Strategic Alternatives

 

Unit 3: Strategic Alternatives/Options/Choice/Selection Concept of Strategic Alternatives/Options: Strategic alternative refer to identify the alternative str strate ategie giess that that organi organizat zation ion might might pursue pursue,, it serves serves at the basis for making making the choices choices of  direction that a firm adopts in order to achieve its objectives and provides basic future direction to the organi organizati zation. on. The st strat rategi egicc altern alternati atives ves are someti sometimes mes used used as str strate ategic gic choices choices and strategic option. They enhance managers to identify strategic option. For the strategic option the

 business should analyse strength and an d weakness and threats and opportunities. t the same time organization economic, personnel, administration, products market and pricing policies should be analysed. Strategic options are the alternative directions and methods available for formulating the organization!s strategy. This phase develops strategic alternatives or options. "rganization should develop the strategic alternatives to link between organization!s strength and weakness with environmental opportunity and threat. nalysis of strategic options seeks to determine the alternative courses of action that could best enable the firm to achieve its mission and objectives. Strategic alternative is a choice between three options which may depend on the particular  situation of the organization. Identify Strategic Options/Alternatives: a# Generic strategies:  is the bases in which an organization might seek to achieve lasting  position or survive in the competitive environment. $t is called generic simply because it can be  persuade by almost all companies. %any scholars have employed different business strategy into into differ different ent situa situatio tion n as generic generic st strat rategie egies. s. $t consis consists ts of &a# 'rand 'rand str strate ategie gies( s( they they are stability stabi lity,, e)pansion, e)pansion, retrenchment retrenchment and combination combination strategies strategies.. &b# market oriented strategies strategies(( they are low cost leadership product differentiation and focused strategies. They can also be  based on strategy clock.  b# Direction of strategy:  is the bases in which an organization organization might choose to develop generic strategies. They are available to the organization in terms of market coverage, products and competence base of the organization. $t is directed towards( &a# protect*build: it can be through consoli cons olidat dation ion or penetra penetratio tion n in home home market market.. &b# product product develo developme pment: nt: it develo develops ps new  products for home market &c# %arket development: it offers e)isting products in new markets. &d# +iversification: $t is going away from e)isting market and products. $t can be related or  unrelated. strategyThe development c# Methods : shows thedevelopment methods by which the directions of strategies might be of achieved. methods of strategy can be&a# $nternal development: developing new products  new markets. &b# %ergers  c-uisitions: taking over ownership of other organizations. : Grand Grand Generic Generic Strategy: Strategy: 'rand generic strategies at corporate level. They provide basic future direction to the organization. They are based on business definition and pace of effort.   $t can be: a! Sta"ility strategies: Stability grand strategy is strategy that an organization pursues when it continuous to serve the public in the same product or serve, market, and functional sectors as defined in its business definitions. $f the e)isting product or market condition is satisfactory then, this type of strategy is selected. They do not want to go over a new activity. This strategy highlights the non acceptance of new strategy. The e)isting strategic options are continued. t

 

this time the environment is also seem stable, no movement, and no new opportunities. So, they don!t want to change their strategy. Sometimes, it may be very dangerous for organization. "! #$pansion strategy: ew products, market and functions are added. The pace of activities increases. The product is in the growth g rowth stage of product lifecycle. /)pansion is through increased marke ma rkett sh shar aree an and d produ product ctio ion n capaci capacity ty.. This This ai aim m is hi high gh gr grow owth th th thro roug ugh h di diver versi sifi ficat catio ion n integration, cooperation and globalization. /)pansion strategy is followed, when an organization substantially broadened the scope of its customer, group customer functions and alternative technologies. c! %etrenchment %etrenchment strategy: This strategy is persuading in threatening environment. 0roducts, markets and functions are reduced. The pace of activities decreases. The product is in the decline stage of product lifecycle. The cash flow is negative. 1etrenchment is aimed through reduced market share, dropping the product lines and markets and investment. The aim is contraction of  activities through turn around, sale of portion of business, li-uidation and increasing cash flows. 'enerally it is not preferred because of managers capabilities may be -uestioned. d! Com"ination Com"ination strategy: 2ombination grand strategy is followed when an organization adopts a mi)ture of stability, e)pansion 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 &S34#. $t simultaneously uses combinations of stability, e)pansion and retrenchment strategies to different parts of the organization. "ld  products, markets and functions are continued, dropped and e)panded. 0roduct lifecycles are in different stages. The aim is to improve performance. The combination can be simultaneous se-uential or both. %arket ket based based generic generic st strat rategie egiess are concern concerned ed with with &: Mar'e Mar'et(" t("ase ased d Gener Generic ic Strat Strategi egies: es: %ar competing successfully in the market by providing superior value to customers, they are S34 divisional divis ional level strategies. strategies. $t strategies strategies can be based on cost, differenti differentiation ation and focus and also sought and type of market target. $t consists of: )i* +o,(Cost +eadership Strategy: The focus of this strategy is on cost. 5ow6cost leadership means low overall costs. 5ow6cost means lower prices relative to competitors. This strategy aims to achieve low costs relative to competitors. The organization becomes the industry!s lowest cost  provider of products. $t finds ways to reduce costs by reducing waste. This strategy appeals to a  broad segment of price6sensitive buyers. Standardized products are offered. There are two ways to reduce costs, control cost driver and revamp value chain. )ii* -road Differentiation Differentiation Strategy: This strategy focuses on differentiation. +ifferentiation aimss to establ aim establish ish uni-ue uni-uenes nesss of a brand brand relati relative ve to compet competing ing brands in the perceptio perception n of  consum con sumers ers.. $t is making making product productss differ different ent from from compet competito itors! rs! products. products. $t incorp incorporat orates es differenti diff erentiating ating product features that are valued by customers. customers. They cause customers customers to prefer prefer a firm!s brand over the broad over the brand of rivals. 2ustomer perceives superior value in differentiation. They are not sensitive to price. )iii** -est(Cos )iii -est(Costt .rovid .rovider er Stra Strategy: tegy:  This strategy aims at giving customers more value for  money. $t strives to have the lowest cost with good -uality relative to rivals. 0roducts with comparable attributes are offered. The provider has resources and competencies to combine low cost with attractive features. 3estt cost 3es cost provid provider er str strate ategy gy is a hybrid hybrid str strate ategy gy.. $t balance balancess low cost cost with with product product differentiation. The market target is value conscious customers. This strategy is appealing to  price6sensitive buyers who prefer product differentiation. differentiation.

 

)iv* oc0sed/Mar'et 1iche Strategies: Strategies: The focused strategies concentrate on a niche of the market. iche is a narrow piece of the total market. $t is identified by dividing a market segment into sub6segments. $t consists of fairly small groups of customers whose needs have not been well served. They re-uire special attention. The market is narrow but well6defined. $t can be defined define d as demographic demographic characteris characteristics tics,, geographical geographical uni-ueness, specialized specialized re-uirements re-uirements and special product attributes. 2ools to "e 0sed to Ded0ct Strategic Alternatives(3: Three have been many tools available for  deducti ded ucting ng the enviro environmen nment. t. The select selection ion of the best best alt altern ernati atives ves also also re-uir re-uires es for proper  proper  evaluation through these tools. These tools educate about future trends and events. For our study, we focus the following tools: ! SO2 Analysis: S7"T is an acronym acronym used to describe describe the particular particular strengths, strengths, weakness, weakness, opportunities and threats that are strategic factors for a company. +uring the analysis of various alternatives, S7"T plays great role for appropriate evaluation of each alternative. mong the many tools, S7"T is an important tool for evaluation. S7"T analysis is a systematic identification of internal strengths and weakness of a  business and e)ternal opportunities and threats facing the business. This analysis helps to formulate the strategies that reflect the best match between them. The best matching may be the  potential strategic alternative among the various alternatives. $t is based on the logic that an effecti eff ective ve strate strategy gy ma)imi ma)imizes zes a busine business ss str streng engths ths and opport opportuni unitie tiess but at the same same time time mi mini nimi mize zess its its weak weaknes nesse sess an and d thre threat ats. s. The The ob obje ject ctiv ivee of S7"T S7"T an anal alys ysis is is to pr prov ovid idee a framework to reflect organizational capabilities to avail opportunities or to overcome threats  presented by the environment. The S7"T matri) is an important matching tool that helps managers develop and analyze anal yze strategies. The S7"T matri) is also called T"7S matri).

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)a* Strength )S*( Strengths is the basic capabilities of the organization in which it can be used to gain competitive advantages. $t is a distinct competence of an organization which gives the competitive advantage. +uring the strategic alternative analysis, some of the factors related to the strengths of an organization need to be analyzed with respect to each alternative: 7ell 7e ll developed strategy Strong financial condition  8uman resource competencies

Strong brand name*image*reputation Strong advertising 3road market coverage )"* ea'nesses ea'nesses )*: $t is the basic limitation or constraint of the organization which creates competitive disadvantages. $t is the deficiency in resource, skills, capabilities and knowledge which negatively affect the performance of an organization. Following are some of the e)amples of weaknesses. 7eak 7e ak marketing plan  o clear strategic direction 7eak 7e ak financial position $nade-uate human resources "bsolete technology 5oss of brand name

 

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1aising manufacturing cost etc. )c* Opport0nities )O*: $t is the favorable conditions in the organization!s e)ternal environment which whi ch enable enabless its st stren rength gth in its its positi position. on. $t provid provides es compet competiti itive ve advant advantage agess to the fir firm m e)ploiting organization!s strength in relation to its competitors. /)amples of the opportunities of  an organization are: /)panding new geographical areas*new market segment +iversify the business c-uisition of rivals lliance or joint venture /)pand core business /)ploit new technologies Serving additional customer groups )d* 2hreats )2*: $t is an unfavorable condition of the organization!s e)ternal environment which causes risk for or damage to the organization!s positions. The e)amples of the threats of an organization are: 'rowing power of customers and suppliers >een competition 2hange in consumer taste. Fashion, likes etc. 1ise of new or substitute product $ncrease in industry rivalry 1aising labor costs ttack on core business etc. Applic Appl icat atio ion n of SO2 SO2 an anal alys ysis is:: S7" S7"T T analys analysis is provid provides es a logica logicall framew framework ork guidin guiding g systematic discussions of the business situation, formulation of alternative strategies and the choice of strategy. n opportunity observed by one e)ecutive may consider the potential threat  by another one. Similarly, Similarly, the strength in one angle to the manager may be the weakness from another perspective. 8owever, the systematic S7"T analysis analyzes all aspects of a firm!s situation and provides a dynamic and useful framework for formulation and selection of strategy. The opportunities and threats of the organization are systematically compared to internal strengths and weaknesses through S7"T analysis. $t helps to develop structured approach to

identify four distinct patterns between the firms! internal and e)ternal situations as shown in figure.  umerous /nvironmental /nvironmental " "pportunities pportunities

2ell  2ell 9 Supports turnaroundSupports orientedggressive strategy Strategy

Substantial $nternal Strengths 2ritical $nternal 7eakness 7eakness 2ell < 2ell ; Supports +efective Strategy Supports +iversification Strategy

%ajor /nvironmental Threats

Fig: Four =uadrants of S7"T nalysis

 

Cell : This is the most favorable situation. The firm has several environmental opportunities and has numerous strengths which encourage pursuing such opportunities. $n this situation, it is  better to follow growth oriented strategy as an aggressive strategy to e)ploit the numerous opportunities. Cell &: This is the situation where the firm has key strengths but faces unfavorable environment. $n this situation, situation, strategist strategistss should should use current current strengths strengths to build long6term opportunities opportunities using key strengths. The firm has to diversify the business for long6term opportunities. Cell Ce ll 3: $n this situation, the firm faces impressive market opportunities but is constrained by several internal weaknesses. 3usiness in this condition is like low market share although it competes in high growth industry. The firm has to focus to eliminate internal weaknesses to  pursue market opportunities. Cell 4: $t is the least favorable situation in which the firm faces major environmental threats and critical internal weaknesses. This condition clearly calls to strategists to reduce involvement in the product market e)pansion. $t also suggests that firm either defined or withdraw the business to secure another business opportunity.

;. .#S2 Analysis/%emote Analysis/%emote #nvironment: #nvironment:  0/ST analysis refers to the systematic analysis of  thee macr th macro o en envi viro ronm nment ental al forc forces es,, su such ch as as,, polit politic ical al6l 6lega egal, l, ec econo onomi mic, c, so soci cio6 o6cul cultu tura rall and technological forces influencing the organizations capability to work in the future and to pursue itss stra it strate tegy gy to co comp mput utee in the the mark market et.. $t prov provid ides es en enoug ough h ba back ck gr grou ound nd to fo form rmul ulat atee an and d implement a good strategy. Such environmental factors are usually beyond the firm!s control and sometimes present themselves as threats. 8owever, changes in the e)ternal environment also create new opportunities. The environmental forces are also interacting together and creating more pressures to change our organizations in the society. 0/ST comprises the four forces. 0/ST analysis helps identify future opportunities and threats to the organizations. n opportunity is a favorable condition in the environment. $t enables and organization to consulate and strengths its strategic position. position. Threats are an unfavorable unfavorable condition in the environment. environment. $t creates risk and causes changes to the organizations strategic position. 0/ST analysis indicates which environmental forces are affecting the organization and which of them are the most important. The impact differs according to the nature of the organization. Components of .#S2 Analysis(4: ! .olitical 5legal:6 a 0olitical 0olitical forces:6 forces:6 They are represented represented by political political system, institution institutionss and philosophy. philosophy. The government governm ent formulates formulates policies and regulations regulations regarding regarding human resource management. management. The  policies regarding e-ual employment opportunities, -uotas in employment for woman,

 

disadvantaged and indigenous people affect ac-uisition aspect of human resource management. 'overnment agencies act as regulatory agencies. agenc ies. They minimum wage of workers.  b 5egal forces:6 it consists of laws, rules, regulations, court cases, and institutions. 5abour laws generally protect the interests of employees. &! #conomic forces:( a  /conomic forces:6 'lobal 'lo baliza izatio tion:6 n:6 $t refers refers to border borderles lesss trade trade throug through h e)tens e)tension ion of operat operation ionss in several several count cou ntri ries es.. The The human human re reso sour urce cess in a glob global al or orga gani nizat zatio ion n have have al also so as assu sume med d gl globa oball dimensions. +emographics:6 $t is concerned with human population and its distribution. The forces consist of population size, growth, age mi), urbanization and migration. /conomic health:6 The level of income, the stage of business cycle, inflationary pressures   and fiscal policies of the government affect the compensation of employees. /conomic groupings, such as /uropean 4nion and S12 facilitate cross border mobility of human resources. " +a"o0 +a"o0rr Mar'e Mar'ett or orce cess:6  labour forces is a geographical g eographical area within which people looking for work interact with employers looking for people. $t can be two types: Tight labour market and loose labour market. 3! Socio(c0lt0ral forces:( a Social Soc ial forces:6 forc es:6 • Social orms: They affect attitudes and e)pectations toward organization and the work itself. 2hanging social values have significant implications for 81%. • 5ife style: $t is a person!s pattern of living reflected in his activities, interests and opinions. 2hanges as life styles have resulted in shorter work weeks, fle)ible working hours and work at home patterns of work.  b 2ultural forces: 2ulture is the comple) whole of knowledge, customer, traditions, values, religion, language and works of art and architectures. $t is created by society and is handed down from generation to generation. 4! 2echnological forces:( Te Technolo chnology gy makes work more efficient. efficient. $t consists consists of skills, skills, methods, methods, systems systems and e-uipment. e-uipment. utomation, computerization, digitalization, robotics, informatics, and artificial intelligence have all affected the field of human resource. a 5eve 5evell of techn technol olog ogy: y:66 $t can be labou labourr ba base sed d or capit capital al based based an and d ap appr prop opri riat atee or  sophisticated.  b Technological Technological change: The speed of technological change dislocates employees by eliminating old jobs, creating new jobs and increasing professionalization of jobs.

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3! ive orces Analysis/Competitive Analysis/ .orter6s 7 orce Model: nalyzing this model, we can say that high force among five factors result as a threat  because they are likely to reduce profits.  low force in contrast can be viewed as an opportunity  because it may allow the company to earn greater profits.  strategist should analyze any industry by rating each competitive force as high, medium or low in strength. The five forces of  industry competition are mentioned below. 2hreats of of 1e 1e, #n #ntrants: ew entries to an industry bring new capacity to gain more market

share and substantial resources. theyand arereactions threats to thecan e)isting firms. from The threat of  entry depends on the presence of Therefore, entry barriers that be e)pected e)isting

 

competitors. $f entry barrier is not tightened, more threats e)ist from new entrants and vice versa, entry barriers further depends in the following factors: i. /conomies of scale ii. ii. 0rod 0roduc uctt &&br bran and# d# dif diffe fere rent ntia iati tion on iii. 2apit pital rere-u uiremen entts iv. Switching cost v. cce ccess ss to dist distri ribu buti tion on ch chan anne nels ls vi. 'overnment policy II! 2hreats of s0"stit0tes: Substitute products and services are those products which may ma y appear  to be different but satisfy the same needs as another product. For e)ample, Fa) is a substitute for  Fed/). 'as central heating system is in competition with solid fuel system. The main threat  posed by substitutes is that they limit the price for products. Tea Tea can be considered as a substitute for coffee. 0lastic container producers competing with glass, paperboard etc. the presence of  substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product. 2ompanies can reduce the risk of substitute by building in switching costs through added product or service benefits b enefits meeting buyers! needs. III! -argaining po,er of "0yers/c0stomer/cons0mer: 3uyers can e)ert bargaining power over  a supplier!s supplier!s industri industries es by b y forcing its prices down, reducing the amount of goods they purchase purchase from the industry, demanding better -uality for the same price. 7hen customers are concentrated  buy in volume, their bargaining power represents a major force affecting the intensity of  competition in an industry. 1ival firms may offer e)tended warrantees or special services to gain customers loyalty whenever the bargaining power of consumers is substantial. 3argaining power  of consumers is also higher when the products produc ts being purchased are standards. I8!!  -argain I8 -argaining ing po,er of s0ppliers: $t refers to the situation where suppliers force the firms to  pay higher prices. The bargaining power of suppliers affects the intensity of competition in an industry, especially when there is a large number of a supplier, when there are only a few good substitute raw materials or costly raw materials. $t is often in the best interest of both suppliers and producers to assists each other with reasonable prices, improved -uality, development of  new services, just in time deliveries and reduced inventory cost, thus enhancing long term  profitability for all concern. 8! %ivalry among e$isting firms: 1ivalry among competitive firms is usually the most powerful of the ? competitive forces. $t takes place between the organizations that make similar products and services and sell them in the same market. The strategies persuade by  firm can be successful only to the e)tent that they provide p rovide competitive advantage over the strategies persuade  by rival firms. 1ivalry occurs because one or more competitors either feel the pressure or see the opportunities to improve the position. #val0ation of Strategic Alternatives(3: The criteria used for evaluation of strategic alternatives are: 9 S0ita"il S0ita"ility( ity(& &: $t is concerned with environmental fit of the strategic alternative. $t also  provides the rationale to a strategy. $t indicate whether the strategic alternative make sense in relation to environmental circumstances. $t is also a basic of -ualitative assessment concerned with testing out the rational of strategy and is useful for screening options. The assessment of  suitabilit suit ability y consists consists of ; stages. stages. &a# /stablishi /stablishing ng the rational: rational: @arious @arious tools and techni-ues techni-ues are used to establish the rational which describes the ideas whether they are good or not some of 

these tools are lifecycle portfolio matri), positioning, value chain analysis and portfolio p ortfolio analysis.

 

&b# Screening "ptions: Suitability Suitability of a specific specific strategic strategic option is relative to other available available options. The methods used for understanding suitability are ranking, decision tree and scenarios. 9& Accepta"ility(3: Accepta"ility(3: $t is concerned with the e)pected performance outcomes of a strategic alternative. $t is strongly related to people e)pectations and therefore the issues of re-uire careful analysis. The criteria for acceptability of strategic alternative are )a* )a* %et0 %et0rn rn(3 (3::  /)pec /)pecte ted d re retu turn rn from from sp spec ecif ific ic st stra rate tegi gicc optio options ns is as asse sess ssed ed.. The The va vari riou ouss approaches to analyze return are &i# 0rofi 0rofitab tabili ility ty analys analysis: is: $t assess assesses es financi financial al return return to inv invest estmen ment. t. The tools tools used used for this this analysis are return on capital employed, pay back period, and discounted cash flow &ii# 2ost benefit analysis: $t assesses the overall overall economic impact of strategic options. This analysis attempts to put a money value of all the costs and benefits of strategic options. &ii &iii# i# Sharehol Shareholder der value value analys analysis: is: $t assess assesses es the impact impact of str strate ategic gic option optionss in genera generatin ting g shareholders value. The shareholder value is the total shareholder return. )"* %is's: $t involves probably estimate about robustness of strategic options. The level of risk is important for acceptability of strategic options. ew product development carries high level of  risks. The approaches for analyzing risks are. &i# Financial ratio projection, &ii# Sensitivity analysis &iii# Simulation modeling &iv# 8euristic &v# +ecision matrices: )c* Sta'eholder : $t provides political dimensions to the organizations acceptability of a strategic alternative. The approaches of stakeholder are &i# stakeholder mapping &ii# game theory. 93 easi"ility(3: $t is concerned with availability of resources and competencies to deliver strategic alternatives. $t determines an option implement ability and work ability in practice. $t assesses the organizations capability to make the strategic alternatives succeed. The approaches for available to understand feasibility are &a# Funds flow analysis: ana lysis: $t assesses financial feasibility. $t forecasts the funds re-uired and the likely resources of funds for strategic alternatives. &b# 3reak even analysis: $t studies costs volume profit relationships to assess financial feasibility. This analysis identifies 3/0 when revenue e-ual costs. &c# 1esource deployment analysis6;: $t identifies need for resources and competencies co mpetencies for specific strategic alternatives. $t is used to judge &i# sufficiency of current resources and competencies to pursue a strategic options. &ii# eed for uni-ue resources and competencies to sustain strategic advantages. S2%A2#G; S2%A2#G ; S#+#C2IO1 M#2