1. INTRODUCTION:

The lexicon meaning of strategy is “a plan of action designed to achieve a long-term goal”. But in the context of organisations, this definition needs to be reworked. According to Alfred Chandler, a prominent business historian says “The determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals”.¹ Strategy is a set of actions that firms take to deliver the superior performance or get a competitive advantage. Bruce Henderson, the founder of BCG, says “Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it.”² It is useful to mention here what strategy is not as Michael Porter writes in his 1996 article on What is strategy? Strategy is not operational effectiveness. It is not a business process reengineering, benchmarking, or any other such thing.

Porter says that “Strategy has the ability to create a unique and valuable position that is not easily imitated by others and therefore Strategy is what allows a firm to create and protect its competitive advantage”.³ There are conflicting views on this definition as some see the process of strategy making as a deliberate and calibrated exercise, while others say it is not. The principal proponent of this alternative view is Henry Mintzberg. Mintzberg says the Strategy is “emergent” and is basically a process and a pattern of actions rather than one which is fully formulated at the beginning”.⁴ In fact, a definition that covers both the emergent perspective as well as the deliberate perspective is the one that is offered by Nag, Hambrick and Chen. They define Strategic Management as “The field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources to enhance the performance of the firm in their external environments”.⁵ This is a comprehensive definition, which focuses on initiatives, the performance of firms and how they involve resources and capabilities and finally these initiatives are taken in the context of firm’s external environment. Therefore, strategy is about a firm’s long-term performance and competitive advantage. The performance does not refer to financial returns alone. Therefore, the metric to evaluate performances would also be vastly different. Firms aiming at shareholder value maximization would use metrics such as Return on Equity (ROE) or sales or Stock Prices to assess its performance.

2. STRATEGIC DECISION MAKING:

Strategists whether they are CEOs of established firms, presidents, or entrepreneurs must have a strategy, an integrated, overarching concept of how the business will achieve its objectives.⁶ ‘Strategic’ decision differs from a ‘tactical’ decision. Strategic decisions are typically characterized by the following features:

· Tend to have a long-term direction

· Concentrates on the “Big Picture”

· Have exceptional cross-functional implications

· Requires a significant involvement of resources

· Are not easily reversible

· Involves a considered choice of what to do and what not to do

The decision of an airline to procure a fleet of only Boeing 737s versus Airbus A330s is strategic in that it has long term implications associated with target city market pairs and customers that can be served owing to aircraft flying range and passenger-carrying capacity restrictions. The decision by a key supplier to this industry (i.e., an aircraft manufacturer such as Boeing) to not compete with Airbus with an offering to counter the A380which incidentally is the largest commercial aircraft available has “Big Picture” implications. It indicates a fundamentally different world view of how the airline industry is likely to evolve. Airbus is betting on the traditional Hub and Spoke model, an approach that involves the plying of large aircraft between Hubs and smaller aircraft from the Hubs to the cities/towns on the spoke. Airbus’s “Big Picture” call is that flying larger aircraft between hubs is a solution to the increasing congestion in airports and the difficulty to increase the number of flights in the hubs and that the larger capacity aircraft would enhance the scale economies in this business. Boeing in sharp contrast is betting on airlines offering more point to point direct services by circumventing the traditional hubs. In line with this perspective, Boeing has invested in medium-capacity long-range aircraft such as the 787 that aims to fly direct to the cities without the need to go via traditional hubs. While Point to Point services is usually considered to be more expensive to offer, Boeing aims to alter the economics associated with it by offering these 787s constructed out of more lightweight composite materials and configured with fuel-efficient twin engines. Also, the higher humidity levels, lower cabin pressure, fresher air is expected to help passengers feel less jet-lagged when they arrive at their destinations, features which Boeing believes will make frequent flyers, in particular, more desirous of flying long-range point to point.

In the airline industry, players in the industry make decisions regarding their positioning in the market. For instance, the industry is broadly divided today into Full-service carriers and Low-cost carriers. The decision to operate either as a Full-service carrier or as a Low-cost carrier has significant implications at the functional levels in the organization as well. The marketing and promotional methods and expenditures incurred between full service and low-cost carriers are likely to differ. The incentive mechanisms that reward employees may be calibrated differently for full service and low-cost carriers. There is also a likelihood of organization structural attributes such as hierarchical layers and reporting structures differing between full service and low-cost carriers. Similarly, budgetary control procedures are also likely to differ between the two organizations. Strategic decisions, therefore, have significant cross-functional implications that span the organization. A change in a strategic decision would typically necessitate a need to change several functional level attributes of the organization to ensure a ‘fit’ between the new ‘strategy’ and the functional level attributes.

The decision by Boeing or Airbus to develop a new aircraft involves a large capital investment. Reports indicate that Airbus has spent around 30 billion US dollars to develop the A380. For airlines, operating the A380 (or a new class of aircraft) results in a requirement to make investments in training pilots and aircraft maintenance engineers so that they are certified to fly and maintain the new aircraft. In addition, several airports around the world have had to make investments to reconfigure their facilities and to make fresh investments to accommodate an aircraft as large as the A380. These include alterations to the gates at airport terminals, the broadening of taxiways and parking bays to support the A380. All of these activities involve a significant commitment of financial, human, and organizational resources. Decisions that involve a significant commitment of such resources are ‘strategic’ in character.

Airbus’s choice to spend 30 billion dollars in improving the A380 and delivering vital and scarce organization resources towards developing this aircraft is not easily reversible as it would involve significant write-downs and lost time about seeking alternative strategic alternatives such as developing a medium-capacity long-range aircraft (space which Boeing endeavoured to focus its energies on). The irreversible character of ‘strategic’ decisions also results in a strong credible signal in the form of conveying a ‘commitment’ to the decision which has significant strategic implications, particularly in a duopoly (two players in an industry) setting. Airbus’s decision to enter the very large commercial transport space, Boeing’s decision to not enter that space, the decision of Southwest airlines (a leading low-cost carrier) to not enter the full-service carrier space and the decision of some airports to upgrade their facilities to cater to the requirements of A380 are examples of calls made by organizations regarding what to do and what not to do which have important long-run strategic implications for the future of these organizations. These epitomizes a key trait of decisions which have a strategic appeal. It is important to appreciate in this context that a key element of a strategy is deciding what you will or what you will not do. Deciding to do everything under the sun is not a ‘strategy’ or a very confused ‘strategy’.

However, in contrast to ‘strategic’ decisions, ‘tactical’ decisions have a short-term outlook. For instance, a price cut announced by an airline in a particular city market pair for a specified duration can be considered ‘tactical’ in nature. Similarly, decisions which are not in the nature of betting on the future survival of the company, such as investments of the magnitude associated with developing the A380, but take the form of say developing an incentive plan to spur innovation in the company are more ‘tactical’ in nature as opposed to being ‘strategic’. In closing, it is however important to appreciate that while I have sought to highlight the distinction between ‘strategic’ and ‘tactical’ decisions, it should also be understood that ‘strategic’ decisions have several ‘tactical’ decisions which undergird or comprise it. A series of ‘tactical’ decisions often lie behind the ‘strategic’ decisions.

3. STRATEGIC MANAGEMENT PROCESS:

The strategic management process can be defined as a consistent rational goal with a well-organized plan for making major decisions in an organization. These decisions are crucial strategies that will have a long-term impact on the company's performance. The basic Strategic formulation process is shown in the following figure.

Figure 1:

Let’s assume that the CEO of a Grocery retailer in a large emerging market has entered the industry early and now has a dominant position in the market and the domestic market is growing. This attracts a global player to enter the market. How should one respond to this competitive threat and go about making your decision? One starting point is to list out the key strategic options that have at a high level to make a choice about whether to save the business to the new entrant or stay on and compete against this new competitor. If the decision is to compete, then the decision would be on how to compete. These decisions are all strategic as they are likely to have a long-term impact on the company’s performance. They are irreversible and they require a significant commitment of resources.

To decide among the various strategic options. One has to conduct an analysis. A tool that is fundamental to study strategic analysis is a SWOT analysis. It essentially involves looking at internal factors, the company’s strengths and weaknesses, and external factors. The opportunities and threats posed by the environment. These factors are important and one must keep in mind that the final decision should be made based on the holistic analysis that includes all factors rather than one particular factor.

4. MACRO-ENVIRONMENT ANALYSIS:

The external factors facing the company can be broadly classified as factors related to the macro-environment and factors related to the industry. The macro-environment can be analyzed using the PESTLE framework. PESTLE includes:

· Political,

· Economic,

· Social,

· Technological,

· Legal and Environmental factors.

Economic factors include those related to the economy such as GDP growth rate and per capita income. A booming economy implies that there are opportunities for growth for multiple competitors and the threat posed by a large foreign giant can be managed, other things being equal. Low per capita income may imply that any foreign retailer that targets high-end goods will only see limited growth potential. Further, a domestic company that targets goods consumed by the masses is unlikely to be threatened by a foreign player, given that a foreign player is very likely to have higher costs compared to the domestic incumbent. Strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weaker.⁷Industry-level factors include rivalry, entry barriers, the threat of substitutes, and so on. The threat of substitutes. One of the biggest threats that the grocery retail business is facing now is e-commerce. If we conclude that the grocery retail is going to move online and you do not have the capabilities to become an e-commerce player yourself, then selling out may be a better option. We can see that the macro-environment and the more proximate industry pose opportunities and threats. And these opportunities and threats not only throw up options but also help in evaluating the options.

5. INTERNAL ENVIRONMENT ANALYSIS:

Keeping the SWOT Analysis in mind, a firm may have several strengths and weaknesses that can affect the strategic choices. These strengths and weaknesses have to be evaluated in comparison to those of your key competitors. In doing so, it is useful to think in terms of a firm’s resources and capabilities. The role that resources and capabilities play in helping a firm achieve superior performance. Strengths may include resources and capabilities such as strong relationships with suppliers and established supply-chain network, a brand that is recognized in the domestic market, and valuable retail locations. Weaknesses may include lack of financial resources – both in terms of raising share capital as well as lack of borrowing capacity- that may inhibit growth. Firms may not have the capabilities of managing a logistics network that a global player may have. If the weaknesses outweigh your strengths, one may conclude that it is better to sell out. On the contrary, if the strengths outweigh your weaknesses, one may decide to stay and fight it out with the new entrants. The strengths and weaknesses can also affect how one could choose to compete. Firms may have insights into the local market that a global player might not possess. In such a case, differentiation based on local knowledge of consumers and market conditions may be an effective way to compete against global giants.

Beyond SWOT analysis, other factors determine how a decision is taken. Any strategy statement must begin with a definition of the objective, or the goal that the strategy is designed to achieve.⁸ The mission and objectives of the company also have an important role to play in making decisions on what a firm will do as well as what it will not do. A firm’s mission states the organization’s purpose of why the organization exists. While the organization’s mission is a broad statement of what it intends to achieve, objectives are the actionable and measurable goals. While there has been some debate on the value added by mission statements, some companies do have very famous and effective mission statements. The firm’s mission and objectives can affect the decision on whether to sell out or stay on in the business and compete against new entrants. Selling out to a global player may not be a preferred option.

6. COMPETITIVE POSITIONING:

The context of strategy formulation (both internal and external) does not uniquely determine business performance. It is important to examine how firms leverage the resources within to position themselves relative to others in the industry. That ultimately is what determines whether a firm will succeed or fail in the long run. Business level strategy relates to one business of a multi-business firm or to the only business of a single business firm and is concerned with the attributes on which it intends to compete within that industry. Some early models of the strategy were based on the assumption that firms with large market share were more profitable. Porter, on the other hand, found that in many industries, firms, which had very large shares or had very small shares of the overall market, were profitable compared to those whose market share was neither very large nor very small.⁹ Researching into these companies, Porter concluded that profitable firms followed one of the three generic approaches. Competing on costs, or on differentiation in the broad market, or by focusing on a narrow segment of the market.

Unprofitable firms, on the other hand, had failed to follow any one of these three strategies effectively. To understand Porter's classification, it is important to comprehend the basic ways in which a firm creates an advantage. This may be by way of prices charged (that is, creating comparable values at a lower cost), or by value delivered (which is delivering greater value to customers generally at a price premium), or doing both simultaneously. The key point here is that to outperform the competition, firms must establish a difference and preserve it by either or both of these approaches. When competing on the basis of cost, this approach is called, a cost leadership strategy. And when competing on superior values (both tangible and intangible), it can be called, a differentiation strategy.

7. GENERATING COMPETITIVE ADVANTAGE:

Competition is at the core of the success or failure of firms. Competition determines the appropriateness of a firm's activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation.¹⁰ A firm determines its competitive positioning by trying to create an advantage for itself. There are two key questions in this context. The first is, what is the kind of advantage sought (the nature of advantage)? Is this cost-based? or, feature-based? The second question related to the scope of the activities that the firm intends to engage in. The scope can be narrow (as in geography, a product family, and so on) or broad. The following figure helps to categorize the strategies of any firm and the positioning they take.

Figure 2:

So, in case a firm chooses to be competing based on cost in a broad market that would be a broad cost leader. A firm that tries to compete based on differentiation in a broad market would be a broad differentiator. Firms also have the choice of deciding to focus on one segment of the market and be either a cost leader or differentiator. So, a firm that focuses on a narrow market and adopts a cost leadership strategy is a focused cost leader. The one that focuses on differentiation, is a focused differentiator. There are four ways of competing at the marketplace. A firm can position itself as a broad cost leader or differentiator or a focused cost leader or a focused differentiator. So, in any industry, firms are occupying all these four positions. Depending on the positioning that the firm chooses, the functional strategies will differ.

8. CONCLUSION:

In this paper some fundamental questions have been addressed of strategy. Specifically, what is strategy, how does strategy relate to competitive advantage and how do one characterize a strategic decision and the key elements of the strategic management process. One must understand that strategy is not a rocket science, however, it is also not something in which you can develop expertise by passively listening or reading. Strategy is best learned by reflecting on and applying the concepts in a real industry context and look for in the industry as well as in the external environment and the strategic choices or decisions firms should take. Implementation challenges also play a key factor given the choices that the firms make.

9. REFERENCE:

1. Alfred Dupont Chandler. (1990). Strategy and structure: Chapters in the history of the industrial enterprise.

2. Bruce Henderson. (1981). The concept of Strategy. BCG Henderson Institute

3. Porter, M. E. (1996). What is strategy? Harvard business review, 86(4), 82-90

4. Henry Mintzberg. (1987). Crafting strategy.

5. Nag, Rajiv and Hambrick, Donald and Chen, Ming-Jer. (2007). What Is Strategic Management, Really? Inductive Derivation

6. Hambrick, D. C., and Fredrickson, J. W. (2001). Are you sure you have a strategy? The Academy of Management Executive, 15(4), 48-59.

7. Porter, Michael E. The Five Competitive Forces That Shape Strategy, HBR, January 2008

8. Collis, D. J., and Rukstad, M. G. (2008). Can you say what your strategy is? Harvard business review, 86(4), 82-90.

9. Porter, Michael E. Competitive strategy: Techniques for analyzing industries and competitors. Simon and Schuster, 2008.

10. Michael E Porter, Free Press. Competitive Advantage: Creating and sustaining superior performance.

11. Jay B. Barney, Gaining and Sustaining Competitive Advantage (Third Edition), PHI Learning Private Ltd.

12. Robert M. Grant, Contemporary Strategic Management (Seventh edition), Wiley Publishing.

Received on 19.07.2020 Modified on 11.08.2020

Asian Journal of Management. 2020;11(4):429-433.

DOI: 10.5958/2321-5763.2020.00065.7