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  • The three strategy-making task three: crafting a strategy

    Hello, Student. I am sure you agree that business organizations need strategies, don't you?

    STUDENT: I sure do, Teacher.

    TEACHER: Good. Now, would you mind telling me what for?

    STUDENT: That's a difficult question, and this is only the beginning of this Module! But let me try: "organizations need strategies to make it clear how to achieve objectives and how to pursue the organization's mission." How about that, Teacher?

    TEACHER: Not bad at all. Strategy-making is all about "how":

    * how to reach performance targets,

    * how to fight competition,

    * how to achieve long-term competitive advantage,

    * how to sustain the firm's long-term business position,

    * how to make management's strategic vision for the company a reality.

    We have already established that a strategy is needed for the company as a whole. Do you want to remind me for what else a strategy is needed?

    STUDENT: Sure. A strategy is needed for each business the company is in, and for each functional area of each business.

    TEACHER: Would you please give me examples of what you call "functional areas"?

    STUDENT: Research and development, purchasing, production, sales and marketing, finance, human resources, etc.

    TEACHER: Very well. In forming a strategy out of the many feasible options, a manager acts as a forger of responses to market change, a seeker of new opportunities, and a synthesizer of the different moves and approaches taken at various times in various parts of the organization.

    The strategy-making spotlight, however, needs to be kept trained on the important facets of management's game plan for running the enterprise -those actions that determine what market position the company is trying to stake out and that underpin whether the company will succeed.

    STUDENT: What you are telling me is the only high-priority issues are part of a basic strategy.

    TEACHER: Exactly. Low-priority issues (whether to increase the advertising budget, raise the dividend, locate a new plant in country X or country Y) and routine managerial housekeeping (whether to own or lease company vehicles, how to reduce sales force turnover) are not basic to the strategy, even though they must be dealt with.

    STUDENT: But I think that strategy is related to taking specific actions, too.

    TEACHER: Sure. Strategy is inherently action-oriented; it concern what to do, when to do it, and who should be involved. Unless there is action, unless something happens, unless somebody does something, strategic thinking and planning simply go to waste and, in the end, amount to nothing.

    STUDENT: What is supposed to happen to a company's strategy as time passes?

    TEACHER: An organization's strategy evolves over time. It's seldom possible to plan all the bits and pieces of a company's strategy in advance and then go for long periods without change. Reacting and responding to happenings either inside the company or in the surrounding environment is a normal part of the strategy-making process. I am making myself clear?

    STUDENT: Yes. You are saying that reality is dynamic and partly unpredictable. If you'd ask me for examples, I'd mention changes in competition, unplanned increases or decreases in costs, mergers and acquisitions among major industry players, new regulations, the raising or lowering of trade barriers, etc.

    TEACHER: Good examples, and of course the list is never ending and constantly changing. There is always something new to react to and some new strategic window opening up. This is why the task of crafting strategy is never ending. And it is why a company's actual strategy turns out to be a blend of its intended or planned strategy and its unplanned reactions to fresh developments.

    The Strategy-Making Pyramid

    Let me say it again: strategy-making is not just a task for senior executives. In large enterprises, decisions about what approaches to take and what new moves to initiate involve senior executives in the corporate office, heads of business units and product divisions, the heads of major functional areas within a business or division (manufacturing, marketing and sales, finance, human resources, and the like), plant managers, product managers, district and regional sales managers, and lower level supervisors.

    In diversified enterprises, strategies are initiated at four distinct organization levels.

    1. There's a strategy for the company and all of its businesses as a whole (corporate strategy).

    2. There's a strategy for each separate business the company has diversified into (business strategy).

    3. Then there is a strategy for each specific functional unit within a business (functional strategy) -each business usually has a production strategy, a marketing strategy, a finance strategy, and so on.

    4. And, finally, there are still narrower strategies for basic operating units-plants, sales districts and regions, and departments within functional areas (operating strategy).

    Student, can you guess which of these strategy-making levels we find in single-business firms?

    STUDENT: Sure. In single-business enterprises, there are only three levels of strategy-making: business strategy, functional strategy, and operating strategy.

    TEACHER: Correct. Now let's discuss...

    Corporate Strategy

    Corporate strategy is the overall managerial game plan for a diversified company.

    It consists of the moves made to establish business positions in different industries and the approaches used to manage the company's group of businesses.

    Crafting corporate strategy for a diversified company involves four kinds of initiatives:

    1. Making the moves to accomplish diversification.

    The first concern in diversification is what the company's portfolio of businesses should consist of; specifically,

    * what industries to diversify into, and
    * whether to enter the industries by starting a new business or acquiring another company.

    2. Initiating actions to boost the combined performance of the businesses the firm has diversified into.

    Decisions must be reached about how to strengthen the long-term competitive positions and profitabilities of the businesses the firm has invested in. Corporate parents can he1p their business subsidiaries be more successful by financing additional capacity and efficiency improvements, by supplying missing skills and managerial know-how, by acquiring another company in the same industry and merging the two operations into a stronger business, and/or by acquiring new businesses that strongly complement existing businesses.

    3. Finding ways to capture the synergy among related business units and turn it into competitive advantage.

    When a company diversifies into businesses with related technologies, similar operating characteristics, the same distribution channels, common customers, or some other synergistic relationship, it gains competitive advantage potential not open to a company that diversifies into totally unrelated businesses.

    4. Establishing investment priorities and steering corporate resources into the most attractive business units.

    A diversified company's different businesses are usually not equally attractive from the standpoint of investing additional funds. This facet of corporate strategy-making involves deciding on the priorities, such as investing more capital in some of the businesses and channeling resources into areas where earnings potentials are higher and away from areas where they are lower. Corporate strategy may include divesting business units that are chronically poor performers or those in an increasingly unattractive industry. Divestiture frees up unproductive investments for redeployment to promising business units or for financing attractive new acquisitions.

    STUDENT: Who is normally in charge of defining corporate strategy?

    TEACHER: Corporate strategy is crafted at the highest levels of management. Senior corporate executives normally have lead responsibility for devising corporate strategy and for choosing among whatever recommended actions come up from lower-level managers. Key business-unit heads may also be influential, especially in strategic decisions affecting the businesses they head. Major strategic decisions are usually reviewed and approved by the company's board of directors.

    Business Strategy

    The term business strategy (or business-level strategy) refers to the managerial game plan for a single business. It specified the approaches and moves devised by management to produce successful performance in one specific line of business.

    STUDENT: From what you said I conclude that for a stand-alone single-business company, corporate strategy and business strategy are one and the same, right?

    TEACHER: Yes, because there is only one business to form a strategy for. The distinction between corporate strategy and business strategy is relevant only for diversified firms.

    OK, let's have a closer look at "business strategy".

    The central objective of business strategy is how to build and strengthen the Company's long-term competitive position in the marketplace. Toward this end, business strategy is concerned principally with:

    1. creating responses to changes under way in the industry, the economy at large, the regulatory and political arena, and other relevant areas,

    2. devising competitive moves and market approaches that can lead to sustainable competitive advantage,

    3. coordinating the strategic initiatives of functional departments, and addressing specific strategic issues facing the company's business.

    STUDENT: What distinguishes an effective business strategy from a weak one?

    TEACHER: Basically, it is the strategist's ability to attain a sustainable competitive advantage for the company. With a competitive advantage, a company has good prospects for above-average profitability and success.

    Developing a business strategy that yields sustainable competitive advantage has three facets:

    1. deciding where a firm has the best chance to win a competitive edge,

    2. developing product/service attributes that have strong buyer appeal and set the company apart from rivals, and

    3. neutralizing the competitive moves of rival companies.

    STUDENT: Teacher, can you give me some examples of competitive strategies?

    TEACHER: Three of the most frequently used competitive approaches are

    1. aiming at becoming the industry's low-cost producer to get a cost-based competitive advantage over rivals,

    2. pursuing differentiation based on such advantages as quality, performance, service, styling, technological superiority, or unusually good value, and

    3. focusing on a narrow market niche and winning a competitive edge by doing a better job than rivals of serving the special needs and tastes of its buyers

    Functional Strategy

    The third functional strategy refers to the managerial game plan for a particular department or key functional activity within a business. A company's marketing strategy, for example, represents the plan for running the marketing part of the business.

    A company needs a functional strategy for every major departmental unit and piece of the business.

    Functional strategies, while narrower in scope than business strategy, add relevant detail to the overall business game plan.

    STUDENT: Specifically, what is the basic objective of a functional strategy?

    TEACHER: The primary role of a functional strategy is to support the company's overall business strategy and competitive approach.

    Also, a related role is to create a managerial road map for achieving the functional area's objectives and mission.

    STUDENT: Do you mean that, for example, the functional strategy in the production/manufacturing area represents the game plan for how manufacturing activities will be managed to support business strategy and achieve the manufacturing department's objectives and mission?

    TEACHER: Correct. To add one more example, functional strategy in the finance area consists of how financial activities will be managed in supporting business strategy and achieving the finance department's objectives and mission.

    STUDENT: And who is mainly in charge of developing a strategy for a functional area?

    TEACHER: Lead responsibility for strategy-making in the functional areas of a business is normally delegated to the respective functional department heads. But often the business-unit head decides to exert a strong influence, too.

    Operating Strategy

    Operating strategies concern the even narrower strategic initiatives and approaches for managing key operating units (plants, sales districts, distribution centers) and for handling daily operating tasks with strategic significance (advertising campaigns, materials purchasing, inventory control, maintenance, shipping).

    STUDENT: We are now talking about the lowest level strategies, right?

    TEACHER: Yes, but operating strategies, while of lesser scope, add further detail and completeness to functional strategies and to the overall business plan.

    Even though operating strategy is at the bottom of the strategy-making pyramid, its importance should not be downplayed. For example, a major plant that fai1s in its strategy to achieve production volume, unit cost, and quality targets can undercut the achievement of company sales and profit objectives and wreak havoc with the whole company's strategic efforts to build a quality image with customers.

    STUDENT: From what you have said until now, I notice that a company's strategic plan is a collection of strategies devised by different managers at different levels in the organizational hierarchy. How can all this be harmonized?

    TEACHER: To address this problem, we will now talk about...

    Coordinating The Strategy-Making Effort

    Management's direction-setting effort is not complete until the separate layers of strategy are unified into a coherent, supportive pattern.

    Unified objectives and strategies don't emerge from an undirected process where managers at each level set objectives and craft strategies independently.

    Harmonizing objectives and strategies piece by piece and level by level can be tedious and frustrating, requiring numerous consultations and meetings, annual strategy review and approval processes, the experience of trial and error, and months (sometimes years) of consensus building. The polities of gaining strategic consensus and the battle of trying to keep all managers and departments focused on what's best for the total enterprise (as opposed to what's best for their departments or careers) are often big obstacles in unifying the layers of objectives and strategies.


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