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STRATEGIC PLANNING - AN INTRODUCTION

Strategic planning is the management task concerned with growth and future of a business enterprise. It ensures that the organization keeps moving in the right direction. It was fast changes in environment since 1950s that compelled organizations to approach the management task with strategic perspective, as the future was no more a measured extension of the past or the present. Instead of making extrapolated estimates about future, it was essential to endow the enterprise with certain fundamental competencies / distinctive strengths which could take care of eventualities resulting from unexpected environmental changes.
Environmental changes which forced the firms to adopt a strategic perspective:
  • Fast changing technologies
  • Proliferation of new products
  • Faster commercialization of new product ideas and patents
  • Socio political changes
  • Emergence of global markets
Consequent to the changes in environment an enterprise had:
  • To be strategically alert
  • To be future oriented
  • To develop the competence for assimilating changes faster
  • To grow big by generating sufficient resources and
  • To gain expertise in technology, marketing and decision support systems
Business firms took up the challenge all over the world, each working it out in its own way. Management schools, consultancy organizations and management authors added their contributions to the experiment. These cumulative attempts gave rise to the body of knowledge that we now call strategic planning. The subject is now known by different names as business policy, strategic management, corporate strategy, strategic business planning etc.

Igor Ansoff a top expert in strategic planning explains nicely the process of strategy formulation in his book Corporate strategy as, “The interest in strategy grew out of the realization that the firm needed a well defined scope and growth direction; objectives alone do not serve the purpose, additional rules are required for an orderly and profitable growth. Such decision rules and guidelines have been broadly defined as strategy. Thus the objectives and strategy together describe the concept of a firms’ business. It specifies the amount of growth, the area of growth, the directions for growth, the leading strengths and the profitability target.”

Peter Drucker, discussing the importance of business policy and strategic planning in his book The practice of management says “we cannot be content with plans for a future that we can foresee. We must prepare for all possible and a good many impossible contingencies. We must have a workable solution for anything that may come up.”

Thelevitt, the doyen of Harvard says, “it is wrong to say that the most important and creatively challenging act of corporate decision making is about choices regarding what is to be done. The most important and challenging work involves thinking up the possibilities from among which choices may have to be made i.e. a possibility has to be created before it can be chosen”.

Alfred Chandler feels that business planning is concerned with the determination of basic long-term goals and objectives and the adoption of courses of action and allocation of resources necessary for carrying out these goals.

The strategic planning is concerned with certain fundamental issues such as

  • Purpose and mission / vision
  • Corporate objectives
  • Choice of businesses
  • Courses of action for achieving the objectives

Strategic planning provides the root map for the firm. It makes it possible for the firm to take decisions concerning the future with a greater awareness of their implications. It lends a frame work which can ensure that decisions concerning the future are taken in a systematic and purposeful way.

Strategic planning offers a methodology by which, firm could anticipate and project the future, and be internally equipped to face it.

Nature and scope of strategic planning

  • Serves as a route map for the corporation
  • Lends a frame work for systematic handling of corporate decisions
  • Lays down growth objectives of the firm and also provides methodology needed for achieving them
  • Ensures that opportunities are chosen widely
  • Ensure best utilization of resources
  • Serves as a hedge against uncertainty as it enables to understand trends in advance and provides the benefit of a lead time for taking crucial decisions
  • Helps build competitive advantages and core competencies

Strategic planning is basically concerned with:

  • Future (long term dynamics not day to day tasks)
  • Growth (direction, extent, pace and timing)
  • Environment (fit between business and environment)
  • Portfolios of business (product-market scope and postures)

Strategic decisions differ from other functions of management as strategic decisions deal with growth of an organization (long range focus). Whereas, operational decisions are routine ones pertaining to day to day activities and administrative decisions are by and large patterned after existing practices in the corporation. In short, strategic planning provides the company with an easily discernible, clear cut, objective-strategy design which in turn takes the company in the required direction.

Strategic planning is however not a single task, it is an integrated package of several tasks that are distinct, yet inter-related

  • Clarifying vision / mission
  • Defining the business
  • Surveying the environment
  • Internal appraisal of the firm
  • Setting the corporate objectives
  • Formulating the corporate / business strategy
  • Monitoring the strategy

Clarifying the vision of the corporation is the first task in strategic planning process. In fact, strategic planning originates at the point of articulation of its vision / mission. It is the expression of corporate intent.

Defining the business correctly is a pre-requisite for selecting the right opportunities and steering the firm on correct path. Very genesis of strategic planning can be traced to environmental turbulence, so it is only obligatory for an organization to survey the environment to compile an opportunities threat profile (OTP). Internal appraisal is a process of assessing corporation’s capabilities and resources, strengths and weaknesses, core competencies and competitive advantages. The firms compare themselves against competitors and develop competitive advantage profile (CAP) and ward off threats to zero on the environmental opportunities.

Objectives are a statement of results the corporation seeks in given area, in a specific time frame. Clarity in objectives is of utmost importance, it facilitates the corporate to march along the direction of vision with minimum errors and diffusion of efforts with maximum utilization of resources. In addition to growth, objectives are set towards profitability, productivity, technology, competitive position, human resources, social responsibility and corporate image. Objectives emphasize where the organization wants to go, and strategies provide the design for getting there. Objectives and strategies together describe an organizations’ concept of business. Time to time, strategies are monitored for compatibility with external environment and re-worked based on internal realities. In fact it is not a one shot affair – it is a continuous process.

The task of formulating a vision and defining the business is carried out with utmost clarity for the strategic planning exercise to be effective. Without a clear idea of firms’ core purpose, values and arena it prefers to play in, the firm can not size up the multifarious developments taking place in the environment; its’ choice of opportunities and strategies is impaired.

A vision statement does not represent a specific target. At the same time it is not all euphoria either, nor is it a PR statement. Zeal and ambition are the main constituents. It also contains the statement on values the organization cherishes and what it will give to and expect from its people and society. The purpose of the firm is also spelt out clearly. It is a grand design of organizations’ future. It is a tool to build and sustain commitment of people to corporate policies and provide motivation and is a guiding philosophy for the enterprise. Firms must ensure that vision remains relevant over time. At times, changes in environment / accomplishment of mission may develop a need for a firm to pursue in a different direction in order to keep serving its purpose and values – a time for re-visioning.

AT&T in its initial years had a mission to “give a telephone to every American” and this set pace of AT&T’s growth. Later when AT&T realized that its mission was almost accomplished it refined its mission as of connecting people “any time anywhere”. And AT&T moved forward in the direction by taking over several instrumentation / telecom firms all over the world to have a global telecom network so that it could accomplish its new mission.

Formulation of vision requires a zealous and passionate approach, in contrast with strategy formulation which needs a totally cool headed approach. These tasks are taken up with the direct intervention of chief executive. Also help from reputed consultants can be sought.

Business definition may follow then; it is an elaboration of the arena the firm will play in. It prescribes the boundaries of the firm’s business / businesses. Vision / mission statements generally provide a clue of the businesses that the organization would be in, and the business definition makes the business clear from the point of product – market choice. A better understanding emerges when we consider that the mission of Unilever was “to make cleanliness commonplace, to lessen work for women … “ and the business definition makes it clear, that they would be in the business of detergents, soaps and scouring powders among other things. A firm can not be myopic in defining its mission and business. Definition should not be from a narrow product oriented perspective, instead it should be from need oriented or function oriented perspective, because substitute products serving the same need or function are always in the offing. Often the case of American Railroad industries is sited as a classic example, if they had defined their business as ‘transportation’ rather than ‘railroads’, they would have strategized accordingly with the changing times and stayed in business.

Next step towards strategic planning is formulating the objectives for the corporate, which basically represent the quantum of growth the corporate seeks to achieve in a given time frame. Corporate objectives do not get fixed abruptly, but they emanate from vision of the chief executive, opportunities in the environment and capability of the firm.

To identify the opportunities in the external environment, a thorough environmental survey is carried out, which places before the firm a list of carefully picked opportunities and threats. Since a business firm functions as a part of environment and seeks to benefit the environment on the way to its profitability, careful survey of environment is considered central to strategic planning. Here a firm studies the environmental factors at macro level and those related to the specific industry – this is truly a diagnosis of changes in environment in all respects.

Some of the macro environmental factors covered in the survey:

  • Demographic environment – covers size of population, growth rate of population, age distribution, literacy levels, composition of work force, population shifts etc. in the areas of interest.
  • Socio-cultural environment – for getting a meaningful insight into lifestyles, traditions, behavior etc.
  • Economic environment – factors to be considered are general economic conditions, rate of growth of economy, behavior of capital markets, interest rates, labour scene etc.
  • Political environment – political stability
  • Natural environment – covers ecology, natural resources etc.
  • Technological environment – assessment of technology options available for specific industry, relative merits and cost-effectiveness of alternative technologies etc.
  • Legal environment – aspects covered are control on trade practices, protection of society as a whole, legislations, enactments and legal provisions relating to conduct of specific business etc.

Environment survey specific to the industry concerned may include

  • Demand related factors – decisions regarding entry into businesses and expansion are based on this factor which surveys natures of demand, demand potential, demand patterns, analysis of customer value etc.
  • Industry and competition – a fundamental input for developing strategy - building competitive advantage.
  • Government policies – have significant affect on strategy choice of the firms based on subsidies, being a large potential buyer etc.
  • Supplier related factors – influence availability and cost of raw materials. Tradeoff between integrating and outsourcing of supplies is a crucial consideration.

Environmental survey is generally carried out using many of the available forecasting techniques, with the purpose of forecasting the status of various factors at a future point of time.

Environment survey is a means to analyze industry and competition, which is of special relevance to the firm in formulating strategy, in other words it brings to the fore the firms’ competitive position with in the industry. Hence the subject is being dealt with in some more detail.

Growth potential and profitability are two major determinants of industrial attractiveness. A company with excellent competitive capabilities may not be profitable because it might be operating in an unattractive (e.g. low growth, small size etc.) industry. A firm has to assess industry attractiveness correctly, as strategy must grow out of it.

Industry attractiveness is a product of several factors such as industry potential, current size of industry, rate of growth of industry, industry structure and profitability of the industry, like wise company’s business strength is also product of several factors such as company’s current market share, growth rate, differential strength, brand image, corporate image etc. Each company will have to identify the factors specific to its industry and its competitive position before moving on with the job of setting objectives and strategies.

Industry structure has to be thoroughly analyzed for number of players, nature of competition, differentiation practiced by the various players etc. in the industry.

Knowing ones’ competitor and one’s own position relative to the competition is critical to effective strategy. Developing successful strategy basically means designing products and services that would enable the firm to score over competition. By analyzing competition a firm can identify areas of advantage and disadvantage and build competitive advantage, so that it can launch more precise attack on competitors and also prepare stronger defenses against other competitors. Both industry attractiveness and competitive position, especially the later can be shaped through strategy. Strategy and competitive advantage are inter-related. It is competitive advantage around which strategies are woven and also competitive advantages are developed through carefully articulated strategies. Technology as a strategy plays an important role too. Companies, which bring in technological innovations and expand their distribution reach, considerably grow faster and have an edge over others.

Michael Porter’s thesis says that there are five forces that shape competition

  • Threat of new entrants
  • Bargaining power of customers – powerful customers usually bargain for better services which involve cost and investment
  • Bargaining power of suppliers – may determine the cost of raw materials and other inputs effecting profitability
  • Rivalry among competitors – competition influences the pricing and other costs like advertising etc.
  • Threats from substitutes – where-ever substantial investments in R&D is taking place, the threat of substitutes is large. It also affects profitability.

“Value chain” concept proposed by Michael Porter can also be applied to competitor analysis. Value chain is a tool for identifying ways in which value can be created / enhanced by a company and this can be used for comparing with the value chain of the competitor.

Value creation depends not only on how well each department of the company performs its activities but also on how well the various departmental activities are coordinated. The business process is basically a value creating and value delivering process. Customers patronize the company that offers the highest delivered value. Hence, the name of the game is to locate the activities in which value could be created and create maximum possible value in each of them.

In analyzing the value chain of the competitor, the company actually identifies the strengths and weaknesses of the competitor; it also gets insights into the strategy followed by the competitor. These revelations help the company improve its assumptions about the competitors while formulating its own strategy.

Basic approach to competitor analysis

  • Identify competitor’s objectives
  • Identify their strategy
  • Identify their strengths and weaknesses
  • Predict their future actions

Once the environmental survey is completed, the information thus gathered is integrated in a meaningful pattern. Opportunities – threats profile (OTP) is made by the company to understand where they stand with respect to environment and competitors. The summary of environmental survey is of core importance to the strategic planning process.

The fact, that industry structure, competition, customer etc. are constantly in a flux, compels a company to be vigilant towards environment and have a dynamic analysis of the environmental factors. Main purpose of the constant vigil towards environmental factors is to facilitate appropriate strategic response at the right time.

Once the opportunities present in the environment are identified next step is to have an understanding of its own strengths and weaknesses through methodical internal appraisal. The firm should get rid of some untested assumptions, which it might have developed over time. Only properly assessed facts can be of help.

Internal appraisal helps in

  • Assessing its position in terms of capabilities, strengths and weaknesses.
  • Selecting opportunities to be tapped in line with its capabilities.
  • Assessing capability gap and take steps for elevating the same in line with growth opportunities.

Assessment of strengths and weaknesses should cover all functional areas in the company e.g.

  • Marketing
  • Product wise positioning
  • Finance
  • Manufacturing
  • R&D
  • Human resources
  • Corporate factors (corporate image, organizational culture, organizational structure, use of IT, adequacy of policy deployment, assessment and review mechanism etc.)

Analysis of strengths and weaknesses portfolio brings out the competitive advantage the company has over its competitors and the core competencies of the company.

Competitive advantage is a position of superiority on the part of the company in some function / factor / activity in relation to its competitors and it is through this superiority that the company attempts to carve out a comfortable position for itself in the industry. For example some companies may be strong in production and some others may be strong in marketing. The strength in production may mean that a particular company may be an efficient producer when compared to its competitor, or it may have more flexible production system, or else it may have strength of variety. As a general rule big firms have strength of size and smaller ones have the strength of flexibility. But here is an example contrary to the rule just mentioned

Toshiba of Japan is huge company operating in electronic goods. Through a flexible manufacturing system it manufactures different products / varieties of some products on the same assembly lines. At Ohme it assembles nine varieties of computers on the same line and on the adjacent line it assembles 20 varieties of lap top computers. It is able to switch from one product / variety to another instantly at low cost and makes profits on low volume runs too. This flexibility of Toshiba to respond quickly and easily to the fast changing market demand is definitely one of its competitive advantages. Where as its competitors make profits only through long volume runs of a particular model.

The phenomenal winners in any industry usually possess competitive advantage in several functions / areas. It actually serves as a back up for strategy as a company not having a competitive advantage may struggle to place a worthwhile strategy. It is not strategy alone but the acquisition of competitive advantage and its utilization through strategy that takes a company to its objectives. Scoring over competition and defending against competition requires a solid and sustainable base of competitive advantage.

In short competitive advantage is the heart of strategy and for strategy to succeed the firm should have relevant competitive advantage.

All strengths identified in internal assessment do not amount to competitive advantage. Strength is a necessity but not sufficient condition for a competitive advantage. For strength to become competitive advantage, whether from production factors or marketing factors or some other factor, it must lead to a cost or differential advantage to the company. A cost or differential advantage may accrue through lower cost of capital, unique production facilities, efficient distribution, latest technology or innovative raw material handling. General rule is that a factor could be counted a competitive advantage if could influence in company’s favour, one or more of the forces shaping the competition.

HLL has distribution as its distinctive competitive advantage with a network to reach the remotest rural areas of the country. Well managed firms are aware of competitive advantage they enjoy and factors that contributed to that, but with so many changes taking place in the environment and so many new forces of competition coming up all the time, a firm can maintain the competitive edge it enjoys only through a process of continuous monitoring.

The companies should correctly spot their competitive advantage factors and draw up their competitive advantage profile (CAP). Competitive advantages are spotted only after internal appraisal as well as industry and competition analysis as competitive advantage is always relative to the competition.

Corporate creates a built in mechanism in their corporate strategy to take care of the task of competitive advantage building. In fact corporate level decisions on acquisitions, mergers, alliances, fresh investments etc. are all steps that would result in competitive advantage building. Corporate may use benchmarking as a practice to ensure excellence instead of mere improvement, and in the process build some competitive advantages. Ford has used this tool effectively in their “Taurus” project and built competitive advantage in that segment of cars. Value chain approach is also used to develop competitive advantage through customer value created by the company by creating / enhancing value in each of its activities.

Developing and nurturing durable competitive advantages involves a conscious choice and medium / long term efforts. Right share of resources should always go to factors that constitute the source of competitive advantage.

A durable and higher order competitive advantage rests on some fundamental and enduring strength of the firm that is unique to the firm. This unique strength of the company can not be easily imitated by the competitors and from which newer and stronger competitive advantages can keep emerging. Companies which enjoy such unique and fundamental strength keep winning in an enduring manner. Such strength is referred as core competency of the firm.

In other words companies acquire lasting and higher competitive advantages only by building core competencies.

Competency can be in technology, process or any other field of expertise but it should be an exclusive preserve of the company or the company should possess it in substantially large measure when compared to the competitors. Such a preserve of competency is core competency.

C.K. Prahlad and Gary Hamel, after an examination of globally successful corporations and their reputed products, in an HBR article say that the battle for global market leadership is waged on the strength of core competence of the competing companies and not on some products / brands put out by them. Behind the visible battle of products and brands, lies the substantive war of core competence of the companies.

  • Sony has a core competence in miniaturization.
  • Philips has a core competence in optical media expertise.
  • Honda has core competence in engines.
  • 3M have a core competence in making substrates, coatings and adhesives and in combining them in multiple ways.

Acquiring core competence is much more difficult than acquiring competitive advantage. Technological excellence, especially competence at the root of technologies, capacity to integrate multiple streams of technologies and expertise to harness diverse production skills are some of the requirements for acquiring core competencies. Critical components required for the business should not be outsourced, because those who do perhaps are denying themselves an opportunity to build core competencies in their chosen business, to enjoy a short term cost benefit.

A comparison of Chrysler and Honda will make the point clearer. Chrysler an American auto giant outsourced as crucial a component as engines from Mitsubishi and Hyundai and Honda on the other hand designed and manufactured its engines well supported by centralized R&D center. No wonder, in the long run Honda built up core competence in engines and based on this competence has gained competitive advantage in several of its product categories, besides cars.

Focus is yet another requirement for developing core competence. A company needs to identify and concentrate on one or two core skills which it should develop as core competencies through well planned and sustained efforts.

After an extensive environmental survey a company gets a list of possibilities, indicating what it might do, and after an in-depth internal appraisal of the business, it narrows down to what it could do, and when it takes core values, purpose and vision into account, the corporate can prune the list to what it would do – setting the stage for corporate objectives.

Put differently, through the tasks of vision clarification, environmental survey, appraisal of internal realities, scrutiny of its competitive advantages and core competencies the company finishes the groundwork, getting on with the crucial task of formulating corporate objectives and strategy.

The process does not stop with fixing of growth target. The conditions necessary for realizing the growth are also covered in the process. The objectives provide the basis for all major decisions of the firm and also set the organizational performance to be realized at each level.

Arriving at objectives - an organization breaks its overall growth ambition, which flows from the vision, into suitable blocks with a time frame.

The vision / growth ambition of Federal Express, a major air freight carrier is to be No.1 air craft carrier in the world. The company however can not achieve it at one go as it faces tough global competition from DHL, UPS, TNT etc. and in U.S. its market share is 45%, so it put the objectives for next five years (1995-2000) as

  • 50 % growth in its turnover globally
  • Market share growth of 10% from 45% to 55% in U.S.
  • Market share growth of 20% increase out side U.S.

Through such time bound blocks of growth ambition, Federal Express sought to ultimately achieve its growth ambition.

While setting the objectives a company takes cognizance of various performance levels. First being currently achieved level next is currently achievable level which the company may achieve with current framework of resources, just by sharpening the efforts and improving efficiencies. But the company may like to achieve much higher growth in assets, revenue and profits. This is aspiration level of performance. It is obvious that the company may not be able to achieve aspiration level of performance at one go so for the period of planning, the company sets a target, which is below the aspiration level but higher than currently achievable levels of performance. That becomes the growth objective for the planning period. The gap between the currently achievable level of performance and the growth objective set is to be filled through strategic planning.

Along with specifying the objectives in terms of growth target, the exercise also covers the conditions / factors / attributes essential for achieving the targeted growth. All subsequent decisions from finance to manufacturing to marketing, human resources etc. will be aligned with the objectives. These overall objectives are split into functional targets with clear demarcation of responsibility for achievement. Finally objectives reach shop floor / sales men in the form of performance targets. So objectives should be well formulated, specific, unambiguous (with out leaving any room for wrong interpretation), quantified, challenging yet attainable, controllable and time bound. Objectives indicate the destination where as strategy constitutes the game plan to reach there. Corporate objectives and strategy are not separate entities, only together do they gain meaning and significance.

Growth constitutes the chief objective of a firm, and since growth is multi dimensional in character, objectives are to be set in all factors governing growth

  • Growth (assets, revenue, profits, market share, competitive position etc.)
  • Profitability (return on investment, earning per share etc.)
  • Productivity (resource utilization, cost reduction, efficiency etc.)
  • Technology (adoption of new technology and being a leader, modernization etc.)
  • R&D innovation
  • Human resources
  • Corporate image
  • Social responsibility (community welfare, civic roles, environment protection)

A point to remember here is though most companies get carried away by objectives concerning to growth (profits, revenue, market share etc.), by specifying specific objective with regard to profitability and monitoring it carefully, the company continuously monitors the profit potential of investment.

In the process of finalizing objectives, intuitions and logic play equally important roles.

Corporate strategy is basically growth design of the firm. Apart from providing a means to fill the gap between currently achievable performance and the target specified in the objectives, creating sustainable competitive advantage is a major concern of strategy. Strategy spells out the program of action for achieving the results and together with objectives clarifies the future plan. Objectives, product-market scope, growth vector, competitive advantage and synergy are all constituents of corporate growth.

The broad corporate strategy that a company may adopt has been classified into four generic categories, stability, expansion, divestment and combination.

Growth objective of firms employing stability strategy will be quite modest. It merely tries to bring about incremental improvements in operation of the business. Focus is on improving functional efficiencies in an incremental way. Here the company has the benefit of concentrating its resources and attention on the existing business / products and markets. It is fairly frequently employed strategy with no additional investments and risks.

When a firm seeks sizeable growth, it turns to expansion strategy. It tries to grow by exploiting the opportunities in the environment, which may lie either with in existing business or outside them. Two broad possibilities under expansion strategy are intensification strategy and diversification strategy.

Intensifying means the firm is strengthening its involvement and position in existing business. Intensification strategy encompasses three alternative routes – market penetration strategy, market development strategy and product development strategy.

Through market penetration strategy a company achieves growth through existing products in existing markets by increasing its market share.

Core parentrals, a leader in IV fluid business, during 1990s, implemented a series of expansion supported by capacity increases. Its objective was to raise its market share from 20% o 60% in Indian markets. So it put up additional capacity required for desired growth and shaped a pricing strategy to match its market penetration strategy, offered prices almost 25% less than the competitors. Core’s strategy had been one of intensification – fighting in the same market, with same products, achieving higher market share and income through greater penetration.

Market development strategy tries to achieve growth through existing products in new markets. There are two ways of implementing the strategy. One, a company expands the marketing territory by capturing new markets in terms of customers and, two, it finds new uses for its products and finds new customers.

Foray into Asian markets by so many auto-mobile manufactures from Europe and America is a good example of intensification through market development – expansion of market by entering newly opened up parts of the global market.

Product development strategy tries to achieve growth through new products in existing markets. New products means improved products serving the same need of the customers.

Singer India in 1990s went in for expansion through intensification by product development route. It introduced improved products in the range of sewing machines. It launched Fashion maker – a decorative sewing machine and followed that up with the introduction of an improved version of Fashion Maker that offered 158 varieties of decorative designs. It kept on improving the product to meet its long term objective of expansion of sales through value added products.

Companies also adopt intensification strategy by any combination of three sub-strategies available. Generally intensification is the first and natural choice of firms in pursuit of expansion.

Diversification strategy has three broad variants, vertically integrated diversification, concentric diversification and conglomerate diversification.

Intensification limits the growth path to existing businesses of the firm, where as diversification takes the growth to new products and new markets. Firms eager to achieve rapid and big growth opt for diversification. There are many reasons for adopting this path, like need to provide flexibility to portfolio, growth ambition, fresh opportunities, environmental uncertainty, higher profitability, availability of surplus resources etc. are some of the inducements to venture on this path.

The characteristic feature of vertically integrated diversification is that the firm does not jump outside the vertically linked product – process chain. For captive consumption too, firms may resort to vertical integration. Reliance had adopted this strategy effectively through 1980s to improve their business portfolio and also for their captive consumption.

Concentric diversification also amounts to related diversification. Here the new product is a spin off from the existing facilities / processes. The new product is only connected in a loop like manner at one or more points in the firm’s existing process / technology / product chain.

Conglomerate diversification has no such linkages, the new businesses / products are disjointed from existing businesses / products in every way. It is totally an unrelated diversification. Conglomerate diversification has no common thread at all with a firm’s present position. Strategies are executed through mergers, acquisitions, alliances etc.

Normally the risk is less with related diversification due to greater scope of sharing of skills and competencies and greater synergy among the businesses. IBM, for example, always prefers such diversification. It operates in more than 20 fields all related to each other, each business deriving synergy of one kind or other from the rest.

With unrelated diversification the scope of opportunities to be pursued and rewards accrued is higher.

Divestment strategy involves dropping some of the activities in a given business of the firm through sale or liquidation. There is nothing negative about it and is as positive and useful as any other strategy. Under certain circumstances it becomes the right strategy choice for the firm. For example, when GE was in troubles it laid down a policy that it should be either No.1 or No.2 in the businesses / markets in which it is present, or else get out of the concerned business. Also Tatas divested Excel Industries, a profit-making company, because it fell out side the Tatas' definition of core business.

Combination strategy is any combination of generic strategies.

The choice of strategy that company makes depend on the results of grinding exercise carried out by it though survey, internal appraisal and setting of objectives. Finding from all the preparatory exercises may be handled compositely. Analysis flows and decision flows criss cross. Past data, current data and forecasted data are sifted and studied using qualitative and quantitative information and strategies are evolved employing logic and intuition. The process of strategy choice is intrinsically linked with the marketing planning process. That is, the opportunities are translated into strategy options / product – market propositions and the ones most suited to the firm are chosen. Strategy choice must take into account firm’s ability to execute the plan; also elements like people, skills, processes and culture of the organization are to be taken into account. Strategic organizations lay emphasis on execution ability and develop it through conscious efforts. Strategy choice, relative priorities and resources are organically linked issues. With strategy choice, scope and priority is made clear, resources in terms of money, people, facilities etc. are to be allotted next, to move on.

The corporate strategies are finally executed at business level through one or both of the two routes

  • Price route
  • Differentiation route

Cost advantage can emanate from different factors like efficient scale of economies, benefit of early entry, a larger market share built over a period of time, locational advantage etc. Whole strategy revolves around building such cost advantage – always looking for opportunities for cost reduction through experience, dropping unprofitable customers / segments etc. Developing such a cost leadership is the main task of firms that adopt this strategy at business level.

Differentiation route revolves basically around the principle of making its offer distinctive from all competing offers and win through distinctiveness. Differentiation route is more dynamic and powerful route in competitive strategy. Most business battles are fought on the strength of differentiation rather than price. Differentiation route gives a company the strength of uniqueness and specialty to its products. Brand image, channel clout, competent structure, unique process, integrated production facilities, advanced (expensive) R&D setup and product innovations are all avenues for differentiation. The success of differentiation strategy depends on firm’s capacity to develop such avenues. Michael Porter adds a third route, focus, to concentrate on serving special needs of niche market. Even under focus the firm has to resort to price route or differentiation route for successfully serving the market, with only the difference being a narrow market segment, a niche, forms the target.

To summarize, in giving a final shape to the strategy, the firm has to size up the forces shaping competition in the industry. Build defenses against these competitive forces, build relevant competitive advantages and also identify, utilize and nurture its synergies.

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