Strategic Options

What is the meaning of Strategic Options?

A strategy is a plan for the successful achievement of the organization’s goals over a period of time. It is always designed towards the achievement of a specific target or a goal. Also, it is always for the long-term. Strategic options are goal-oriented alternatives that an organization has towards the external uncertain environment. It is not only the choice but also the obligation of the management to choose the best possible alternative. It should be done in context with the organization, its needs, its resources, its vision, and other similar considerations.

The determination of these options involves a thorough study of the organization’s strengths, weaknesses, opportunities, and threats from the internal as well as the external environment. This becomes more complex in case the organization has a portfolio of various businesses, or products. Similarly, it becomes complex to decide and implement if it operates in different geographies. Because the tastes and preferences of the customers may vary considerably. Then the proper evaluation of each of the options has to be done by the management. Each will have its own advantages as well as disadvantages. This involves a lot of brainstorming and making tough decisions and choices. After evaluation, comes the selection stage where one or multiple options can be chosen as per the need and circumstances. Also, the management needs to decide how these options will be put into use and practice.

Which Techniques are useful for making Strategic Options?

Some of the key techniques for the generation of strategic options are:

Using the Ansoff Matrix

The Ansoff matrix provides strategic options with regard to the growth of an organization. And what modifications/amends needed in the existing portfolio of products to grow. It takes into account new and existing markets, new and existing products, and their inherent risks. After analyzing these aspects the matrix provides four different strategic options. And these are Market penetration, Market development, Diversification, and finally fourth being Product development.

The matrix helps to guide and make decisions to sell the existing products and services to new customers and clients, altogether new products and services to the existing clients, or new products and services to new clients. Thus, it can be a very useful tool to provide sales and growth options along with an outline of their risks. It is a widely used tool due to its ease of use and simplicity. In other words, this matrix is a quick and simple way of understanding and appreciating the risks of growth.

Using the Innovation Matrix

The Innovation matrix provides a formal structure to promote and manage innovation in an organization. It helps to create strategies that can help to simplify and design techniques for effective thinking. This can act as a tool for innovation.

It promotes the use of three key steps: Think, Strategize and then finally Act in order to promote innovation and innovative techniques within the organization.

Porter’s Generic Strategies

Porter’s Generic Strategies is a framework to plan the direction of the organization. It suggests ways to gain a competitive advantage in the market. This tool gives an organization a roadmap to get an edge over the competitor by taking sales away from them and establish leadership in the market.

Porter’s generic strategies suggest the use of three key strategic options: Cost Leadership, Differentiation, and Focus. These three options aim at giving a competitive advantage to an organization and evolve as a leader.

Cost leadership advocates capturing a bigger pie of the market share. This can be done by lowering costs or increasing profits by maintaining average and competitive prices. Also, this option advocate minimizing costs so that it is lower than that of any competitor.

The strategy of differentiation focuses on offering products and services with a tinge of differentiation or uniqueness. The offerings of the organization should be such that they provide additional value and features than that any competitor provides.

The strategy of focus pushes an organization to gain a competitive advantage. This is done by focusing on niche markets and clientele. The organization can either use cost leadership or differentiation to achieve this goal.

Using a BCG Analysis

The BCG Analysis is an important tool for companies to determine where their products stand in front of the competitor’s products. It provides answers to important questions like which products to invest in and grow; which products to develop more and finally, which products to discontinue or stop investing in.

The matrix has “rate of growth of the market” on the y-axis, and “relative share in the market” on the x-axis. Organizations can divide their products into four categories and place them in the matrix: Cash cows, stars, dogs, and question marks. Cash cows generate positive and good cash flow, stars are products with maximum market share and cash generation potential, question marks have high growth rate and potential to grow, but currently have a low share in the market. Finally, the dogs have very limited future growth potential. Hence, an organization will be better off to stop further investments in this category of products.

SWOT Analysis

SWOT analysis also provides relevant strategic options for an organization. It helps to fight competition and is useful in doing project planning. The meaning of SWOT is S for strengths, W for weaknesses, O for opportunities and finally T for threats.

An organization can make use of the analysis for decision making and decide whether the option will help it to meet its goals and objectives.

Pareto Analysis

Pareto Analysis helps to analyze multiple choices or alternatives that are available to an organization. It helps to figure out the benefits a company can expect with each of the alternatives, and then the best course of action to implement that choice. The main goal is to derive as much benefit as possible from that choice of action.

The analysis depends upon brainstorming and bringing out new ideas from the management. Also, it results in the active involvement of each and everyone involved in the process of chalking out the strategic options in the organization.

Strategy Canvas

Strategy canvas or Blue ocean strategy canvas helps to compare the strategic profile of an existing market with that of the new entrant or the company. The strategy helps to develop a “blue ocean market”. It means that it focuses to continuously discover newer markets that have a limited presence of the competition and have good growth potential.

Also, the canvas is strictly against venturing into “red oceans” or the markets that already have a lot of competition present and are already saturated.

Strategic Options

What Strategic Options does a company have?

An organization can opt for any of the following strategic options as per its needs and requirements, and the stage it is in its lifeline-

Diversification strategy

A company may opt for a diversification strategy in case of saturation of its already existing markets and product portfolio. It can plan to diversify into new markets, new products and even opt for foreign markets for expansion.  

This strategy is helpful in achieving economies of scale and scope. It enables companies to make the best possible use of inexpensive resources of foreign countries and bring down its costs. Companies can benefit from the already established brand name, and make use of their already existing know-how, techniques, processes, and patents. Thereby they can gain a competitive advantage over others and become market leaders with improved market share and profitability with relative ease.

Restructuring strategy

The strategy of restructuring means that a company may choose to restructure some of its unprofitable product lines or processes. It may discontinue them, and make entirely new acquisitions to substitute them.

This strategy is useful for those companies that have products in their portfolio that have become unprofitable or are starting to become unviable to continue with. Or the products that are towards the end of their lifecycle/existence. It is a sort of reorganization of a company that may help it to free some of its underutilized or unviable resources. Redeploying them towards growth will improve the overall status of the company.

Harvesting strategy

This strategy involves the reduction of business assets to the bare minimum and freeing up the resources and capital of the business. Such a strategy leads to the stoppage of new investment in the business, whereas cash flow increases in the short run. The end road of such a strategy is generally liquidation of the business.

Turnaround strategy

Turnaround strategy is nothing but bringing an unprofitable or dying business back to life. Instead of harvesting, a company may choose the strategy of investing in new resources and turn back the business into being profitable.

The adoption of such a strategy can be done when the industry prospects look bright and profitable in the long run, even though the business suffers losses in the short run. It may choose to cut costs, invest in new products and regions, or change its business strategy altogether.

Divestiture strategy

A company may choose the strategy of divesting its business unit, or a part of it if it continues to be unprofitable for a long time. Also, the company may find limited growth opportunities for the same in the future too. The company may either go for “spinoff” in which it sells the portion to outside individuals. Else it may opt for a “management buyout” in which the company’s management itself buys that unit.

Companies may opt for this strategy when they intend to concentrate solely on their core business, or when they are unable to manage the diversified portfolio of the company properly.

Strategy of liquidation

This is the last option that a company intends to take. The company writes off an investment since it is not able to find a suitable buyer for the same. It takes such an extreme step in case of financial or managerial failure of the business unit. The collapse becomes inevitable or else the unit may continue to drain the company’s valuable resources.

Strategic Options: Conclusion 

A company should be extremely cautious and thoughtful before choosing a particular strategy. It should continue to look for better options even when it has chosen one. This process is continuous and never-ending for the management. Choosing a strategy option may call for a tough choice or even a trade-off on the part of the management and it should be ready for it.

While going for multiple options, the management must always abide by the company’s core values and missions. It should ensure that the options work in tandem with each other, no friction is created between them and the departments and they meet the end objective of a high growth rate along with high profits.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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