M.B.A IV Semester Course 401
STRATEGIC MANAGEMENT
LESSONS 1 TO 10
By. Anupama
INTERNATIONAL CENTRE FOR DISTANCE EDUCATION
AND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY,
GYAN PATH, SUMMERHILL, SHIMLA-171005
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M.B.A IV Semester Course 401
STRATEGIC MANAGEMENT
LESSONS 1 TO 10
By. Anupama
INTERNATIONAL CENTRE FOR DISTANCE EDUCATION
AND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY,
GYAN PATH, SUMMERHILL, SHIMLA-
CONTENTS
- SYLLABUS SR. NO. TOPIC PAGE NO. - Lesson – 1 Strategic Management: An Introduction
- Lesson – 2 Formulation of Business Level Strategies
- Lesson – 3 Formulation of Corporate Level Strategies
- Lesson – 4 Organisational Appraisal
- Lesson – 5 Resource Allocation
- Lesson – 6 Patterns Of Leadership
- Lesson – 7 Strategic Analysis and Selection
- Lesson – 8 Implementation of Strategy
- Lesson – 9 Structural and Behavioural Implementation of Strategy
- Lesson – 10 Evaluation and Control
- Assignments
Recommended Books:
- Hamel E. Prahalad C.K., Competing for the future, Harward Business School Press : Boston, MA.
- H. Lgor Ansoff, Corporate Strategy, Tata McGraw Hill.
- Simul C. Carto & J. Paul Peter, Strategic Management-A Focus on Process, McGraw Hill International Edition.
- C. Appa Rao, B Parvathiswara Rao and K. Srivaramakrishna, Strategic Management and Business Policy, Excel Books, Delhi.
- George Luffman, Edward Lea, Staurt Sanderson and Brian Kenny, Strategic Management & Business Policy, Person Education, Delhi.
- Thomas L. Wheetan, J, David Hunger and Krish Rangarajan, Strategic Management & Business Policy, person Education, Delhi.
- Ahzar Kazmi, Business Policy and Strategic Management, Tata McGraw hill, New Delhi.
- Lawrence R. Jauch, Gupta Rajeev, Willian F. Glueck, Business Policy & Strategic Management, Frank Bros. & Co., Delhi.
Lesson – 1
Strategic Management: An Introduction
STRUCTURE
1.0 Introduction 2.0 Lesson Objectives 3.0 Presentation of Contents 3.1 Nature and Concept of Strategy 3.2 Two Approaches to Strategy 3.3 Elements of Strategy 3.4 Strategic Management 3.5 Strategic Planning and Decision Making 3.6 Importance of Strategic Management 3.7 Process of Strategic Management 3.8 The Growth Vector 3.9 Mission Statements 4.0 Summary 5.0 Glossary 6.0 Answers to Self Check Exercise 7.0 Terminal Questions 8.0 References/Suggested Readings 1.0 Introduction Strategy and Strategic Management are the prominent words used often in today’s business world. Strategy refers to decisions bearing on the future of an enterprise defining its direction and scope in long run. While shaping the future of an organization, strategic decisions often mould the organizational activities and deciding whether the organization will continue to be in the same line of business. Strategic management is the process which deals with fundamental organizational renewal and growth with the development of the strategies, structures and systems necessary to achieve such renewal and growth, and with the organizational systems needed to effectively manage the strategy formulation and implementation processes.
2.0 Lesson Objectives:
Ø Explain the meaning and approaches to strategy. Ø To describe the central concept of decision making of strategic planning. Ø To describe the process of strategic management. Ø To explain the concept of mission statement.
plan redundant, creativity is buried beneath the weight and protocols of planning and communication rules. Furthermore, those not involved in devising the plan are never committed to its implementation. The second approach emphasizes speed of reaction and flexibility to enable the organization to function best in an environment that is fast-changing and essentially unpredictable. The essence of strategy, according to this view, is adaptability and incrementalism. This approach has been criticized for failing to give an adequate sense of where the organization is going and what its mission is. Critics speak disparagingly of the ‘mushroom’ approach to management. (Place in a dark room, shovel manure/money on the seeds, close the door, wait the it to grow!). 3.3 Elements of Strategy Definitions of strategy have their roots in military strategy, which defines itself in terms of drafting the plan of war, shaping individual campaigns and, within these deciding on individual engagements (battles/ skirmishes) with the enemy. Strategy in this military sense is the art of war, or, more precisely, the art of the general – the key decision maker. The analogy with business is that business too is on a war footing as competition becomes more and more fierce and survival more problematic. Companies and armies have much in common. They both, for example, pursue strategies of deterrence, offence, defense and alliance. One can think of a well developed business strategy in terms of probing opponents’ weaknesses: with drawing to consider how to act, given the knowledge of the opposition generated by such probing: forcing opponents to stretch their resources: concentrating one’s own resources to attack an opponent’s exposed position; overwhelming selected markets or market segments: establishing a leadership position of dominance in certain markets: then regrouping one’s resources. Deciding where to make the next thrust: then expanding from the base thus created to dominate a broader area.
Strategic thinking has been much in influenced by military thinking about ‘the strategy hierarchy’ of goals, policies arid programmes. Strategy itself sets the agenda for future action, strategic goals state what is to be achieved and when (hut not how), policies set the guidelines and limits for permissible action in pursuit of the strategic goals, and programmes specify the step-by-step sequence of actions necessary to achieve major objectives and the timetable against which progress can be measured. A well defined strategy integrates organizations major plans, objectives, policies and programmes and commitments into a cohesive whole. It marshals and allocates limited resources in the best way, which is defined by an analysis of a firm’s unique strengths and weaknesses and of opportunities and threats in the environment. It considers how to deal with the potential actions of intelligent opponents.
Management is defined both in terms of its function as those activities that serve to ensure that the basic objectives of the enterprise, as set by the strategy, are achieved, arid as a group of senior employees responsible for performing this function. Our working definition of strategic management is as billows: all that is necessary to position the firm a way that will assure its long–term survival in a competitive environment. A strategy is an organization’s way of saying how it creates unique value arid thus attracts the custom that is its lifeblood.
3.4 Strategic Management
Strategic management is a process that includes analysis of organizational environment by the top management. It is a set of decisions and actions that results in the formulation of a strategy and the plan for implementing and controlling the strategy that is designed to achieve the objectives of the organization. It thus determines the long run performance of an organization.
Strategic management may be defined as “the formulation and implementation of plans and carrying out of activities relating to the matters which are of vital, pervasive, or continuing importance to the total organization”. 3.4.1 Strategic Planning and Decision Making Strategic planning refers to the formulation of a verified, comprehensive and integrated planned aimed at relating the strategic advantages of the firm to the challenges of the environment. It is a concerned with appraising the environment in relation to the company, identifying the strategies to obtain sanction for one of the alternatives to be interpreted and communicated in an operationally useful manner. Thus, strategic planning provides the framework within which future activities of the company are expected to be carried out. It contributes positively to the performance of enterprises. Strategic decision making is the prominent task of the senior management. Decision making in performing strategic tasks is, therefore, an extremely difficult, complicated and at times, intriguing and enigmatic process. Decision makers are unable to describe the exact manner in which strategic decisions are made. Strategic decisions are associated with several fields of organizational operations and call for obligation of the organization to long term activities that aim the operation of substantial resources. These decisions have a impact on the organization’s prospective growth and success. This is a challenging dimension that involves real time issues. The organization should therefore remain flexible and prepared to make strategic decisions at any point of time.
3.4.2 Importance of strategic management:
The process of strategic management has become significant because of several other benefits: (i) Financial Benefits : The impact of strategic management is primarily that of improved financial performance in terms of profit. The growth of firms with a developed strategic management system has a major impact on both planning and implementation of future strategies. (ii) Improved Ability to prevent problems: This is likely to result from encouraging and rewarding subordinate attention of planning considerations and managers being assisted in their monitoring and forecasting role by employees who are altered to the needs of strategic planning. (iii) Improved quality of strategic decisions through group Incentives: The process of group interaction for decision making helps in generating alternative strategies. It also helps in better screening of options due to specialized perspectives of group members. Thus the best alternatives are selected and pursued effectively. (iv) Better Employee Incentive: Participation of employees or their representatives in strategy formulation leads to a better understanding of the priorities. Also they appreciate the link between productivity on their part and its subsequent rewards that is inbuilt in a strategic plan. Thus goal-directed behaviour is likely to follow the incentives. (v) Reduced gaps and overlaps in activities: With strategy formulation there is better understanding of the responsibilities of individuals and groups. This helps in a clear role identification by the employees which reduces the gaps and overlaps in the activities of groups and individuals. 3.4.3 Process of Strategic Management: The process of strategic decision making leads to the formulation and implementation of a chosen strategy that is strategic management. Figure 1.1 shows the various strategic issues.
If change is the order of the day, then two issues need to be addressed: environmental (external) analysis and organizational (internal) analysis. (Remember, this is the ideal was of proceeding. In practice, managers may adopt only a partial solution and analyze only external or internal factors.) For a change of strategy to work there must be alignment between internal capability and external opportunity. This is described as ‘strategic fit’. The ideal situation is where there is a fit between the environment, a business need arising out of that environment that is strongly felt by a firm that has the sense of purpose ( mission ) and a management system that enables it to respond to this need with a coherent and practicable strategy. The potential to act in this way depends upon managerial judgment, managerial skill to exploit windows of opportunity and management ability to motivate other employees to support and commit themselves to the firm’s new strategic objectives.
The analysis of the environment can be segmented into four interactive elements. There is the issue of the firm’s general environment , the broad environment comprising a mix of general factors such as social and political issues. Then there is the firm’s operating environment , its more specific industry/business environment. What kind of industry is the firm competing in? What ‘Forces’ make up its ‘industry structure’? Having examined its business environment, the issue then arises: how is the firm to compete in its industry? What is to he the unique source of its competitive positioning that will give it an edge over its competitors? Will it go for a broad market position, competing on a variety of fronts, or will it look for niches? Will it compete on the basis of cost or on the basis of added value, differentiating its products and charging a premium? What is the range of options that managers have to choose from? How are they to prioritize between these options? Does the company have strategic vision, a strong sense of mission, a ‘reason for being’ that distinguishes it from others? If change is necessary, what is to be the firm’s direction for development? Having identified the major forces affecting its environment how is the firm to approach the future?
Organizational analysis can also be thought of as fourfold. How is the firm organized? What is the structure of the organization, who reports to whom, how are the tasks defined, divided and integrated? How do the management systems work, the processes that determine how the organization gets things done flout day to day – for example, information systems, capital budgeting systems, performance measurement systems, quality systems? What do organizational members believe in, what are they trying to achieve, what motivates them, what do they value? What is the culture of the organization? What are the basic beliefs of organizational members? Do they have a shared set of beliefs about how to proceed, about where they are going, about how they should behave? We know, thanks to Peters and Waterman’s In Search of Excellence that the basic values, assumptions and ideologies (systems of belief) which guide and fashion behaviour in organizations have a crucial role to play in business success (or failure). What resources does the organization have at its disposal – for example, capital, technology and people?
Management’s role is to try to ‘fit’ the analysis of externalities and internalities, to balance the organizations strength and weaknesses in the light of environmental opportunities and threats. A concept that bridges internal and external analyses is that of stakeholders, the key groups whose legitimate interests have to be borne in mind when taking strategic decisions. These can be internal groups, such as managers themselves and employees, or the owners of the firm, shareholders. They can also be external groups: the stock market if it is a quoted company, banks, consumers, the government.
Senior management’s task is to try and align the various interest groups in arriving at its chosen strategy in the light of the creation of an appropriate strategic vision for the organization. Increasingly important here is the issue of corporate responsibility, how the organization defines and acts upon its sense of responsibility
to, its stakeholders. The broad responsibility to society at large is important here in, for example, such areas as ‘green’ (ecological) issues. Sometimes the various interest groups may be at odds with each other and management will have to perform a delicate political balancing act between them. Having chosen a strategy, there is the issue of implementation. Very few schemes go totally (or even approximately) according to plan. The business environment changes new issues emerge — green ones, for example. Some demand to be taken op board so that in many, perhaps the majority of cases emergent strategy asserts itself to the extent that the realized strategy differs markedly from the chosen/planned strategy. In time, the realized strategy becomes a part of the firm’s strategic history…. .. and the strategy process continues.
3.5 The Growth Vector
Strategic management involves decisions concerning what a company might do, given the opportunities in its environment: what it can do given the resources at its disposal: what it wants to do, given the personal values and aspirations of key decision makers: and what it should do, given the ethical and legal context in which it is operating. A firm needs a well defined sense of where it is going in the future and a firm concept of the business it is in. We can think of these in terms of the firm’s ‘product—market scope’ and ‘growth vector’. This specifies the particular products or services of the firm and the market(s) it is seeking to serve. A firm’s ‘growth vector’ defines the direction in which the firm is moving with respect to its current product— market scope. The key components of the ‘growth vector’ are set out in figure 1.2. One qualification is necessary here. The use of the growth vector assumes that the firm is indeed growing. This is obviously not always the case, and strategic decision making may therefore involve downsizing and withdrawal from some areas of business.
Figure 1.2 Product, mission and market choices.
The growth vector illustrates the key decisions concerning the directions in which a firm may choose to develop. Market penetration comes about when the firm chooses as its strategy to increase its market share for its present product markets. If the firm pursues product development it sets out to develop new products to complement or replace its current offerings while staying in the same markets. It retains its current mission in the sense of continuing to attempt to satisfy the same or related consumer needs in market development the firm searches for new markets with its existing products. If a strategy of diversification is chosen, the firm has decided that its product range and market scope are no longer adequate, and it actively seeks to develop new kinds of products for new kinds of markets.
Product
Mission
Present New
Present Market
penetration
Product
development
New Market
development
Diversification
4.0 Summary:
Strategic management is an integrated process that aims at the overall growth and development of an organization. It is an activity that requires planning through strategic decisions by the organizational management. Although, it would be a part of decision making process of operating live and staff managers. Strategic decision is related to decision concerning the scope of the organization and the internal skills and resources required to achieve the scope. This needs the selection and execution of a sound strategic decision that can influence major investment patterns.
A strategy operates at several levels. Corporate level strategic management is the management of activities, which define the overall character and mission of the organization, whereas business level strategic management includes policies involving new product development marketing mix research of development, personnel etc. The strategic management process is simplified and performed effectively by a strategist, someone who is expert in developing and implement strategies. He enacts the ultimate organizational purpose of growth and success through a variety of roles in the form of forecaster, guru etc.
5.0 Glossary
Strategy: a plan of action designed to achieve a long-term or overall aim Diversification: the process of a business enlarging or varying its range of products or field of operation
6.0 Answers to Self Check Exercise
Ans.1 Refer to section 3. Ans.2 Refer to section 3. Ans.3 Refer to section 3.
7.0 Terminal Questions:
Q.1 Define the term strategy and explain its scope and importance. Q.2 What is strategic management? Explain its significance in decision making. Q.3 Give the various steps involved in the strategic management process. Q.4 Discuss the issues that are relevant for strategic decision making. Q.5 Explain various approaches of strategy.
8.0 Suggested Readings
Ø Sharplin, A. 1985 “Strategic Management” McGrew Hill Book Company, New York. Ø Azhar Kazmi, “Business Policy and Strategic Management,” Tata McGrew Hill. Ø Ghosh, P.K., “Strategic Planning and Management” Sultan Chand and Sons, New Delhi. Ø David, F.R., “Strategic Management” Prentice Hall, New Jersey. Ø Prasad, L.M., “Business Policy : Strategic Management”.
Lesson-
Formulation of Business Level Strategies
STRUCTURE
1.0 Introduction 2.0 Lesson Objectives 3.0 Presentation of contents 3.1 Strategy Formulation 3.2 Strategy Formulation Process 3.2.1 Environment Scanning 3.2.2 Continuous Implementation 3.2.3 Values Assessment 3.2.4 Strategy Design 3.2.5 Performance Audit Analysis 3.2.6 Gap Analysis 3.2.7 Action Plan Development 3.3 Business-Level Strategies 3.4 Analysis of Business-Level Strategies 3.4.1 Overall Cost Leadership 3.4.2 Differentiation 3.4.3 Niche Strategy 3.5 Important factors for Formulation Business Strategies 3.5.1 Timing Factor 3.5.2 Market Location Factors 4.0 Summary 5.0 Glossary 6.0 Answers to Self Check Exercise 7.0 Terminal Questions 8.0 References/Suggested Readings
1.0 Introduction
Business strategies are the courses of action adopted by a firm for each of its business separately to serve identified customer groups and provide value to the customer by a satisfaction of their needs. Thus, business strategies deal with the strategies that will be used by the individual business within the organization. The real action occurs at the level of business strategies as the competitive forces in the market are confronted by a firm at the formulation level of business strategies.
3.2.3 Values Assessment All business decisions are fundamentally based on some set of values, whether they are personal or organizational values. The implication here is that since the strategic plan is to be used as a guide for daily decision making, the plan itself should be aligned with those personal and organizational values. To delve even further, a values assessment should include an in-depth analysis of several elements: personal values, organizational values, operating philosophy, organization culture, and stakeholders. This allows the planning team to take a macro look at the organization and how it functions as a whole. Strategic planning that does not integrate a values assessment into the process is sure to encounter severe implementation and functionality problems if not outright failure. Briefly put, form follows function; the form of the strategic plan must follow the functionality of the organization, which is a direct result of organizational values and culture. If any party feels that his or her values have been neglected, he or she will not adopt the plan into daily work procedures and the benefits will not be obtained. 3.2.4 Strategy Design This section of strategy formulation involves the preliminary layout of the detailed paths by which the company plans to fulfill its mission and vision. This step involves four major elements: identification of the major lines of business (LOBs), establishment of critical success indicators (CSIs), identification of strategic thrusts to pursue, and the determination of the necessary culture. A line of business is an activity that produces either dramatically different products or services or that are geared towards very different markets. When considering the addition of a new line of business, it should be based on existing core competencies of the organization, its potential contribution to the bottom line, and its fit with the firm’s value system. 3.2.5 Performance Audit Analysis Conducting a performance audit allows the organization to take inventory of what its current state is. The main idea of this stage of planning is to take an in-depth look at the company’s internal strengths and weaknesses and its external opportunities and threats. This is commonly called a SWOT analysis. Looking internally, there several key areas that must be analyzed and addressed. This includes identifying the status of existing line of business and unused resources for prospective additions; identifying the status of current tracking systems defining the organization’s strategic profile; listing the available resources for implementing the strategic thrusts that have been elected for achieving the newly defined mission: and an examining the current organizational culture. The external investigation should look closely at competitors, suppliers, markets and customers, economic trends, labor-market conditions, and governmental regulations. In conducting this query, the information gained and used must reflect a current state of affairs as well as directions for the future. The result of a performance audit should be the establishment of a performance gap, that is, the resultant gap between the current performances of the organization in relation to its performance targets. To close this gap, the planning team must conduct what is known as a gap analysis, the next step in the strategic planning process.
3.2.6 Gap Analysis
A gap analysis is a simple tool by which the planning team can identify methods with which to close the identified performance gap(s). All too often, however, planning teams make the mistake of making this step much more difficult than need be. Simply, the planning team must look at the current state of affairs and the desired future state. The first question that must be addressed is whether or not the gap can feasibly be
closed. If so, there are two simple questions to answer: “What are we doing now that we need to stop doing?” and “What do we need to do that we are not doing?” In answering these questions and reallocating resources from activities to be ceased to activities to be started, the performance gap is closed. If there is doubt that the initial gap cannot be closed, then the feasibility of the desired future state must be reassessed. 3.2.7 Action Plan Development This phase of planning ties everything together. First, an action plan must be developed for each line of business, both existing and proposed. It is here that the goals and objectives for the organization are developed. Goals are statements of desired future end-states. They are derived from the vision and mission statements and are consistent with organizational culture, ethics, and the law. Goals are action oriented, measurable, standard setting, and time bounded. In strategic planning, it is essential to concentrate on only two or three goals rather than a great many. The idea is that a planning team can do a better job on a few rather than on many. There should never be more than seven goals. Ideally, the team should set one, well- defined goal for each line of business.
Writing goals statements is often a tricky task. By following an easy-to-use formula, goals will include all vital components.
Ø Accomplishment/target Ø A measure (e.g., sales on the East Coast) Ø Standards (e.g., number one) Ø Time frame (e.g., long-term) Objectives are near-term goals that link each long-term goal with functional areas, such as operations, human resources, finance, etc., and to key processes such as information, leadership, etc. Specifically, each objective statement must indicate what is to be done, what will be measured, the expected standards for the measure, and a time frame less than one year (usually tied to the budget cycle). Objectives are dynamic in that they can and do change if the measurements indicate that progress toward the accomplishment of the goal at hand is deficient in any manner. Simply, objectives spell out the step-by-step sequences of actions necessary to achieve the related goals.
With a thorough understanding of how these particular elements fit and work together, an action plan is developed. If carefully and exactingly completed, it will serve as the implementation tool for each established goal and its corresponding objectives as well as a gauge for the standards of their completion. 3.3 Business-Level Strategies Business-level strategies are similar to corporate-strategies in that they focus on overall performance. In contrast to corporate-level strategy, however, they focus on only one rather than a portfolio of businesses. Business units represent individual entities oriented toward a particular industry, product, or market. In large multi-product or multi-industry organizations, individual business units may be combined to form strategic business units (SBUs). An SBU represents a group of related business divisions, each responsible to corporate head-quarter for its own profits and losses. Each strategic business unit will likely have its own competitors and its own unique strategy. A common focus of business-level strategies are sometimes on a particular product or service line and business-level strategies commonly involve decisions regarding individual products within this product or service line. There are also strategies regarding relationships between products. One
A second alternative is to price lower than competitors and accept slimmer gross profit margins, with the goal of gaining market share and thus increasing sales volume to offset the decrease in gross margin. Such strategies concentrate on construction of efficient-scale facilities, tight cost and overhead control, avoidance of marginal customer accounts that cost more to maintain than they offer in profits, minimization of operating expenses, reduction of input costs, tight control of labor costs, and lower distribution costs. The low-cost leader gains competitive advantage by getting its costs of production or distribution lower than the costs of the other firms in its relevant market. This strategy is especially important for firms selling unbranded products viewed as commodities, such as beef or steel.
Cost leadership provides firms above-average returns even with strong competitive pressures. Lower costs allow the firm to earn profits after competitors have reduced their profit margin to zero. Low-cost production further limits pressures from customers to lower price, as the customers are unable to purchase cheaper from a competitor. Cost leadership may be attained via a number of techniques. Products can be designed to simplify manufacturing. A large market share combined with concentrating selling efforts on large customers may contribute to reduced costs. Extensive investment in state-of-the-art facilities may also lead to long run cost reductions. Companies that successfully use this strategy tend to be highly centralized in their structure. They place heavy emphasis on quantitative standards and measuring performance toward goal accomplishment.
Efficiencies that allow a firm to be the cost leader also allow it to compete effectively with both existing competitors and potential new entrants. Finally, low costs reduce the likely impact of substitutes. Substitutes are more likely to replace products of the more expensive producers first, before significantly harming sales of the cost leader unless producers of substitutes can simultaneously develop a substitute product or service at a lower cost than competitors. In many instances, the necessity to climb up the experience curve inhibits a new entrant’s ability to pursue this tactic.
3.4.2 Differentiation
Differentiation strategies require a firm to create something about its product that is perceived as unique within its market. Whether the features are real, or just in the mind of the customer, customers must perceive the product as having desirable features not commonly found in competing products. The customers also must be relatively price-insensitive. Adding product features means that the production or distribution costs of a differentiated product will be somewhat higher than the price of a generic, non differentiated product. Customers must be willing to pay more than the marginal cost of adding the differentiating feature if a differentiation strategy is to succeed.
Differentiation may be attained through many features that make the product or service appear unique. Possible strategies for achieving differentiation may include warranty (Sears tools have lifetime guarantee against breakage), brand image (Coach Handbags, Tommy Hilfiger sportswear), technology (Hewlett-Packard laser printers), features (Jenn-Air ranges. Whirlpool appliances), service (Makita hand tools), and dealer network (Caterpillar construction equipment), among other dimensions. Differentiation does not allow a firm to ignore costs; it makes a firm’s products less susceptible to cost pressures from competitors because customers see the product as unique and are willing to pay extra to have the product with the desirable features.
Differentiation often forces a firm to accept higher costs in order to make a product or service appear unique. The uniqueness can be achieved through real product features or advertising that causes the customer to perceive that the product is unique. Whether the difference is achieved through adding more
vegetables to the soup or effective advertising, costs for the differentiated product will be higher than for non- differentiated products. Thus, firms must remain sensitive to cost differences. They must carefully monitor the incremental costs of differentiating their product and make certain the difference is reflected in the price. 3.4.3 Niche Strategy Focus, the third generic strategy, involves concentrating on a particular customer, product line, geographical area, channel of distribution, stage in the production process, or market niche. The underlying premise of the focus strategy is that the firm is better able to serve its limited segment than competitors serving a broader range of customers. Firms using a focus strategy simply apply a cost-leader or differentiation strategy to a segment of the larger market. Firms may thus be able to differentiate themselves based on meeting customer needs through differentiation or through low costs and competitive pricing for specialty goods. A focus strategy is often appropriate for small, aggressive businesses that do not have the ability or resources to engage in a nation-wide marketing effort. Such a strategy may also be appropriate if the target market is too small to support a large-scale operation. Many firms start small and expand into a national organization. Wal-Mart started in small towns in the South and Midwest. As the firm gained in market knowledge and acceptance, it was able to expand throughout the South, then nationally, and now internationally. The company started with a focused cost-leader strategy in its limited market and was able to expand beyond its initial market segment. Firms utilizing a focus strategy may also be better able to tailor advertising and promotional efforts to a particular market niche. Many automobile dealers advertise that they are the largest-volume dealer for a specific geographic area. Other dealers advertise that they have the highest customer-satisfaction scores or the most awards for their service department of any dealer within their defined market. Similarly, firms may be able to design products specifically for a customer. Customization may range from individually designing a product for a customer to allowing the customer input into the finished product. Tailor-made clothing and custom-built houses include the customer in all aspects of production from product design to final acceptance. Key decisions are made with customer input. Providing such individualized attention to customers may not be feasible for firms with an industry-wide orientation. 3.5 Important factors for Formulation Business Strategies A tactic is a sub strategy. It is “a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action. By their nature, tactics are narrower in their scope and shorter in their time horizon than are strategies. We shall consider here the two tactics of timing (when) and market location (where) used in formulating and implementing business strategies. 3.5.1 Timing Factor When to make a business strategy move is often as important as what move to make. It is here that the timing of the application of a business strategy becomes important. A business strategy of low-cost or differentiation may be essentially a right move but only if it is made at the right time. The first company to manufacture and sell a new product or service is called the pioneer or the first- mover firm. The firms which enter the industry subsequently are late-mover firms. Sometimes an intermediate category of second-movers is also considered to include those firms which react immediately to the first- movers. Each industry has its first-movers, second-movers and late-movers. Our discussion here will, however, be limited to the first-movers and the late-movers only, as second-howsoever quick they might be to react, are in any case late-movers.