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There are three types of organizational strategies; corporate, business and functional. |
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Top managers typically are responsible for corporate strategies, middle level managers for business or competitive strategies, and lower level managers for the functional strategies. |
Corporate Strategy
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Corporate strategy is seen as a strategy that determines what businesses a company is in, should be in, or wants to be in, and what it wants to do with those businesses. |
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It is based on the mission and goals of the organization and the roles that each business unit if the organization will play. |
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There are three main types of corporate strategies: |
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Growth. |
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A growth strategy is used when an organization wants to grow and does so by expanding the number of products offered or markets served, either through its current businesses or through new businesses. |
7.4 Types of Organizational Strategies
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As a result of its growth strategy, the organization may increase sales revenues, number of employees, market share, or other quantitative measures. |
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Organizations grow by using concentration, vertical integration, horizontal integration or diversification: |
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Growth through concentration is achieved when an organization concentrates on its primary line of business and grows by increasing the number of products offered or markets served in this primary business, that is, the company chooses to grow by increasing its own business operations. |
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Growth through vertical integration can be done either backward, forward or both. In backward vertical integration, the organization attempts to gain control of its inputs by becoming its own supplier. In forward vertical integration, the organization gains control of its outputs by becoming its own distributor. In horizontal integration, a company grows by combining with other organization in the same industry, that is, its competitors. |
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An organization can also grow through diversification, either related or unrelated. |
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Related diversification is when a company grows by combining with firms in different, but related, industries. |
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Unrelated diversification is when a company grows by combining with firms in different and unrelated industries. |
7.4 Types of Organizational Strategies
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Stability |
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A stability strategy is a seen as a corporate strategy characterized by an absence of significant change in what the organization is currently doing. |
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The organization does not grow but it does not fall behind either. |
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This strategy is suitable for an organization when the industry is in a period of upheaval with external forces drastically changing and making the future uncertain. |
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Another situation is when the industry is facing slow or no growth opportunities. |
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Renewal. There are two types of renewal strategies. |
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A retrenchment strategy is a short run renewal strategy used in situations when performance problems are not serious. When an organization is facing minor performance setbacks, a retrenchment strategy helps it stabilize operations. |
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A turnaround strategy is a renewal strategy for times when the organization's performance problems are more critical. A turnaround strategy typically involves a more extensive use of cost cutting and organizational operations restructuring. |
7.4 Types of Organizational Strategies
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Corporate Portfolio Analysis |
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When an organization's corporate strategy involves a number of businesses, managers can manage this collection, or portfolio, of businesses using a corporate portfolio matrix. |
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BCG Matrix is a portfolio matrix, which was developed by the Boston Consulting Group. |
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An organization's various businesses could be evaluated and plotted using a 2x2 matrix to identify, which ones are offered high potential and which were a drain on organizational resources. |
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The horizontal axis indicates market share, which was evaluated as either low or high; and the vertical axis indicates anticipated market growth, which also was evaluated as either low or high. |
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Based on its evaluation, the business was placed in one of four categories: |
7.4 Types of Organizational Strategies
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Cash Cows (low market growth, high relative market share). Businesses generate large amounts of cash but their prospects for future growth are limited. |
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Stars (high market growth, high relative market share). Businesses are in fast-growing market, and hold a dominant share of that market. Their contribution to cash flow depends on their need for resources. |
7.4 Types of Organizational Strategies
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Question Marks (high market growth, low relative market share). These businesses are in an attractive industry but hold a small market share percentage. |
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Dogs (low market growth, low relative market share). Businesses do not produce, or consume much cash. However, they hold no promise for improved performance. |
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A corporate portfolio matrix, such as the BCG matrix, can be a useful strategic management tool. |
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It provides a framework for understanding diverse businesses and helps managers establish priorities for making resources allocation decisions. |
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Relative market share refers to the business's market share relative to the leader in the industry. |
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For instance, the business market share is 10% and the leader of the industry's market share is 50%, then the relative market share is 0.1. |
Business Strategy
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A business strategy is a strategy focused on how an organization will compete in each of its businesses. |
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For a small organization in only one line of business or a large organization that has not diversified into different products or markets, the competitive strategy simply describes how the company will compete in its primary or main market. |
7.4 Types of Organizational Strategies
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For organizations in multiple businesses, however, each business will have its own competitive strategy that defines its competitive advantage, the products or services it will offer, the customers it want to reach and the like. |
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When an organization is in several different businesses, these single businesses that are independent and formulate their own strategies are often called strategic business units or SBUs. |
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Competitive advantage is what sets an organization's core competencies, which come from doing something that others cannot do or doing it better than others can do it. |
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It is not enough for an organization simply to create a competitive advantage; it must be able to sustain it. |
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Michael Porter suggests doing an industry analysis. |
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In any industry, five competitive forces dictate the rules of competition. |
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They determine industry attractiveness and profitability: |
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Threat of new entrants. How likely it is that new competitor will come into the industry? |
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Threat of substitutes. How likely is it that other industries' products can be substituted for out industry's products? |
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Bargaining power of buyers. How much bargaining power do buyers have? |
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Bargaining power of suppliers. How much bargaining power do suppliers have? |
7.4 Types of Organizational Strategies
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Current rivalry. How intense is the rivalry among current industry competitors? |
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Once managers have assessed the five forces and determine any threats and opportunities, they are ready to select an appropriate competitive strategy, which is one that fits the competitive strengths of the organization and the industry it is in: |
7.4 Types of Organizational Strategies
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Cost leadership |
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This is chosen when an organization competes on the basis of having the lowest costs in its industry. |
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A low cost leader aggressively searches out efficiencies in production, marketing, and other areas of operation. |
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Overhead is kept to a minimum, and the firm does everything it can to cut costs. |
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Differentiation |
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This is chosen when a company competes by offering unique products that are widely valued by customers. |
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Sources of differentiation might be exceptionally high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand imaging. |
7.4 Types of Organizational Strategies
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Focus |
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This is chosen when a company select a market segment in an industry and attempt to exploit it rather than serve the broad market. |
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It involves a cost advantage (cost focus) or a differentiation advantage (differentiation focus). |
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Segments can be based on product variety, type of end buyer, distribution channel, or geographical location of buyers. |
Functional strategy
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Functional strategies are the strategies used by an organization's various functional departments to support business or competitive strategy. |
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Specific functional strategies are not covered in this course as they are covered in other business courses you take. |