STRATEGIC MANAGEMENT
LESSON THREE
STRATEGY
The word strategy comes from the ancient Greek word ‘’strategos’’ which was used in the
military to describe the leadership created by the council of generals in planning how to
deploy their army ‘’stratos’’. The army or stratos were to be assigned tasks appropriately to
be able to achieve their objectives. It is from this point that leaders have cascaded this
experience into warriors and latter political leaders to grow the body of vision to guide the
organisation path to success. In recent years this has been translated into the context of the
business world and academics have built a body of knowledge, experience, and drawn up
rules and guidelines to business leaders in their organisations.
Chandler(1962) defines it as “the determination of the basic long-term goals and objectives of
an enterprise, and the adoption of courses of action and the allocation of resources for
carrying out these goals.”, Anthony(1965) “the pattern of objectives, purposes or goals and
major policies and plans for achieving these goals stated in such a way as to define what
business the company is or is to be in and the kind of company it is or is to be.”
Porter(1980),defined competitive strategy as “a broad formula for how a business is going to
compete, what its goals should be, and what policies will be needed to carry out those goals.”
There are some lasting truths in the body of knowledge that has been built up since the time
of ancient Athens. So, for instance, Sun Tzu said that war, or conflict, can be measured in
five ways: the way, the weather, the terrain, the leadership, and discipline. We can interpret
these as follows:

The way- illustrates the organisation goal which is the target at the end of the day.

The weather, we would represent as the time frame and the state of the market within
which, guided by our strategic plan, we are progressing towards the goal

The terrain is about assessing difficulties and risks associated with implementing our
strategy

Leadership is about courage, wisdom, integrity and an ethical approach

Discipline means the rules and the appropriateness of the supporting organisation and
accountability of individuals within that organisation
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ROLE OF STRATEGY
1. Framework for Operational Planning. Strategies provide the framework for plans by
channelling operating decisions and often pre-deciding them. If strategies are developed
carefully and understood properly by managers, they provide more consistent framework for
operational planning. If this consistency exists and applied, there would be deployment of
organisational resources in those areas where they find better use. Strategies define the
business area both in terms of customers and geographical areas served. Better the definition
of these areas, better will be the deployment of resources. For example, if an organisation has
set that it will introduce new products in the market, it will allocate more resources to
research and development activities which is reflected in budget preparation.
2. Clarity in Direction of Activities. Strategies focus on direction of activities by specifying
what activities are to be undertaken for achieving organisational objectives. They make the
organisational objectives more clear and specific. For example, a business organisation may
define its objective as profit earning or a non-business organisation may define its objective
as social objective. But these definitions are too broad and even vague for putting them into
operation. They are better spelled by strategies, which focus on operational objectives and
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make them more practical. For example, strategies will provide how profit objective can be
sharply defined in terms of how much profits is to be earned and what resources of how much
profit is to be earned and what resources will be required for that. When objectives are
spelled out in these
terms, they provide clear direction to persons in the organisation responsible for
implementing various courses of action. Most people perform better if they know clearly
what they are expected to do and where their organisation is going
3. Increase Organisational Effectiveness. Strategies ensure organisational effectiveness in
several ways. The concept of effectiveness is that the organisation is able to achieve its
objectives within the given resources. Thus, for effectiveness, it is not only necessary that
resources are put to the best of their efficiency but also that they are put in a way which
ensures their maximum contribution to organisational objectives. In fact, this can be done by
taking strategic management which states the objective of the organisation in the context of
given resources. Therefore, each resource of the organisation has a specific use at a particular
time. Thus, strategies ensure that resources are put in action in a way in which these have
been specified. If this is done, organisation will achieve effectiveness
4. Personnel Satisfaction. Strategies contribute towards organisation effectiveness by
providing satisfaction to the personnel of the organisation. In organisation where formal
strategic management process is followed, people are more satisfied by definite prescription
of their roles thereby reducing role conflict and role ambiguity. If the decisions are
systematized in the organisation, everyone knows how to proceed, how to contribute towards
organisational objectives, where the information may be available, who can make decisions,
and so on. Such clarity will bring effectiveness at the individual level and consequently at
organisational level. Strategies provide all these things in the organisation through which
everything is made crystal clear.
Looking into the role of strategy, Ross and Kami have suggested that “without a strategy the
organisation is like a ship without a rudder, going around in circles. It is like a tramp; it
has no place to go.”
They ascribe most business failures to lack of strategy, or the wrong strategy, or lack of
implementation of a reasonably good strategy. They conclude from their study that without
appropriate strategy effectively implemented, failure is a matter of time.
TYPES OF STRATEGY
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The typical business firm usually considers three types of strategy: corporate, business, and
functional.
Corporate strategy describes a company’s overall direction in terms of its general attitude
towards growth and the management of its various businesses and product lines. Corporate
strategies typically fit within the three main categories of stability, growth, and retrenchment.
Cadbury Schweppes, for example, was following a corporate strategy of retrenchment by
selling its marginally profitable soft drink business and concentrating on its very successful
confectionary business.
Business strategy usually occurs at the business unit or product level, and it emphasizes
improvement of the competitive position of a corporation’s products or services in the
specific industry or market segment served by that business unit. Business strategies may fit
within the two overall categories, competitive and cooperative strategies. For example,
Staples, the U.S. office supply store chain, has used a competitive strategy to differentiate its
retail stores from its competitors by adding services to its stores, such as copying,UPS
shipping, and hiring mobile technicians who can fix computers and install networks. British
Airways has followed a cooperative strategy by forming an alliance with American Airlines
in order to provide global service. Cooperative strategy may thus be used to provide a
competitive advantage. Intel, a manufacturer of computer microprocessors, uses its alliance
(cooperative strategy) with Microsoft to differentiate itself (competitive strategy) from AMD,
its primary competitor.
Functional strategy is the approach taken by a functional area to achieve corporate and
business unit objectives and strategies by maximizing resource productivity. It is concerned
with developing and nurturing a distinctive competence to provide a company or business
unit with a competitive advantage. Examples of research and development (R&D) functional
strategies are technological followership (imitation of the products of other companies) and
technological leadership (pioneering an innovation). For years, Magic Chef had been a
successful appliance maker by spending little on R&D but by quickly imitating the
innovations of other competitors. This helped the company to keep its costs lower than those
of its competitors and consequently to compete with lower prices. In terms of marketing
functional strategies, Procter & Gamble (P&G) is a master of marketing “pull”—the process
of spending huge amounts on advertising in order to create customer demand. This supports
P&G’s competitive strategy of differentiating its
products from those of its competitors.
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Business firms use all three types of strategy simultaneously.
A hierarchy of strategy is a grouping of strategy types by level in the organization.
Hierarchy of strategy is a nesting of one strategy within another so that they complement and
support one another. Functional strategies support business strategies, which, in turn, support
the corporate strategy(ies).Just as many firms often have no formally stated objectives, many
firms have unstated, incremental, or intuitive strategies that have never been articulated or
analyzed. Often the only way to spot a corporation’s implicit strategies is to look not at what
management says but at what it does. Implicit strategies can be derived from corporate
policies, programs approved
(and disapproved), and authorized budgets. Programs and divisions favored by budget
increases
and staffed by managers who are considered to be on the fast promotion track reveal
where the corporation is putting its money and its energy.
There is also Portfolio Strategy, which is concerned with the collection of businesses
contained under a corporate umbrella, and whether the corporate strategy requires acquiring
new businesses or parting with existing ones to achieve its objectives.
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The characteristic strategies at this level may include the following in a typical
organisation.
• Business scope and an expression of competitive leadership
• Identification of product market segments
• Corporate strategic thrusts and planning challenges relevant to the business unit
• Internal security at the business level that includes identification and evaluation of critical
success factors and assessment of competitive position
• Environmental scan at business level and identification of product markets and industry
attractiveness.
Thus, Formulation of business strategy is a set of multiyear broad action programs.
At the functional level, the decisions involve action oriented operational issues. Essentially
these are short term type and hence periodically made. They reflect some or all part of the
strategy at corporate level. These decisions are also comparatively of low risk and involve
lower costs as the resources to be used by them are from the organisation itself. The company
as a
whole is rarely involved in these decisions. They are more concrete, clear, simple to
implement and do not disturb the on- going processes of the company. The decisions at this
level are more critically examined inspite of being less profitable.
FORMS/CATEGORIES OF STRATEGY
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Strategy in General
Strategy, in general, refers to how a given objective will be achieved. Consequently, strategy
in general is concerned with the relationships between ends and means, that is, between the
results we seek and the resources at our disposal. Strategy and tactics are both concerned with
formulating and then carrying out courses of action intended to attain particular objectives.
For the most part, strategy is concerned with deploying the resources at your disposal
whereas tactics is concerned with employing them. Together, strategy and tactics bridge the
gap between ends and means (see Figure 2).
SOME FUNDAMENTAL QUESTIONS TO BE ASKED
Related to Strategy in General
ends we seek?
or explicit?
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the ends we seek?
constrained by the means at our disposal?
ones are serious enough that we should
plan for them?
Related to Corporate Strategy
explicit?
current strategy to be viable?
political,
tech-nical
and
financial
environments?
profitability goals?
Related to Competitive Strategy
explicit?
current strategy to be viable?
our competi-tors, and in general?
profitability goals?
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offer?
be made?
and services?
ll
we require?
and what will we acquire through
alliance?
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COMPETIVE ADVANTAGE
It is the edge that the organisation uses to stand out against the others, in other words what
sets an organisation aside. It includes the organisations ability to controlling or having
something others do not have, doing something better than other organizations, doing
something other organizations cannot do. For example; lower costs, variety of products, or
creating a niche.
Competitive strategies are designed to exploit an organization’s competitive advantage and it
implies there are other competitors also trying to develop competitive advantage & attract
customers. The competitive advantage can be eroded easily (& often quickly) by rival’s
actions
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Every firm has resources & work processes systems to do whatever it’s in business to do But
not every firm is able to effectively exploit its resources & capabilities obtain resources &
capabilities it needs. Some firms are able to “pull it together” & develop distinctive
capabilities, others don’t. Competitive advantage implies gaining the edge on others – using
resources & capabilities; as firms strive for sustainability, a competitive advantage stage for
competition is set - intense, moderate, low.
Some questions to ask in respect of competitive advantage

What makes one firm better than another one?

Why do other firms outcompete the others with few resources at their disposal, capital
and even specialists?
THE VALUE CHAIN DEFINED
The idea of a value chain was first suggested by Michael Porter (1985) to depict how
customer
value accumulates along a chain of activities that lead to an end product or service.
Porter describes the value chain as the internal processes or activities a company performs “to
design, produce, market, deliver and support its product.” He further states that “a firm’s
value
chain and the way it performs individual activities are a reflection of its history, its strategy,
its
approach to implementing its strategy, and the underlying economics of the activities
themselves.”
CATEGORIES OF BUSINESS ACTIVITIES
Porter describes two major categories of business activities: primary activities and support
activities. Primary activities are directly involved in transforming inputs into outputs and in
delivery and after-sales support. These are generally also the line activities of the
organization. They include:
Inbound Logistics—material handling and warehousing;
Operations—transforming inputs into the final product;
Outbound Logistics—order processing and distribution;
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Marketing And Sales—communication, pricing and channel management; and
Service—installation, repair and parts.
Support activities support primary activities and
other support activities. They are
handled by the organization’s staff functions and include:
Procurement—purchasing of raw materials, supplies and other consumable items as well
as assets;
Technology Development—know-how, procedures and technological inputs needed in every
value chain activity;
Human resource management—selection, promotion and placement; appraisal; rewards;
management development; and labor/employee relations; and
Firm Infrastructure—general management, planning, finance, accounting, legal, government
affairs and quality management.
John Shank and V. Govindarajan (1993) describe the value chain in broader terms than does
Porter. They state that “the value chain for any firm is the value-creating activities all the way
from basic raw material sources from component suppliers through to the ultimate end-use
product delivered into the final consumers hands.” This description views the firm as part of
an overall chain of value-creating processes. According to Shank and Govindarajan, the
industry
value chain starts with the value-creating processes of suppliers, who provide the basic raw
materials and components. It continues with the value-creating processes of different classes
of buyers or end-use consumers, and culminates in the disposal and recycling of materials.
The industry value chain and the value chain
activities within the firm are compared in Exhibit 1.
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COMPETITIVE ADVANTAGE AND CUSTOMER VALUE
In order to survive and prosper in an industry, firms must meet two criteria: they must supply
what customers want to buy, and they must survive competition. A firm’s overall competitive
advantage derives from the difference between the value it offers to customers and its cost of
creating that customer value. Competitive advantage in regard to products and services takes
two possible forms. The first is an offering or differentiation advantage. If customers
perceive a product or service as superior, they become more willing to pay a premium price
relative to the price they will pay for competing offerings.
The second is a relative low-cost advantage, which customers gain when a company’s total
costs undercut those of its average competitor.
THE THREE GENERIC TRATEGIES
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Generic strategies according to Michael Porter, strategy enables organizations to achieve
competitive advantage from three different bases:

Cost leadership

Differentiation

Focus
Cost leadership
Differentiation
(competitive advantage defined by cost) (Competitive advantage defined by distinctive…)
Focus
Based on lowest cost
Based on differentiation
Figure, generic strategic approaches to building competitive advantage
1. Cost leadership
These organizations aim at selling products and supplies at the lowest cost possible and tend
to sell products that appeal to the broader market. Products are highly standardized not
customized to ordinary groups in terms of tastes, needs or desires.
Areas of cost reduction
 High capacity utilization. An organization increases its production so that the costs are
spreads over more units. The higher the levels of capacity utilization, the lower the cost per
unit.
 Economies of scale. Large established organizations procure, produce, sell and advertise in
greater volume than smaller and later extracts to the market. This is because long established
relationships with suppliers, reduces advertising agencies that enable them negotiating better
prices than the new extracts. Negotiate quantity discount as such cost per unit decreases as
the scale and business activities increases.
 Technological advances. Often associated with manufacturing firms but office and services
automation is also a great enabler to the reduction of the unit cost of the products and
services. For example price scanning machines reduces the time per transaction and reduces
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stock management costs. Stock levels are updated automatically by the computer when the
code is scanned onto the system.
 Economies of learning and experience. As employees learn to do their job more efficiently
with repetition the time required per transaction reduces. As experiences increases the
workforce can contribute more efficiently towards activities like products redesign and
process improvements. For example sales persons with experience presents sales pitch and
close deal more effectively.
REASONS FOR PURSUING COST LEADERSHIP
1)
To provide lowest prices to consumers in order to gain a market. There is a particular
market mostly successful in markets that are price sensitive.
2) To provide the organization with a bigger profit margin. Organizations that pursue this
strategy aim at maximizing their profits. This is because such strategy may lead to higher
sales with as such bigger profits.
Circumstances that lead to success of cost leadership strategy
 The market must be price sensitive.
 Products or supplies should be standardized and appeals to a broader market.
 Market is large enough to provide organization with advantages
 Organization has the capital to invest in the technology.
 Organization has capital to invest in research.
ADVANTAGES OF COST LEADERSHIP
 Capital reserves that are accumulated provide the organization with greater variety of
strategic alternatives when it comes to defending or expanding market share.
 Customers that are familiar with product or service of low cost leaders are unlikely to switch
to a competing brand unless competitors have a different unique offer
 Their ability to keep the new extracts from entering the market. Established new organization
requires vast capital investment and assets
Disadvantages of cost leadership
 Because of standardization. There is a high risk of initiation.
 High investment in plants, equipment’s, processes which may become absolute.
 Organization may concentrate on cost cutting and forgets the desire in regard to customer
behavior, competitor activities and customer needs.
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2. Differentiation
The organization aims at providing gas and supplies that have unique characteristics unique
in quality, technological superiority or product usage.
Note:

Such organizations should study the customer needs and preferences to determine the
feasibility of those features.

Speed or rapid response to customers’ needs given the changing environment.

Concentration on customer relation and ensure loyalty
Circumstances that facilitate differentiation
 Customers are willing to pay more for the uniqueness of the product and supplier should have
a wide appeal to many market sectors.
 Organization should have a durable source of uniqueness that can’t be initiated quickly and
cheaply by competitors.
Advantages of differentiation
 Leads to brand loyalty and customer relation, which exonerates the organization from price
users.
 Imitation of the commodity features before it becomes available by the competitors.
Focus
Selecting a particular market and catering for the very specific needs of customers in the
market. The strategies here may be cost or differentiation.
A focus strategy based on differentiation requires that the products and suppliers are provided
to the niche at a higher price premium because its small and sales figures relatively low.
Circumstances that facilitate differentiation of products
 Market segment focused on should have a sufficient size and growth potential.
 The market segment identified by the organization not crucial to the success of other major
competitors.
 Customers are willing to pay a high premium for the prepared value.
 Customers are loyal to the brand despite the price.
 Customers identify with the brand because it performs a certain image or life style.
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Advantages of focus strategy
 Ability of the organization to carve a niche market against a larger, broader line competitors
 Enables a firm to utilize its specialized distinctive competence or assets to create new niches.
Risks of poisoning a focus strategy
 Needs, expectations and characteristics of the market may shift towards the broader market.
 Competitors may redefine the preferences of the niche, the organization has been
concentrating on.
 Lowest cost is sufficiency quality and service in the pursuit of lowest cost.
RELATIONSHIP BETWEEN GENERIC STRATEGIES AND GRAND STRATEGIES
Grand strategies are often referred to as business strategies, these are more specific strategies
that organizations can pursue in order to achieve the generic strategies.
They enable the organization to coordinate their efforts towards the attainment of their long
term goals.
GENERIC STRATEGIES
Cost leadership
GRAND STRATEGIES
Focused integration
Backward integration
Horizontal integration
Concentrated growth
Good venture
Strategies alliances
Differentiation
Concentrated growth
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Product development
Market development
Conglomerate diversification
Horizontal diversification
Concentric diversification
focus
Concentrated growth
Product development
Horizontal diversification
Concentric diversification
Finite venture
Strategic alliances
Classification of the grand strategies
1) Growth strategies
2) Decline strategies
3) Combination strategies
Growth strategies
1) Internal growth, which focuses on internal environment of the organization.
2) External growth which focuses on market and task environment.
(a) Internal growth strategies
i.
Concentrated growth (market penetration) seeks to increase market share so concentrate on
the marketing efforts. Pursues market share growth by customizing product features, prices,
distribution, distribution channels and promotional strategies to meet needs and expectations
of customers in a particular market. Through this attract new uses and increases usage by
customers.
ii.
Market development. Expanding portfolio of markets that the organization serves present
products introduced to new geographic areas.
iii.
Product development. Improving and modifying the product and services of the organization
in order to increase sales.
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iv.
Innovation. These organizations create new product life cycles that well make similar
existing products or services absolute. Innovation is the fundamental way of relating to their
markets.
(b) External growth strategies
i.
Diversification. Adding new and related products and services to the products line of he
organization to expand the market share of the existing market and also enter new markets.
(Related or concentric diversification).
ii.
Un related or conglomerate diversification involves new but unrelated products or suppliers
in an effort to reach and penetrate new markets
Methods of pursuing unrelated diversification
 Buying a high performing organization.
 Buying cash trapped organization and quickly turn it around.
 Buying a seasonal and critical sales patterns organization to provide stability to the cash flow
and profitability.
 Buying largely a debt free organization to improve the borrowing power of the organization.
Benefits of diversification

More attractive scope that can provide opportunities for faster growth which and stability.

Access to key resources like capital, technology and expertise activities to provide greater
E.O.S and this lower total cost.
Risks associated with diversification

Ignorance about newly entered markets could result into inefficiency.

Reduction of management ineffectiveness because of complexity.
(ii) Integration
Involves gaining control over supplies, distributors or competitors in a particular industry to
enhance the effectiveness and efficiency of the organization.
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TYPES OF INTEGRATION
1. Backward
2. Foreword
3. Horizontal
1. Backward vertical integration involves gaining ownership or increased control of common
organizations supplies. Especially in industries while there is low cost and certainties of
supplies are vital to maintain a competitive advantage.
Reasons for backward integration

Supplies of an organization in relatable

Too costly

Incapable of marketing the needs of the organization with regard to parts, components or
material.
2. Forward vertical integration
Entails gaining ownership over distribution or retailers,
Establishing websites to sell
products directly tom consumers also is am form of forward integration as the organization
cuts out retailers and distributors its products to consumers directly.
Reasons

Unreliable distributors.

Here high profit margins.

Incapable of serving the organization products effectively.
3. Horizontal integration
When organization takes control over certain values chain activities of its competitors. This
occurs through merger, acquisitions and take over.
Reasons

Competitive environment

Available human capacity
DECLINE STRATEGIES
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These are also called defensive strategies. These are pursued when an organization finds
themselves in a vulnerable position as a result of poor management inefficiency and
ineffectiveness.
It retrenchment or turnarounds some organizations find themselves in a state of declining
profits because of:

Decline in sales

Adverse economic conditions.

Increased competition.

Obsolesce of products.

Ineffective production

Distribution processes

Poor management
Turnaround strategies strengthen the distinctive competencies of a declining organization that
is to say sales and profits. Most firms emphasize:
 Re-engineering
 Total grading management to increase cost effectiveness of the organization.
 Sale of land and building (assets) to aid cost cutting.
 Outsourcing of activities that are not organization competences
 Reduction of personnel
 Curtailment of managerial products.
Problems that affects organization of turnaround
 Inefficiency
 Low productivity
 Poor profitability
 Low employee morale
 Pressure from stakeholders to increase performance.
(iii) Diversities
Involves selling a division or part of the organization to raise capital for the fortune
acquisition; or investments that are more paying and fit into the strategic direction that the
organization is embarking on.
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(iv) Liquidation
Involves selling all the assets of an organization in an attempt to avoid bankruptcy; It’s a
planned and an orderly way of converting the assets of the organization into cash in an
attempt to minimize losses for the shareholders of the organization.
(v) Bankruptcy
An organization that has no hope of turning its activities around closes its doors and declares
it bankrupt in order to avoid major debt obligations and union contracts. It’s a kind of
retrenchment strategy where assets are sold in parts for their tangible worth. Creditors are
compensated to the extent of cash resources allow the rest is written off.
Bankruptcy allows organization to reorganize and come back after filling a petition for
bankruptcy.
CORPORATE COMBINATION STRATEGIES
In a competitive world, organizations are tending to appreciate the need to combine efforts to
be able to achieve their goals.
These corporate strategies are more appropriate for organizations that operate in global,
dynamic and technologically driven world.
I.
Joint ventures
It is a temporary partnership formed by two or more organizations for the purpose of
capitalizing on a particular opportunity.
Partners’ contributions
 Capital
 Distinctive skills
 Manages
 Technologies \
Possible reasons for joint ventures
 Seek some degree of vertical integration (with potential cost benefits)
 To acquire or learn a partners distinctive skills.
 To upgrade and improve internal skills
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 Develop and commercialize new technologies
 Synergy where small organizations may join forces to increase their competitiveness against
large organizations.
II.
STRATEGIC ALLIANCES
Two or more companies come together but do not share ownership in a specific business
venture like it is with joint ventures.
A local organization may form an alliance (partnership) with a foreign organization that is
already established in the market.
III.
Consortia
These are large interlocking relationships between organizations in a particular industry. It
involves multi-partner alliances and highly complex linkages between groups of
organizations
Examples of linkages include
 Financial –organization owns major equity stakes in one another.
 Sharing of technologies
 Resources
Disadvantages

Partners becoming incompatible over time

Dependency on each other becomes too much

Providing more insight into knowledge and skills that intended.

Very cost intensive especially for coordination, learning and flexibility issue.
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