What is Strategy? Definition, Levels, Process of Formation

What is Strategy?

Strategy is defined as a plan of action to achieve a set of pre-determined and specific goals. The word strategy originates from the Greek word ‘Strategia’, meaning a military general.

There is no definite meaning given to strategy, as various authors have defined the term “strategy” in different ways.

Strategy Definition

According to Henry Mintzberg, “People use “strategy” in several different ways, such as:

• Strategy is a plan, a “how,” a means of getting from here to there.
  
  
• Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a “highend” strategy.
  
  
• Strategy is position, that is, it reflects decisions to offer particular products or services in particular markets.
  
  
• Strategy is a perspective, that is, vision and direction.”

According to Kenneth Andrews, Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organisation it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities.

According to Johnson and Scholes, Strategy is the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations.

A strategy furnishes a platform for an organisation to better perform and achieve a competitive edge.

Objectives of Strategy

The concept of strategy can be made clear by looking at its objectives, which are as follows:

• To provide direction and stability to the organisation
  
  
• To determine policies and tactics to achieve goals and objectives of the organisation
  
  
• To help the organisation to prioritise targets based on organisational resources
  
  
• To facilitate the planning and execution of long-term, medium-term, short-term and day-to-day plans
  
  
• To facilitate the decision-making process
  
  
• To allocate resources to various departments of an organisation
  
  
• To increase organisational effectiveness by making a judicious use of organisational resources, such as funds, human resources, technology and infrastructure
  
  
• To define the code of conduct that lays down various rules and policies for an organisation

In the modern business world, the term “strategy” is widely used and applied in industries. For instance, strategies are adopted to gain market share from competitors. Let us now study different levels of strategy.

Levels of Strategy

Every organisation needs to have a strategy in order to beat competition and stay ahead. A strategy is practised at three different levels in an organisation. These levels are depicted below:

• Corporate-level strategy
  
• Business-level strategy
  
• Functional-level strategy

Corporate-level strategy

This strategy is designed by the top management consisting of the Board of Directors and the Chief Executive Officer. A corporate-level strategy helps in achieving objectives by analysing all business opportunities available to an organisation. Corporate-level strategies help in developing objectives, allocating resources and coordinating with Strategic Business Units (SBUs).

A corporate-level strategy is futuristic, innovative and pervasive in nature. It includes major decisions, such as mergers, takeovers, liquidations and diversifications. It relates with the ‘what’ aspect of the business. Following are some of the critical questions that are addressed by a corporate-level strategy

• In what all businesses should the organisation enter?
• How should available resources be allocated to different business units of an organisation?
• What should be the diversification strategy of an organisation?
• Should an organisation have strategic alliance with other organisations? If yes, what type of strategic alliance?
• What should be the organisational structure like?
• What should be the roles, responsibilities and objectives of each business unit of an organisation?

Business-level strategy

The business heads of each SBU design this strategy. A business-level strategy allocates resources among functional areas of a business. In addition, it is more specific and action-oriented as compared to the corporate-level strategy. It relates with the ‘how’ aspect of the business. Business-level strategies help in:

• establishing coordination among different business units, for creating synergy and implementing the corporate-level strategies of an organisation
• evaluating the needs of the market and delivering products and services accordingly
• creating a sustainable competitive advantage for each business unit
• accomplishing corporate-level strategies

Functional-level strategy

This strategy is designed by functional managers to carry out the day-to-day activities of an organisation. In this strategy, resources are allocated to each operation of the business. The functional-level strategy ensures development and coordination of resources in an organisation. It can be further divided into operational-level strategies. For example, a marketing strategy is divided into sales, distribution and promotional strategies. The main objectives of a functional-level strategy are as follows:

• To facilitate coordination among different functional areas, such as marketing, finance, human resource and production
• To align each functional area with the respective business-level strategies, thereby helping in attaining corporate-level strategies of an organisation

Process of Formulating Strategies

A strategy is important for every organisation. Therefore, every organisation aims at formulating strong strategies. The process of formulating strategies goes through various stages, as shown in Figure 1.2:

Let us discuss the stages of strategy formulation in detail.

• Analysing the vision and mission of the organisation
  
• Scanning the organisational environment
  
• Setting objectives and goals
  
• Identifying alternate strategies

Analysing the vision and mission of the organisation

Vision and mission are the two elements that describe the nature, direction, future, goals, shape, hierarchy, products and services and areas of operation of the business. The vision statement provides the organisation’s long-term goal, whereas the mission statement is the path to achieve the vision.

Analysing vision and mission statements helps the strategists to develop strategies for achieving organisational goals. This analysis provides guidelines for the following concerns:

• What strategies need to be developed?
• What are the tools required for strategy formulation?
• How the strategy is going to be implemented?
• What is the level of involvement of employees at different functional levels?

Scanning the organisational environment

It involves studying the external and internal environment of a business. It is necessary to study the environment for knowing the strengths, weaknesses, opportunities and threats of a business. This study is called environment appraisal. It involves scanning the business environment.

The business environment is complex, dynamic and multifaceted as it consists of various factors that interact with each other and change with time. Various sources of information that help in environmental appraisal are as follows:

• Sources, such as reports published by government, banks, competitors, industry federations, internal reports of various organisations and so on
  
  
• Mass media, such as TV, radio or surveys published in newspapers
  
  
• Employees, who help organisations to know the external environment, as they are the ones who interact with the customers
  
  
• Internal reports of the organisation, such as financial reports, daily reports and performance reports
  
  
• Environment appraisal is divided into two parts, namely internal appraisal and external appraisal.
  
  
  • Internal appraisal: It helps to know the strengths and weaknesses of the organisation, which further helps to analyse the gap between available and required resources.
    
    Internal appraisal includes scanning organisational resources, behaviour, strengths, weaknesses and core competencies. These organisational variables are controllable in nature. The organisation can either modify its plans, policies and strategies based on these factors or modify these factors based on their plans, policies and strategies.
    
    
  • External appraisal: It helps to know market threats and opportunities affecting the business. Organisations cannot modify external environment variables based on their plans, policies and strategies; they simply need to adapt changes for sustaining in the market.
    
    External appraisal involves scanning the micro and macro environmental factors. Microenvironment factors are somewhat controllable in nature. They are affected by factors such as competitors, customers, suppliers and government policies. Macro environment factors are uncontrollable in nature. These factors are affected by political, economic, social, technological, legal and ecological factors.

Setting objectives and goals

It involves identifying the longterm plans of the organisation and making objectives and goals to achieve them. Objectives and goals provide direction to strategy formulation. Objectives and goals should be set using the SMART criteria, which is as follows:

• Specific: Goals and objectives must be clear, concise and state exactly the targets to be achieved.
  
  
• Measurable: A measurable objective is something that can be quantitatively described. An objective should be measurable as it can help in determining the effectiveness of a particular approach from different standpoints. In other words, measurable objective can help in measuring the progress made towards the achievement of objectives.
  
  
• Achievable: An objective should be realistic, attainable and action-oriented, depending on environmental and organisational factors.
  
  
• Relevant: Objectives should be result-oriented, rewarding and relevant to the employees of the organisation.
  
  
• Time-bound: Objectives should have a definite time-frame of completion.

Identifying alternate strategies

This refers to recognising different strategies for growth. These strategies are also known as grand strategies. Some major strategies are as follows:

• Stability strategy: The strategy focuses on maintaining the current position. The organisation does not change products or services offered, which means that the same products are offered to the same customers with the same technology in the same market. There is no scope of modification, expansion and diversification in this strategy.
  
  However, in today’s competitive environment, it is difficult to adopt this strategy. Therefore, improvisation in customer-base, product technology and service quality are acceptable in this strategy.
  
  
• Expansion strategy: It focuses on growing a business in terms of customer base, operations, market share and increased product and services, with the sole objective of increasing revenue. The expansion strategy is also known as growth strategy. An organisation can expand by the following ways:
  • Expansion through concentration: It involves investment in the existing resources of the organisation for expansion
    
    
  • Expansion through integration: It involves integrating with suppliers or distributors to expand.
    
    
  • Expansion through diversification: It involves expanding into a new segment of a related or unrelated product.
    
    
• Retrenchment strategy: It implies reducing or cutting off. In this strategy, an organisation reduces products, employees, investments or assets. Organisations use this strategy when there is a decline in sales and profits.
  
  Using the retrenchment strategy, the organisation re-organises itself to cope-up with the challenges, such as reduced demand for organisation’s product and recession in the economy. In this strategy, the organisation looks for various options, such as complete business liquidation or selling off some part of the business.
  
  Various retrenchment strategies are given below:
  
  • Liquidation Strategy: Closing business and selling off the business assets
  • Divestment Strategy: Selling off a part or business unit of the organisation
  • Turnaround Strategy: Reversing trends in the organisational profits to stop negative cash flows
  • Restructuring Strategy: Reducing the mix of organisational operations
  • Downsizing Strategy: Decreasing operations and human resources of the organisation
    
    
• Combination strategy: It refers to a mixture of two or more grand strategies. This is the most widely used strategy. For example, an organisation can use two strategies at the same time in different departments.
  
  This happens when some departments of the organisation are generating less profit in comparison with other departments. In such situations, in one department, employees can be paid according to the work hours, whereas in another department, employees can be paid according to their performance.
  
  
• Choosing the strategy: It refers to evaluating each strategy for choosing the best optimal strategy. After evaluating all strategies, a single strategy or combination of two or more strategies is decided by the strategist. The choice of strategy depends on the stage of business life cycle and pre-determined objectives.