Introduction to Strategic Management PDF

# Introduction to Strategic Management ## Concept 1: Concept of Management To understand the concept of strategic management, we need to have a basic understanding of the term management. The term 'management' is used in two senses, such as: 1. **People view;** It is used with reference to a key...

# Introduction to Strategic Management ## Concept 1: Concept of Management To understand the concept of strategic management, we need to have a basic understanding of the term management. The term 'management' is used in two senses, such as: 1. **People view;** It is used with reference to a key group in an organisation in-charge of its affairs. In relation to an organisation, management is the chief organ entrusted with the task of making it a purposeful and productive entity, by undertaking the task of bringing together and integrating the disorganized resources of manpower, money, materials, and technology into a functioning whole. An organisation becomes a unified functioning system when management systematically mobilises and utilizes the diverse resources efficiently and effectively. The survival and success of an organisation depends to a large extent on the competence and character of its management. Management has to also facilitate organisational change and adaptation for effective interaction with the environment. 2. **Functional view;** The term 'Management' is also used with reference to a set of interrelated functions and processes carried out by the management of an organisation to attain its objectives. These functions include Planning, Organising, Directing, Staffing and Control. The functions or sub-processes of management are wide-ranging but closely interrelated. They range all the way from determination of the goals, design of the organisation, mobilization and acquisition of resources, allocation of tasks and resources among the personnel and activity units and installation of control system to ensure that what is planned is achieved. ## Concept 2: Strategy **Introduction;** The term strategy has been derived from the Greek word 'strategos' which means generalship. **Business today is like fighting a war and businessmen have to respond to the dynamic and hostile (i.e., unfriendly) environment. Every businessman makes use of strategies to face the tricks of his enemy (i.e., rivals).** **Strategy may be defined as a long-range blueprint of an organisation, what it wants to be? (i.e., desired image), what it wants to do? (i.e., direction) and where it wants to go? (i.e., destination).** **Policy and Strategy are quite interrelated, but the interesting thing to study is how they differ. Where a policy is a thought process, it talks about what should be done in a particular situation, or what should be the reaction to a given circumstance. The strategy part of it explains the real actions, strategy talks about how the policy would be followed.** **For example, the policy of an organisation could be to not drop their prices to fight competition. The strategy could be to give more quantity for the same price, or give some other product as a freebie to attract customers without dropping their price.** **Strategy is consciously considered and flexibly designed scheme of corporate intent and action to mobilise resources, to direct human effort and behaviour, to handle events and problems, to perceive and utilise opportunities, and to meet challenges and threats for corporate survival and success.** ## Concept 3: Strategic Intent **Definition;** Strategic Management is defined as a dynamic process of; formulation, implementation, evaluation, and control of strategies to realise the organization's strategic intent. **Introduction;** The intentions with which organisational manager's plans the future course of action, that intention is known as strategic intent. Strategic intent is the base of all the activities every manager at all levels is doing to achieve organisational goals. It is the fire within the organisational officers which keeps them moving more closer to the objectives and goals instead they face the hardest challenge and unfriendly business environment. As a name suggesting that "intent" in strategic intent is extremely important for the future success and growth of the enterprise, irrespective of its nature and size. Senior managers must define “what they want to do” and "why they want to do". This "why they want to do” underlies the end result that is likely to be achieved through "what they want to do". This end result is referred to as as "strategic intent" **Strategic intent can be understood as the philosophical base of strategic management. Strategic intent provides the framework within which the firm would adopt a predetermined direction and would operate to achieve strategic objectives. Strategic intent could be in the form of vision and mission statements for the organisation at the corporate level. It could be expressed as the business definition and business model at the business level of the organisation.** ### Element of Strategic Intent; 1. **Vision:** Vision implies the blueprint of the company's future position. It describes where the organisation wants to land. It depicts the organisation's aspirations and provides a glimpse of what the organisation would like to become in future. Every sub system of the organisation is required to follow its vision. 2. **Mission:** Mission delineates the firm's business, its goals and ways to reach the goals. It explains the reason for the existence of the firm in the society. It is designed to help potential shareholders and investors understand the purpose of the firm. A mission statement helps to identify, 'what business the firm undertakes. It defines the present capabilities, activities, customer focus and role in society. 3. **Goals and Objectives:** These are the base of measurement. Goals are the end results, that the organisation attempts to achieve. On the other hand, objectives are time-based measurable targets, which help in the accomplishment of goals. These are the end results which are to be attained with the help of an overall plan, over the particular period. However, in practice, no distinction is made between goals and objectives and both the terms are used interchangeably. The vision, mission, business definition, and business model explain the philosophy of the organisation but the goals and objectives represent the results to be achieved in multiple areas of business. 4. **Values/ Value System:** Values are the deep-rooted principles which guide an organisation's decisions and actions. Collins and Porras succinctly define core values as being inherent and sacrosanct; they can never be compromised, either for convenience or short-term economic gain. Values often reflect the values of the company's founders-Hewlett-Packard's celebrated "HP Way" is an example. They are the source of a company's distinctiveness and must be maintained at all costs. *** ## Concept 4: Vision **Introduction;** The most important issue organisational managers need to work on is clarity of destination i.e., where they want the organisation to be in specified time period. Where to go is the most important question and should be always asked before planning how to go. **Strategic vision thus points out a particular direction, charts a strategic path to be followed in future, and moulding organizational identity.** **Definition;** A Strategic vision is a road map of a company's future - providing specifics about technology and customer focus, the geographic and product markets to be pursued, the capabilities it plans to develop, and the kind of company that management is trying to create. **Vision implies the blueprint of the company's future position.** **A strategic vision shows management's aspirations for the business, providing a view of "where we are going".** **It describes where the organisation wants to land.** **Every sub system of the organization is required to follow its vision.** *** ## Concept 5: Mission **Introduction;** A company's mission statement is typically focused on its present business and answer to the basic question scope i.e., "who we are? And what we do?" **Mission statements broadly describe organizations;** * Present capabilities, * Activities, and * Customer focus, * Business makeup. It has been observed that many firms fail to conceptualise and articulate the mission and business definition with the required clarity. Such firms are seen to fumble in the identification of opportunities and fail in formulating strategies to make use of opportunities. Firms working to manage their organisation strategically cannot be lax (meaning cannot be careless i.e., लापरवाह or बेपरवाह) in the matter of mission and business definition, as the two ideas are absolutely central to strategic planning. * Mission statement should reflect the philosophy of the organizations that is perceived by the senior managers. * A good mission statement should be precise, clear, feasible, distinctive and motivating. * The mission is a statement which defines the role that an organization plays in the society. *** ## Concept 6: Overview of Corporate Strategies **Corporate Strategies** | **Stability** | **Growth** | **Retrenchment** | **Combination** | |---|---|---|---| | **Internal** | | | | | **Turnaround** | **Expansion** | | (S+E+R) | | **Divestment** | | | | | **Liquidation** | | | | | **External** | | | | **Strategy** | **Basic Feature** | |---|---| | **Stability** | The firm stays with its current businesses and product markets; maintains the existing level of effort; and is satisfied with incremental growth. | | **Expansion** | Here, the firm seeks (attempt) significant growth-maybe within the current businesses; maybe by entering new business that are related to existing businesses; or by entering new businesses that are unrelated to existing businesses. | | **Retrenchment** | The firm retrenches some of the activities in some business(es), or drops the business as such through sell-out or liquidation. | | **Combination** | The firm combines the above (Stability, Growth and Retrenchment) strategic alternatives in some permutation or combination so as to suit the specific requirements of the firm. | ## Concept 7: Stability Strategy **Introduction;** A firm opting for stability strategy stays with the same business, same product market posture and functions, maintaining same level of effort as at present. One of the important goals of a business enterprise is stability, strategy is to stabilise - it may be opted to safeguard its existing interests and strengths, to pursue well established and tested objectives, to continue in the chosen business path, to maintain operational efficiency on a sustained basis, to consolidate the commanding position already reached, and to optimise returns on the resources committed in business. **Stability strategy applied when?** * This strategy is typical for those firms whose product has reached the maturity stage of product life cycle. * Those firms who have a sufficient market share but need to retain that. * Small organizations may also follow stability strategy to consolidate their market position and prepare for the launch of growth strategies. * After rapid expansion, a firm might want to stabilize and consolidate itself. Stability strategy should not be confused with 'do nothing' strategy (it mean "do-nothing new strategy"). It involves keeping track of new developments to ensure that the strategy continues to make sense. ### Characteristics of Stability Strategy; * A firm opting for stability strategy stays with the same business, same product-market posture and functions, maintaining same level of effort as at present. * The attempt is to enhance functional efficiencies in an incremental way, through better deployment and utilization of resources. * Stability strategy does not involve a redefinition of the business of the corporation. * It is basically a safety-oriented, status quo (i.e., to maintain same state of affairs) oriented strategy. * The risk is also less and It does not warrant much of fresh investments * It involves minor improvements in the product and its packaging. * The firms with modest (i.e., limited) growth objective choose stability strategy. * While opting for stability strategy, the organization can concentrate on its resources and existing businesses or products and markets, thus leading to building of core competencies. ### Major Reasons for Stability Strategy; * A product has reached the maturity stage of the product life cycle. * The environment faced is relatively stable. * Where it is not advisable to expand as it may be perceived as threatening. * The staff feels comfortable with the status quo as it involves less changes and less risks. * After rapid expansion, a firm might want to stabilize and consolidate itself. ## Concept 8: Growth/ Expansion Strategy **Introduction;** The firm attempt significant growth-maybe within the current businesses; maybe by entering new business that are related to existing businesses; or by entering new businesses that are unrelated to existing businesses. **Growth/Expansion strategy is implemented by redefining the business by enlarging the scope of business and substantially increasing investment in the business.** It is often characterised by significant reformulation of goals and directions, major initiatives and moves involving investments, exploration and onslaught (i.e., attack) into new products, new technology and new markets, innovative decisions and action programmes and so on. Expansion also includes diversifying, acquiring and merging businesses. This strategy may take the enterprise along relatively unknown and risky paths, full of promises and pitfalls. ### Characteristics of Growth/Expansion Strategy; * Expansion strategy involves a redefinition of the business of the corporation. * Expansion strategy is the opposite of stability strategy. While in stability strategy, rewards are limited, in expansion strategy they are very high. In the matter of risks, too, the two are the opposites of each other. * Expansion strategy leads to business growth. A firm with a huge growth ambition can meet its objective only through the expansion strategy. * The process of renewal of the firm through fresh investments and new businesses/ products/markets is facilitated only by expansion strategy. * Expansion strategy is a highly versatile strategy; it offers several permutations and combinations for growth. A firm opting for the expansion strategy can generate many alternatives within the strategy by altering its propositions regarding products, markets and functions and pick the one that suits it most. * Expansion strategy holds within its fold two major strategy routes: Meaning There are two routes for expansion strategy; 1. Intensification, 2. Diversification. ### Major Reasons for Growth/Expansion: * It may become essential when environment demands increase in pace of activity. * Expansion may lead to greater control over the market vis-a-vis (w.r.t.) competitors. * Advantages from the experience curve and scale of operations may accrue. * Psychologically, Strategists may feel more satisfied with the prospects of growth from expansion; Chief executives may take pride in presiding over organizations perceived to be growth-oriented. **A. Internal Growth Strategies** | **Intensification** | **Mergers and Acquisitions** | |---|---| | **Market Penetration** | **Horizontal Merger** | | **Market Development** | **Vertical Merger** | | **Product Development** | **Congeneric Merger** | | **Diversification** | **Conglomerate Merger** | | **Vertically Integrated** | **Strategic Alliance** | | **Horizontally Integrated** | | | **Concentric Diversification** | | | **Innovation** | | **B. External Growth Strategies** ### Expansion through Intensification; Expansion or growth through intensification means that the organisation tries to grow internally by intensifying its operations either by market penetration or by market development or by product development are emphasised to develop new products, enter new markets and embracing new technology. In other words, an internal growth strategy involves re-defining of business definition by substantially scaling the level of operations through internal development. Firm tries to cash on its internal capabilities and internal resources. The firm can intensify by adopting any of the following strategies * **Market Penetration:** Highly common expansion strategy is market penetration/ concentration on the current business. The firm directs its resources to the profitable growth of its existing product in the existing market. * **Market Development:** It consists of marketing present products, to customers in related market areas by adding different channels of distribution or by changing the content of advertising or the promotional media. * **Product Development:** Product development involves substantial modification of existing products or creation of new but related items that can be marketed to current customers through establish channels. ### Expansion through Diversification; Diversification is defined as entry into new products or product lines, new services or new markets, involving substantially different skills, technology and knowledge. This is also an internal growth strategy. Innovative and creative firms always look for opportunities and challenges to grow, to venture into new areas of activity and to break new frontiers with the zeal of entrepreneurship. Entrepreneur at diversification offers greater prospects of growth and profitability than expansion. For some firms, diversification is a means of utilising their existing facilities and capabilities in a more effective and efficient manner. They may have excess capacity in manufacturing facilities, investible funds, marketing channels, competitive standing, market prestige, managerial and other manpower, research and development, raw material sources and so forth. Another reason for diversification lies in its synergistic advantage. It may be possible to improve the sales and profits of existing products by adding suitably related or new products, because of linkages in technology and/or in markets. Diversification can be related or unrelated to existing businesses of the firm. Based on the nature and extent of their relationship to existing businesses, diversifications have been classified into three broad categories: 1. Concentric diversification 2. Vertically integrated diversification, * Forward Integration, and * Backward Integration. 3. Horizontally integrated diversification 4. Conglomerate diversification. 5. Innovation #### (i) Concentric Diversification: Concentric diversification too amounts to related diversification. In concentric diversification, the new business is linked to the existing businesses through process, technology or marketing. The new product is a spin-off from the existing facilities and products/processes. This means that in concentric diversification too, there are benefits of synergy with the current operations. 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. For E.g., One Plus, Nokia, Xiaomi, other cell phone manufacturing companies have started manufacturing Smart TV, Android TV. #### (1) Vertically Integrated Diversification: In vertically integrated diversification, firms opt to engage in businesses that are related to the existing business of the firm. The firm remains vertically within the same process sequence moves forward or backward in the chain and enters specific product/process steps with the intention of making them into new businesses for the firm. The characteristic feature of vertically integrated diversification is that here, the firm does not jump outside the vertically linked product-process chain. **Forward and Backward Integration:** Forward and backward integration forms part of vertically integrated diversification. In vertically integrated diversification, firms opt to engage in businesses that are vertically related to the existing business of the firm. The firm remains vertically within the same process. While diversifying, firms opt to engage in businesses that are linked forward or backward in the chain. **(a) BACKWARD INTEGRATION;** It is a step towards, creation of effective supply by entering business of input providers. Strategy employed to expand profits and gain greater control over production of a product. Whereby a company will purchase or build a business that will increase its own supply capability or lessen its cost of production. For E.g., a large supermarket chain considers to purchase a number of farms that would provide it a significant amount of fresh produce. **(b) FORWARD INTEGRATION:** It is moving forward in the value chain and entering business lines that use existing products. Forward integration will also take place where organizations enter into businesses of distribution channels. For E.g., a coffee bean manufacture may choose to collaborate with a coffee cafe. #### (2) Horizontal Integrated Diversification: A firm gets horizontally diversified by integrating through the acquisition of one or more similar business operating at the same stage of the production-marketing chain. They can also integrate with the firms producing or manufacturing complementary products, by-products or taking over competitors' products. In other words, Horizontal integration is the process of a company increasing production of goods or services at the same part of the supply chain. For E.g., offering 'AKG' earphone (complementary product) with Samsung premium device. #### (ii) Conglomerate Diversification: In conglomerate diversification, no linkages related to product, market or technology exist; the new businesses/products are disjointed from the existing businesses/ products in every way; it is a totally unrelated diversification. In process/technology/function, there is no connection between the new products and the existing ones. Conglomerate diversification has no common thread at all with the firm's present position. For E.g., a cement manufacturer diversifies into the manufacture of steel and rubber products. #### (iii) Innovation: Innovation drives upgradation of existing product lines or processes, leading to increased market share, revenues, profitability and most important, customer satisfaction. Some may argue that innovation leads to unnecessary expenses that do not give as much returns, but on the contrary, for a business to grow long term, innovation offers the following; * Helps to solve complex problems: A business strives to find opportunities in existing problems of the society, and it does so though planned innovation in areas of expertise. This guided innovation help solve complex problems by developing customer centric sustainable solutions. For example, the pressing problem of environmental damage is being tackled heads on by shifting to renewable sources of energy like solar, wind, sea waves, etc. It might be costly in introductory stages but in the long run it will only have economical and environmental sustainability. * Increases Productivity: Innovation leads to simplification and in most cases automation of existing tasks. Productivity is defined as a measure of final output from a task or a process, and companies are willing to spend millions on increasing their productivity, Innovation, by automating repetitive tasks, and simplifying the long chain of processes, adds to productivity of teams and thereby the organisation as a whole. For example, MSExcel, every finance professional uses this software to simplify and automate their manual tasks. Such digital innovation which leads to improved productivity, creates opportunities to further develop processes and products within and outside the organisatoin. Thus, innovation creates a ripple effect that has a far and wide impact across industries. **Gives Competitive Advantage:** Being ahead of competition is a need, and businesses spend majority of their strategic time building solutions to achieve this advantage. An interesting concept about innovation is the faster a business innovates, the farther it goes from its competitor's reach. Innovative products need less marketing as they aim to provide added satisfaction to consumers, thus, creating a competitive advantage. Innovation not only helps retain the existing customers but helps acquire new ones with ease. ## Concept 9: Expansion through Mergers and Acquisitions; **Introduction;** Acquisition or merger with an existing concern is an instant means of achieving the expansion. **Merger and acquisition in simple words are defined as a process of combining two or more organizations together.** It is an attractive and tempting proposition in the sense that it circumvents (i.e., bypass or avoid) the time, risks and skills involved in screening internal growth opportunities, seizing them and building up the necessary resource base required to materialise growth. Organizations consider merger and acquisition proposals in a systematic manner, so that the marriage will be mutually beneficial, a happy and lasting affair. Apart from the urge (i.e., wish) to grow, acquisitions and mergers are resorted (i.e., opted) to for purposes of achieving a measure of synergy between the parent and the acquired enterprises. Synergy may result from such bases as physical facilities, technical and managerial skills, distribution channels, general administration, research and development and so on. Only positive synergistic effects are relevant in this connection which denotes that the positive effects of the merged resources are greater than the effects of the individual resources before merger or acquisition. There is a thin line of difference between these terms but the impact of combination is. ### Types of Mergers; 1. **Horizontal Merger;** Horizontal merger is a combination of firms engaged in the same industry. It is a merger with a direct competitor. The principal objective behind this type of merger is to achieve economies of scale in the production process by shedding (i.e., removing) duplication of installations and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition and so on. For Instance, formation of Brook Bond Lipton India Ltd. through the merger of Brook Bond and Lipton India. 2. **Vertical Merger:** It is a merger of two organizations that are operating in the same industry but at different stages of production or distribution system. This often leads to increased. * **Merger:** Is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms and both the organizations share profits in the newly created entity. For Instance, Formation of Brook Bond Lipton India Ltd. through the merger of Brook Bond and Lipton India. * **Acquisition:** When one organization takes over the other organization and controls all its business operations, it is known as acquisitions. In this process of acquisition, one financially strong organization overpowers the weaker one. For Instance, WalMart acquired Flipkart of India. * **Takeover:** A deal in case of an acquisition is often done in an unfriendly manner, it is more or less a forced association where the powerful organization either consumes the operation or a company in a weaker position is forced to sell its entity. For Instance, in 2000, Tata Tea took over Tetley Tea.