Business Strategy and Policy

Continued business success is the result of systematic planning, the process of developing strategies to increase the organization's market share and policies to promote this goal and meet other requirements placed on the firm. The first step in strategic planning is to develop sound objectives for the organization based on a rigorous analysis of available data about the marketplace, the competition, and the resources of the organization. These must be specific with measurable outcomes so that success can be objectively determined. Supporting plans and budgets can then be developed to provide a practical guide for carrying out the budget strategy and meeting its objectives. Although much of corporate strategy revolves around the "bottom line," not all approaches to strategy and policy are about marketing support. Total Quality Management and Six Sigma strategies help better position an organization in the marketplace by emphasizing quality.

Keywords Business Plan; Market Share; Policy; Return on Investment (ROI); Risk; Strategic Planning; Strategy; Total Quality Management (TQM)

Management > Business Strategy & Policy

Overview

A wise person once said that "if you don't know where you're going, you'll never get there." This axiom is no more true anywhere than in the business arena. Development of a successful business does not happen as a result of luck, but requires hard work. As in pathfinding, the roadmap to success in the business world is to determine where one is going and then to specify the best way to get there.

In business, determining the target destination for the organization is called goal setting. Goals define in practical terms what the organization would like to be within a specific period of time. Determining the best way to accomplish these goals is called strategic planning. A strategy is a plan of action to help the organization reach its goals and objectives. A good business strategy is based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization's resources and abilities. Implementation of the plan is done through policies and practices. These are guiding principles or specific procedures or courses of action developed to help the organization meet its goals and objectives. Policies are typically developed to support business strategies or in response to government regulations. For example, an organization may have a series of customer service policies that deal with how employees are supposed to interact with customers in order to keep them loyal to the organization's brand and it may also have a series of human resource policies for how it deals with its own employees to not only encourage them to maximize their performance, but also so that the organization is in compliance with various laws regarding equal treatment, minimum wage, and so forth. Organizations may also have policies about social and environmental concerns or other factors that it perceives as important to its reputation and success.

Determining the organization's business goals requires an examination of several areas of the firm's functioning. To avoid falling into the trap of doing activities that appear to reach a goal but that, in fact, are only spinning the corporate wheels without making real progress, the objectives of the organization need to be expressed in concrete terms. For example, rather than stating that the goal of the company is to "maximize profits and return on investment," "develop new and high quality products," or "meet our corporate social responsibility," objectives need to be specific; stating how success will be determined in measurable terms. For example, rather than saying that the organization is going to increase profits, a well-stated objective would state how much profit the organization is trying to make and the time frame in which this is to be achieved (e.g., "increase profits to $5 million in the next fiscal year"). Rather than vaguely stating that new products will be developed, a well-stated objective would specify the types of products to be developed and the quality standard to which they are to be developed (e.g., "develop a widget that will automatically mop the floor using a process that yields less than three defects per million"). Similarly, vague goals about social responsibility would be replaced by specific objectives stating in what kinds of public service activities the organization will be involved and the extent of its involvement.

Strategic planning is the process that helps the organization determine what goals to set and how to reach them. This process allows the organization to determine and articulate its long-term goals and to develop a plan to use the company's resources — including materials, equipment, technology, and personnel — in reaching these goals. This business plan summarizes the operational and financial objectives of the organization and is supported by detailed plans and budgets to show how these objectives will be achieved. In addition to articulating organizational objectives and strategies for reaching these goals, the business plan also analyzes the risk involved. In business terms, risk can be defined as the quantifiable probability that a financial investment's actual return will be lower than expected. Higher risks mean both a greater probability of loss and a possibility of greater return on investment. The goal of organizations is to reduce risk by managing it. Risk management is an essential part of business strategy development. This process includes analyzing projected tasks and activities, planning ways to reduce the impact if the predicted normal course of events does not occur, and implementing reporting procedures so that project problems are discovered earlier in the process rather than later.

Whether the organization is trying to maintain its market share or it is trying to be on the leading edge of the industry through sustainable innovation, there are a number of sources of data that can be tapped in order to help make better informed strategic decisions about the direction in which the organization should go. In general, it is advisable to look at every business event — whether it was a success or a failure — as a learning opportunity that can help the organization better understand and anticipate the needs of the market or how to improve internal processes and practices. The organization can also look forward by examining incongruities between the way things currently are and how the industry or organization perceives they should be (e.g., the requirement for more complicated desktop computing capabilities required the development of more affordable computing power) and developing solutions that meet these needs. Similarly, changes to the market or industry as the result of an innovation, contributed by the organization itself or by a competitor, can help organizational management better develop strategies to stay competitive, become leaders in the field, or practice sustainable innovation. Other external changes that require attention when developing strategic plans are demographic changes (e.g., the rise in the number of people in the general population who are computer-literate), the development of new knowledge (e.g., how to develop a graphical user interface that reduces the need for specialized abilities to use a computer), or changes in perceptions (e.g., the acceptance of computers as a way to make life easier).

There are a number of factors that need to be taken into account during the strategic planning process in order to develop a sound, achievable business plan. One of the most important of these steps is setting realistic, achievable objectives. To be useful, objectives should specify the performance that the organization wants to see as a result of meeting the objective, the activities in which the organization will engage to help meet the objective, and the measurable results that will allow the organization to know whether or not the objective has been achieved. In addition, a well written objective should specify the time period in which the improved performance will occur. For example, rather than the nebulous objective of "maximize profits," a well written objective might be to "increase profits (objective) by 25 percent (measurable criterion) over the next year (time frame) by targeting two new metropolitan areas with media ads and six additional sales calls per salesperson (actions)."

In order to develop meaningful objectives that will support the organization in reaching its goals, financial concerns should be expressed in terms of objective, measurable results, such as profits, return on investment, earnings per share, or profit-to-sales ratio. For example, financial objectives should be expressed in specific, concrete terms such as "increase return on investment to 15 percent after taxes within five years" or "increase profits to $6 million before the end of the fiscal year." Similarly, well written objectives should be specific about the market in which these actions will take place. For example, this might include the market share the organization is trying to reach ("increase our share of the market to 28 percent within three years"), dollar amount or unit volume of sales ("sell 200,000 widgets next year"), or industry niche ("increase commercial sales to 95 percent and reduce military sales to 15 percent over the next two years"). The business strategy might also include a discussion of the productivity necessary to reach these objectives. This might include a ratio of input to output (e.g., "increase number of widgets produced to 100 per eight hour day") or the cost per unit of production (e.g., "decrease cost of production to $6 per widget").

In addition to the objectives or end goals that the organization is trying to reach, strategic planning should also include a consideration of the resources necessary to get it there. One of the considerations in this process is the financial resources of the organization such as capital structure, new issues of common stock, cash flow, working capital needed, dividend payments, and collection periods. These factors also need to be stated specifically when developing the organization's objectives. For example, statements could include such objectives as "decrease the collection period to 26 days by the end of the year," "decrease working capital to $5 million within three years," or "reduce long-term debt to $8 million within five years."

The strategic planning process also needs to give consideration to the resources necessary to accomplish the other objectives. To increase one's market share, for example, may mean a concomitant increase in the size of the production facility, the number of production workers required, and so forth. Therefore, the business plan needs to specify the physical facilities needed to do this, including required square feet of space for offices, storage, production facilities, etc.; fixed costs such as rent and utilities; and the number of units that can be produced within these constraints. For example, objectives might include to "increase production capacity to 8 million widgets per month within the next two years" or to "increase storage capacity to 15 million barrels by the end of December." Similarly, the plan should express the organization's goals for human resources quantitatively, not only in terms of numbers of employees needed, but also in terms of employee performance and employee management. This may include consideration of absenteeism, tardiness, turnover, number of grievances, need for training, etc. For example, objectives might include to "reduce absenteeism to less than four percent within six months" or "conduct a 20-hour, in-house management training program for first-line supervisors by the end of next year at a cost not to exceed $500 per participant." In addition, strategic planning may take into account changes that need to be made to the structure or design of the organization itself in order to accomplish these goals, such as implementing a team structure, decentralizing decision making, etc.

Also specified within the strategic planning process are the research and development efforts that go into continued innovation and new product development. As with the other organizational goals, these goals need to be specific, including the associated budget for each effort. For example, an objective for research and development might be to "develop an engine in the $2000 price range with an emission rate of 5 percent within two years at a cost not to exceed $500,000."

Finally, increasingly, organizations are realizing that to be successful, their concerns need to go beyond the profit and loss statement. It is also important to be a good corporate citizen of the planet. Therefore, many organizations are including social concerns within their strategies. These may be expressed in terms of types of activities, number of days of service, or financial contributions. For example, an organization may have as its goals to "reduce greenhouse emissions by ten percent over the next year," "establish a scholarship fund for underprivileged students to study engineering at the local university," or "hire and successful train 120 hard-core unemployables to be acceptable widget production specialists against existing standards within the next two years."

Applications

Business strategy is not only about plans or even about selling. Strategy includes all the things that the organization intentionally does to better position itself within the marketplace and to earn a larger market share. Strategy, therefore, can include the organization's intentional attempts at improving customer satisfaction through the institution of such things as around the clock customer service lines or e-mail rebate systems; positioning itself to be perceived as environmentally or socially aware by lessening the environmental impact of a product or instituting a recycling plan; or improving quality control methods or reducing the number of defects per group of products.

One strategy that has been widely adapted in recent years for increasing the quality of goods and services and concomitant customer satisfaction is Total Quality Management (TQM). TQM attempts to reach these goals by raising awareness of quality concerns across the organization. This management strategy emphasizes the use of teams in the workplace as a way to improve quality and meet customer demands. TQM emphasizes developing an organizational environment that supports innovation and creativity as well as taking risks to meet customer demands using such techniques as participative problem solving that includes not only managers, but employees and customers as well.

The five cornerstones of the TQM strategy are the product, the process that allows the product to be produced, the organization that provides the proper environment needed for the process to work, the leadership that guides the organization, and commitment to excellence throughout the organization. To successfully implement a TQM program, consideration needs to be given to all five of the primary emphases of product, process, organization, leadership, and commitment. To help ensure that the TQM strategy will work, it is necessary that an environment of quality be fostered within the organization. This should include such things as an emphasis on consistency, integrity, and other positive interpersonal relationship skills. The organizational culture should also foster pride in the product and professionalism among the all team members through all levels in the organization. To foster the teamwork necessary to bring about high quality, TQM also encourages organizations to implement a decentralized authority structure where decisions are made close to those affected and all have a chance to participate in the process. This helps employees feel part of the system and to feel that they are a vital part of the organization, not just hirelings. Other ways to improve the ownership of team members in the product is to increase the flow of communication across all levels of the organization and provide each employee the training that s/he needs to successfully add value to the product.

One of the things that sets TQM apart from many other business strategies is that its emphasis is on the product, not on the job. For example, if Harvey works on an assembly line attaching steering wheels to cars, TQM would emphasize making Harvey feel that he was integral to building the car, not that he just attached the steering wheel. This is intended to improve pride in one's work, which in turn helps increase the team spirit and enables employees to better feel that they are important parts of the outstanding process. Similarly, leadership in a TQM organization is taught to focus on the outputs rather than on the inputs. This helps sharpen the focus on producing a high quality product (the output) rather than on unimportant things that may happen on the way to producing that product. To encourage this attitude, managers are taught to reinforce productive behaviors and discourage nonproductive behaviors. In addition, quality is continuously monitored and employees are given timely feedback so that any corrections are made sooner rather than later in the process so that the organization can perform at a high level.

TQM looks not only at the bottom line in terms of numbers, but also helps link the concepts of value to the customer with the cost of the product. This, too, can help in market positioning and increasing market share. This strategy can be enabled by continually assessing the marketplace of the organization's product vis a vis the organization's skills and resources. This helps strategic efforts to better position the organization to excel in the marketplace.

The Six Sigma process is a spin-off of TQM and was first developed by Motorola. The term "six sigma" is a statistical term referring how far (i.e, the number of standard deviations, symbolized by the Greek letter sigma, "σ") a data point is from the middle of the normal curve. This distance signifies the degree to which a product reaches its quality goal. At six sigma above "normal," a product is reaching its quality goal 99.9999997 percent of the time, or has only 3.4 defects per million. Six sigma is the goal toward which manufacturing and quality control efforts in the organization are focused. In addition, the Six Sigma process is also targeted toward improving non-manufacturing processes and functions within the organization.

The Six Sigma program is targeted at reducing costs by making changes before defects or problems occur. As part of the Six Sigma program, employees and managers are trained in statistical analysis, project management, and problem solving methodology so that they can use these skills to reduce defects in their products. Most organizations that have implemented Six Sigma programs report increased profitability. This is the result of lower production costs from doing it correctly the first time in combination with reduced costs for not having to redo work previously done.

Globalization

The Internet has facilitated the internationalization of companies. By the end of the first decade of the twenty-first century, even medium-sized companies could reach markets worldwide (Bell, 2010). With globalization, however, comes a number of risks. These include information and product piracy, as well as cyber-sabotage by competitors and mischievous hackers. Patent protection is especially problematic (Kim & Kim, 2011). Improvements in the transportation of goods has made possible the globalization of the supply chain, allowing manufacturers in high-wage countries to take advantage of labor in low-wage countries. Consumer perception of worker exploitation may backfire, even on popularly esteemed companies such as Apple. Company negligence in supply chain management, however, is particularly observable in low-cost producers (Hoejmose, Brammer, & Millington, 2013).

Terms & Concepts

Business Plan: A document prepared by the organization's management that summarizes the operational and financial objectives of the organization as well as detailed plans and budgets to show how these objectives will be achieved.

Market Share: The proportion of total sales of a given type of product or service that are earned by a particular business or organization.

Organizational Culture: The set of basic shared assumptions, values, and beliefs that affect the way employees act within an organization.

Policy: A guiding principle or specific procedure or course of action developed to help the organization meet its goals and objectives. Policies are often developed to support business strategies or in response to government regulations.

Return on Investment (ROI): A measure of the organization's profitability or how effectively it uses its capital to produce profit. In general terms, return on investment is the income that is produced by a financial investment within a given time period (usually a year). There are a number of formulas that can be used in calculating ROI. One frequently used formula for determining ROI is (profits - costs) / (costs) x 100. The higher the ROI, the more profitable the organization.

Risk Management: The process of analyzing the tasks and activities, planning ways to reduce the impact if the predicted normal course of events does not occur, and implementing reporting procedures so that project problems are discovered earlier in the process rather than later.

Risk: The quantifiable probability that a financial investment's actual return will be lower than expected. Higher risks mean both a greater probability of loss and a possibility of greater return on investment.

Six Sigma (6s): An approach to improving quality. The term "six sigma" is a statistical term referring to the degree to which a product reaches its quality goal. At six sigma, a product is reaching its quality goal 99.9999997 percent of the time, or has only 3.4 defects per million. The six sigma system was originally developed by Motorola.

Strategic Planning: The process of determining the long-term goals of an organization and developing a plan to use the company's resources — including materials and personnel — in reaching these goals.

Strategy: In business, a strategy is a plan of action to help the organization reach its goals and objectives. A good business strategy is based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization's resources and abilities.

Sustainable Innovation: The process by which an organization systematically analyzes various indicators of customer needs and industry trends and leverages these into cutting edge products and services that allow them to maintain their competitive edge and be leaders in the industry.

Total Quality Management (TQM): A management strategy that attempts to continually increase the quality of goods and services as well as customer satisfaction through raising awareness of quality concerns across the organization.

Turnover: The number of new employees that an organization must hire in order to replace those that have left the company in a given period of time.

Bibliography

Bell, J., & Loane, S. (2010). 'New-wave' global firms: Web 2.0 and SME internationalisation. Journal of Marketing Management, 26(3/4), 213-229. Retrieved October 27, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=60088151&site=ehost-live

Creech, B. (1994). The five pillars of TQM: How to make total quality management work for you. New York: Truman Talley Books/Dutton.

Hoejmose, S., Brammer, S., & Millington, A. (2013). An empirical examination of the relationship between business strategy and socially responsible supply chain management. International Journal of Operations & Production Management, 33, 589-621. Retrieved October 27, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88133816&site=ehost-live

Kim, T., & Kim, B. (2011). Regulatory policies and business strategies on patent protection: A general model and cases for the east Asian economy. Global Economic Review, 40, 463-481. Retrieved October 27, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=67225025&site=ehost-live

Landy, F. J. & Conte, J. M. (2004). Work in the 21st century: An introduction to industrial and organizational psychology. Boston: McGraw Hill.

Suggested Reading

Boyd, B. (1991). Strategic planning and financial performance: A meta-analytic review. Journal of Management Studies, 28, 353-374. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4554329&site=bsi-live

Dean, J. W. & Sharfman, M. P. (1996). Does decision process matter? A study of strategic decisionmaking effectiveness. Academy of Management Journal, 39, 368-396. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9605140870&site=bsi-live

Fredrickson, J. W. & Mitchell, T. R. (1984). Strategic decision processes: Comprehensiveness and performance in an industry with an unstable environment. Academy of Management Journal, 27, 399-423. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4395068&site=bsi-live

Papadakis, V. M., Lioukas, S., & Chambers, D. (1998). Strategic decision-making processes: The role of management and context. Strategic Management Journal, 19, 115-147. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=241344&site=bsi-live

Talavera, G. V. (2004). Development and validation of TQM constructs. Gadjah Mada International Journal of Business, 6, 355-381. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15276141&site=bsi-live