Topic 7 X Organisational

Strategy

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the concept of organisational strategy;
2. Explain the four conditions that need to be fulfilled by the
organisationÊs resources in order to establish a competitive
advantage;
3. Discuss the three processes in establishing strategy; and
4. Evaluate the three levels of strategy.

X INTRODUCTION
Strategy means common planning or a plan that is established to achieve long-
term objectives (Abu Mansor et. al., 1999). It is the driving force to organisationÊs
members on the steps that need to be followed in order to achieve the targeted
objectives. Thus, the strategy has to be consistent with the objectives of the
organisation.

Before an organisation drafts a strategy, the main issue that needs to be known is
the competitive advantage of the said organisation. Competitive advantage refers
to any aspect that can be done by the said organisation which is better than its
competitor. For example, providing fast and efficient service.

The competitive advantage is established through the use of resources that are
available in an organisation. The organisationÊs resources not only consist of
financial resources, human resources and fixed assets but also consist of
information owned, knowledge and capabilities in certain sectors as well as the
work processes that are being practised.
 TOPIC 7 ORGANISATIONAL STRATEGY W 107

These resources must fulfil at least four conditions in order for an organisation to
establish its competitive advantage, these are (1) valuable, (2) limited, (3) difficult
to be copied and (4) no replacements.

The use of valuable resources will increase the efficiency and effectiveness of the
organisationÊs operations. An example of an organisationÊs valuable resources is
the possession of sophisticated and latest technology. Nonetheless, the elements
in a business environment such as changes in consumer taste, action of
competitors, technology advancement and others, can affect the resources that
were previously valuable to be of less value now.

In order to maintain competitive advantage, these valuable resources have to be

limited. This means that they are not owned by the competitor. Even if there are
other people who have the said resources or such capabilities, the numbers are
very limited.

Apart from that, the resources owned must be difficult to be copied. This means
that the valuable and limited resources cannot be copied or are too expensive to
be copied by competitors.

Finally, these resources must also be irreplaceable. This means that there are no
other resources that could provide the same results or interest such as the one
produced by the said valuable resource.

In summary, in order to establish a strategy, the organisation must firstly identify

its strengths (that is the competitive advantage) it owns. This identification is
important to ensure that the competitive strategies established are based on these
strengths.

SELF-CHECK 7.1
Some organisations prefer to use old strategies to compete with other
companies and it is not impossible for them to fail in such competitions.
How important are the changes of strategies to an organisation?

7.1 PROCESS OF STRATEGY ESTABLISHMENT

Organisations establish strategies to maintain its competitive advantages. The
strategies are established based on the three steps illustrated in Figure 7.1.
108 X TOPIC 7 ORGANISATIONAL STRATEGY

Figure 7.1: Process of strategy establishment

(a) Evaluating Requirements to Change Strategies

Before deciding on a new strategy, the first step is to evaluate or identify
whether the said strategy needs to be changed. This process usually takes a
long time to process especially if the manager is facing competition inertia.
Inertia competition refers to the refusal of the manager to change the
existing strategies as the strategies have proven to be successful all this
while. Even though the strategy had been proven to work previously, it
does not necessarily mean that it is suitable for use in the future. Probably
in the future that strategy would become obsolete or be copied by
competitors.

One of the ways that can be used to facilitate the evaluation process on the
requirement to change is by conducting an assessment on the strategy that
is currently being implemented. Is it really as it was planned before? If there
are any deviations, even a little, it will mean that the strategy has to be
restarted with the same original strategy. Definitely it would not be suitable
as changes in time had made a part of the original plan no longer suitable
for the current situation. Therefore, the best step is to establish a new
strategy. This means the existence of the requirement to establish a new
strategy.

(b) Analysing Situations

After identifying that the establishment of strategies must be made, the
subsequent step is to carry out environment analysis or SWOT analysis.
SWOT analysis is the abbreviation for Strengths, Weaknesses, Opportunities
and Threats. The purpose of this analysis is to identify the strengths and
weaknesses of the organisation as well as the opportunities and threats in
the environment that could influence the organisation.

Strengths and weaknesses are the internal elements found in organisations.

Strengths refer to elements that are positive while weaknesses refer to the
elements that are negative. Examples of organisation strengths are the
 TOPIC 7 ORGANISATIONAL STRATEGY W 109

employment of employees who are hardworking and motivated, possess

technologies that are sophisticated, financial resources that are strong,
efficient work processes and others. Weaknesses are the deficiency or
activities that are detrimental that are adopted by the organisation. For
example, employees who are undisciplined.

Opportunities and threats refer to incidents or issues outside the

organisation. Opportunities are positive while threats are negative as they
can have impacts on the organisation. For example, the consumersÊ tastes,
economic situations, government policies and actions by competitors.

(c) Selecting Strategy

After identifying the requirements to establish a strategy and after
implementing the SWOT analysis, the last step in the process of strategy
establishment is to generate as many alternative strategies as possible based
on the SWOT analysis. Thereafter, the best strategy will be chosen and
implemented in order to maintain the competitive advantage of the
organisation. Based on the Theory of Strategic Referral Centre, the manager
will make a choice between the two basic alternatives that is either to
implement the strategy that avoids risk or to implement the strategy that is
more aggressive that is by taking a risk (Williams, 2000).

The determination of whether a manager will choose the strategy that takes
risks or avoids risk depends on the Strategic Referral Centre (SRC). SRC
refers to the average achievement of a variable that has been measured. If
the organisationÊs performance level is much higher than the level of SRC,
then usually the manager will choose to avoid risk. This is to maintain the
present performance level. Instead, if the organisation performance level is
below the level of SRC, then the strategy to take a risk will be made. This
means that the organisation will do anything in order to increase the
organisationÊs performance level to the level of SRC or higher than SRC.

For example, in the hotel industry, suppose an average rate of a deluxe

room is RM130. Hence, RM130 is the SRC. If the room rate of a deluxe room
in Hotel Raya costs RM120 then the performance of Hotel Raya can be said
to be above the level of SRC. This is a good strategy because Hotel Raya will
be able to attract more visitors to the hotel. In this situation, Hotel Raya
normally will not choose a strategy with high risk in order to maintain its
existing performance. However, the opposite will occur if Hotel RayaÊs
performance is below the level of SRC. Hotel Raya will take the aggressive
approach to increase its performance level to the same or higher level than
the level of SRC.
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ACTIVITY 7.1
To obtain additional information related to strategic management, visit
the following website under the topic of strategic management.
http://www.lib.usm.my/press/ssu/sulai/

In this website, you will find a complete text titled „Leadership and
Strategic Management for an OrganisationÊs Excellence‰ by Professor
Mohamed Sulaiman. Print out the topic of Strategic Management and
obtain the important information that is relevant to this topic.

EXERCISE 7.1

Essay Question

State the meaning of SWOT analysis.

7.2 STRATEGIES AT THE CORPORATE,

INDUSTRY AND FIRM LEVELS
After identifying the process of establishing strategy, the next discussion will
focus on the types of strategies found in organisations. The types of strategies
that will be discussed focus on the strategies that are established to fulfil the
requirements of the management hierarchy.

7.2.1 Corporate Level Strategy

Corporate level strategy is an overall organisational strategy that answers to
issues of, „the type of business that is intended to be operated.‰ For a new
organisation, corporate strategies are made in order to determine the type of
business that it intends to be involved in. For instance, an electronic factory will
determine whether to operate a business of producing fans, television sets, video
recorder, refrigerator and others. However, for a business that has already been
in operation, corporate planning will be made to determine whether to continue
the current business or not. The decision to continue or to shut down a business
operation depends largely on the cost and benefits of operating the business.
 TOPIC 7 ORGANISATIONAL STRATEGY W 111

There are two approaches that can be adopted to determine the business sector
that it intends to be involved in, that is firstly, the portfolio strategy and secondly
the grand strategy.

(a) Portfolio Strategy

One of the strategies normally practised by share market investors is
diversification, which is buying shares from various companies in different
industries. The purpose of this strategy is to minimise the shares portfolio
risk (collection of shares). The idea is simple, if the shares of a company
experience losses, it would not affect the overall portfolio. As these shares
consist of shares from various industries, the losses in a company will be
offset by profits from other companies.

Portfolio strategy is based on the same idea. It is a corporate level strategy

to minimise risk through its business diversification or diversification of
product line. Among the methods to minimise risk in these strategies are:

(i) Acquisition is the buying or taking over of other companies in that

industry, such as competitors. This will reduce the level of
competition in the same industry and consequently strengthen the
companyÊs position in that industry.

(ii) Unrelated diversification is the establishment of a new business or the

takeover of another business that does not have any link with the
original business of the company. For example, Company A which is
involved in the electronic industry all this while, is now involved in
another business sector, which is the hotel industry. The idea to
implement this strategy as explained above is that if the business
declines, it will have not affect the other business as both the
businesses are in different industries.

(iii) BCG Matrix (Boston Consulting Group) was introduced by a new

group of consultants from Boston. It is a portfolio analysis method
that can assist managers in establishing strategies. Specifically, BCG
Matrix is used to identify the status of each business unit that it is
involved in. Does it has any potential to develop and generate
profitability or has problems and must be written off? It is a very
useful tool for an organisation that has many business units.

The evaluation of each business unit in the BCG Matrix is made based
on the market growth rate and market share owned by the said
business unit. Business unit is also known as strategic business unit
(SBU). SBUs comprise of product lines or business sectors that it is
involved in. For example, Magnolia produces ice cream, soft drinks
and milk based products such as yogurt. Magnolia is said to consist of
112 X TOPIC 7 ORGANISATIONAL STRATEGY

three SBUs. It is the same for DRB Hicom because if DRB Hicom is
involved in the sectors of property, finance, automotive and
construction, it will have four SBUs.

Figure 7.2: BCG matrix

Source: Certo, S. C. (2000). Modern management (8th ed.). New Jersey: Prentice Hall

Next we will continue the discussion using the BCG Matrix to categorise
each SBU. SBU can be at any of the four sections in the BCG Matrix, as
illustrated in Figure 7.2. Let us look at the above symbols and their
meanings.
 TOPIC 7 ORGANISATIONAL STRATEGY W 113

Table 7.1 explains the categories found in BCG Matrix.

Table 7.1: Categories in the BCG Matrix

Category Explanation

Question This SBU is a question mark to the organisation. Whether it can be

Mark continued or not depends on its financial viability. This is because
it requires a large sum of cash in order to support the market
growth to be faster and also to maintain its market share that is low.
If the management is confident that the additional investment
could bring the SBU towards the category of „Star,‰ it will try to
obtain cash to invest in this SBU. If it the opposite, then this SBU
will be stopped.

Star This SBU also requires a large sum of cash to support its market
growth. However, as its market share is high, this SBU can also
generate money to the organisation.

Cash Cow As its market share market is high, this SBU usually contributes a
lot of money to the organisation. Its low market growth does not
require lots of money. It can be better used to help the
development of other SBU units such as the SBU in the „Star‰
category.

Dog Apart from generating little cash, sometimes this SBU has to obtain
help from the other SBU units. This type of SBU is best written off.

In summary, by using the BCG Matrix the organisation will be able to assess
the position of each SBU it owns. The SBUs that have potential will be
continued, whereas the SBUs that are liabilities to the organisation will be
written off. This means that the usage of BCG Matrix can guarantee that an
organisation only holds the SBUs that have potential and are profitable.

(b) Grand Strategy

The grand strategy is the strategy at the corporate level that is established to
achieve the long-term objectives of the organisation. There are three types of
grand strategies, which are the growth strategy, stability strategy and
retrenchment strategy.

(i) Growth strategy is implemented for the purpose of developing a

business. This development might be from the aspects of increase in
production, profitability, market share or the number of branches. The
company can be developed in two ways that are through internal
114 X TOPIC 7 ORGANISATIONAL STRATEGY

growth or secondly, through external growth. Internal growth means

the company expands on its own without involving another party. For
example, the company opens up branches in other places or
establishes another new business besides its original business.
External growth refers to the development of business through the
involvement of other companies, whether through mergers or
acquisitions of other companies. Usually, the growth strategy is made
in order to increase the SBU that is at the „Star‰ position or at in the
„Question Mark‰ category which has the potential of achieving the
„Star‰ position.

(ii) Stability strategy is used to defend the current position of the

organisation. It still sells the same products to the same market.
However, it is now focusing on improving the way the organisation
operates its business such as improving its services to customers, to
speed up the production of products and others. This strategy is
always implemented by SBUs that is in the position of „Cash Cow‰
which is a good position. Thus, the stability strategy is used to
maintain the position so that it will not fall to the „Dog‰ position.

(iii) Retrenchment strategy is made to restore the organisationÊs declining

performance. It can be done by reducing the size or scope of the
business operation. Normally, the early steps taken are to save cost by
reduction of expenditure, termination of employees and closure of
branches, factories or any product lines that are not profitable. After
cost saving or reducing the scope of operations, the next step is to
initiate recovery. In the process of recovery, the organisation will take
specific actions to restore the performance of the organisation.

EXERCISE 7.2

Essay Question

State the types of grand strategies.

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7.2.2 Industry Level Strategy

SELF-CHECK 7.2

In absorbing the world of business and commerce, an organisation

cannot deny the prominence of other organisations that are also
competing in the same industry. The organisation has to establish
strategies for the purpose of competing with the other organisations in
the same industry. How to compete in the industry that you intend to
participate?

The industry level strategy is established to compete with others in the same
industry. Before determining the types of strategies that will be used to counter
competition, we need to analyse the competitive situation in the industry. The
level of competition in an industry can be identified by using the Five Industry
Power approach introduced by Michael Porter. This model provides an outline
on the main powers that determine the level of competition in an industry. The
Five Industry Power meant here are ă competitive nature, threat of new entry
firms, threat of product/service replacements, bargaining power of buyers and
bargaining power of suppliers. These five powers will determine whether the
industry is attractive or not (attractiveness) and whether the industry has the
potential to generate profitability in the long term or not (profitability). The five
power industry is illustrated in Figure 7.3.

Figure 7.3: Five industry power by Michael Porter

Source: Certo, S. C. (2000). Modern management (8th ed.). New Jersey: Prentice Hall
116 X TOPIC 7 ORGANISATIONAL STRATEGY

(a) Competitive Nature

Competitive nature is the measure of competition levels between firms in
the industry. Are the firms competing aggressively or otherwise? Is the
purpose of competition to defeat the opposition or to provide the best
service to customers?

(b) Threat of New Entry Firms

The threat of new entry firms is a measure on the obstructions to enter that
industry. Is it difficult or easy for new firms to enter and conduct business
in the industry? If there are too many rules and procedures that must be
complied with or the capital required is too large or the requirement of
specific expertise is needed, these will complicate matters for a new firm
that is entering into the said industry. Subsequently, the competition will
become less and the present firmsÊ revenue and profitability will be secured.

(c) Threat of Product/Service Replacements

The threat of product/service replacements refers to whether there are any
other products that can replace the product that we produce. Product
replacement is another product that can provide the same benefits if it is
used. For example, raincoats and umbrellas are product replacements. If
there is no umbrella, we can use the raincoat to protect ourselves from rain.
It gives the same benefits as using an umbrella. Suppose in the business
that you intend to participate there are many product replacements, then
that business will not be attractive as you have to compete with the product
replacements and thereafter affect profitability.

(d) Bargaining Power of Suppliers

The bargaining power of suppliers refers to the extent a supplier is able to
control the price of its raw materials that are sold to an organisation. If the
number of suppliers in the market is small, then the organisation does not
have much choice. Hence, suppliers are in control to set any price for their
raw materials. If the suppliersÊ price setting is high, it will affect the
profitability of the organisation. Therefore, the business will no longer be
attractive for participation.

(e) Bargaining Power of Buyers

The bargaining power of buyers refers to the extent the buyer is willing to
set a price on an organisationÊs product. If the organisation is too dependent
on certain customers then indirectly the customers will have the power to
influence the price of the products sold. If the buyers have the power to
influence the price of the product then the business is no longer attractive as
traders would not be able to plan their profits.
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EXERCISE 7.3

Essay Question

1. What is the meaning of „Threat of New Entry Firms‰ and the

„Bargaining Power of Suppliers‰?

(a) Positioning Strategy

After finding out the actual conditions and level of competition in the
industry, the next step is to establish specific competitive advantages in
order to protect the organisation from any negative impact of the
competition.

Positioning strategy focuses on the methods to position the organisation in

the said industry or in other words, how we want the organisation to be
perceived, as an organisation that sells quality products or as an
organisation that provides the best customer services or selling unique
products.

According to Michael Porter, there are three types of positioning strategy

which are cost leadership strategy, differentiation strategy and focus
strategy.

(i) Cost leadership strategy refers to companies that are capable of

producing products at a much lower production cost compared to its
competitors. As a result, the product can be sold to buyers at a cheaper
price in the market. Therefore, even though there is a threat in the
industry, the organisation will still have its fixed consumers as the
product or service save cost for consumers.

(ii) Differentiation strategy refers to the organisation that produces

products that are different compared to its competitorsÊ products. Due
to the uniqueness of the said product, consumers are willing to buy it
even though it is being sold at a much higher price compared to its
competitorÊs product.

(iii) Focus strategy emphasises on a target group. This strategy is always

used by magazine publishers where certain magazines target a specific
group of consumer only. For example, the Female and Her World
magazines are specifically targeted at female consumers.
118 X TOPIC 7 ORGANISATIONAL STRATEGY

(b) Adaptation Strategy

Adaptation strategy is made for the purpose of selecting the most suitable
strategy based on the changes that have taken place in the external
environment of the organisation. There are four types of adaptation
strategies, which are the defenders, prospectors, analysers and reactors.
Table 7.2 below, illustrates the four types of adaptation strategies including
their explanations.

Table 7.2: Adaptation Strategies

Organisation
Explanations
Strategies
Defenders Organisations experience average growth by continuously
improving its existing products/services. Defenders will try their
best to maintain their existing customers. The objective of this
strategy is to defend the present position of the company from
falling to a lower level.
Prospectors This organisation pursues growth aggressively. Prospectors will
seek and seize any opportunities that are available in the market.
Due to its nature that likes to seek opportunities and dare to take
risks, this organisation will always be the pioneer in introducing
new products into the market.
Analysers This is the hybrid between defender strategy and prospector
strategy. This organisation pursues growth through certain
selective opportunities only. Its purpose is to minimise risk and
increase profitability through implementing strategies that have
proven to be successful as done by prospectors.
Reactors Unlike the rest, reactors do have consistent strategies. Instead of
forecasting and being prepared for any available opportunities or
threats, reactors usually react to changes after it happens.
Therefore, it is not surprising at all, if they show a lower
performance rate compared to the defenders, prospectors and
analysers.

7.2.3 Firm Level Strategy

Most of the firms actually do not compete with the industry but compete with
several other firms in the said industry. The competition between two firms that
sell similar products or services is known as direct competition. In direct
competition, any action taken by a party will cause a reaction from the other
party.
 TOPIC 7 ORGANISATIONAL STRATEGY W 119

There are two factors that determine the direct competition levels between two
firms, which are market similarity and resource similarity. Market similarity
refers to the number of markets where both firms face overlapping products and
overlapping consumers. The greater the overlap, the stiffer the competition
between both firms. Resource similarity refers to the extent where both firms
have the same sum and type of resources such as assets, capabilities, processes,
information and knowledge that is being used to establish and maintain the
competitive advantage of each firm. From the point of competition, higher
resource similarity would mean that when any action is taken by a firm, it is
highly probable that it will be copied or adopted by the competitor firm.

ACTIVITY 7.2

You have been exposed to corporate, industry and firm level strategies
including the two approaches that will be used to determine the business
sectors that you intend to participate in. Based on what you have learned,
in order to ease your understanding and help your studies, sketch a
diagram for all the three levels of strategies.

(a) Strategic Action in Direct Competition

Corporate strategy helps a manager to determine the type of business that it
intends to participate in, while the industry level strategy helps a manager
in identifying ways to compete in an industry. Finally, the firm level
strategy is made to identify the time, methods and actions that need to be
taken in direct competition.

There are two types of action in direct competition, which are attack and
counter-attack. Attack is made with the purpose of reducing market share
or profits of competitors. Counter attack is made for the purpose of
protecting its profitability and market share from declining due to attacks
from competitors.

Attack and counter attack may consist of tactical actions such as price
reductions, large-scale product promotions, improving existing products
and others. Nevertheless, attack and counter-attack can consist of strategic
actions that are based on an organisationÊs resources such as increasing
production facilities, expanding the factory, introduction of new products,
going in and out of a market and so forth.
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ACTIVITY 7.3
To obtain additional articles or information on how to strengthen
competition, visit the website stated below:

http://www.el.com.my/pcghs/dayasain.htm

You will find an article titled „Stabilising Management Competition in

the Era of Globalisation.‰ Print the article and obtain the main headings
of this article as it will help you to give opinions.

EXERCISE 7.4

Essay Question

State the meaning of direct competition. What are the strategic actions in
this type of competition?

Multiple Choice Questions

1. __________ is known as SWOT analysis. It is the evaluation of the

strengths and weaknesses of an organisationÊs internal
environment and the opportunities as well as threats in the
external environment.

A. Situation analysis
B. Firm level strategy
C. Competitive advantage
D. Differentiation analysis

2. The Model of Five Industry Power is the model that was created
by a management expert by the name of __________.

A. Abraham Maslow
B. Henry Mintzberg
C. Alten Mayo
D. Michael Porter
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3. The term __________ refers to assets, capabilities, processes,

information and knowledge that are being used by an organisation to
improve its effectiveness and efficiency.

A. Resources
B. Power
C. Competitive advantage
D. Grand strategy

4. Which one of the following is the positioning strategy that was

introduced by Michael Porter?

A. Cost leadership
B. Variety
C. Focus
D. Growth

5. Which of the following is NOT one of the grand strategies?

A. Profitability
B. Stability
C. Retrenchment
D. Growth

TRUE (T) or FALSE (F) Statements

1. In order to maintain competitive advantage, an organisationÊs

resources have to fulfil three features, which are valuable, difficult to
be copied and no replacements.

2. At the corporate level strategy, the three types of grand strategies are
growth strategy, stability strategy and retrenchment strategy.

3. The industry level strategy answers the issue of „what is the business
that one intends to participate in‰.

4. The process of establishing a strategy consists of (1) evaluating the

requirements for changes in the strategy, (2) analysing situations and
(3) choosing alternative strategies.

5. Corporate level strategy consists of portfolio strategy and grand

strategy.
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„Detailed and accurate planning will bring success‰

• Strategy means a plan that is established to achieve the long-term objectives

of an organisation.
• An organisation establishes strategies to maintain its competitive advantage.
• Competitive advantages will only be established if the organisationÊs
resources fulfil four conditions ă valuable resources, limited, difficult to be
copied and no replacement.
• The process of establishing strategies are divided into three levels ă
evaluation of the requirement to change the strategy; analysis of the situation;
and selection of alternative strategies.
• Generally, an organisationÊs strategies can be divided into three levels ă
corporate, industry and firm.
• The corporate level strategy is made to determine the business sectors one
intends to participate in.
• The industry level strategy is established to determine how an organisation
should compete in an industry while the firm level strategy refers to the direct
competition between two firms.
 TOPIC 7 ORGANISATIONAL STRATEGY W 123

Competitive advantage Grand strategy

Corporate level strategy Industry level strategy
Firm level strategy SWOT analysis