Strategic options are creative alternative action-oriented responses to the external situation that an organization (or group of organizations) faces. Strategic options take advantage of facts and actors, trends, opportunities and threat of the outside world.
Strategic options can be identified after an institutional assessment, keeping in mind the aspirations (basic question) of an organization. The tool ‘Strategic options’ helps to identify and make a preliminary screening of alternative strategic options or perspectives.
Corporate level strategy:
Strategic Alternative at Corporate Level (Grand Strategies): Corporate or Grand strategies are the decisions or choices of long term plans from available alternatives. Grand strategies also called as master or corporate strategy. It is based on analysis of internal and external environment. This directs the organization towards achievement of overall long term objectives (strategic intent).
Corporate level strategy is concerned with overall purpose and scope of an organization and how value will be added to the different parts (business units) of the organization. ( Johnson and Scholes).
Corporate level strategy addresses the question as “what business are we in? It is related to the acquisition of new business‚ addition or divestments of business units‚ plants or product lines and joint ventures with other companies in new areas etc.
Strategic Alternatives at Corporate level:
The different strategic options/alternatives at corporate level are as follows:
- Stability Strategy: Keeping the organization where it is…….
- Growth Strategy: Moving the organization ahead ………
- Retrenchment Strategy: Reversing the organization’s weaknesses or decline………
1. Stability Strategy:
A strategy where the organization maintains its current size and current level of business Stability strategy does not mean do nothing nor are that goals such as profit growth abandoned. It means, to increase profit through such methods as improving efficiency in current operations.
When stability strategy is suitable to adopt:
- This strategy is pursued in relatively stable environment.
- Organization is market leader.
- The product is at the maturity stage in the product life cycle.
- Its main strategic decision focus on incremental improvement of functional performance.
- Industry is facing slow or no growth opportunities.
- When product is in maturity stage.
Types of strategic alternatives/options under stability strategy:
- Pause/Proceed with caution strategy: This strategy is taken as a rest before continuing a growth or retrenchment strategy. It is a deliberate attempt to make only incremental improvements until a particular environmental situation changes.
- No change Strategy: This strategy is adopted when environment is perceived as to be stable, with few threats to cause problems or few opportunities the firm wishes to take advantage.
- Profit Strategy: This is an attempt to artificially support profits when a company’s sales are declining by reducing investment and short-term discretionary expenditure.
Advantages and disadvantages of Stability Strategy:
- It is less risky.
- Implementation is relatively simple ‚since it does not demand fundamental change.
- It aims to bring efficiency to maintain current profit and growth.
- Suitable if growth strategy is risky to pursue.
- Organization may lose opportunities created by change in external environment.
- May not able to address the expectation of the shareholder.
- Market share may decline due to expansion of competitors.
2. Growth Strategy:
It involves the attainment of specific growth objectives by increasing the level of a firm’s operations. An organization can grow internally expanding its operations or it can grow externally through merger‚ acquisitions and strategic alliance.
Purposes behind Growth Strategy:
- Increase in sales revenues
- Increase in earnings or profits
- Other performance measures
- Increasing clients served or patrons attracted
- Broadening the geographic area
- Increasing programs offered
Types of Strategic options under growth Strategy:
i. Concentration Strategy:
A growth strategy where the firm concentrates on its primary line of business .It looks for ways to meet its growth objectives through increasing its level of operation in this primary business. It directs all its resources to the profitable growth of a single product, in a single market with a single dominant technology. Two basic concentration strategies are vertical integration and horizontal integration.
- Vertical Integration: When a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier (Backward integration) and/or distributor (Forward Integration). Vertical integration can help companies reduce costs and improve efficiency by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated.
- Horizontal Integration: The acquisition of additional business activities that are at the same level of the value chain in similar or different This can be achieved by internal or
external expansion. Because the different firms are involved in the same stage of production, horizontal integration allows them to share resources at that level.
Expanding the firm's operations through combining with competitors operating in the same industry & doing the same things.
ii. Diversification Strategy:
A risk reduction strategy that involves adding product, services, location, customers and market to company’s portfolio.
- Concentric (Related) Diversification: concentric diversification strategy allows a company to add similar products to an already successful line of business. For example, a computer manufacturer that produces personal computers begins to produce laptop computers. The technical knowledge necessary to accomplish the new task comes from its current field of skilled employees
- Conglomerate (unrelated) Diversification: It is related to Diversifying into completely different industry from the firm’s current operations. When companies engage in conglomerate diversification strategies, they are often looking to enter a previously untapped market. Companies can do this by purchasing or merging with another company in the desired industry. Moving into a totally unrelated industry is often highly dangerous; as the company’s current management is unfamiliar with the new industry.
Advantages and Disadvantages of Growth Strategy: Advantages:
- Market power of the organization increase due to growth of product and market.
- It ensures strategic advantage to the organization through high production and long experience.
- High degree of profit potential from the untapped market.
- Suitable for highly competitive and dynamic markets.
- Focusing other product lines and market may deplete the current product lines productivity.
- In absence of knowledge of product market ‚growth strategy may be high risky.
- May not fulfill growth requirement from current available resources and competencies.
3. Retrenchment Strategy:
Retrenchment strategy is a strategy used by corporate in order to reduce the diversity or to cut the overall size of the operations of the company. This strategy is often used to cut down expenses with the goal of becoming more financially stable business. Typically the strategy involves withdrawing from certain markets or the discontinuation of selling certain products or services in order to make a beneficial turn around.
Types of Strategic options under retrenchment strategy:
- Turnaround strategy: This strategy focuses on regrouping and restructuring the organizational functioning to reduce cost & asset to reverse declining sales.
- Divesture: The partial or full disposal of a business unit through sale, exchange, closure or bankruptcy. Divestiture may result from a management decision to no longer operate a business unit because it is not part of a core competency. It may also occur if a business unit is deemed redundant (unnecessary) after a merger or acquisition.
- Liquidation: A liquidation strategy involves selling a company, in its entirety or in parts, for the value of its assets. Many small business owners exit their businesses through This strategy is mostly adopted by companies in distress. To make any money with such an exit strategy, the business should have valuable assets to sell, such as land or expensive equipment, and profits from selling assets have to go to pay creditors first. The selling under this strategy is not as a going concern but in salvage value to escape further hardship.
Advantages and Disadvantages of retrenchment strategy: Advantages:
- Suitable for highly uncertain business environment.
- It is helpful in securing the organization form deep crisis.
- Restructuring under retrenchment may revitalize the organization and may lead to achieving higher productivity.
- Gives the organization a sense of failure.
- Ineffective to meet the customer demands.
- Employees and management may fear of losing jobs and may not show expected behaviors in the jobs.
- Depreciate public image
4. Combination strategy:
Combination grand strategy is followed when an organization adopts a mixture of stability, expansion and retrenchment, either at the same time, in its different business or at the different time in the same business with the aim of improving it performances. The organization has several strategy business units (SBU). It simultaneously uses combinations of stability, expansion and retrenchment strategies to different parts of the organization. Old products, markets and functions are continued, dropped and expanded. Product lifecycles are in different stages. The aim is to improve performance. The combination can be simultaneous sequential or both.
Business Level Strategy:
Business level strategy attempts to gain competitive advantage by exploiting core competences in specific product market. The main objectives of business strategies are:
- To fulfill customer needs and attract them.
- To reduce competitive pressure
- To enhance market position by increasing market share.
The different strategic alternatives available at business level may be studied in two ways.
- Porter’s Competitive Strategies
- Strategic Clock Oriented Market based Generic
Porter’s Generic/Competitive Strategies: Porter’s Generic Strategies is a frameworks used to outline the three major strategic options open to organizations that wish to achieve a sustainable competitive advantage. Each of the three options needs to be considered within the context of two aspects of the competitive environment. Firstly, the sources of competitive advantage which establish whether the products are differentiated in any way, or if they are the lowest cost producer in the industry. Secondly, the competitive scope of the market determines if the company targets a wide market or if it focuses on a very narrow niche market.
a. Low Cost Strategy: In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost
leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.
Ways of Reducing Costs: There are two ways to reduce cost
- Controlling Cost Drivers
- Economics of scale
- Cost key resources ( strong bargaining power)
- Resource sharing
- Capacity utilization
- Being first mover (introducing new product )
- Integration (forward and backward)
- Revamping ( improving) Value Chain:
- Make greater use of Internet technology application.
- Use direct –to-end-user sales marketing methods.
- Simplify product design
- Offer basic, no frills (unnecessary ) product /services
- Shift to a simpler, less capital-intensive or more flexible technological process
- Find the way to bypass use of high-cost raw materials
- Relocate facilities closer to suppliers or customers.
- Drop “something for everyone” approach and focus on a limited product /service.
Conditions for the best use of low cost strategies:
- High price competition
- Identical products and sufficient suppliers
- Price sensitive customers
- Low switching cost
- Most buyers use the product in the same way
- Bargaining power of buyer
- New entrants with low introductory price
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it-self to meet those needs. It is rewarded for its uniqueness with a premium price. The downside to this strategy is that these unique features will eventually be copied by the competition or customers could change their tastes and options, so there is a constant pressure to innovate and continuously improve.