can be classified under the following groups:

  1. The Prescriptive Schools 
  2. The Descriptive Schools
  3. The Integrative Schools

Strategic Management: Creating Competitive AdvantagesThe prescriptive schools:- Under this category, three variations are found. The brief description about them are as follows: 

  1. The design school:- (Selzniek and Andrews) – Strategy is seen as something unique. The process of strategy formation is based on judgment and thinking. 
  2. The planning school:- (Ansoff) – Under this school, the strategy is seen as a plan divided into sub-strategies and programmes. The lead role in strategy formation is played by the planners. 
  3. The positioning school:- (Schendel-Hatten & Porter) – The process of strategy formation is analytical, systematic and deliberate. Under this school, strategy is seen as a set of planned generic positions chosen by a firm on the basis of an analysis of the competition and the industry in which they operate.

The Austrian School: Market Order and Entrepreneurial CreativityThe Descriptive Schools:- In this category, six schools of thought are existing. Their brief description is as follows:

  1. Entrepreneurial School (Schumpeter & Cole):–The process of strategy formation is intuitive, visionary and largely deliberate. Strategy is seen asthe outcome of a personal and unique perspective often aimed at thecreation of a niche.
  2. Cognitive School (Simon and March):– This school perceives strategy formation as a mental process. The lead role is played by the thinker philosopher.
  3. Learning School (Weick, Quinn, Senge and Lindblom) – This school perceives strategy formation as an emergent process. The process is informal and messy and the lead role is played by the learner.
  4. Power School (Allison & Astley):– Under this school, strategy is seen as political and cooperative process or pattern. The process of stategy formation is messy, emergent and deliberate. This school perceives strategy formation as a negotiation process.
  5. Cultural School (Rhenman and Normann):– Under this school, strategy is seen as a collective perspective. The process of strategy formation is ideological, constrained and deliberate.
  6. Environmental School (Hanan, Freeman and Pugh):– The lead role in strategy formation is played by the environment as an entity. This reactive process of strategy formation is passive and imposed and hence emergent.

The Integrative School:– The major contributions to the configuration school are by Chandler, Miles and Snow. Under this school, strategy is viewed in relation to a specific context and thus could be in a form that corresponds to any process visualized by above nine schools. The strategy formation process is integrative, episodic and sequential.

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The Eight Advantages of Corporate Strategy

Corporate Strategy (4th Edition)In the present day competitive environment, no business organization can dream of survival without formulating appropriate corporate strategy. As the environment is continuously changing, the need for corporate strategic framework is more specific. The following areas clearly show the importance of corporate strategy:

  1. Corporate strategy rationalises allocation of scarce resources.
  2. Corporate strategy motivates employees examples to shape their work in the context of shared corporate goals.
  3. Strategy assists management to meet unanticipated future changes.
  4. Organizational effectiveness is ensured through implementing and evaluating the strategy. 
  5. Corporate strategy is a powerful tool to management to deal with the future which is uncertain and hazy in all respects. 
  6. Corporate strategy improves the capability of management in coping with the volatile external environmental forces.
  7. Corporate strategy encourages the management to choose the best course of action to realize the objectives.
  8. Strategy planning system provides an objective basis for measuring performance.

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