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CHAPTER 5

Strategy
What is strategy ?
• Strategy can be defined as the determination
of:
• the basic long-term goals and objectives of
an enterprise
• the adoption of courses of action
• the allocation of resources necessary for
carrying out these goals.
• Strategy is a plan you develop to help you achieve
your vision.
Views of Strategy
• Planning Mode: A plan or explicit set of guidelines developed
in advance. Managers identify where they want to go; then
they develop a systematic & structured plan to get there.

• Evolutionary Mode: Strategy is not a well-thought-out &


systematic plan but evolves over time as a pattern in a stream
of decisions.
e.g. a manufacturer of women’s clothing bought a local hotel because
it was priced right & generated a high rate of return. This was followed
by the acquisition of more hotels & further success led to the
acquisition of a restaurant chain. Today the Co is in the hospitality &
fast food business, with just 10% of its revenues coming from women’s
wear. Company’s strategy evolved without being formally planned.
Types of Strategies
Organizations that are in multiple businesses need to
develop different strategies for different levels of
activities.
The Strategy Imperative:

Environmental Strategy Structure


Factors & Organ-
izational
capabilities
Levels of strategy
Multi business Corp

Corporate level
Business Unit 1 Business Unit 2 Business Unit 3

Business Level
Product 1 Product 2 Product 3
Types of Strategies
Corporate Level Strategy
If an organization is in more than one line of business, it will
need a corporate level strategy. This strategy seeks to answer
the question: ‘In what set of businesses should we be?’
Corporate-level strategy determines the roles that each business
in the organization will play
Business level strategy
Business-level strategy seeks to answer the question: ‘How
should we compete in each of our businesses?’ For a small
organization in only one line of business or a large organization
that has avoided diversification, business-level strategy is
typically the same as corporate strategy
Classifying strategic dimensions
•Innovation strategy does not mean a strategy merely for simple or
cosmetic changes from previous offerings but rather one for
meaningful and unique innovations, major new products or services.
e.g. Apple.
•Market differentiation strategy strives to create customer loyalty by
uniquely meeting a particular need. e.g. Nike, Honda.
•Breadth strategy refers to the scope of the market to which the
business caters: the variety of customers, their geographic range,
and the number of products. e.g. Rolls Royce, Rolex watch.
•Cost Control strategy considers the extent to which the organization
tightly controls costs, refrains from incurring unnecessary innovation
or marketing expenses, and cuts prices in selling a basic product.
e.g. Wal-Mart, Imtiaz.
Alfred Chandler’s Work on the Relationship
between an Organization’s Strategy & its
Structure
• A new strategy required a new or at least
refashioned structure if the enlarged enterprise was
to be operated efficiently….. unless structure follows
strategy, inefficiency results.
• Chandler studied about 100 large firms like DuPont,
General Motors, Sears, etc., and concluded that
changes in corporate strategy led to changes in
organization structure.
Contemporary Strategic Theory
Structure
• Since Chandler’s work in the 1960’s, the most
important research on the strategy-structure
relationship has been undertaken by Miles &
Snow.
• This was later followed by landmark work of
Michael Porter on competitive strategies.
• Then Danny Miller developed an integrative
framework.
• We’ll review each of these three contributions.
Raymond Miles’ & Charles Snow’s
Environment strategy continuum
• Miles & snow classify organizations into four strategic types,
based on the rate at which they change their products &
markets.
1. Defenders
2. Prospectors
3. Analyzers
4. Reactors
Little change Rapid change and
and uncertainty high uncertainty

Defender Reactor Analyzer Prospector


Miles & Snow’s Four Strategic Types
•Defenders seek stability by producing only a limited set of
products directed at a narrow segment of the total potential
market.
•Prospectors are almost the opposite of defenders. Their
strength is finding and exploiting new-product and market
opportunities
•Analyzers try to capitalize on the best of both the preceding
types. They seek to minimize risk and maximize opportunity for
profit. Their strategy is to move into new products or new
markets only after viability has been proved by prospectors
•Reactors represent a residual strategy. The label is meant to
describe the inconsistent and unstable patterns that arise when
one of the other three strategies is pursued improperly.
Defender strategy
• The defender strategy, rather than taking risks and seeking out new
opportunities, is concerned with stability or even retrenchment.
• This strategy seeks to hold on to current customers, but it neither
innovates nor seeks to grow.
• The defender is concerned primarily with internal efficiency and
control to produce reliable, high-quality products for steady
customers. This strategy can be successful when the organization
exists in a declining industry or a stable environment.
• Paramount Pictures has been using a defender strategy for several
years. Paramount turns out a steady stream of reliable hits but few
blockbusters. Managers shun risk and sometimes turn down
potentially high-profile films to keep costs low. This has enabled the
company to remain highly profitable while other studios have low
returns or actually lose money.
Prospector strategy
• The prospector strategy is the opposite of defenders. It
innovates, takes risks, seeks out new opportunities and grows.
• This strategy is suited to a dynamic, growing environment,
where creativity is more important than efficiency.
• Nike, which innovates in both products and internal
processes, exemplifies the prospector strategy. CEO Mark
Parker says Nike’s growth strategy is based on both outward
expansion and inward redesign of operations.
• Online companies such as Facebook and Google also reflect a
prospector strategy.
Analyzer Strategy
• The analyzer attempts to balance efficient production for current
product or service lines with the creative development of new product
lines.
• The analyzer tries to maintain a stable business while innovating on
the border. It seems to lie midway between the prospector and the
defender.
• The analyzer attempts to balance efficient production for current
product or service lines with the creative development of new product
lines.
• Amazon.com provides an example. The company’s current strategy is
to defend its core business of selling books and other physical goods
over the Internet, but also to build a business in digital media,
including initiatives such as a digital book service, an online DVD rental
business, and a digital music store to compete with Apple’s iTunes.
Reactor strategy
• The reactor strategy is not really a strategy at all. Rather,
reactors respond to environmental threats and
opportunities in an ad hoc fashion.
• In a reactor strategy, top management has not defined a
long-range plan or given the organization an explicit
mission or goal, so the organization takes whatever
actions seem to meet immediate needs.
• In recent years, managers at Dell, for long one of the
most successful and profitable makers of personal
computers in the world, have been floundering to find
the appropriate strategy. Competitors caught up, and
Dell had failed to identify new strategic directions that
could provide a new edge.
Porter’s competitive strategies
Michael Porter proposes that management must
select a strategy that will give its organization a
competitive advantage.
Types:
• Cost-Leadership Strategy
• Differentiation Strategy
• Focus Strategy
• Stuck in the middle Strategy
Business Unit Strategies: Cost
Leadership
• Increases in efficiency and cutting of costs; then
passing the savings to the consumer. e.g Wal-Mart,
Imtiaz.
• Assumes price elasticity in demand for products or
services is high; small change in price will cause large
increase in demand.
• Assumes that customers are more price sensitive
than brand loyal.
• HR strategy focuses on short-term performance
measures of results and promoting efficiency
through
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Business Unit Strategies:
Differentiation
• In order to demand a premium price from consumers
– Attempting to distinguish organizational products or
services from other competitors or
– Creating perception of difference
– e.g. Apple, Nike.
• Organization offers employees incentives &
compensation for creativity
• HR strategy focuses on external hiring of unique
individuals & on retaining creative employees

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Business Unit Strategies: Focus
• Business attempts to satisfy the needs of only a
particular group or narrow segment of the market.
e.g. Rolls Royce, Rolex watch.
• Strategic intent is to gain consumer loyalty of
neglected groups of consumers.
• Strategic HR issue is ensuring employee awareness
of uniqueness of market segment.
– Thorough employee training and a focus on
customer satisfaction are critical factors.
– Hiring members of the target segment who are
sensitive to customer in the target segment.

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Business Unit Strategies: Stuck in the
middle
• For those organizations who are unable to gain
competitive advantage by the first three strategies.
• They find it very difficult to achieve long-term
success.
• They find success when they compete in a highly
favourable industry or having their roles in a similar
position.
Miller’s Integrative Framework

• Danny Miller & McGill University developed the four


strategy dimensions of Innovation, Marketing
Differentiation, Breadth & Cost-Control.
• They integrated the work and concepts given by
Chandler, Miles & Snow and Porter and also aligned
them.
Organization structure
• The form of an organization is evident in the way
divisions, departments, functions, and people link
together and interact.
• Organization structure reveals vertical operational
responsibilities, and horizontal linkages, and is represented
by an organization chart.
• The complexity of an organization's structure is
often proportional to its size and its geographic
dispersal.
• The core dimensions of organizational structure are:
Complexity, Formalization & Centralization.
Complexity
• Complexity: The degree of differentiation that exists within an
organization. Differentiation may be horizontal or vertical or
spatial.
• Horizontal differentiation: The degree of differentiation based on the
orientation of members , nature of tasks they perform and education
and training. The most visible evidence of horizontal differentiation is
specialization and departmentalization.
• Vertical differentiation: Refers to the depth in the structure. As
differentiation increases and hence the complexity , as the number of
hierarchical levels in the organization increases. The determining factor
is the span of control, that is the number of subordinates that a manager
can direct effectively.
• Spatial differentiation (dimensional): An organization can perform the
same activities with the same degree of horizontal differentiation and
hierarchical arrangement in multiple locations. It refers to the degree to
which the location of an organization’s offices, plants and personnel are
dispersed geographically.
Why is complexity important

The more complex an organization , the greater


the need for effective communication,
coordination and control devices.
As complexity increases so do the demands on
management to ensure that differentiated and
dispersed activities are working smoothly and
together towards achieving the org goals.
Formalization
• Formalization refers to the degree to which jobs
within the organization are standardized. If a job is
highly formalized, the job incumbent has a minimum
amount of discretion over what is to be done, when
it is to be done, and how he or she should do it.
• Degree of formalization varies widely within and
among organizations.
• Organization use formalization because of the
benefits that accrue from regulating employees
behavior.
Centralization
• Centralization refers to the degree to which
decision making is concentrated at a single
point in the organization.
• Low concentration indicates low centralization
or it may be called decentralization.
Industry structure relationship
Strategy may merely be an intermediate step
between the unique characteristics of industries
that affect the strategies they will choose.

Industry Strategy Structure


The Effects of Structure on the Strategic
Decision Process
Complexity
As the level of complexity increases, so does the probability that :
• Members initially exposed to the decision framework will not
recognize it as being strategic or will ignore it.
• A decision must satisfy a large constraint set, which decreases the
likelihood that decisions will be made to achieve organization-level
goals.
• Strategic action will be the result of an internal process of political
bargaining, and moves will be incremental.
• Biases induced by members’ inward-looking perceptions will be the
primary constraint on the spread of the strategic decision process. In
general, the integration of decisions will be low.
Contd-
Formalization
As the level of formalization increases, so does the probability
that:
• The strategic decision process will be initiated only in response
to problems or crises that appears by the formal system.
• Decisions will be made to achieve precise and corrective
goals.
• Strategic action will be the result of standardized
organizational processes, and moves will be incremental.
• The level of detail achieved in the standardized organizational
processes will be the primary constraint on the
comprehensiveness of the strategic decision process. The
integration of decisions will be intermediate.
Contd-
Centralization
As the level of centralization increases, so does the probability that:
• The strategic decision process will be initiated only by the
dominant few, and it will be the result of proactive, opportunity-
seeking behavior.
• The decision process will be oriented toward achieving
“positive” goals (i.e., intended future domains).
• Strategic action will be the result of intended sensible choices,
and moves will be major departures from the existing strategy.
• Top management’s subjective limitations will be the primary
constraint on the comprehensiveness of the strategic process.
The integration of decisions will be relatively high.