Identifying and Evaluating Business Strategies

By Dan Power

What is a business strategy?

A strategy is a statement of the means that will be used to achieve long-term objectives. Also, a strategy is a pattern identified in a series of decisions or actions. An intended strategy is planned by decision makers and an emergent or realized strategy is a product of any planned and unplanned actions.

Examples of what are sometimes called grand or master strategies include: concentration, market development, product development, innovation, horizontal integration, divestiture, and liquidation. These strategies need to be customized for a specific firm. Strategic plans should describe programs of action and resource allocations. Strategies must be formulated for the corporation as a whole and for any business units.

·  Strategies for Dominant-product Businesses

·  Strategies for Multibusiness Companies

·  Strategies for Global Companies

·  Strategies for Start-up Companies

Other key terms

·  Planning horizon is the time frame for planning strategic activities and for accomplishing strategic long-term objectives. This time frame is often 5 years, but the appropriate horizon depends on the industry. For example, 2 years in the fashion industry and 10 or 15 years in the forest products industry.

·  Corporate strategy is the pattern of company purposes and goals, and the major policies and actions for achieving them that defines the business or businesses the company will be involved with and the kind of company it will be.

·  A strategic business plan is an action-oriented document that describes the mission, strategic thrust, and major actions for an entire organization or an SBU. The plan also usually includes resource allocations, major im­plementation steps and pro forma financial statements.


What are common categories of long-term objectives?

·  Profitability

·  Productivity

·  Competitive Position

·  Employee Development

·  Employee Relations

·  Technological Leadership

·  Public Responsibility

 

PEPTECS



Generic Strategies

The following framework of generic strategies was developed by Michael Porter.

Each strategy requires specific skills, resources and organizational arrangements for successful implementation.

·  Overall low-cost leadership - striving for overall low-cost leadership in the industry.

·  Differentiation - striving to create and market unique products for many, varied customer groups through differentiation.

·  Focused low-cost leadership - striving to have special appeal to one or a few groups of consumers or industrial buyers by focusing on their cost concerns.

·  Focused differentiation - striving to have special appeal to one or a few groups of consumers or industrial buyers by focusing on their differentiation needs and concerns.


Grand Strategies

Grand strategies are also called strategic thrusts. They provide basic direction for specific strategic actions and functional tactics. Some grand strategies are used together and reinforce each other and some are usually employed singly.

  1. Concentrated growth

This strategy emphasizes growth by concentrating on increasing sales of current products/services using current distribution channels.

  1. Market Development

This strategy emphasizes growth by marketing current products/services to related market areas by adding channels of distribution or changing advertising or promotion.

  1. Product development

A product development strategy focuses on developing new products for currently served markets and customers. The focus is often on products/services related to current offering. Sometimes quality variations or new models or sizes of products are developed.

  1. Innovation

An innovation strategy involves new processes, business ideas, and more basic R&D than is usually associated with a product development strategy. Innovation is usually paired with other strategies as a supporting or complementary strategy.


More Grand Strategies

5. Horizontal Integration

Horizontal integration strategies focus on acquiring firms in current markets or in new markets. This strategy will usually increase a firm's market share and it help the firm gain relevant knowledge and expertise. Horizontal integration strategy can support a concentrated growth or market development strategy.

6. Vertical Integration

Vertical integration is a grand strategy that involves acquiring either suppliers or customers. The transaction may involve stock purchase, buying assets, or stock swap. Backward vertical integration involves acquiring a firm at an earlier stage of the value chain. Forward integration involves acquiring a firm at a later stage in the value chain. This strategy can result in control of more value chain activities. For example, backward vertical integration may insure control of sources of supply.

7. Concentric Diversification

A diversification strategic thrust involves acquiring related or unrelated businesses, and in some cases major new product line development programs.

Concentric diversification is one type of diversification strategic thrust. Concentric diversification focuses on creating a portfolio of related business. The portfolio is usually developed by acquisition rather than by internal new business creation. Product-market synergies are a major issue in creating the portfolios of SBUs.

8. Conglomerate Diversification

Conglomerate diversification involves acquiring a portfolio of businesses based on financial performance criteria. Product-market synergies are not an issue.

9. Turnaround

A turnaround strategy is used when firms are struggling financially. The strategy usually involves cost reduction and asset reduction. Managers reduce costs by reducing staff, leasing rather than buying equipment, reducing marketing expenditures or R&D. Assets are also often sold to free up cash for new initiatives. In some cases assets are sold and then leased back by the company from the purchaser of the asset. Once costs are reduced and assets have been sold to generate cash a positive growth or diversification strategy must be implemented to complete the turnaround.

10. Divestiture

Divestiture is a strategic action that involves selling a major component of a firm or the entire firm. The entity is sold as an ongoing business.

11. Liquidation

Liquidation involves selling parts of a firm or the entire firm at auction or to a private buyer for its tangible asset value. The intent is not to operate an ongoing business. Contrast this strategic action with divestiture.

12. Joint ventures

A shared ownership arrangement where 2 or more companies pool capital, production equipment, patents, or expertise to serve customers in a target market or country.


Even more Grand Strategies

13. Export-based strategy

Domestic firms can sell their products in foreign countries by contracting with either a domestic exporter or a foreign importer. This strategy is coupled with market development or concentrated growth.

14. Global market strategy

Provide a homogenized product/service in all countries served with global sourcing, international logistics and marketing.

15. Multidomestic, international expansion strategy

Provide a customized product for a country or group of countries with local sourcing and production. Firm has a decentralized production/distribution structure and usually has multiple, coordinated tactics for marketing and branding. Local brands may be developed or acquired.

16. Strategic Alliances

17. Consortia, Keiretsus, and Chaebols

Keiretsu are Japanese business combinations that may involve as many as 50 firms that are related through a large trading company or bank. The companies are coordinated through interlocking directors.


What behavioral factors and considerations
can affect strategic choices?

  1. Role of current strategy - Who has an interest in maintaining the status quo?
  2. Degree of the firm's external dependence - Are we dependent on another firm? for what?
  3. Management attitudes toward risk - Can we afford a loss? how much?
  4. Internal political considerations - Who is involved in the decision? Are there any hidden agendas?
  5. Timing issues
  6. Competitive reaction - How will our competitors react to our proposed action?

Strategy Choice Criteria

  1. Consistent. Is the proposed strategy consistent with the organization's environment, internal capabilities and characteristics, available resources, and risk preferences?
  2. Goal-Directed. Is the strategy aimed at clearly identified goals?
  3. Appropraite Timing. Does the strategy appear to have appropriate timing relative to competitors and does it minimize action conflicts?
  4. Flexible. Does the strategy allow sufficient flexibility to deal with competitors' responses and environmental changes?
  5. Strong Support. Is the company's leadership committed to the strategy?

General Criteria for Evaluating Strategies

·  Acceptability test examines the attitudes that major stake­holders will have toward the proposed strategy.

·  Economic feasibility test focuses on returns and costs in both the short and long-term.

·  Operational risk refers to the possibility that new strategies and plans will fail.

·  Workability test determines if what is proposed can really be accomplished as planned and whether it is likely that the intended results will be realized.