Strategic Decisions and Levels of Strategy

An auto-parts maker in Pune must decide whether to start making parts for electric vehicles. That choice will tie up crores of rupees for a decade. Choosing next week's shift roster ties up nothing. Only the first is strategic.

Characteristics. Strategic decisions:

• commit major resources, whether acquiring new ones or reorganising and reallocating existing ones;
• match the organisation's capabilities to the threats and opportunities around it;
• define the scope of its activities: what it wants to be, and to be about;
• involve major change, are complex, and are made at the top;
• carry much uncertainty and risk, because they concern the future. Managers must think through scenarios that may or may not happen.

H. Igor Ansoff (Corporate Strategy, 1965) distinguished three kinds of decision.

Back to the Pune plant. Deciding to make parts for electric vehicles, or to compete on cost, is strategic. Setting up a new division and moving engineers and budget into it is administrative. Scheduling shifts and ordering materials within the new budget is operational.

Don't confuse "strategic" with "expensive". Replacing a worn-out machine can cost lakhs, yet it changes neither direction nor scope, so it is not strategic. Study notes sometimes swap the time spans and frequencies of the last two types. Administrative decisions are medium term and periodic; operational ones are short term and daily.

Where it breaks. The three types are a simplification. In a small firm the owner makes all three. Many small operational choices, repeated, can add up to a direction nobody chose; Henry Mintzberg called strategy that forms this way "emergent".

In practice. Before a big choice, ask: does it change what we do or for whom, does it commit a large share of our resources, and can we undo it cheaply? Two yes answers mean it belongs at the top. For exams, match each type to who makes it, its time span and its frequency.

Strategic decisions are few, far-reaching and hard to reverse.

A family group runs a cement plant, a hotel chain and a dairy. Whether to sell the hotels, how the dairy should beat local rivals, and how the dairy's plant should cut waste are questions for different people.

A diversified company has several lines of business under one umbrella. Each level of strategy is named after the level that makes it.

Corporate strategy sets long-term direction and affects every business under the umbrella. Business strategy is formulated in line with it. Functional strategies support the business strategy. Operating strategies carry out the functional ones, often one for each set of annual objectives.

Example. A business that competes on low cost needs a production strategy that cuts operating costs. It needs an HR strategy that keeps a lean workforce of highly qualified people. Its marketing and financial strategies must fit the same aim.

Don't confuse corporate strategy with business strategy. Corporate strategy asks which businesses to be in. Business strategy asks how one of them wins. In a single-business firm the two levels merge.

Where it breaks. The neat cascade suggests strategy only flows down. In practice ideas also flow up: a plant manager's way of cutting cost can reshape how the whole business competes.

For exams. Match a question to its level, and each level to who makes it.

Corporate: where to compete. Business: how to compete. Functional and operational: how to deliver.

Three chai stalls share a road. One sells the cheapest cup at ₹10; another sells ₹30 masala chai with fresh snacks; the third tries to be both, and loses customers to each. Business-level strategy is the choice the third stall never made.

It is made up of competitive strategies, which aim to win customers away from rivals, and cooperative strategies, in which a firm works with others to gain advantage together. Lasting success needs a sustainable competitive advantage, one rivals cannot quickly copy.

Michael Porter (Competitive Strategy, 1980) named three generic strategies, set by two choices: compete on cost or on uniqueness, and target the broad market or a narrow segment. The third strategy, focus, comes in a cost and a differentiation form, which gives four cells.

Porter warned that a firm trying to do everything without committing to one of these risks being stuck in the middle, with no clear advantage. That was the third chai stall.

Blue ocean strategy (W. Chan Kim and Renée Mauborgne, 2005) takes another route. Instead of fighting rivals in existing markets, the ‘red oceans’, it creates uncontested market space where competition is irrelevant.

Key success factors are the few things in an industry that most decide whether a firm can compete successfully. Examples are distribution reach in packaged foods and reliability in airlines.

Don't confuse a focus strategy with simply being small. Focus is a deliberate choice of a narrow segment, served on cost or on uniqueness. A small firm that sells a bit of everything to everyone has no focus.

Where it breaks. Later writers questioned "stuck in the middle". Some firms combine low cost and differentiation, for example when better quality also cuts waste and rework. And any advantage wears away as rivals copy it.

For exams. Know the two choices behind the grid, the four cells, and the authors and years of the generic strategies and blue ocean strategy.

Go deeper for practitioners

Neither choice is absolute. Porter also argued that a cost leader cannot ignore quality: its product must stay close enough to rivals' that buyers do not demand a deep discount. A differentiator, in turn, must keep its costs near rivals', or its price premium is eaten by higher costs.

A decision. You run a regional snacks brand. A national rival has wider distribution, which is the key success factor in packaged foods. Matching its reach would cost crores. The alternative is a focus strategy: one region's tastes, served better than a national brand bothers to. Which advantage can you defend for five years?

Links. Porter's five forces (External analysis) explain why some industries leave more room for any strategy. The resource-based view and VRIO (Internal analysis) ask whether an advantage can last.

Low cost or different; broad or focused.