Thursday, 22 December 2011

02: Strategies, Policies and Planning Premises

Conceptually Strategic Planning is deceptively simple; analyze the current and expected future situation, determine the direction of the firm, and develop means for achieving the mission. In reality this is an extremely complex process that demands a systematic approach for identifying and analyzing factors external to the organization and matching them with the firm’s capabilities.

01. The Nature and Purpose of Strategies and Policies
Strategy: Derived from Greek Word strategos, meaning “general
Strategy refers to the determination of the purpose (or mission) and the basic long-term objectives of an enterprise, and the adoption of course of action and allocation of resources necessary to achieve these aims. Therefore, objectives are a part of the strategy formulation.
Policies are general statements or understandings that guide managers’ thinking in decision making. They usually do not require action but are intended to guide managers in their commitment to the decision they ultimately make.
Strategies and policies must be put into practice by means of plans, increasing in detail until they get down to the nuts and bolts of operation. Tactics then, are the action plans through which strategies are executed. Strategies must be supported by effective tactics. 

02. The Strategic Planning Process
  1. Input to the Organization: Various Inputs (People, Capital, Management and Technical skills, others) including goals input of claimants (Employees, Consumers, Suppliers, Stockholders, Government, Community and others)need to be elaborated.
  2. Industry Analysis: Formulation of strategy requires the evaluation of the attractiveness of an industry by analyzing the external environment. The focus should be on the kind of compaction within an industry, the possibility of new firms entering the market, the availability of substitute products or services, the bargaining positions of the suppliers, and buyers or customers.
  3. Enterprise Profile: Enterprise profile is usually the starting point for determining where the company is and where it should go. Top managers determine the basic purpose of the enterprise and clarify the firm’s geographic orientation.
  4. Orientation, Values, and Vision of Executives: The enterprise profile is shaped by people, especially executives, and their orientation and values are important for formulation the strategy. They set the organizational climate, and they determine the direction of the firm though their vision. Consequently, their values, their preferences, and their attitudes toward risk have to be carefully examined because they have an impact on the strategy.
  5. Mission (Purpose), Major Objectives, and Strategic Intent: Mission or Purpose is the answer to the question: What is our business? The major Objectives are the end points towards which the activates of the enterprise are directed. Strategic intent is the commitment (obsession) to win in the competitive environment, not only at the top-level but also throughout the organization.
  6. Present and Future External Environment: The present and future external environment must be assessed in terms of threats and opportunities.
  7. Internal Environment: Internal Environment should be audited and evaluated with respect to its resources and its weaknesses, and strengths in research and development, production, operation, procurement, marketing and products and services. Other internal factors include, human resources and financial resources as well as the company image, the organization structure and climate, the planning and control system, and relations with customers.
  8. Development of Alternative Strategies: Strategic alternatives are developed on the basis of an analysis of the external and internal environment. Strategies may be specialize or concentrate. Alternatively, a firm may diversify, extending the operation into new and profitable markets. Other examples of possible strategies are joint ventures, and strategic alliances which may be an appropriate strategy for some firms.
  9. Evaluation and Choice of Strategies: Strategic choices must be considered in the light of the risk involved in a particular decision. Some profitable opportunities may not be pursued because a failure in a risky venture could result in bankruptcy of the firm. Another critical element in choosing a strategy is timing. Even the best product may fail if it is introduced to the market at an inappropriate time.
  10. Medium/Short Range Planning, Implementation through Reengineering the Organization Structure, Leadership and Control: Implementation of the Strategy often requires reengineering the organization, staffing the organization structure and providing leadership. Controls must also be installed monitoring performance against plans.
  11. Consistency Testing and Contingency Planning: The last key aspect of the strategic planning process is the testing for consistency and preparing for contingency plans.
03. The TOWS Matrix

For many years, the SWOT analysis has been used to identify a company’s strengths, weakness, opportunities and threats. However, this kind analysis is static and seldom leads to the development of distinct alternative strategies based on such an analysis. Therefore, the TOWS Matrix has been introduced for analyzing the competitive situation of the company or even of nation leading to the development of four distinct sets of strategic alternatives. The TOWS Matrix is a conceptual framework for a systematic analysis that facilitate matching the external threats and opportunities with the internal weaknesses and strength of the organization.

External Factors
  1. External Opportunity (O): Current and future economic conditions, political and social changes, new products, services and technologies. (considering risks)
  2. External Threat (T): Lack of energy, competition. Also threat in current and future economic conditions, political and social changes, new products, services and technologies.
Internal Factors
  1. Internal Strength (S): Strength in management, operations, finance, marketing, R&D, engineering.
  2. Internal Weaknesses (W): Weakness in management, operations, finance, marketing, R&D and engineering.
Strategies are based on above four components.
  1. The WT Strategy: It aims to minimize both weaknesses and threats and may be called the “mini-mini” strategy. It may require that the company, for example, form a Joint Venture, retrench, or even liquidate.
  2. The WO Strategy: It attempts to minimize the weakness and maximize the opportunities. So it requires to develop those areas within the enterprise or acquire the needed competencies from the outside.
  3. The ST Strategy: It is based on the organization’s strength to deal with threats in the environment.
  4. The SO Strategy: This is the most desirable situation, in which company can use its strengths to take advantage of opportunities. Indeed it is the aim of enterprise to move from other position in the matrix to this one, if they have weakness they will strive to overcome them, making them strengths. If they face threats, they will cope with them so that they can focus on opportunities.
The strategy designer must prepare several TOWS Matrices at different point in time.

04. The Portfolio Matrix: A tool for allocating resources

This is simplified version of the matrix, shows the linkages between the growth rate of the business and the relative competitive position of the firm. Business Growth Rate can be High or Low similarly Relative Competitive Position can be Strong or Weak. This is developed for large corporations and are too simple.

Strategies based on above four combinations are as follows:

  1. Question Mark: Weak market share and a high growth rate, usually require cash investment so that they can become Stars
  2. Stars: The businesses in the high growth rate and Strong competitive position. They have opportunities for growth and profit.
  3. Cash Cows: With strong competitive position and low growth rate, are usually well established in market, and such enterprise are in the position of making their products at low cost.
  4. Dogs: These are businesses with low growth rate and weak market share. These businesses are usually not profitable and generally should be disposed of.
05. Major Kinds of Strategies and Policies

For a business enterprise, the major strategies and policies that give an overall direction to operations are likely to be in the areas of growth, finance, organization, personnel, public relations, products or services, and marketing.

Product or Services Strategies:
Key questions in this area can be summarized as follows:
1. What is our business?
2. Who are our customers?
3. What do our customers want?
4. How much will our customers buy and at what price?
5. Do we which to be a product leader?
6. What is our competitive advantage?
7. Do we wish to develop our own new products?
8. What advantages do we have in serving customer needs?
9. How should we respond to existing and potential completion?
10. How far can we go in serving customer needs?
11. What profits can we expect?
12. What basic form should our strategy take?

Marketing Strategy:
These are design to guide managers in getting products or services to customers and in encouraging customers to buy. They are closely related to product strategies; they must be interrelated and mutually supportive. Marketing and Innovations are key factors for business survival. Key questions in this area can be summarized as follows:
1. Where are our customers, and why do they buy?
2. How do our customers buy?
3. How is it best for us to sell?
4. Do we have something to offer that competitors do not have?
5. Do we wish to take legal steps to discourage competition?
6. Do we need, and can we supply, supporting services?
7. What are the best pricing strategies and policies for our operation?
8. How can we best serve our customers?

Hierarchy of Company Strategies 
At the top of the pyramid is the Corporate-level Strategy i.e. overall strategy for a diversified company. What industry company wants to compete? The second level in the hierarchy,Business Strategies are developed, usually by the general manager of business unit. The purpose of the business strategy is to gain a competitive advantage in particular area of product line. On the third hierarchical level, Functional Strategies (or policies) are developed. Thus, Strategies are devised for department or other organizational units such as finance, production, marketing, service, personnel and so on.

06. Porter’s Industry Analysis and Generic Competitive Strategies

Michael Porter at Harvard has suggested that strategy formulation requires an analysis (attractiveness) of the industry and the company’s position within that industry.

  1. Industry Analysis: Five forces of Industry Analysis are a. The competition among companies. b. The threat of new companies entering in the market. c. Possibility of using substitute product or service. d. bargaining power of the supplier. e. bargaining power of buyers or customers. On basis of industry analysis a company may adopt generic strategy or strategies.
  2. Overall Cost Leadership Strategy: This strategic approach aims at reductions in cost, based to a great extent on experience. The objective is for a company to have low cost structure when compared with that of its competitors.
  3. Differentiation Strategies: This strategy attempts to offer something unique in the industry in respect to products or services.
  4. Focused Strategy (Low Cost or Differentiation): This strategy concentrates on special groups of customers, a particular product line, a specific geographic region or other aspects that become the focal point of the firm’s efforts. This may be accomplished by low-cost strategy, differentiation or both. In general company needs to choose a generic strategy and should not “get stuck in middle”
  5. Best Value and Best Cost Producer: This is a hybrid strategy that focuses on the customers that want a differentiated product but a cost lower than that of its rivals.
07. Premising and Forecasting

The most overlooked but the most essential step. This is establishment of, and the agreement by managers and planners to utilize, consistent assumptions critical to plans under consideration.

Planning Premises are defined as the anticipated environment in which plans are expected to operate. They include assumptions or forecasts of the future and known conditions that will affect the operation of plans.

A forecast that are planning premises and forecasts that are translated into future expectancies can be distinguished as in the first case, the forecast is a prerequisite of planning; in the second case, the forecast is the result of planning. At the same time, plans themselves and forecast of their future effects often become premises for other plans.

In practice, Environmental forecasting is much more complicated.

Values and areas of forecasting
Values of forecasting
  1. This compels thinking ahead, looking to the future, and providing for it.
  2. Discover areas where necessary control is lacking.
  3. Participation throughout the organization helps to unify and coordinate plans.
Areas for forecasting include economic, social, political/legal and technical.

One approach of forecasting is Delphi technique, in which experts are ask to forecast till convergence of opinion begins to evolve.

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