Corporate Level Retrenchment Strategy

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INTRODUCTIONSTRATEGY

The word strategy is derived from the Greek word strategos that is stratus (meaning army) and ago (meaning leading/moving).

Strategy is an action that managers take to attain one or more of the organizations goals. Strategy can also be defined as a general direction set for the company and its various components to achieve a desired results state in the future. Strategy results from the detailed strategic planning process.

A strategy is all about integrating organizational activities and utilizing and allocating the scarce resources within the organizational environment so as to meet the present objectives. While planning a strategy it is essential ti consider that decision are not taken in a vacuum and that any act taken by a firm is likely to be met by a reaction from those affected, competitors, customers, employees or suppliers .

DEFINITION OF STRATEGY

According to oxford dictionary

Strategy is a plan of action or policy designed to achieve a major or overall aim.

According to Johnson and schools

Strategy is the direction and scope of an organization over long term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholders expectations.

In simple words it can be defined asStrategy is a broad long term plan designed to achieve the overall objectives of the firm

In other words, strategy is about

Where is the business trying to get to in the long term?( direction) Which markets should a business compete in and what kinds of activities are involve in such markets?(markets: scope) How can the business perform better than the competition in those markets?(advantage) What resources (skills, asses, finance, relationships, technical competence and facilities) are required in order to be able to compete? (resources)

PROCESS OF STRATEGY

The process of strategy is cyclical in nature. The elements within it interact among themselves. Figure-1 present the process for single SBU firm. The process has to be adjusted for multiple SBU firms because there it is conducted at corporate level as well as SBU levels as these firms insert SBUstrategy between corporate strategy and functional strategy.

For our understanding, the process has been divided into the following steps:

1.Strategic Intent2.Environmental and Organizational Analysis3.Identification of Strategic Alternatives4.Choice of Strategy5.Implementation of Strategy6.Evaluation and Control

FIG-1 : STRATEGIC PROCESS

FIG-1 : Strategic Process in a Single SBU FirmLEVEL OF STRATEGIESStrategy can be formulated on three different levels: corporate level business unit level functional or departmental level.While strategy may be about competing and surviving as a firm, one can argue that products, not corporations compete, and products are developed by business units. The role of the corporation then is to manage its business units and products so that each is competitive and so that each contributes to corporate purposes.Consider Textron, Inc., a successful conglomerate corporation that pursues profits through a range of businesses in unrelated industries. Textron has four core business segments: Aircraft - 32% of revenues Automotive - 25% of revenues Industrial - 39% of revenues Finance - 4% of revenues.While the corporation must manage its portfolio of businesses to grow and survive, the success of a diversified firm depends upon its ability to manage each of its product lines. While there is no single competitor to Textron, we can talk about the competitors and strategy of each of its business units. In the finance business segment, for example, the chief rivals are major banks providing commercial financing. Many managers consider the business level to be the proper focus for strategic planning.

Corporate Level StrategyCorporate level strategy fundamentally is concerned with the selection of businesses in which the company should compete and with the development and coordination of that portfolio of businesses.Corporate level strategy is concerned with: Reach - defining the issues that are corporate responsibilities; these might include identifying the overall goals of the corporation, the types of businesses in which the corporation should be involved, and the way in which businesses will be integrated and managed. Competitive Contact - defining where in the corporation competition is to be localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation was clearly identified with its commercial and property casualty insurance products. The conglomerate Textron was not. For Textron, competition in the insurance markets took place specifically at the business unit level, through its subsidiary, Paul Revere. (Textron divested itself of The Paul Revere Corporation in 1997.) Managing Activities and Business Interrelationships - Corporate strategy seeks to develop synergies by sharing and coordinating staff and other resources across business units, investing financial resources across business units, and using business units to complement other corporate business activities. Igor Ansoff introduced the concept of synergy to corporate strategy. Management Practices - Corporations decide how business units are to be governed: through direct corporate intervention (centralization) or through more or less autonomous government (decentralization) that relies on persuasion and rewards.Corporations are responsible for creating value through their businesses. They do so by managing their portfolio of businesses, ensuring that the businesses are successful over the long-term, developing business units, and sometimes ensuring that each business is compatible with others in the portfolio.

Business Unit Level StrategyA strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm.At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the business level, the strategy formulation phase deals with: Positioningthe business against rivals Anticipating changes in demand and technologies and adjusting the strategy to accommodate them Influencing the nature of competition through strategic actions such as vertical integration and through political actions such as lobbying.Michael Porter identified threegeneric strategies(cost leadership,differentiation, andfocus) that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of thefive forces.

Functional Level StrategyThe functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher level strategies can be based. Once the higher-level strategy is developed, the functional units translate it into discrete action-plans that each department or division must accomplish for the strategy to succeed.

CORPORATE STRATEGIES

Growth is essential for an organization. Organizations go through an inevitable progression from growth through maturity, revival, and eventually decline. The broad corporate strategy alternatives, sometimes referred to as grand strategies, are: stability/consolidation, expansion/growth, divestment/ retrenchment and combination strategies. During the organizational life cycle, managements choose between growth, stability, or retrenchment strategies to overcome deteriorating trends in performance.

Just as every product or business unit must follow a business strategy to improve its competitive position, every corporation must decide its orientation towards growth by asking the following three questions:

1. Should we expand, cut back, or continue our operations unchanged?

2. Should we concentrate our activities within our current industry or should we diversify into other industries?

3. If we want to grow and expand nationally and/or globally, should we do so through internal development or through external acquisitions, mergers, or strategic alliances?At the core of corporate strategy must be a clear logic of how the corporate objectives, will be achieved. Most of the strategic choices of successful corporations have a central economic logic that serves as the fulcrum for profit creation. Some of the major economic reasons for choosing a particular type corporate strategy are:

a) Exploiting operational economies and financial economies of scope.b) Uncertainty avoidance and efficiency.c) Possession of management skills that help create corporate advantage.d) Overcoming the inefficiency in factor markets ande) Long term profit potential of a business.

The non-economic reasons for the choice of corporate strategy elements include:

a) Dominant view of the top management,b) Employee incentives to diversify (maximizing management compensation),c) Desire for more power and management control,d) Ethical considerations ande) corporate social responsibility.

There are four types of generic corporate strategies. They are:1. Stability strategies: M