Chapter

8
Strategic Planning

CHAPTER OUTLINE

&.I Levels of Strategy

82 Concept and Nature of Strategic Planning
8.3 Importance of Strategic Planning
8.4 Limitations of Strategic Planning
85 Business Level Strategic Planning

8.1 LEVELS OF STRATEGY

Surztegies are formulated at three different levels of management - corporate, busincss, and
functional levels.

Corporate
BOARD OF DIRECTORS Level
AND CHIEF EXECUTIVE

Business
SBU SBU SBU
Level
A B C

Functional
Finance Marketing Operations Personnel Level

Fig. 8.1 : Levels of Strategy Making

1. Corporate strategy: Athe corporate level, strategic decisions relate to the choice of
direction that afirm will adopt to achieve its long-term objectives. Corporate level stra
tegies are basically decisions concerning the product market scope, acquisition and
allocation of resources. Corporate strategy provides answers to the basic questions :
 Managenent: Principles and
(a) What is our business (the products and services the firm will offor Applicat on
(b) Who are our customers (market scopc)
(c) What do we want (basic goals c.g. market sharc).
Coporate stratcgics are also known as Grand Strategies: According to Glucck

and,theranye
are four grand strategic alternatives--stability., expansion, retrcnchment
combinationof thesethrec.
(a) Stabilin strategy: Astrategy oriented towards stability is generallyfollowed by an
enterprise when it is satisfied with its present position.
.Stability strategy is likely to
be successful in a stable and simple external environment.
(b) Gronth strategy: Whenthe environment is dynamic, managers may find it
or desirable to expand and diversity the firm's operations. Growth necessary
strategyAfimis
generally used in dynamic industries with rapidly changing technologies.
may grow intermally through expansion and diversification.
Alternatively,
may be achieved by integrating with other firms. Market penetration, growth
mara
development and product development are three forms of expansion. Integrative
strategy has several alternatives e.g. backward integration, forward integration
horizontal intergration, conglomerate integration, joint venutre, takeover, merper
etc.

(c) Retrenchment or retreat strategy: An enterprise may retreat or retrench from its
present position in order to survive or improve its performance. Such a strategy
may be adopted during recession and other crisis such as heavy losses. Retrenchment
may take the form of Turnaround, Divest1ment or Liquidation.
(d) Combination strategy: A large firnm active in a number of industries may adopt a
combination strategy. It represents a mix of any of three strategies given above.
2. Business level strategy: A company operates through businesses. Therefore, business
level strategies are formulated to implement corporate strategy. A Strategic Business
Unit (SBU) is an operating division of a company which serves as a distinct product
market segment or a well defined set of customers or a geographical area. For example,
food and beverages and personal care products are two different SBUs in Hindustan
Unilever. Business level strategy seeks to achieve the specific objectives of SBUs so as
to help achieve the overall corporate objectives.
Each SBU makes its own strategy within the guidelines laid down by
SBU level strategy is concerned with product market issues, allocation corporate strategy.
of resources
among functional areas and coordination between them for making an optimal
contribution to the achievement of corporate level objectives. While corporate strategy
defines the business in which the fim will compcte and deploy its
strategy determines how the firmwill compete in agiven business.resources, business
Thus, the scope ol
business strategy is limited in comparison to
corporate strategy.
3. Functional strategy: Every SBU functions through
functions like finance, marketing
production andpersonnel. Therefore, functional strategies are formulated to implemenl
SratcgicPlanning

SRUStratcgy. Functional strategy lays down objectives lor a speeifie functional arca,
allocates resources mong dillerent operalions within that functional urea, and
ordinates various tunctions for making optimal contribution to the chievenment of
business and corporate level objeetives,.
8.2 CONCEPT AND NATURE OF STRATEGIC PLANNING
Strategic planning involves formulation of'strategies at different
This is to bring to your atten
levels in order to achieveeoverall objcctives of the organistion. tion that mny one Including
Accordingto Robert. Anthony. "Strategic planning is the procesS students iffound in posession
of deciding on the objectives of the organisation, on changes in of graphic, clecironie or ne
these objectives, on the resources usedto attainthese objcclives chanical, including photo
and on the policies that will govern the acquisition, use and copylng, PDE, recoding, scan
ning, digitizing, tapiny, web
disposition of these resources"! distributions (neluding
whatsapp groups), informa
The salient features of strategic planning are as follows: tion networkn, or infor1nation
storage and relrival systenns
) Strategic planning identifies the basic mission and goals without the prior or writlen
of the organisation. The business andcustomers of the permission of the publisher
fim are specified in it. willattract FIR, legal actlon
(Including eourt ease for
(i) It is long-term in nature and providesaframework for compensatlon).
operational planning and day-to-day decision making.
(ü) Iis atop management activity.
(i) It is based on forecasted opportunitics and threats in the environment and analysis of
the firm's strengths and wcaknesses.
() It isa comprehensive and unified plan that harmonises the organisation's policies,
programmes and decisions.
(i) It provides direction for the activitics of the organisation so as to achievce long term
objectives.
8.3 IMPORTANCE OF STRATEGY/STRATEGIC PLANNING
Strategy defines the way in which an organization will react to its environment. It is a scheme
for the marshalling and deployment of resources in pursuit of organizational objectives. A
strategy contributes to the success of an organization in the following ways:
1. Helps in facing environmental challenges: Every organization opcrates within the
overall socio-cconomic and political environment of a country. Business cnvironment
has becomc increasingly turbulent. The long-term success of a business enterprise
depends, to a great extent, upon how it responds to the changes in its cnvironment.
Need for strategy arises due to the dynamic environmnent. Strategies arc helpful in
facing environmental challenges. While formulating strategies, an organization
Identifies the thrcats and opportunities posedby the likcly future environment. It
Kobert N. Anthony: Planning &Control-A Franework for Analysis, Harvard Uni. Press, 1965.p. 56
 Munagenent: Principles and
Appli
preparcs itsclf to successfully facc the thrcats and This is to bring to
Cxploit the opportunities by formulating strategics. tion that any your aten
one lneluding
students if found in porsescn
2. Providesdirection: Corporate stratcgy serves as the long of
tem guide towards the achievement of objcctives. It graphic, clectronic or rne.
provides answers to some vital and crucial qucstions such chanical,
copying, including photo.
PDE,
as: (a) what business are wcin ? (b) what busincss should
ning, digitizing.reod1ng, sca
taping, we
we be in ? (c) Who are our customers, ctc. distributionsgroups),(nclinforna
whatsapp udlng
tion nctworks, or
3. Oprimum utilization of resources: Corporate strategy storagc and retriIvalinformatyn
indicates how the resources of the organization should without thc prior or systes
written
be marshalled and deploycd for best results. It ensures permission of the publishe
will attract FIR, legal
more efticient and effective utilization of organization actlan
(including court case for
resources, e.g., time, money, talents, etc. compensation).

4. Facilitates co-ordination and control: Master strategy

interrelates the different departments and groups of the organization. It provides 3
unifying force by focusing attention on common objectives. Strategy also simplifes
control by prescribing broad standards of performance.
5. Competitive strength: Strategies are specifically designed to counter the actions of
competitors. Acompetitive strategy is formulated keeping in view the likely moves of
competitors. It helps in maintaining or increasing the firm's market share in the face of
competition.
Thus, strategic planning clarifies the objectives of the organisation, reduces environ
mental uncertainty by identifying the key factors for the success of business, helps in
fighting competition in the market and increases the chances of survival and growth of
the enterprise.
8.4 LIMITATIONS OF STRATEGIC PLANNING
Strategic planning sufers from the following weaknesses :
(i) Strategic planning involves considerable time, money and efforts. In some cases, it may
take years for the strategic planning to function smoothly.
(iiy Trained and experienced professionals are required to anticipate opportunities and
threats and to assess strengths and weaknesses. Few organisations can afford such
professionals.
üi) Strategic planning may in some cases restrict the organisation to less risky options. Ibe
organisation may fail to encash attractive opportunities in the environment.
tiv) Some organisations defer important decisions due to short tern compulsions and shortag
of resources.

8.5 BUSINESS LEVEL STRATEGIC PLANNING

As discussed in section 8.1, a business level strategy is the strategy developed for a strategx
 8.5

This strategy deals with product market issucs, allocation of

NSInCSS unitt(SBU) ofthe firm.
defincs the
resures anddevweloping competitive cdge for theSBU. While corporate strategy
determines
sinessinwhich the firn will competc and deploy its resources, business strategy
fm will competeiin agiven business. While devcloping abusiness level strategy the
howthe
must analyzethe industry structurce for attractivencss.
its
SBU
SE1 Industry Structure Analysis: Using Porter's Five Force Analysis
lodist structure analys1s is a pre requisite for developing business level strategy. It can be
inne us1ng Porter s Five Force Analvsis'. Porter identified five forces which determine the
naure of competition in the industry. These are:
in Threats of entr: The industry structure is determined by the ease with which new
ims can enter market. If it is easy for new firms to enter the industry, the existing firms
maylose their market share to the new firms. This threat is reduced if there are strong
barriers to entry like economies of scale, product differentiation, huge capital
eguirements.cost disadvantages, restricted access to distribution channels and licensing
requirements. These are described as under:
(3) Economies of scale: Economies of scale restrict entry by forcing the aspirant either
to come on a large scale or to accept a cost disadvantage. These economies may be
in any area of business, e.g..production, marketing, financing, human resources,
etc.
(b) Product differentiation: Due to product differentiation an existing fim is able to
Create customer loyalty. Anew entrant finds it difficult to overcome such loyalty
and must spend heavily on advertising. Product differentiation may act as powerful
barrier where brand loyalty is quite high such as in soft drinks, cosmetics, bathing
soaps and other personal care products.
(c) Capital requirements: The need to invest huge financial resources in order to
compete acts abarrier to entry particularly in case oflargeand long duration projects.
For example,a capital outlay of more than Rs. 1,000crores is required for a urea
fertiliser plant and the gestation period is 7to 8years. Many enterprises find it very
difficult to mobilise so much capital.
(d) Cost disadvantages: The existing firms may have cost advantages which are not
available topotential rivals irespective of theirsize. These advantages may accrue
due to learming, proprietary technology, access to the best sources of raw material,
favourable location and so on. According tolearning curve, cost per unit declines
as an organisation gains experience. New aspirants with no experience face higher
costs than the established firms. Thus, learning or experience curve can work as a
powerful entry barrier.
(e) Access todistribution channels: The distribution channels enjoyed by the established
firms may not be available to the ncw entrants. The wholesale and retail channels
Michael E. Porter, Compctitive Advantage- Techniques for Analysing Industries and Conmpetitors Strategy.
Free Press, New York, 1988.
 Munagement: Principles and
may be linited and the existing firms might have tied up with them. In
cntry will be restricted. Sometimes, this barrier is so high that the new
Apsuchplicatlon
a
cas.
to create an entircly new distribution channcl as Timcx did in the watchentrant ha
() Government policy: The Government may rostrict or even foreclosc
industrythrough licensing when it fecls that supply of a particular
industry.
entry 1o an
its demand. The Government may also crcate cntry barricrs through product
controlscxceed,
raw material prices. pollution control, product safety regulations, etc. 0ver
() Bargaining pOwer of customers: Somctines the industry may be dominated
buycrs. This is especially true in case of industrial or bulk buyers,
by the
products or in case of backward integration. In such industries buyers have
bargaining power and may negotiatethe terms oTtrade in their favour.
undif erentiated
More
of customers is high in the following circumstances: Bargaining power
(a) There are large-volume buyers and industry has heavy fixed costs.
(b) The product is standard or undifferentiated and. therefore, buyers can find
suppliers. altemativ
(c) When the product purchased forms a significantcomponent (in terns of costs nf
the buyer's own product. Such buyers will purchase selectively as in case of
automobile components or TV picture tubes.
(d) If buyers operate on a low profit margin, they will be more price sensitive.
(c) When the industry's product is not important to the quality of buyers' product.
() The buyers are likely to dominate the industry if they pose a problem of backward
integration as in case of textiles and automobiles.
(üi) Bargaining power of suppliers: In industries where there are few suppliers selling
differentiated products having no close substitutes, the suppliers may hold more
bargaining power. Sometimes there may be threat of forward integration. In all such
cases the suppliers will be able to charge higher prices.
The supplier group is powerful in the following circumstances:
(a) The group consists of a few firms and is more concentrated than the industry it
sells to.
(b) The product is unique or differentiated.
(c) Itsells products having no substitutes.
(d) It poses a threat of forward integration.
(e) The ndustry to which the group supplies is not an important customer of the supplier
group.
(iv) Substitute products: Availability of close substitutes affects the growth of the industr)
andalso defines the degree of competition in that industry.
quality, performance, lower prices arc strong competitors Substitutes having be
and adversely affect
prospects of the industry. In several cases product substitutes have affected the growu
ukPlanning 8.7

o'industry. For cxample, credit cards and debit cards are better substitutes than travellers
cheques, Light Emitting Diodes (LED) save more cnergy than CFL bulbs, E-mail is
quicker than a letter.
The following factors determinc how strong is thecompetitive pressure from substitute
products:
a) The substitute product is readily available and attractively priccd.
(b) The buyer views(perceives the substitute product as being better in terms of quality.
performance, among other relevant attributes.
(c) The costs of cnd products to switch to substitutes.
wRialry between existing firms: It is also important to analyze the players in the industry.
The number of competitors, their strengths and weaknesses, positioning of products,
differentiation. brand image, pricing, distribution channels and promotion strategies all
influence the nature of competition in the industry.
Porer's model provides framework of how value is created and divided among existing and
otential participants in an industry. Itallows the firm to analyze competition inthe industry.
Industrv analysis forms the basis of formulating an effective business level strategy to counter
competition Thus, it helps to develop appropriate competitive positioning.

Potential Entrants

Threat of
New Entrants

Bargaining
Bargaining Industry Competitors Power
Power Rivalry Among Buyers
Suppliers of Existing Fins |of Buyers
Suppliers

Threat of Substitute
Products or Service

Substitutes

Fig. 8.2: Forces Driving Industry Competition

8.5.2 Business Level Strategies
market share and
Ihe emphasis of business level strategies is on protecting the firm's
naintaining profitability by countering competition. While the corporate strategies (stability,
achieved through
rowth and retrenchment) work at business level as well, but they are
leadership,
Competitive generic positioning. Porter identified three strategies namely, costadopt one (or
ajferentiation and focus strategy. Based on the industry analysis, an SBU may
More) of the following generic positions as business level strategy:
 Munagement: Priniples and Ayli
I. Cost leadership straleRr
utlons
Cost leadership strategy ams at ganing acompetitive cdye through lower costs, Ilhe
costs of prduction lead to lower prices and help the firm in achieving alarye market lshatowere.
Lower costs are the result of internal etliciencies while maintaining the overall
poducts and services. Thetim must contiuously strive to incrense eficiency to qual i ty
maintain it
of
position as the cost leader. Costs can be reduced through:
" Maintaning tight control over cOsts.
" Controlling costs of R&D.
" Invest1ng in latest cost saving technologies of production
Adv antages:
" Increased profits duc to higher margins.
Large market share
Low costs create barricr to entry for new firms.
" The existing fims are not able to compete on basis of prices.
" Ability to withstandeconomic downturns as well as supplier and buyer pressures better
than the competitors due to low cost structure.
Suitability:
This strategy is suitable where products and services are standardized and consumers are price
sensitive.

Example:
Amazon is an example of acompany that follows cost lcadership strategy. It focuses on attracting
a large number of customers by offering products at low prices. lt buys products at a low cost
and has low overheads because of itsonlinc service (no physicalstores). It also has excellent
d1stnbution facilities. Despite lower prices it is able to maintain high margins.
Limitations:
The organization may develop a tunnel vision and lose focus of what the customers
really want.
if the cost advantages are casilycopied by competitors the firm may lose its strategic
position as acost leader.
" Fmeryence of new low cost technologies can also negate the
tirm's advantage.
2. Diferentiation strategy
This strategy involves using product dilerentiation to gain a competitiveadvantage over the
other firms. In this case the fim tries to dillercntiate its
products from the
product may be diflerentiated on the basis of quality, features, design,competitors. Te
uses, services,
perfortnance, durability, innovativeness, technology used ctc. An cxcellence in this value
SrategicPlanning 8.9

eeinline could result in customers perceiving the product as This is to bring to your atten
unique. This could help the firm generate high revenue. tion that any one including
students iffound in possession
Advantages of graphic, clectronic or me
chanical, including photo
" Creates a loyal customer basc. copying, PDE, recoding, scan
ning, digitizing, taping, web
. Brand loyalty creates a barrier to entry for the new firms distributions (including
and also prevents the existing competitors from capturing whatsapp groups), informa
tion networks, or information
the firm's market shbare. storage and retrival systems
Ability to charge higher prices on the basis of without the prior or written
differentiation. permission of the publisher
will attract FIR, legal action
Easier to sellthe product. (including court case for
compensation).
Awell differentiated product is not easily substituted.
Buyers do not have much power over a differentiated
product's prices due to non - availability of substitutes.
. Anincrease in costs by the suppliers can be absorbed through charging higher prices
from customers.

Suitability:
This strategy is suitable for a fim which is able to create meaningful basis of differentiation.
Example:
Apple follows the strategy of differentiation for its products such as I-Phones. Through research
development and technology, it has created a loyal customer base which is willing to pay a
premium for its products.
Limitations:
If the differentiating element is easy to imitate, the advantage may be lost.
3. Focus strategy
Focus strategies aim to cater to the needs of a particular set of customers, market segment or
narrow product line. They focus on niches and are able to better understand their requirements.
Focus strategy may be based on either cost leadership or differentiation. Accordingly, it is
classified as - (a) Focused low cost. (b) Focused Differentiation.
(a) Focused low cost: The firm caters to a small segment and offers its products and services
for low prices. By focusing on the needs of the niche market, you design a product at a
low cost.

Advantages:
I has the same merits as the cost leadership.

Suitability:
This strategy is used when there is little competition or competitors are not cost leaders.
 8.10
Managenent: Principles and
Example: Applicatlon:
Atake-away food truck /stall offering low prices. This food truck Istall caters to
segment that does not wish for a dining expcrience but wishes to cat fod on the nceds of a
costs because it does not nced servers or largc serving area with scating facility,go. It cuts ita
Limitations:
" The scgment may be too smallto be profitable.
" If competitors cnter the niche the fim may lose its advantage.
" There are few opportunities of growth as the size of the segment is limited.
(b) FoCused differentiation strategy: The firm caters to a small segment and offerS a
differentiated product or services. By focusing on the needs of the niche market, well
design a product that caters to the specific needs of the segment. The you
usually willing to pay a higher price for the product. customers
are

Advantages:
This strategy offers the same advantages as the differentiation strategy.
Suitability:
This strategy is suitable for apreviously uncatered market niche willing to pay ahigh premium
for products catering to its specific requirements.
Example:
Rolls Royce uses focused differentiation strategy. Their cars symbolize with luxury, quality.
and engineering excellence. They are premium priced and focussed on a small niche market.
Limitations:

If competitors enter the niche the firm may lose its advantage.
" There are few opportunities of growth as the size of the segment is limited.
In addition to the above strategies, another hybrid strategy has emerged which combines the
cost leadership with differentiation. This strategy is known as the integrated low-cost
diferentiation strategy.
4. Integrated low-cos/differentiation strategy
This business strategy combines the features of low cost with differentiation strategy. Here,
the business offers differentiated products at a low cost. In view of the increasing
competition
in the market this is ernerging as a desirable approach. Here, the products may not be unique
ror is the company the cost leader but rather has a reasonably low cost.

Advantages:
Customers are brand loyal due to product differentiation as well as low prices.
 ragicPlanning 8.11

Example: This is to bring to your atten

tion that any one including
IKEA uscs this stratcgy and offers product differcntiation in students if found in possession
design at aflordable prices. of graphic, electronic or rnc
chanical, including photo
Limitations: copylng, PDE, rccoding, scan
ning, digitizing, taping, web
einvolves making a compromise. The organization is neither a distributions (íncluding
leader nor consideredlexccllent in diferentiation. In Porter's whatsapp groups), informa
opinion, this may result in the company being "stuck in the tion nctworks, or information
storage and retrival systems
mddle without the prior or written
permission of the publisher
will attract FIR, legal action
Choice of a Strategy (including court case for
tris important for the firmto select the right strategy. To decide compensation).
ahich strategy to adopt the firm must evaluate its internal
resources. It must identify its core competencies. Core
cmpetencies are the strengths which give the firn an edge over the competitors. For example,
Fthe core competency of afim is its latest technology then it must develop astrategy around
his technology. It could use this technology to differentiate its products from the competitors.
Atermatively, if the firm's core competency lies in its access to low cost raw material, it could
strive to be the cost leader in the industry. The firm must also evaluate its external environment
md identify the requirements of the market. It must analyze the industry structure and analyze
the forces at work. Finally based on all the three- environment and target market, industry and
core competency; it must choose a value discipline it can excel in (cost/ differentiation etc)
and select an appropriate strategy.

TEST QUESTIONS

1. What is Strategic Planning? Explain its advantages and limitations.

2. Discuss the importance of strategic planning in today's era ofglobalization.
(Delhi, 2006)
3. Define the term 'Strategic Planning.' Describe the process involved in Strategic Planning.
(Delhi, 2016 CBCS)
4. What is business level strategic planning? Explain the different business level strategies
that can be adopted bythe firm to gain a competitive edge.
planning?
D. What aspects of industry structure analysis affect business level strategic
Explain in light to Porter's five force model.
6. Write detailed note on Strategic Planning. (Delhi, CBCS 2018)
 Mumayenent: Primiples und
PRACTICAL EXERCISES
Applleationn
CASESTUDY I
Blow Dry Ltd. manufactures hair dryers in the domestic market. There are 3
other
companics in the samc busincss, All these companics produce hair drycrs which havc najor
fcatures, quality and offer similar product support scrvices. Blow Dry Ltd has a similar
of29 %whilc the others have shares between 20-26 percent. Blow Dry Ltd and market
its rivalsharc
not own patents for the products. For production, the parts and material are casily availab
through local supplicrs. Blow Dry Ltd. sclls the products to cndl customers as well as
customers (like hotels, beauty salons ctc). business
QUESTION
" Using Porter's 5force analysis, analyze the industry structure for Blow Dry Ltd
CASE STUDY 2
Ziffi Ld manufactures and sclls two models of laptops- Basc and Acc. Base is a lower end
modcl which has a lowconfiguration. It is sold at a low price and supports basic functionality.
Thecustomers buy this model for its affordability. The company also caters to the tech-savvy
customers with their Ace model of laptop. Ace is a high-cnd model with an excellent
configuration and boasts of the latest processor and advanccd features. This model is ofered
at premium price becausc of its distinguishing features.
While curently the manufacturing process of both models is separate; Ziffi is working on
standardizing the manu•acturing proccss for both modcls of laptops so that many of the
componcents used by the two nodels can be produccd with the same machinery in future. The
company is also trying toenter into agrcement with supplicrs to supply thc parts as and when
needed. This is aimcd at reducing the logistics costs.
Recently. the sales of Basemodel have dropped. Ancw competitor has emerged in this market
segment. They are selling a better configuration laptop at a lower price than Base. The managing
Director Mr Raman is wondering how to tackle this problem. Mr Rao, the marketing manager
has asked him to discontinuce with the Base Model and only focus on
Ace as Ace accounts for
65% of profits nade by the company. The production manager Mr Fernandez however says
that thecompany sells 3 Bascmodels for every Acc model.Thercfore, he is of theopinion that
discontinuation willlead to lOss of alarge customer base. Hc argues that
should bec Cxplored to make Base lucrativc for the customers again. cost cutting measures
On the basisof the above case, answer the
following:
What business strategies are being followed by ZiffM Ltdfor its two laptop
What are the advantages and limitations of each of these modes.
strategies?
" Do you agree with the suggestions given by Mr Rao and Mr Fernandez? Advice
Mr Raman about the strategy to be followed. Give reasons to support your
answer.