May 4, 2012

PM0010 [Introduction to Project Management] Set1 Q1

Q 1. Describe the three strategy levels in detail. 

Strategy exists at three hierarchical levels in an organisation, ranging from the overall business (or group of businesses) to the individuals working in it. 

Corporate Strategy
Corporate strategy is basically related to the purpose and scope of the business to meet stakeholder expectations. This is often explicitly stated in a mission statement. It is heavily influenced by investors in the business, and acts to guide strategic decision-making throughout the business. Corporate strategy is about managing its business units and products so that each becomes competitive and can contribute to corporate purposes. Hence corporate level strategy is fundamentally concerned with the selection of businesses in which the company competes, develops and coordinates.

Corporate level strategy addresses the following: 

  • Reach: To define the corporate responsibilities. These include identifying overall goals of the corporation, selecting the types of business in which the corporation may be involved, and the way of integrating and managing the business. 
  • Competitive contact: To define the localisation of the corporate competition. 
  • Manage activities and business relationships: To develop synergies by having business units complement one another, both by sharing and coordinating staff and other resources across business units or by investing financial resources across business units. 
  • Management practices: To decide the ways of governing business units through centralisation and decentralisation. Corporate strategy can best be described as the overall plan that integrates the strategies of all businesses within a corporation. A diversified company has two strategy levels: 
  • Corporate level strategy: This strategy aims to create value for the corporation as a whole. 
  • Business level strategy: This strategy addresses the way to create competitive advantage in each business. 

Corporate Strategy Planning 
Two tools popularly used in the planning of corporate strategy are: 

  • Ansoff matrix 
  • BCG matrix 

Ansoff Matrix 
The Ansoff matrix (originator Igor Ansoff in 1957) presents the product and market choices available to an organisation. The Ansoff matrix is used to aid decision-making concerned with market expansion and diversification. Markets may be defined as customers, products, or items sold to the customers. It considers two factors: 
• Newness of the product to the company. 
• Experience of the company with the intended market. 

Based on management of time availability, skill of personnel, and fund mobilisation capacity the company decides to adopt one or more of the four strategies. The fourth strategy provides high growth potentials but requires careful planning and analysis prior to taking any decision. If the firm decides to expand in all four areas, some of its businesses could end up being badly managed. 

The limitation of Ansoff matrix is that the matrix tells us one part of the strategy story, but it is imperative to look at other strategic models like Strength Weakness Opportunity and Threat (SWOT) analysis2 in order to view how the strategy changes in the future. 
2 Refer SWOT analysis - Strategic planning - Business strategies 

BCG Matrix 
The BCG matrix (developed by Boston Consulting Group in the early 1970s) is another popular tool for portfolio planning. It is based on the product life cycle. The observation that the companys business units can be classified into four categories based on a combination of market growth and market share relative to the largest competitor is called „growth-share. Market growth serves as a replacement for industry attractiveness and relative market share serves as a replacement for competitive advantage. 

The position of a business on this matrix provides an indication of cash generation and cash consumption. Business units which are in a more mature stage and are generating significant cash can deliver the cash to the rapidly growing business as required. 

Four types of SBUs are identified using the four quadrants of the matrix: 
Stars: These are high-growth businesses or products competing in markets. They are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth slows down and they become cash cows. 
Cash cows: These are low-growth businesses or products that have relatively high share in markets. Cash cows continuously manage to yield profit and generate strong cash flows which are needed for starting firms. 
Dogs: These are businesses or products that have low relative share in unattractive low-growth markets. They may generate enough cash to break even, but rarely, only if profit is there. 
Question Marks: These are businesses or products that have low market share, but operate in relatively higher growth markets. They have the potential but may require substantial investment to increase the market share at the cost of more powerful competitors. 

Some limitations cited for the BCG matrix model are as follows: 
• In industry attractiveness, market growth rate is only one factor and in competitive advantage, relative market share is only one factor. Other factors are overlooked. 
• As per framework each SBU is independent of others. Sometimes, a dog, an SBU may help other SBUs to gain advantage. 
• The matrix depends heavily on the breadth of the definition of the market. An SBU may dominate its small position, but have very low market share in the overall industry. In such a case, the definition of a market makes the difference between a dog and a cash cow. 

We must note that any tool used for strategy planning has some limitations and no tool is exclusive for strategy planning. For example, in case of the BCG matrix, it is difficult to get reliable data on the market share and market growth rate. 

Business Unit Strategy 
Business unit strategy is concerned with how a business unit competes successfully in a particular market. It includes strategic decisions about choice of products, customer requirements, gaining advantage over competitors, creation of new opportunities and so on. A strategic business unit can be planned independently from the other business units of the firm. 

Business level strategy addresses the following:
  • Positing the business against rivals. 
  • Adjusting the strategies to anticipate and accommodate changes in demand and technologies. 
  • Influencing the nature of competition through strategies like vertical integration and political actions. 

The detailed action of business level strategy is taken to provide value to the customers. Business level strategy is also adopted to gain a competitive advantage by exploring core competencies in specific, individual product or service markets.

The four generic strategies to establish a competitive advantage over industry rivals are as follows:
  • Cost leadership: The firm offers products to customers at the lowest price essentially by tight control over production and overhead costs. 
  • Differentiation: The firm provides value to customers by delivering products with unique features and characteristics rather than with the lowest price. For example, lower costs for buyers by ensuring better quality thereby leading to lesser breakdowns; by raising perceptions of buyers of the customer support provided by the firm by responding quickly. 
  • Focussed low cost: The firm not only sells its products at lowest price, but also selects a small segment of the market to provide goods and services. For example, sale of a product to only a Government department. 
  • Focussed differentiation: The firm not only competes with rivals based on differentiation, but also selects a small segment of the market as in focussed low cost strategy. 

A fifth strategy is also adopted sometimes, which integrates low cost and differentiation strategy. Here, the customer realises value based both on product features and a low price. Southwest Airlines is an example of a company that adopts this strategy.

Operational Strategy 
Operational strategy is concerned with the process of organising business in order to deliver the corporate and the business-unit level strategic direction. It focuses the on issues of resources, processes, people and so on. Operational strategy is also termed as Functional strategy. Functional levels provide input (input, is usually information on resources and capabilities) into the business unit level and corporate level strategy. After developing the higher level strategy, the functional units translate it into discrete action-plans so that each department follows it to achieve success.

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