STRATEGIC MANAGEMENT ( Study Material By Dr.

Anuradha Jha )

Introduction to Strategic Management

Strategic Management is exciting and challenging. It makes fundamental decisions about the future
direction of a firm – its purpose, its resources and how it interacts with the environment in which it
operates. Every aspect of the organisation plays a role in strategy – its people, its finances, its
production methods, its customers and so on. Strategic Management can be described as the
identification of the purpose of the organisation and the plans and actions to achieve that purpose.
It is that set of managerial decisions and actions that determine the long-term performance of a
business enterprise. It involves formulating and implementing strategies that will help in aligning the
organisation and its environment to achieve organisational goals. Strategic management does not
replace the traditional management activities such as planning, organising, leading or controlling.
Rather, it integrates them into a broader context taking into account the external environment and
internal capabilities and the organisation’s overall purpose and direction. Thus, strategic
management involves those management processes in organisations through which future impact of
change is determined and current decisions are taken to reach a desired future. In short, strategic
management is about envisioning the future and realizing it.

Definition of Strategic Management

We have so far discussed the concepts of strategic thinking, strategic decision-making and strategic
approach which, it is hoped, will serve as an a background understand the nature of strategic
management. However, to get an understanding of what goes on in strategic management, it is
useful to begin with definitions of strategic management. Later in the unit, we introduce the
elements and the process of strategic management and the importance, benefits and limitations of
strategic management. As already mentioned, the concepts in strategic management have been
developed by a number of authors like Alfred Chandler, Kenneth Andrews, Igor Ansoff, William
Glueck, Henry Mintzberg, Michael E. Porter, Peter Drucker and a host of others. There are therefore
several definitions of strategic management. Some of the important definitions are: 1. “Strategic
management is concerned with the determination of the basic long-term goals and the objectives of
an enterprise, and the adoption of courses of action and allocation of resources necessary for
carrying out these goals”. – Alfred Chandler, 1962 2. “Strategic management is a stream of decisions
and actions which lead to the development of an effective strategy or strategies to help achieve
corporate objectives”. – Glueck and Jauch, 1984 3. “Strategic management is a process of
formulating, implementing and evaluating cross-functional decisions that enable an organisation to
achieve its objective”. – Fed R David, 1997 4. “Strategic management is the set of decisions and
actions resulting in the formulation and implementation of plans designed to achieve a company’s
objectives.” – Pearce and Robinson, 1988 5. “Strategic management includes understanding the
strategic position of an organisation, making strategic choices for the future and turning strategy
into action.” – Johnson and Sholes, 2002 6. “Strategic management consists of the analysis,
decisions, and actions an organisation undertakes in order to create and sustain competitive
advantages.” – Dess, Lumpkin & Taylor, 2005 We observe from the above definitions that different
authors have defined strategic management in different ways. Note that the definition of Chandler
that we have quoted above is from the early 1960s, the period when strategic management was
being recognized as a separate discipline. This definition consists of three basic elements: l.
Determination of long-term goals 2. Adoption of courses of action 3. Allocation of resources to
achieve those goalsThough this definition is simple, it does not consist of all the elements and does
not capture the essence of strategic management. The definitions of Fred R. David, Pearce and
Robinson, Johnson and Sholes and Dell, Lumpkin and Taylor are some of the definitions of recent
origin. Taken together, these definitions capture three main elements that go to the heart of
strategic management. The three on-going processes are strategic analysis, strategic formulation
and strategic implementation. These three components parallel the processes of analysis, decisions
and actions. That is, strategic management is basically concerned with: l. Analysis of strategic goals
(vision, mission and objectives) along with the analysis of the external and internal environment of
the organisation. 2. Decisions about two basic questions: (a) What businesses should we compete
in? (b) How should we compete in those businesses to implement strategies? 3. Actions to
implement strategies. This requires leaders to allocate the necessary resources and to design the
organisation to bring the intended strategies to reality. This also involves evaluation and control to
ensure that the strategies are effectively implemented. The real strategic challenge to managers is to
decide on strategies that provide competitive advantage which can be sustained over time. This is
the essence of strategic management, and Dess, Lumpkin and Taylor have rightly captured this
element in their definition.

Nature of Strategic Management

Strategic Management can be defined as the art & science of formulating, implementing, and
evaluating, cross-functional decisions that enable an organisation to achieve its objectives. Strategic
management is different in nature from other aspects of management. An individual manager is
most often required to deal with problems of operational nature. He generally focuses on day-to-day
problems such as the efficient production of goods, the management of a sales force, the monitoring
of financial performance or the design of some new system that will improve the level of customer
service. ! Caution These are all very important tasks. But they are essentially concerned with
effectively managing resources already deployed, within the context of an existing strategy. In other
words, operational control is what managers are involved in most of their time. It is vital to the
effective implementation of strategy, but it is not the same as strategic management. Strategic
management involves elements geared toward a firm's long term survival and achievement of
management goals. The components of the content of a strategy making process include a desirable
future, resource allocation, management of the firm-environment and a competitive business ethics.
However, some conflicts may result in defining the content of strategy such as differences in
interaction patterns among associates, inadequacy of available resources and conflicts between the
firm's objectives and its environment.

Dimensions of Strategic Management

The characteristics of strategic management are as follows: 1. Top management involvement:

Strategic management relates to several areas of a firm’s operations. So, it requires top
management’s involvement. Generally, only the top management has the perspective needed to
understand the broad implications of its decisions and the power to authorize the necessary
resource allocations. 2. Requirement of large amounts of resources: Strategic management requires
commitment of the firm to actions over an extended period of time. So they require substantial
resources, such as, physical assets, money, manpower etc.

Example: Decisions to expand geographically would have significant financial implications in terms of
the need to build and support a new customer base. 3. Affect the firm’s long-term prosperity: Once a
firm has committed itself to a particular strategy, its image and competitive advantage are tied to
that strategy; its prosperity is dependent upon such a strategy for a long time. 4. Future-oriented:
Strategic management encompasses forecasts, what is anticipated by the managers. In such
decisions, emphasis is placed on the development of projections that will enable the firm to select
the most promising strategic options. In the turbulent environment, a firm will succeed only if it
takes a proactive stance towards change. 5. Multi-functional or multi-business consequences:
Strategic management has complex implications for most areas of the firm. They impact various
strategic business units especially in areas relating to customer-mix, competitive focus,
organisational structure etc. All these areas will be affected by allocations or reallocations of
responsibilities and resources that result from these decisions. 6. Non-self-generative decisions:
While strategic management may involve making decisions relatively infrequently, the organisation
must have the preparedness to make strategic decisions at any point of time. That is why Ansoff calls
them “non-self-generative decisions.”

Need for Strategic Management

No business firm can afford to travel in a haphazard manner. It has to travel with the support of
some route map. Strategic management provides the route map for the firm. It makes it possible for
the firm to take decisions concerning the future with a greater awareness of their implications. It
provides direction to the company; it indicates how growth could be achieved. The external
environment influences the management practices within any organisation. Strategy links the
organisation to this external world. Changes in these external forces create both opportunities and
threats to an organisation’s position – but above all, they create uncertainty. Strategic planning
offers a systematic means of coping with uncertainty and adapting to change. It enables managers to
consider how to grasp opportunities and avoid problems, to establish and coordinate appropriate
courses of action and to set targets for achievement. Thirdly, strategic management helps to
formulate better strategies through the use of a more systematic, logical and rational approach.
Through involvement in the process, managers and employees become committed to supporting the
organisation. The process is a learning, helping educating and supporting activity. An increasing
number of firms are using strategic management for the following reasons: 1. It helps the firm to be
more proactive than reactive in shaping its own future. 2. It provides the roadmap for the firm. It
helps the firm utilize its resources in the best possible manner. 3. It allows the firm to anticipate
change and be prepared to manage it. 4. It helps the firm to respond to environmental changes in a
better way. 5. It minimizes the chances of mistakes and unpleasant surprises. 6. It provides clear
objectives and direction for employees

Benefits of Strategic Management

“We are tackling 20-year problems with five-year plans staffed with two-year personnel funded by
one–year appropriations”. – Harlan Cleveland The above quotation sums up why today’s decision-
makers must plan and manage strategically. In developing as well as in industrialized countries, the
increasingly rapid nature of change as well as a greater openness in the political and economic
environments, requires a different set of perspective from that needed during more stable times.
When a certain degree of equilibrium existed in the environment, as during the 1950s, with constant
positive economic growth, low debt, manageable budgets and relative environmental stability,
managers could concentrate almost exclusively on the internal dimensions of their organisations and
assume constancy in the external environment. Forward calculations were simple, inputs were
predictable, and planning was mostly an arithmetic exercise. Now, systems are much more open,
environment is characterized by increasingly unstable economic growth, budgets are constantly
revised, inputs are thoroughly unpredictable, and planning in the traditional sense is no longer
tenable. Therefore, today’s enterprises need strategic management to reap the benefits of business
opportunities, overcome the threats and stay ahead in the race. The purpose of strategic
management is to exploit and create new and different opportunities for tomorrow; while long term
planning, in contrast, tries to optimize for tomorrow the trends of today. Today, all top companies
are involved in strategic management. They are finding ways to respond to competitors, cope with
difficult environmental changes, meet changing customer needs and effectively use available
resources. At a time when the business environment is changing rapidly, even established firms are
paying more attention to strategy because they may face new competitors who threaten their core
business. Should a firm compete in all areas or concentrate on one area? Should a company try to
extend the brand to even more diverse areas of activity, or would it gain more by building profits in
the existing areas, and achieving more synergies across the group? Should the company continue the
current strategy as it is now, or would it initiate a radical review of its strategy? These are just a few
examples of the strategic part of the management tasks. A structured approach to strategy planning
brings several benefits (Smith, 1995; Robbins, 2000) 1. It reduces uncertainty: Planning forces
managers to look ahead, anticipate change and develop appropriate responses. It also encourages
managers to consider the risks associated with alternative responses or options. 2. It provides a link
between long and short terms: Planning establishes a means of coordination between strategic
objectives and the operational activities that support the objectives. 3. It facilitates control: By
setting out the organisation’s overall strategic objectives and ensuring that these are replicated at
operational level, planning helps departments to move in the same direction towards the same set
of goals. 4. It facilitates measurement: By setting out objectives and standards, planning provides a
basis for measuring actual performance. Strategic management has thus both financial and non-
financial benefits: 1. Financial Benefits: Research indicates that organisations that engage in strategic
management are more profitable and successful than those that do not. Businesses that followed
strategic management concepts have shown significant improvements in sales, profitability and
productivity compared to firms without systematic planning activities. 2. Non-financial benefits:
Besides financial benefits, strategic management offers other intangible benefits to a firm. They are;
(a) Enhanced awareness of external threats (b) Improved understanding of competitors’ strategies
(c) Reduced resistance to change (d) Clearer understanding of performance-reward relationship (e)
Enhanced problem-prevention capabilities of organisation (f) Increased interaction among managers
at all divisional and functional levels (g) Increased order and discipline. According to Gordon
Greenley, strategic management offers the following benefits: 1. It allows for identification,
prioritization and exploitation of opportunities. 2. It provides objective view of management
problems3. It provides a framework for improved coordination and control of activities. 4. It
minimizes the effects of adverse conditions and changes. 5. It allows decision-making to support
established objectives. 6. It allows more effective allocation of time and resources to identified
opportunities. 7. It allows fewer resources and less time to be devoted to correcting erroneous and
ad hoc decisions. 8. It creates a framework for internal communication among personnel. 9. It helps
integrate the behaviour of individuals into a total effort. 10. It provides a basis for clarifying
individual responsibilities. 11. It encourages forward thinking. 12. It provides a cooperative,
integrated enthusiastic approach to tackling problems and opportunities. 13. It encourages a
favourable attitude towards change. 14. It gives a degree of discipline and formality to the
management of a business.

Risks involved in Strategic Management

Strategic management is an intricate and complex process that takes an organisation into
unchartered territory. It does not provide a ready-to-use prescription for success. Instead, it takes
the organisation through a journey and offers a framework for addressing questions and solving
problems. Strategic management is not, therefore, a guarantee for success; it can be dysfunctional if
conducted haphazardly. The following are its limitations: 1. It is a costly exercise in terms of the time
that needs to be devoted to it by managers. The negative effect of managers spending time away
from their normal tasks may be quite serious. 2. A negative effect may arise due to the non-
fulfillment of the expectations of the participating managers, leading to frustration and
disappointment. 3. Another negative effect of strategic management may arise if those associated
with the formulation of strategy are not intimately involved in the implementation of strategies. The
participants in formulation of the policy may shirk their responsibility for the decisions taken. As
quoted by Fred R. David, some pitfalls to watch for and avoid in strategic planning are: 1. Using
strategic planning to control over decisions and resources 2. Doing strategic planning only to satisfy
accreditation or regulatory requirements 3. Moving too hastily from mission development to
strategy formulation 4. Failing to communicate the strategic plan to the employees, who continue
working in the dark 5. Top managers making many intuitive decisions that conflict with the formal
plan 6. Top managers not actively supporting the strategic planning process 7. Failing to use plans as
a standard for measuring performance8. Delegating strategic planning to a consultant rather than
involving all managers 9. Failing to involve key employees in all phases of planning 10. Failing to
create a collaborative climate supportive of change 11. Viewing planning to be unnecessary or
unimportant 12. Becoming so engrossed in current problems that insufficient or no planning is done
13. Being so formal in planning that flexibility and creativity are stifled. Strategic Management
Process

Developing an organisational strategy involves four main elements – strategic analysis, strategic
choice, strategy implementation and strategy evaluation and control. Each of these contains further
steps, corresponding to a series of decisions and actions, that form the basis of strategic
management process. 1. Strategic Analysis: The foundation of strategy is a definition of
organisational purpose. This defines the business of an organisation and what type of organisation it
wants to be. Many organisations develop broad statements of purpose, in the form of vision and
mission statements. These form the spring – boards for the development of more specific objectives
and the choice of strategies to achieve them. Environmental analysis – assessing both the external
and internal environments is the next step in the strategy process. Managers need to assess the
opportunities and threats of the external environment in the light of the organisation’s strengths
and weaknesses keeping in view the expectations of the stakeholders. This analysis allows the
organisation to set more specific goals or objectives which might specify where people are expected
to focus their efforts. With a more specific set of objectives in hand, managers can then plan how to
achieve them. 2. Strategic Choice: The analysis stage provides the basis for strategic choice. It allows
managers to consider what the organisation could do given the mission, environment and
capabilities – a choice which also reflects the values of managers and other stakeholders. (Dobson et
al. 2004). These choices are about the overall scope and direction of the business. Since managers
usually face several strategic options, they often need to analyze these in terms of their feasibility,
suitability and acceptability before finally deciding on their direction. 3. Strategy Implementation:
Implementation depends on ensuring that the organisation has a suitable structure, the right
resources and competencies (skills, finance, technology etc.), right leadership and culture. Strategy
implementation depends on operational factors being put into place. 4. Strategy Evaluation and
Control: Organisations set up appropriate monitoring and control systems, develop standards and
targets to judge performance.

Elements in strategy process

Questions Description

STRATEGY FORMULATION Strategic analysis

Defining organizational purpose

What is our purpose? What kind of organization do we want to be?

Organizational purpose is generally articulated in vision and mission statements. The first task is,
therefore, to identify vision and mission of the organization. Environmental analysis involves the
gathering and analysis of intelligence on the business environment. This encompasses the external
environment (general and competitive forces), the internal environment (resources, competences,
performance relative to competitors), and stakeholder expectations. Strategic choice Objectives
Where do we want to be? Objectives provide a more detailed articulation of purpose and a basis for
monitoring performance. Options analysis Are there alternative routes? Alternative strategic
options may be identified; options require to be appraised in order that the best can be selected.
Strategies How are we going to get there? Strategies are the means or courses of action to achieve
the purpose of the organization. STRATEGY IMPLEMENTATION Actions How do we turn plans into
reality? A specification of the operational activities and tasks required to enable strategies to be
implemented. STRATEGY EVALUATION AND CONTROL Monitoring and control How will we know if
we are getting there? Monitoring performance and progress in meeting objectives, taking corrective
action as necessary and reviewing strategy. The above steps can also be depicted as a series of
processes involved in strategic management.

Agreement on and initiation of the strategic management process. The organization determines
vision, mission, goals and objectives. The organization analyzes both external
and internal environment. The organization establishes long-term goals and
objectives.

The organization chooses from alternative courses of action. The

organization implements the choices to achieve strategic fit.

The organization monitors the implementation activity.

Feedback

The seven steps in the above model of strategy process fall into three broad phases – formulation,
implementation and evaluation – though in practice the three phases interact closely. Good
strategists know that formulation and implementation of strategy rarely proceed according to plan,
partly because the constantly changing external environment brings new opportunities or threats,
and partly because there may also be inadequate internal competence. Since these may lead the
management to change the plan, there will be frequent interaction between the activities of
formulating and implementing strategy, and management may need to return and reformulate the
plan.

Strategy Formulation and Defining Vision

Strategy formulation is the process of determining appropriate courses of action for achieving
organisational objectives and thereby accomplishing organisational purpose. Strategy formulation is
vital to the well-being of a company or organisation. It produces a clear set of recommendations,
with supporting justification, that revise as necessary the mission and objectives of the organisation,
and supply the strategies for accomplishing them. In formulation, we are trying to modify the
current objectives and strategies in ways to make the organisation more successful. This includes
trying to create "sustainable" competitive advantages – although most competitive advantages are
eroded steadily by the efforts of competitors.

A good recommendation should be: effective in solving the stated problem(s), practical (can be
implemented in this situation, with the resources available), feasible within a reasonable time frame,
cost-effective, not overly disruptive, and acceptable to key "stakeholders" in the organisation. It is
important to consider "fits" between resources plus competencies with opportunities, and also fits
between risks and expectations. There are four primary steps in this phase: 1. Reviewing the current
key objectives and strategies of the organisation, which usually would have been identified and
evaluated as part of the diagnosis 2. Identifying a rich range of strategic alternatives to address the
three levels of strategy formulation outlined below, including but not limited to dealing with the
critical issues 3. Doing a balanced evaluation of advantages and disadvantages of the alternatives
relative to their feasibility plus expected effects on the issues and contributions to the success of the
organisation 4. Deciding on the alternatives that should be implemented or recommended. In
organisations, and in the practice of strategic management, strategies must be implemented to
achieve the intended results. Here it has to be remembered that the most wonderful strategy in the
history of the world is useless if not implemented successfully.

Aspects of Strategy Formulation

The following three aspects or levels of strategy formulation, each with a different focus, need to be
dealt with in the formulation phase of strategic management. The three sets of recommendations
must be internally consistent and fit together in a mutually supportive manner that forms an
integrated hierarchy of strategy, in the order given. 1. Corporate Level Strategy 2. Competitive
Strategy 3. Functional Strategy Let us understand each of them one by one. 1. Corporate Level
Strategy: In this aspect of strategy, we are concerned with broad decisions about total organisation's
scope and direction. Basically, we consider what changes should be made in our growth objective
and strategy for achieving it, the lines of business we are in, and how these lines of business fit
together. It is useful to think of three components of corporate level strategy: (a) Growth or
directional strategy (what should be our growth objective, ranging from retrenchment through
stability to varying degrees of growth - and how do we accomplish this) (b) Portfolio strategy (what
should be our portfolio of lines of business, which implicitly requires reconsidering how much
concentration or diversification we should have), and (c) Parenting strategy (how we allocate
resources and manage capabilities and activities across the portfolio – where do we put special
emphasis, and how much do we integrate our various lines of business).

This comprises the overall strategy elements for the corporation as a whole, the grand strategy, if
you please. Corporate strategy involves four kinds of initiatives: (a) Making the necessary moves to
establish positions in different businesses and achieve an appropriate amount and kind of
diversification. A key part of corporate strategy is making decisions on how many, what types, and
which specific lines of business the company should be in. This may involve deciding to increase or
decrease the amount and breadth of diversification. It may involve closing out some LOB's (lines of
business), adding others, and/or changing emphasis among LOB's. (b) Initiating actions to boost the
combined performance of the businesses the company has diversified into: This may involve
vigorously pursuing rapid-growth strategies in the most promising LOB's, keeping the other core
businesses healthy, initiating turnaround efforts in weak-performing LOB's with promise, and
dropping LOB's that are no longer attractive or don't fit into the corporation's overall plans. It also
may involve supplying financial, managerial, and other resources, or acquiring and/or merging other
companies with an existing LOB. (c) Pursuing ways to capture valuable cross-business strategic fits
and turn them into competitive advantages – especially transferring and sharing related technology,
procurement leverage, operating facilities, distribution channels, and/or customers. (d) Establishing
investment priorities and moving more corporate resources into the most attractive LOBs. 2.
Competitive Strategy: It is quite often called as Business Level Strategy. This involves deciding how
the company will compete within each Line of Business (LOB) or Strategic Business Unit (SBU). In this
second aspect of a company's strategy, the focus is on how to compete successfully in each of the
lines of business the company has chosen to engage in. The central thrust is how to build and
improve the company's competitive position for each of its lines of business. A company has
competitive advantage whenever it can attract customers and defend against competitive forces
better than its rivals. Companies want to develop competitive advantages that have some
sustainability (although the typical term "sustainable competitive advantage" is usually only true
dynamically, as a firm works to continue it). Successful competitive strategies usually involve building
uniquely strong or distinctive competencies in one or several areas crucial to success and using them
to maintain a competitive edge over rivals. Some examples of distinctive competencies are superior
technology and/or product features, better manufacturing technology and skills, superior sales and
distribution capabilities, and better customer service and convenience. 3. Functional Strategy: These
more localized and shorter-horizon strategies deal with how each functional area and unit will carry
out its functional activities to be effective and maximize resource productivity. Functional strategies
are relatively short-term activities that each functional area within a company will carry out to
implement the broader, longer-term corporate level and business level strategies. Each functional
area has a number of strategy choices, that interact with and must be consistent with the overall
company strategies. Three basic characteristics distinguish functional strategies from corporate level
and business level strategies: shorter time horizon, greater specificity, and primary involvement of
operating managers. A few examples follow of functional strategy topics for the major functional
areas of marketing, finance, production/operations, research and development, and human
resources management. Each area needs to deal with sourcing strategy, i.e., what should be done in-
house and what should be outsourced?

Marketing strategy deals with product/service choices and features, pricing strategy, markets to be
targeted, distribution, and promotion considerations. Financial strategies include decisions about
capital acquisition, capital allocation, dividend policy, and investment and working capital
management. The production or operations functional strategies address choices about how and
where the products or services will be manufactured or delivered, technology to be used,
management of resources, plus purchasing and relationships with suppliers. For firms in high-tech
industries, R&D strategy may be so central that many of the decisions will be made at the business
or even corporate level, for example the role of technology in the company's competitive strategy,
including choices between being a technology leader or follower. However, there will remain more
specific decisions that are part of R&D functional strategy, such as the relative emphasis between
product and process R&D, how new technology will be obtained (internal development vs. external
through purchasing, acquisition, licensing, alliances, etc.), and degree of centralization for R&D
activities. Human resources functional strategy includes many topics, typically recommended by the
human resources department, but many requiring top management approval.
Example: Job categories and descriptions Pay and benefits Recruiting Selection and orientation
Career development and training Evaluation and incentive systems Policies and discipline
Management/executive selection processes

Business Vision

The first task in the process of strategic management is to formulate the organisation’s vision and
mission statements. These statements define the organisational purpose of a firm. Together with
objectives, they form a “hierarchy of goals.”

Plans Objectives Goals Mission Vision

A clear vision helps in developing a mission statement, which in turn facilitates setting of objectives
of the firm after analyzing external and internal environment. Though vision, mission and objectives
together reflect the “strategic intent” of the firm, they have their distinctive characteristics and play
important roles in strategic management. Vision can be defined as “a mental image of a possible and
desirable future state of the organisation” (Bennis and Nanus). It is “a vividly descriptive image of
what a company wants to become in future”. Vision represents top management’s aspirations about
the company’s direction and focus. Every organisation needs to develop a vision of the future. A
clearly articulated vision moulds organisational identity, stimulates managers in a positive way and
prepares the company for the future. “The critical point is that a vision articulates a view of a
realistic, credible, attractive future for the organisation, a condition that is better in some important
ways than what now exists.” Vision, therefore, not only serves as a backdrop for the development of
the purpose and strategy of a firm, but also motivates the firm’s employees to achieve it. According
to Collins and Porras, a well-conceived vision consists of two major components: 1. Core ideology 2.
Envisioned future Core ideology is based on the enduring values of the organisation (“what we stand
for and why we exists”), which remain unaffected by environmental changes. Envisioned future
consists of a long-term goal (what we aspire to become, to achieve, to create”) which demands
significant change and progress.

Defining Vision

Vision has been defined in several different ways. Richard Lynch defines vision as “ a challenging and
imaginative picture of the future role and objectives of an organisation, significantly going beyond its
current environment and competitive position.” E1-Namaki defines it as “a mental perception of the
kind of environment that an organisation aspires to create within a broad time horizon and the
underlying conditions for the actualization of this perception”. Kotter defines it as “a description of
something (an organisation, corporate culture, a business , a technology, an activity) in the future.”

sets out a range of definitions of organisational vision. Most refer to a future or ideal to which
organisational efforts should be directed. The vision itself is presented as a picture or image that
serves as a guide or goal. Depending on the definition, it is referred to as inspiring, motivating,
emotional and analytical. For Boal and Hooijberg, effective visions have two components: 1. A
cognitive component (which focuses on outcomes and how to achieve them) 2. An affective
component (which helps to motivate people and gain their commitment to it)

1. Johnson: Vision is "clear mental picture of a future goal created jointly by a group for the benefit
of other people, which is capable of inspiring and motivating those whose support is necessary for its
achievement". 2. Kirkpatrick et al: Vision is "an ideal that represents or reflects the shared values to
which the organisation should aspire". 3. Thornberry: Vision is "a picture or view of the future.
Something not yet real, but imagined. What the organisation could and should look like. Part
analytical and part emotional". 4. Shoemaker: Vision is "the shared understanding of what the firm
should be and how it must change". 5. Kanter et al: Vision is "a picture of a destination aspired to,
an end state to be achieved via the change. It reflects the larger goal needed to keep in mind while
concentrating on concrete daily activities". 6. Stace and Dunphy: Vision is "an ambition about the
future, articulated today, it is a process of managing the present from a stretching view of the
future".

Nature of Vision

A vision represents an animating dream about the future of the firm. By its nature, it is hazy and
vague. That is why Collins describes it as a “Big hairy audacious goal” (BHAG). Yet it is a powerful
motivator to action. It captures both the minds and hearts of people. It articulates a view of a
realistic, credible, attractive future for the organisation, which is better than what now exists.
Developing and implementing a vision is one of the leader’s central roles. He should not only have a
“strong sense of vision”, but also a “plan” to implement it.

Example: 1. Henry Ford’s vision of a “car in every garage” had power. It captured the imagination of
others and aided internal efforts to mobilize resources and make it a reality. A good vision always
needs to be a bit beyond a company’s reach, but progress towards the vision is what unifies the
efforts of company personnel. 2. One of the most famous examples of a vision is that of Disneyland
“To be the happiest place on earth”. Other examples are: (a) Hindustan Lever: Our vision is to meet
the everyday needs of people everywhere. (b) Microsoft: Empower people through great software
any time, any place and on any device. (c) Britannia Industries: Every third Indian must be a Britannia
consumer

Although such vision statements cannot be accurately measured, they do provide a fundamental
statement of an organisation’s values, aspirations and goals. Some more examples of vision
statements are given

1. A Coke within arm's reach of everyone on the planet (Coca Cola) 2. Encircle Caterpillar (Komatsu)
3. Become the Premier Company in the World (Motorola) 4. Put a man on the moon by the end of
the decade (John F. Kennedy, April 1961) 5. Eliminate what annoys our bankers and customers
(Texas Commerce Bank) 6. The one others copy (Mobil)

Characteristics of Vision Statements

As may be seen from the above definitions, many of the characteristics of vision given by these
authors are common such as being clear, desirable, challenging, feasible and easy to communicate.
Nutt and Backoff have identified four generic features of visions that are likely to enhance
organisational performance:

1. Possibility means the vision should entail innovative possibilities for dramatic organisational
improvements.

2. Desirability means the extent to which it draws upon shared organisational norms and values
about the way things should be done.

3. Actionability means the ability of people to see in the vision, actions that they can take that are
relevant to them.

4. Articulation means that the vision has imagery that is powerful enough to communicate clearly a
picture of where the organisation is headed.
According to Thompson and Strickland, some important characteristics of an effective vision
statement are:

1. It must be easily communicable: Everybody should be able to understand it clearly.

2. It must be graphic: It must paint a picture of the kind of company the management is trying to
create.

3. It must be directional: It must say something about the company’s journey or destination.

4. It must be feasible: It must be something which the company can reasonably expect to achieve in
due course of time

. 5. It must be focused: It must be specific enough to provide managers with guidance in making
decisions.

6. It must be appealing to the long term interests of the stakeholders. 7. It must be flexible: It must
allow company’s future path to change as events unfold and circumstances change.

Importance of Vision

Having a strategic vision is linked to competitive advantage, enhancing organisational performance,

and achieving sustained organisational growth. Clear vision enable firms to determine how well
organisational leaders are performing and to identify gaps between the vision and current practices.
Organisations preparing for transformational change regularly undertake “envisioning” exercises to
help guide them into the future. The visioning process itself can enhance the self-esteem of the
people who participate in it because they can see the potential fruits of their labours. Conversely, a
“lack of vision” is associated with organisational decline and failure. As Beaver argues “Unless
companies have clear vision about how they are going to be distinctly different and unique in adding
and satisfying their customers, they are likely to be the corporate failure statistics of tomorrow”.
Lacking vision is used to explain why companies fail to build their core competencies despite having
access to adequate resources to do so. Business strategies that lack visionary content may fail to
identify when change is needed. Lack of an adequate process for translating shared vision into
collective action is associated with the failure to produce transformational organisational change.

Thus vision statements serve as:

1. A basis for performance: A vision creates a mental picture of an organisation’s path and direction
in the minds of people in the organisation and motivates them for high performance.

2. Reflects core values: A vision is generally built around core values of an organisation, and
channelizes the group’s energies towards such values and serves as a guide to action.

3. Way to communicate: A vision statement is an exercise in communication. A well communicated

vision statement will bring the employees together and galvanize them into action.

4. A desirable challenge: A vision provides a desirable challenge for both senior and junior
managers.

While providing a sense of direction, strategic vision also serves as a kind of “emotional
commitment”. Thompson and Strickland point out the significance of “vision” which is broadly as
follows:

1. It crystallizes top management’s own view about firm’s long-term direction.

2. It reduces the risk of rudderless decision-making.

3. It serves as a tool for maximizing the support of organisation members for internal changes.

4. It serves as a “beacon” to guide managers in decision-making.

5. It helps the organisation to prepare for the future. Vision poses a challenge and addresses the
human need for something to strive for.

It can depict an image of the future that is both attractive and worthwhile. Indeed, developing a
strategic vision may be regarded as a managerial imperative in the strategic management process.
This is because strategic management presupposes the necessity to look beyond today, to anticipate
the impact of new technology, changes in customer needs and market opportunities. Creating a
well-conceived vision illuminates an organisation’s direction and purpose, and then using it
repeatedly as a reminder of “where we are headed and why” helps keep organisation members on
the chosen path. ! Caution Although the idea of vision is widely accepted as a useful backdrop for
the development of purpose and strategy, there is a problem. Vision has little meaning unless it can
be successfully communicated to those working in the organisation, since these are the people who
will have to realize it.

Advantages of Vision

Several advantages accrue to an organisation having a vision. Parikh and Neubauer point out the
following advantages:

1. Good vision fosters long-term thinking

2. It creates a common identity and a shared sense of purpose.

3. It is inspiring and exhilarating.

4. It represents a discontinuity, a step function and a jump ahead so that the company knows
what it is to be.

5. It fosters risk-taking and experimentation.

6. A good vision is competitive, original and unique. It makes sense in the market place.

7. A good vision represents integrity. It is truly genuine and can be used for the benefit of
people.

Did u know? When does a vision fail? A vision may fail when it is:

1. Too specific (fails to contain a degree of uncertainty)

2. Too vague (fails to act as a landmark)

3. Too inadequate (only partially addresses the problem)

4. Too unrealistic (perceived as unachievable) A.D. Jick observes that a vision is also likely to fail
when leaders spend 90 percent of their time articulating it to their staff and only 10 percent of their
time in implementing it.

There are two other reasons for vision failure:

1. Adaptability of vision over time

2. Presence of competing visions

Formulating a Vision Statement

Generally, in most cases, vision is inherited from the founder of the organisation who creates a
vision. Otherwise, some of the senior strategists in the organisation formulate the vision statement
as a part of strategic planning exercise. Nutt and Backoff identify three different processes for
crafting a vision:

1. Leader-dominated Approach: The CEO provides the strategic vision for the organisation. This
approach is criticized because it is against the philosophy of empowerment, which maintains that
people across the organisation should be involved in processes and decisions that affect them.

2. Pump-priming Approach: The CEO provides visionary ideas and selects people and groups within
the organisation to further develop those ideas within the broad parameters set out by the CEO.

3. Facilitation Approach: It is a “co-creating approach” in which a wide range of people participate in

the process of developing and articulating a vision. The CEO acts as a facilitator, orchestrating the
crafting process.

According to Nutt and Backoff, it is this approach that is likely to produce better visions and more
successful organisational change and performance as more people have contributed to its
development and will therefore be more willing to act in accordance with it. While the above
frameworks identify the extent to which there is involvement throughout the organisation in the
development of the vision, they do not address the specifics on how to develop the actual vision
itself.

To develop a strategy with a coherent internal logic, the strategists need to understand where the
firm and industry are headed. As the future cannot be precisely and definitely described, the
strategist has to make some assumptions about it. This requires foresight. Foresight requires
imagination of how events might unfold and the role the firm might play in shaping that future to
the firm’s advantage. “Vision” is therefore needed to guide the strategists’ plan for bridging the gap
between current reality and a potential future.

Defining Mission, Goals and Objectives

Introduction

“A mission statement is an enduring statement of purpose”. A clear mission statement is essential

for effectively establishing objectives and formulating strategies. A mission statement is the purpose
or reason for the organisation’s existence. A well-conceived mission statement defines the
fundamental, unique purpose that sets it apart from other companies of its type and identifies the
scope of its operations in terms of products offered and markets served. It also includes the firm’s
philosophy about how it does business and treats its employees. In short, the mission describes the
company’s product, market and technological areas of emphasis in a way that reflects the values and
priorities of the strategic decision makers. As Fred R. David observes, mission statement is also called
a creed statement, a statement of purpose, a statement of philosophy etc. It reveals what an
organisation wants to be and whom it wants to serve. It describes an organisation’s purpose,
customers, products, markets, philosophy and basic technology. In combination, these components
of a mission statement answer a key question about the enterprise: “What is our business?”

Defining Mission
Thompson defines mission as “The essential purpose of the organisation, concerning particularly
why it is in existence, the nature of the business it is in, and the customers it seeks to serve and
satisfy”. Hunger and Wheelen simply call the mission as the “purpose or reason for the
organisation’s existence”. A mission can be defined as a sentence describing a company's function,
markets and competitive advantages. It is a short written statement of your business goals and
philosophies. It defines what an organisation is, why it exists and its reason for being. At a minimum,
a mission statement should define who are the primary customers of the company, identify the
products and services it produces, and describe the geographical location in which it operates.

Example: l. Ranboxy Petrochemicals: To become a research based global company.

2. Reliance Industries: To become a major player in the global chemicals business and
simultaneously grow in other growth industries like infrastructure.

3. ONGC: To stimulate, continue and accelerate efforts to develop and maximize the contribution of
the energy sector to the economy of the country. 4. Cadbury India: To attain leadership position in
the confectionery market and achieve a strong national presence in the food drinks sector. 5.
Hindustan Lever: Our purpose is to meet everyday needs of people everywhere – to anticipate the
aspirations of our consumers and customers, and to respond creatively and competitively with
branded products and services which raise the quality of life. 6. McDonald: To offer the customer
fast food prepared in the same high quality worldwide, tasty and reasonably priced, delivered in a
consistent low key décor and friendly manner. Most of the above mission statements set the
direction of the business organisation by identifying the key markets which they plan to serve.

Missions have one or more of the five distinct and identifiable components: 1. Customers 2.
Products or services 3. Markets 4. Concern for growth 5. Philosophy

It's more important to communicate the mission statement to employees than to customers. Your
mission statement doesn't have to be clever or catchy–just accurate. Once a mission statement has
been set, every organisation needs to periodically review and possibly revise it to make sure it
accurately reflects its goals and the business and economic climates evolve.

Importance of Mission Statement

The purpose of the mission statement is to communicate to all the stakeholders inside and outside
the organisation what the company stands for and where it is headed. It is important to develop a
mission statement for the following reasons: 1. It helps to ensure unanimity of purpose within the
organisation. 2. It provides a basis or standard for allocating organisational resources. 3. It
establishes a general tone or organisational climate. 4. It serves as a focal point for individuals to
identify with the organisation’s purpose and direction. 5. It facilitates the translation of objectives
into tasks assigned to responsible people within the organisation. 6. It specifies organisational
purpose and then helps to translate this purpose into objectives in such a way that cost, time and
performance parameters can be assessed and controlled. Developing a comprehensive mission
statement is also important because divergent views among managers can be revealed and resolved
through the process. According to Pearce (1982), vision and mission statements have the following
value: 1. They provide managers with a unity of direction that transcends individual, parochial and
transitory needs. 2. They promote a sense of shared expectations among all levels and generations
of employees. 3. They consolidate values over time and across individuals and interest groups.

4. They project a sense of worth and intent that can be identified and assimilated by company
outsiders. 5. Finally, they affirm the company’s commitment to responsible action, in order to
preserve and protect the essential claims of insiders for sustained survival, growth and profitability
of the firm. According to Fred R. David, a mission statement is more than a statement of purpose. It
is 1. A declaration of attitude and outlook 2. A declaration of customer orientation 3. A declaration of
social policy and responsibility

Characteristics of a Mission Statement

A good mission statement should be short, clear and easy to understand. It should therefore possess
the following characteristics: 1. Not lengthy: A mission statement should be brief. 2. Clearly
articulated: It should be easy to understand so that the values, purposes, and goals of the
organisation are clear to everybody in the organisation and will be a guide to them. 3. Broad, but not
too general: A mission statement should achieve a fine balance between specificity and generality. 4.
Inspiring: A mission statement should motivate readers to action. Employees should find it
worthwhile working for such an organisation. 5. It should arouse positive feelings and emotions of
both employees and outsiders about the organisation. 6. Reflect the firm’s worth: A mission
statement should generate the impression that the firm is successful, has direction and is worthy of
support and investment. 7. Relevant: A mission statement should be appropriate to the organisation
in terms of its history, culture and shared values. 8. Current: A mission statement may become
obsolete after some time. As Peter Drucker points out, “Very few mission statements have anything
like a life expectancy of thirty, let alone, fifty years. To be good enough for ten years is probably all
one can normally expect”. Changes in environmental factors and organisational factors may
necessitate modification of the mission statement. 9. Unique: An organisation’s mission statement
should establish the individuality and uniqueness of the company. 10. Enduring: A mission statement
should continually guide and inspire the pursuit of organisational goals. It may not be fully achieved,
but it should be challenging for managers and employees of the organisation. 11. Dynamic: A
mission statement should be dynamic in orientation allowing judgments about the most promising
growth directions and the less promising ones. 12. Basis for guidance: Mission statement should
provide useful criteria for selecting a basis for generating and screening strategic options. 13.
Customer orientation: A good mission statement identifies the utility of a firm’s products or services
to its customers, and attracts customers to the firm.

14. A declaration of social policy: A mission statement should contain its philosophy about social
responsibility including its obligations to the stakeholders and the society at large. 15. Values, beliefs
and philosophy: The mission statement should lay emphasis on the values the firm stands for;
company philosophy, known as “company creed”, generally accompanies or appears within the
mission statement. 3.4 Components of a Mission Statement

Mission statements may vary in length, content, format and specificity. But most agree that an
effective mission statement must be comprehensive enough to include all the key components.
Because a mission statement is often the most visible and public part of the strategic management
process, it is important that it includes all the following essential components: 1. Basic product or
service: What are the firm’s major products or services? 2. Primary markets: Where does the firm
compete? 3. Principal technology: Is the firm technologically current? 4. Customers: Who are the
firm’s customers? 5. Concern for survival, growth and profitability: Is the firm committed to growth
and financial soundness? 6. Company philosophy: What are the basic beliefs, values, aspirations and
ethical priorities of the firm? 7. Company self-concept: What is the firm’s distinctive competence or
major competitive advantage? 8. Concern for public image: Is the firm responsive to social,
community and environmental concerns? 9. Concern for employees: Are employers considered a
valuable asset of the firm? 10. Concern for quality: Is the firm committed to highest quality ?
Products or Services, Markets and Technology

An indispensable component of the mission statement is specification of the firm’s basic product or
service, markets and technology. These three components describe the company’s activity.

Survival, Growth and Profitability

Every firm has to secure its survival through growth and profitability. These three economic goals
guide the strategic direction of almost every business organisation. A firm that is unable to survive
will be incapable of satisfying the aims of any of its stakeholders. Profitability is the mainstay goal of
a business organisation, and profit over the long term is the clearest indication of a firm’s ability to
satisfy the claims and desires of all stakeholders. A firm’s growth is inextricably linked to its survival
and profitability.

Company Philosophy

The statement of a company’s philosophy (also called company creed) generally appears within the
mission statement. It specifies the basic values, beliefs and aspirations to which the strategic
decision-makers are committed in managing the company. The company philosophy provides a
distinctive and accurate picture of the company’s managerial outlook.

Company Self-concept Both individuals and companies have a crucial need to know themselves. The
ability of a company to survive in a highly competitive environment depends on its realistic
evaluation of its strengths and weaknesses. Description of the firm’s self-concept provides a strong
impression of the firm’s self-image.

Public Image Mission statements should reflect the public expectations of the firm since this makes
achievement of the firm’s goals more likely.

Example: “Johnson & Johnson make safe products” reflects the customer expectations of the
company in making safe products. Sometimes, a negative public image can be corrected by
emphasizing the beneficial aspects in the mission statements.

Concern for Employees

Mission statements should also emphasize their concern for improvement of quality of work life,
equal opportunity for all, measures for employee welfare etc.

Customers “The customer is our top priority” is a slogan that would be claimed by most of the
businesses the world over. A focus on customer satisfaction causes managers to realize the
importance of providing an excellent customer service. So, many companies have made customer
service a key component of their mission statement.

Quality The emphasis on quality has received added importance in many corporate philosophies.

Example: Motorola’s mission statement contains a statement that “dedication to quality is a way of
life at our company, so much so that it goes beyond rhetorical slogans.”

Formulation of Mission Statements

There is no standard method for formulating mission statements. Different firms follow different
approaches. As indicated in the strategic management model, a clear mission statement is needed
before alternative strategies can be formulated and implemented. It is important to involve as many
managers as possible in the process of developing a mission statement, because through
involvement, people become committed to the mission of the organisation. Mission statements are
generally formulated as follows: 1. In many cases, the mission is inherited i.e. the founder
establishes the mission which may remain unchanged down the years or may be modified as the
conditions change. 2. In some cases, the mission statement is drawn up by the CEO and board of
directors or a committee of strategists constituted for the purpose.

3. Engaging consultants for drawing up the mission statement is also common. 4. Many companies
hold brainstorming sessions of senior executives to develop a mission statement. Soliciting
employee’s views is also common. 5. According to Fred R. David, an ideal approach for developing a
mission statement would be to select several articles about mission statements and ask all managers
to read these as background information. Then ask managers to prepare a draft mission statement
for the organisation. A facilitator or a committee of top managers, merge these statements into a
single document and distribute this draft mission statement to all managers. Then the mission
statement is finalized after taking inputs from all the managers in a meeting. Thus, the process of
developing a mission statement represents a great opportunity for strategists to obtain needed
support from all managers in the firm. 6. Decision on how best to communicate the mission to all
managers, employees and external constituencies of an organisation are needed when the
document is in its final form. Some organisations even develop a videotape to explain the mission
statement and how it was developed. 7. The practice in Indian companies appears to be a
consultative-participative route. For example, at Mahindra and Mahindra, workshops were
conducted at two levels within the organisation with corporate planning group acting as facilitators.
The State Bank of India went one step ahead by inviting labour unions to partake in the exercise.
Satyam Computers went one more step ahead by involving their joint venture companies and
overseas clients in the process. ! Caution Although many organisations have mission statements,
their value has sometimes been questioned. Kay (1996) asserts that visions or missions are indicative
of a 'wish driven strategy' that fails to recognize the limits to what might be possible, given finite
organisational resources. He cites the case of Groupe Bull, a French computer company, which for
many years sought to challenge the supremacy of IBM, particularly in the large US market. After
several attempts, Bull finally conceded that its mission was faulty. Kay's analysis was that for 30
years Groupe Bull was: Driven not by an assessment of what it was, but by a vision of what it would
like to be. Throughout, it lacked the distinctive capabilities that would enable it to realize that vision.
Bull epitomizes wish-driven strategy, based on aspiration, not capability (Kay, 1996). In a study of
some organisations, Leach (1996) found that mission statements and strategic vision had become
fashionable. While in some organisations, mission statements had made a real impact in clarifying
organisational values and culture, others regarded them only as symbolic public relations documents
that had little effect as a management tool. The dangers are not just that missions are unrealistic and
fail to recognize an organisation's capabilities (as in the case of Groupe Bull), but also that
management fails to develop a belief in the mission statement throughout the organisation. People
come to believe in and act upon the mission statement only when they see others doing so,
especially senior management and other influential players. The ideas of the mission statement need
to be cascaded through the structure to ensure a link between mission and day-to-day actions.

Evaluating Mission Statements

For a mission statement to be effective, it should meet the following ten conditions: 1. The mission
statement is clear and understandable to all parties involved. The organisation can articulate and
relate to it. 2. The mission statement is brief enough for most people to remember. 3. The mission
statement clearly specifies the purpose of the organisation. This includes a clear statement about:
(a) What needs the organisation is attempting to fill (not what products or services are offered)? (b)
Who the organisation's target populations are? (c) How the organisation plans to go about its
business; that is, what its primary technologies are? 4. The mission statement should have a primary
focus on a single strategic thrust. 5. The mission statement should reflect the distinctive competence
of the organisation (e.g., what can it do best? What is its unique advantage?) 6. The mission
statement should be broad enough to allow flexibility in implementation, but not so broad as to
permit lack of focus. 7. The mission statement should serve as a template and be the same means by
which the organisation can make decisions. 8. The mission statement must reflect the values, beliefs
and philosophy of operations of the organisation. 9. The mission statement should reflect attainable
goals. 10. The mission statement should be worked so as to serve as an energy source and rallying
point for the organisation (i.e., it should reflect commitment to the vision).

Goals

The terms “goals and objectives” are used in a variety of ways, sometimes in a conflicting sense. The
term “goal” is often used interchangeably with the term “Objective”. But some authors prefer to
differentiate the two terms. A goal is considered to be an open-ended statement of what one wants
to accomplish with no quantification of what is to be achieved and no time criteria for its
completion. For example, a simple statement of “increased profitability” is thus a goal, not an
objective, because it does not state how much profit the firm wants to make. Objectives are the end
results of planned activity. They state what is to be accomplished by when and should be quantified.
For example, “increase profits by 10% over the last year” is an objective. As may be seen from the
above, “goals” denote what an organisation hopes to accomplish in a future period of time. They
represent a future state or outcome of the effort put in now. “Objectives” are the ends that state
specifically how the goals shall be achieved. In this sense, objectives make the goals operational.
Objectives are concrete and specific in contrast to goals which are generalized. While goals may be
qualitative, objectives tend to be mainly quantitative, measurable and comparable.

Some writers, however, have reversed the usage, referring to objectives as the desired longterm
results and goals as the desired short-term results. And still others use the terms interchangeably,
meaning one and the same. These authors view that, little is gained from semantic distinctions
between goals and objectives. The important thing is to recognize that the results an enterprise
seeks to achieve vary as to both scope and time-frame. To avoid confusion, it is better to use the
single term “objectives” to refer to the performance targets and results an organisation seeks to
attain. We can use the adjectives long-term (long-range) and short-term (shortrange) to identify the
relevant time-frame, and try to describe their intended scope and level in the organisation, by using
expressions like broad objectives, functional objectives, corporate objectives etc Some of the areas
in which a company might establish its goals and objectives are: 1. Profitability (net profit) 2.
Efficiency (low costs, etc) 3. Growth (increase in sales etc) 4. Shareholder wealth (dividends etc) 5.
Utilization of resources (return on investment) 6. Market leadership (market share etc)

Stated vs. Operational Goals

Operational goals are the real goals of an organisation. Stated goals are the official goals of an
organisation. Operational goals tell us what the organisation is trying to do, irrespective of what the
official goals say the aims are. Official goals generally reflect the basic philosophy of the company
and are expressed in abstract terminology, for example, ‘sufficient profit’, ‘market leadership’ etc.
According to Charles Perrow, the following are the important operational goals: 1. Environmental
Goals: An organisation should be responsive to the broader concerns of the communities in which it
operates, and should have goals that satisfy people in the external environment. For example, goals
like customer satisfaction and social responsibility may be important environmental goals. 2. Output
Goals: Output goals are related to the identification of customer needs. Issues like what markets
should we serve, which product lines should be followed, etc. are examples of output goals. 3.
System Goals: These goals relate to the maintenance of the organisation itself. Goals like growth,
profitability, stability etc. are examples. 4. Product Goals: These goals relate to the nature of
products delivered to customers. They define quantity, quality, variety, innovativeness of products.

5. Derived Goals: These goals relate to derived or secondary areas like contribution to political
activities, promoting social service institutions etc.

Objectives

Objectives are the results or outcomes an organisation wants to achieve in pursuing its basic
mission. The basic purpose of setting objectives is to convert the strategic vision and mission into
specific performance targets. Objectives function as yardsticks for tracking an organisation’s
performance and progress.

Characteristics of Objectives

Well – stated objectives should be: 1. Specific 2. Quantifiable 3. Measurable 4. Clear 5. Consistent 6.
Reasonable 7. Challenging 8. Contain a deadline for achievement 9. Communicated, throughout the
organisation

Role of Objectives

Objectives play an important role in strategic management. They are essential for strategy
formulation and implementation because: 1. They provide legitimacy 2. They state direction 3. They
aid in evaluation 4. They create synergy 5. They reveal priorities 6. They focus coordination 7. They
provide basis for resource allocation 8. They act as benchmarks for monitoring progress 9. They
provide motivation

Nature of Objectives

The following are the characteristics of objectives:

Hierarchy of Objectives

In a multi – divisional firm, objectives should be established for the overall company as well as for
each division. Objectives are generally established at the corporate, divisional and functional levels,
and as such, they form a hierarchy. The zenith of the hierarchy is the mission of the organisation.
The objectives at each level contribute to the objectives at the next higher level.

Long-range and Short-range Objectives

Organisations need to establish both long-range and short-range objectives (Long–range means
more than one year, and short–range means one year and less.) Short-range objectives spell out the
near – term results to be achieved. By doing so, they indicate the speed and the level of
performance aimed at each succeeding period. Short – range objectives can be identical to long–
range objectives if an organisation is performing at the targeted long-term level (for example, 20%
growth - rate every year). The most important situation where short-range objectives differ from the
long-range objectives occurs when managers cannot reach the long-range target in just one year,
and are trying to elevate organisational performance. Short–range objectives (one – year goals) are
the means for achieving long range objectives. A company that has an objective of doubling its sales
within five years can’t wait until the third or fourth year of its five-year strategic plan. Short range
objectives then serve as stepping-stones or milestones.
Multiplicity of Objectives

Organisations pursue a number of objectives. At every level in the hierarchy, objectives are likely to
be multiple.

Example: The marketing division may have the objective of sales and distribution of products. This
objective can be broken down into a group of objectives for the product, distribution, research and
promotion activities. To describe a single, specific goal of an organisation is to say very little about it.
It turns out that there are several goals involved. This may be due to the fact that the enterprise has
to meet internal as well as external challenges effectively. Moreover, no single objective can place
the organisation on a path of prosperity and progress in the long run. However, an organisation
should not set too many objectives. If it does, it will lose focus. Too many objectives have a number
of problems.

Examples: (a) They dilute the drive for accomplishment (b) Minor objectives get highlighted to the
detriment of major objectives There is no agreement to the number of objectives that a manager
can effectively handle. But, if there are so many that none receives adequate attention, the
execution of objectives becomes ineffective; there is a need to be cautious. It will be wise to identify
the relative importance of each objective, in case the list is not manageable.

Network of Objectives

Objectives form an interlocking network. They are inter-related and inter-dependent. The
implementation of one may impact the implementation of the other. If there is no consistency
between company objectives, people may pursue goals that may be good for their own function but
detrimental to the company as a whole. Therefore, objectives should not only “fit” but also reinforce
each other. As observed by Koontz et al., “it is bad enough when goals do not support and interlock
with one another. It may be catastrophic when they interfere with one another.”

External Assessment

Introduction

At a time of fast growth, rapid changes and cut throat competition as exists in about all industries, it
is a challenge for the companies to establish a strategic agenda for dealing with these contending
currents and to grow despite them. A company must understand how the above currents work in its
industry and how they affect the company in its particular situation. For this a very useful tool is
used by the analysts. The name of this tool is external analysis. External assessment is a step where a
firm identifies opportunities that could benefit it and threats that it should avoid. It includes
monitoring, evaluating, and disseminating of information from the external and internal
environments to key people within the corporation.

Concept of Environment

Environment literally means the surroundings, external objects, influences or circumstances under
which someone or something exists. The environment of any organisation is “the aggregate of all
conditions, events and influences that surround and affect it.” Davis, K, The Challenge of Business,
(New York: McGraw Hill, 1975), p. 43. Environment refers to all external forces which have a bearing
on the functioning of business. Jauch and Gluecke has defined environment as “The environment
includes factors outside the firm which can lead to opportunities or a threat to the firm. Although
there are many factors the most important of the sectors are socio-economic, technological,
supplier, competitor and govt.” The recent changes in tariff rates have changed the toy industry of
India with the market now being dominated by Chinese products. A slight change in the Reserve So it
is quite obvious that success in a business depends upon better understanding of the environment. A
successful organisation doesn’t look at the environment on an ad hoc basis but develops a system to
study the environment on a continuous basis to try and protect the organisation from every possible
threat and to take the advantage of every opportunity. Some times better and timely understanding
of the environment can even turn a threat into an opportunity.

Importance of Business Environment

1. Environment is Complex: The environment consists of a number of factors, events, conditions and
influences arising from different sources. All these interact with each other to create new sets of
influences. 2. It is Dynamic: The environment by its very nature is a constantly changing one. The
varied influences operating upon it impart dynamism to it and cause it to continually change its
shape and character. 3. Environment is multi -faceted: The same environmental trend can have
different effects on different industries. For instance, GATS is an opportunity for some companies
but a threat for others. 4. It has a far-reaching impact: The environment has a far-reaching impact on
organisations in that the growth and profitability of an organisation depends critically on the
environment in which it exists. 5. Its impact on different firms with in the same industry differs: A
change in environment may have different bearings on various firms operating in the same industry.
In the pharmaceutical industry in India, for instance, the impact of the new IPR (Intellectual Property
Rights) law will different for research-based pharmacy companies such as Ranbaxy and Dr. Reddy’s
Lab and will be different for smaller pharmacy companies. 6. It may be an opportunity as well as a
threat to expansion: Developments in the general environment often provide opportunities for
expansion in terms of both products and markets.

Example: Liberalization in 1991 opened lot of opportunities for companies and HLL took the
advantage to acquire companies like Lakme, TOMCO, KISSAN etc. Changes in environment often also
pose a serious threat to the entire industry. Like Liberalization does pose a threat of new entrants to
Indian firms in the form of Multi National Corporation (MNCs). 7. Changes in the environment can
change the competitive scenario: General environmental changes may alter the boundaries of an
industry and change the nature of its competition. This has been the case with deregulation in the
telecom sector in India. Since deregulation, every second year new competitors emerge, old foes
become friends and M&As follow every new regulation. 8. Sometimes developments are difficult to
predict with any degree of accuracy: Macroeconomic developments such as interest rate
fluctuations, the rate of inflation, and exchange rate variations are extremely difficult to predict on a
medium or a long term basis. On the other hand, some trends such as demographic and income
levels can be easy to forecast. Bank of India’s monetary policy can increase or decrease interest rates
in the market. A slight shift in the government’s fiscal policy can shift the whole demand curve
towards the right or the left.

Example: Hindustan Lever Limited (HLL) took advantage of the new takeover and merger codes and
acquired brands like Kissan from the UB group, TOMCO (Tata Oil Mills Company) and Lakme from
Tata and Modern Foods from the government, besides many other small takeovers and mergers.
The new moguls of the Indian business are those who predicted the changes in the environment and
reacted accordingly. Azim Premji of Wipro, Narayana Murthy of Infosys, Subhash Goyal of ZEE, the
Ambanis of Reliance, L.N. Mittal of Mittal Steel, Sunil Mittal of Bharti Telecom are some of them.
Even a small businessman who plans to open a small shop as a general merchant in his town needs
to study the environment before deciding where he wants to open his shop, the products he intend
to sell and what brands he wants to stock. The relation between a business and an environment is
not a one way affair. The business also equally influences the external environment and can bring
about changes in it. Powerful business lobbies for instance, actively work towards changing
government policies. The business environment is not all about the economic environment but also
about the social and political environment. Politically, after the Congress government came to power
at the center with the support of the CPI in May 2004, the whole process of disinvestments took a
Uturn. Similarly, a new sociological order in India today has created a market for fast foods,
packaged foods, multiplexes, designer names, Valentine day gifts and presents, and gymnasiums and
clubs etc.

Porter’s Five Force Analysis

In 1979, the Harvard Business Review published the article “How Competitive Forces Shape
Strategy” by the Harvard Professor Michael Porter. It started a revolution in the strategy field. In
subsequent decades, “Porter’s five forces” have shaped a generation of academic research and
business practice. This unit explores how competitive analysis can be done using Porter’s five forces
model.

The Five Forces

In essence, the job of the strategist is to understand and cope with competition. However, managers
define competition too narrowly, as if it occurs only among today’s direct competitors. Yet
competition for profits goes beyond established industry rivals. It includes four other competitive
forces as well: customers, suppliers, potential entrants and substitutes.

The Five Forces model developed by Michnal E. Porter has been the most commonly used analytical
tool for examining competitive environment. According to this model, the intensity of competition in
an industry depends on five basic forces. These five forces are: 1. Threat of new entrants 2. Intensity
of rivalry among industry competitors 3. Bargaining power of buyers 4. Bargaining power of suppliers
5. Threat of substitute products and services. Each of these forces affects a firm’s ability to compete
in a given market. Together, they determine the profit potential for a particular industry.

Porter argues that the stronger each of these forces are, the more limited is the ability of established
companies to raise prices and earn greater profits. With Porter’s framework, a strong competitive
force can be regarded as a threat because it depresses profits. A weak competitive force can be
viewed as an opportunity because it allows a company to earn greater profits. The strength of the
five forces may change with time as industry conditions change. For example, in industries such as
airlines, textiles and hotels, where these forces are intense, almost no company earns attractive
returns on investment. In pharmaceuticals and toiletries, where these forces are benign, many
companies earn attractive profits.

Forces that Shape Competition

The configuration of the five forces differ from industry to industry. For example in the market for
commercial aircraft, fierce rivalry among existing competitors (i.e. Airbus and Boeing) and the
bargaining power of buyers of aircrafts are strong, while the threat of entry, the threat of
substitutes, and the power of suppliers are more benign. Thus, the strongest competitive force or
forces determine the profitability of an industry and becomes the most important to strategy
formulation. 1. The Threat of New Entrants: The first of Porter’s Five Forces model is the threat of
new entrants. New entrants bring new capacity and often substantial resources to an industry with a
desire to gain market share. Established companies already operating in an industry often attempt to
discourage new entrants from entering the industry to protect their share of the market and profits.
Particularly when big new entrants are diversifying from other markets into the industry, they can
leverage existing capabilities and cash flows to shake up competition. Pepsi did this when it entered
the bottled water industry, Microsoft did when it began to offer internet browsers, and Apple did
when it entered the music distribution business. The threat of new entrants, therefore, puts a cap on
the profit potential of an industry. When the threat is high, existing companies hold down their
prices or boost investment to deter new competitors. And the threat of entry in an industry depends
on the height of entry barriers (i.e. factors that make it costly for new entrants to enter industry)
that are present and on the retaliation from the entrenched competitors. If entry barriers are low
and newcomers expect little retaliation, the threat of entry is high and industry profits will be
moderate. It is the threat of entry, not whether entry actually occurs, that holds down profitability.
2. Barriers to entry: Entry barriers depend on the advantages that existing companies have relative
to new entrants. There are seven major sources: (a) Economies of scale: These are relative cost
advantages associated with large volumes of production, that lower a company’s cost structure. The
cost of product per unit declines as the volume of production increases. This discourages new
entrants to enter on a large scale. If the new entrant decides to enter on a large-scale to obtain
economies of scale, it has to bear high risks associated with a large investment.

A further risk is that the increased supply of products will depress prices and results in vigorous
retaliation by established companies. For these reasons, the threat of new entrants is reduced when
established companies have economies of scale.

Example: In microprocessors, existing companies such as Intel are protected by economies of scale in
research, chip fabrication and consumer marketing. (b) Product differentiation: Brand loyalty is
buyer’s preference for the differentiated products of any established company. Strong brand loyalty
makes it difficult for new entrants to take market share away from established companies. It reduces
threat of entry because the task of breaking down well-established customer preferences is too
costly for them. (c) Capital requirements: The need to invest large financial resources in order to
compete can deter new entrants. Capital may be necessary not only for fixed assets, but also to
extend customer credit, build inventories and fund start-up losses. The barrier is particularly great if
the capital is required for unrecoverable expenditure, such as up-front advertising or research and
development. While major corporations have the financial resources to invade almost any industry,
the capital requirements in certain fields limit the pool of likely entrants. It is important not to
overstate the degree to which capital requirements alone deter entry; if industry returns are
attractive and are expected to remain so, and if capital markets are efficient, investors will provide
new entrants with the funds they need. For example, in airlines industry, financing is available to
purchase expensive aircrafts because of their resale value, and that is why there have been a
number of new airlines in almost every region. (d) Switching costs: Switching costs are the one-time
costs that a customer has to bear to switch from one product to another. When switching costs are
high, customers can be locked up in the existing product, even if new entrants offer a better product.
Thus, the higher the switching costs are, the higher is the barrier to entry. Enterprise Resource
Planning (ERP) software is an example of a product with very high switching costs. Once a company
has installed SAP’s ERP system, the cost of moving to a new vendor are astronomical. (e) Access to
distribution channels: The new entrant’s need to secure distribution channel for the product can
create a barrier to entry. The established companies have already tied up with distribution channels.
For example, a new food item may have to displace others from the supermarket shelf via price
breaks, promotions, intense selling efforts or some other means. The more limited the wholesale or
retail channels are, tougher will be the entry into an industry. Sometimes, if the barrier is so high, a
new entrant must create its own distribution channels as Timex did in the watch industry in the
1950s. (f) Cost disadvantages independent of size: Some existing companies may have advantages
other than size or economies of scale. These are derived from: (i) Proprietary technology (ii)
Preferential access to raw material sources (iii) Government subsidies (iv) Favorable geographical
locations (v) Established brand identities (vi) Cumulative experience New entrants may not have
these advantages. (g) Government policy: Historically, government regulations have constituted a
major entry barrier into many industries. The government can limit or even foreclose entry into
industries, with such controls as license requirements and limits on access to raw materials. The
liberalization policy of the Indian government relating to deregulation, delicensing and decontrol of
prices opened up the economy to many new entrepreneurs. ! Caution Even if entry barriers are very
high, new firms may still enter an industry if they perceive that the benefits outweigh the substantial
costs of entry. Such a situation creates excess capacity in the industry and sparks off intense price
competition that might depress the returns for all players – new entrants as well as established
companies. So, the strategist must be mindful of the creative ways newcomers might find to
circumvent apparent barriers. 3. Expected Retaliation: How new entrants believe that the existing
companies may react will also influence their decision to enter or stay out of an industry. If reaction
is vigorous and protracted enough, the profit potential in the industry can fall below the cost of
capital for all participants. Existing companies often use public statements to send massages to new
entrants about their commitment to defending market share. New entrants are likely to fear
expected retaliation if: (a) Existing companies have previously responded vigorously to new entrants
(b) Existing companies possess substantial resources to fight back (c) Existing companies seem likely
to cut prices to protect their market share (d) Industry growth is slow, so newcomers can gain
volume only by taking the market share from existing companies. An analysis of entry barriers and
expected retaliation is obviously crucial for any company contemplating entry into a new industry.
The challenge is to find ways to surmount the entry barriers without nullifying the profitability of the
industry. 4. Intensity of Rivalry among Competitors: The second of Porter’s Five-Forces model is the
intensity of rivalry among established companies within an industry. Rivalry means the competitive
struggle between companies in an industry to gain market share from each other. Firms use tactics
like price discounting, advertising campaigns, new product introductions and increased customer
service or warranties. Intense rivalry lowers prices and raises costs. It squeezes profits out of an
industry. Thus, intense rivalry among established companies constitutes a strong threat to
profitability. Alternatively, if rivalry is less intense, companies may have the opportunity to raise
prices or reduce spending on advertising etc. which leads to higher level of industry profits. The
intensity of rivalry is greatest under the following conditions: (a) Numerous competitors or equally
powerful competitors: When there are many competitors in an industry or if the competitors are
roughly of equal size and power, the intensity of rivalry will be more. Any move by one firm is
matched by an equal countermove. In such situations rivals find it hard to avoid poaching business.

(b) Slow industry growth: Slow industry growth turns competition into fight because the only path to
growth is to take sales away from a competitor. (c) High fixed but low marginal costs: This creates
intense pressure for competitors to cut prices below their average costs even close to their marginal
costs, to steal customers.

Example: Many paper and aluminium businesses suffer from this problem, especially if demand is
not growing. (d) Lack of differentiation or switching costs: If products or services of rivals are nearly
identical and there are few switching costs, this encourages competitors to cut prices to win new
customers. Years of airline price wars reflect these circumstances in that industry. (e) Capacity
augmentation in large increments: If the only way a manufacturer can increase capacity is in a large
increment, such as building a new plant, it will run that new plant at full capacity to keep its unit
costs low. Such capacity additions can be very disruptive to the supply/demand balance and cause
the selling prices to fall throughout the industry. (f) High exit barriers: Exit barriers keep a company
from leaving the industry. Exit barriers can be economic, strategic or emotional factors that keep
firms competing even though they may be earning low or negative returns on their investments. If
exit barriers are high, companies become locked up in a non-profitable industry where overall
demand is static or declining. Excess capacity remains in use, and the profitability of healthy
competitors suffers as the sick ones hang on.

Did u know? What are the Common Exit Barriers? Common exit barriers are: 1. Investment in
specialized assets like plant and machinery are of little or no value, and cannot be put to alternative
use. So, they have to be continued. 2. High costs of exit such as retrenchment benefits, etc. that
have to be paid to the redundant workers when a company ceases to operate. 3. Emotional
attachment to an industry keep owners or employees unwilling to exit from an industry for
sentimental reasons. 4. Economic dependence on the industry when the firm depends on a single
industry for revenue and profit. 5. Government and social pressures discourage exit of industries out
of concern for job loss. 6. Strategic interrelationships between business units and others prevent exit
because of shared facilities, image and so on. 5. Bargaining power of buyers: The third of Porter’s
five competitive forces is the bargaining power of buyers. Bargaining power of buyers refers to the
ability of buyers to bargain down prices charged by firms in the industry or driving up the costs of
the firm by demanding better product quality and service. By forcing lower prices and raising costs,
powerful buyers can squeeze profits out of an industry. Thus, powerful buyers should be viewed as a
threat. Alternatively, if buyers are in a weak bargaining position, the firm can raise prices, cut costs
on quality and services and increase their profit levels. Buyers are powerful if they have more
negotiation leverage than the firms in the industry, using their clout primarily to pressure price
reductions. According to Porter, buyers are most powerful under the following conditions: (a) There
are few buyers: If there are few buyers or each one does bulk purchases, then they have more
bargaining power. Large buyers are particularly powerful in industries like telecommunication
equipment, off-shore drilling, and bulk chemicals. High fixed costs and low marginal costs increase
the pressure on rivals to keep capacity filling through discounts. (b) The products are standard or
undifferentiated: If the products purchased from the firm are standard or undifferentiated, the
buyers can easily find alternative sources of supplies. Then buyers can play one company against the
other, as in commodity grain markets. (c) The buyer faces low switching costs: Switching costs lock
the buyer to a particular firm. If switching costs are low, buyers can easily switch from one firm’s
product to another. (d) The buyer earns low profits: If the buyer is under pressure to trim its
purchasing costs, the buyer is price sensitive and bargains more. (e) The quality of buyer’s products:
If the quality of buyer’s product is little affected by industry’s products, buyers are more price
sensitive. Most of the above sources of buyer power can be attributed to consumers as a group as
well as to industrial and commercial buyers. The buying power of retailers is determined by the
same factors, with one important addition. Retailers can gain significant bargaining power over
manufacturers when they can influence consumers. Purchasing decisions as they do in audio
components, jewellery, appliances, sporting goods etc., are examples. 6. Bargaining power of
suppliers: The fourth of Porter’s Five Forces model is the bargaining power of suppliers. Suppliers are
companies that supply raw materials, components, equipment, machinery and associated products.
Powerful suppliers make more profits by charging higher prices, limiting quality or services or
shifting the costs to industry participants. Powerful suppliers squeeze profits out of an industry and
thus, they are a threat. For example, Microsoft has contributed to the erosion of profitability among
PC makers by raising prices on operating systems. PC makers, competing fiercely for customers, have
limited freedom to raise their prices accordingly. A supplier’s bargaining power will be high under
the following conditions: (a) Few suppliers: When the supplier group is dominated by few companies
and is more concentrated than the firms to whom it sells, an industry is called concentrated. The
suppliers can then dictate prices, quality and terms. (b) Product is differentiated: When suppliers
offer products that are unique or differentiated or built-up switching costs, it cuts off the firm’s
options to play one supplier against the other. For example, pharmaceutical companies that offer
patented drugs with distinctive medical benefits have more power over hospitals, drug buyers etc.
(c) Dependence of supplier group on the firm: When suppliers sell to several firms and the firm does
not represent a significant fraction of its sales, suppliers are prone to exert power. In other words,
the supplier group does not depend heavily on the industry for revenues. Suppliers serving many
industries will not hesitate to extract maximumprofits from each one. If a particular industry
accounts for a large portion of a supplier group’s volume or profit, however, suppliers will want to
protect the industry through reasonable pricing. (d) Importance of the product of the firm: When the
product is an important input to the firm’s business or when such inputs are important to the
success of a firm’s manufacturing process or product quality, the bargaining power of suppliers is
high. (e) Threat of forward integration: When the supplier poses a credible threat of integrating
forward, this provides a check against the firm’s ability to improve the terms by which it purchases.
(f) Lack of substitutes: The power of even large, powerful suppliers can be checked if they compete
with substitutes. But, if they are not obliged to compete with substitutes as they are not readily
available, the suppliers can exert power. 7. Threat of substitute products: The fifth of Porter’s Five
Forces model is the threat of substitute products. A substitute performs the same or a similar
function as an industry’s product. Video conferences are a substitute for travel. Plastic is a substitute
for aluminum. E-mail is a substitute for a mail. All firms within an industry compete with industries
producing substitute products. For example, companies in the coffee industry compete indirectly
with those in the tea and soft drink industries because all these serve the same need of the
customer for refreshment. The existence of close substitutes is a strong competitive threat because
this limits the price that companies in one industry can charge for their product. If the price of coffee
rises too much relative to that of tea or soft drink, coffee drinkers may switch to those substitutes.
Thus, according to Porter, “substitutes limit the potential returns of an industry by placing a ceiling
on the prices firms in the industry can profitably charge”. For example, the price of tea puts a ceiling
on the price of coffee. To the extent that switching costs are low, substitutes may have a strong
effect on the profitability of an industry. The more attractive is the price/performance ratio of
substitute products, the more likely they affect an industry’s profits. In other words, when the threat
of substitutes is high, industry profitability suffers. If an industry does not ward off the substitutes
through product performance, marketing, price or other means, it will suffer in terms of profitability
and growth potential in the following circumstances: (a) It offers an attractive price and
performance: The better the relative value of the substitute, the worse is the profit potential of the
industry. For example, long distance telephone service providers suffered with the advent of
Internet-based phone services. (b) The buyer’s switching costs to the substitutes is low: For example,
switching from a proprietary, branded drug to a generic drug usually involves minimum switching
costs. Strategists should be particularly alert to changes in other industries that may make attractive
substitutes. For example, improvements in plastic materials prompted the automobile manufactures
to substitute plastic for steel in many automobile components.

Industry Analysis

Each business operates among a group of firms that produce competing products or services known
as an “industry”. An industry is thus a group of firms producing similar products or services. By
similar products we mean products that customers perceive to be substitutes for one another.
Example: Firms that produce and sell textiles such as Reliance Textiles, Raymond, S. Kumars etc.
belong to the textile industry. Similarly, firms that produce PCs, such as Apple, Compaq, AT&T, IBM,
etc. belong to the microcomputer industry.

Although there are usually some differences among competitors, each industry has its own set of
“rules of combat” governing such issues as product quality, pricing and distribution. This is especially
true in industries that contain a large number of firms offering standardized products and services.
As such, it is important for strategic managers to understand the structure of the industry in which
their firms operate before deciding how to compete successfully. Industry analysis is therefore a
critical step in the strategic analysis of a firm. In a perfect world, each firm would operate in one
clearly defined industry. However, many firms compete in multiple industries, and strategic
managers in similar firms often differ in their conceptualization of the industry environment. In
addition, the advent of Internet has completely changed the way business is done. As a result, the
process of industry definition and analysis can be specially challenging when internet competition is
considered. The basic purpose of industry analysis is to assess the strengths and weaknesses of a
firm relative to its competitors in the industry. It tries to highlight the structural realities of particular
industry and the extent of competition within that industry. Through industry analysis, an
organisation can find whether the chosen field is attractive or not and assess its own position within
the industry.

Framework for Industry Analysis

Industry analysis covers two important components: 1. Industry environment 2. Competitive

environment The following are the aspects to be covered in the above analysis:

Industry Analysis

1. Industry features 2. Industry boundaries 3. Industry environment 4. Industry structure 5. Industry

performance 6. Industry practices 7. Industry attractiveness 8. Industry prospects for future

Competitive Analysis

Competitive analysis basically addresses two questions: 1. Which firms are our competitors? 2. What
factors shape competition in industry

Industry Analysis

1. Industry Features: Industries differ significantly. So, analyzing a company’s industry begins with
identifying the industry’s dominant economic features and forming a picture of the industry
landscape. An industry’s dominant economic features include such factors as: (a) Overall size (b)
Market growth rate (c) Geographic boundaries of the market (d) Number and sizes of competitors
(e) Pace of technological change (f) Product innovations etc. Getting a handle on an industry features
promotes understanding of the kinds of strategic moves that managers should employ. For example,
in industries characterized by one product advance after another, a strategy of continuous product
innovation becomes a condition for survival.

Example: Video games, computers and pharmaceuticals. 2. Industry Boundaries: All the firms in the
industry are not similar to one another. Firms within the same industry could differ across various
parameters, such as: (a) Breadth of market (b) Product/service quality (c) Geographic distribution (d)
Level of vertical integration (e) Profit motives 3. Industry Environment: Based on their environment,
industries are basically of two types: (a) Fragmented Industries: A fragmented industry consists of a
large number of small or medium-sized companies, none of which is in a position to determine
industry price. Many fragmented industries are characterized by low entry barriers and commodity
type products that are hard to differentiate. (b) Consolidated Industries: A consolidated industry is
dominated by a small number of large companies (an oligopoly) or in extreme cases, by just one
company (a monopoly). These companies are in a position to determine industry prices. In
consolidated industries, one company’s competitive actions or moves directly affect the market
share of its rivals, and thus their profitability. When one company cuts prices, the competitors also
cut prices. Rivalry increases as companies attempt to undercut each other’s prices or offer customers
more value in their products, pushing industry profits down in the process. The consequence is a
dangerous competitive spiral. According to Michael Porter, industries can be categorized into:
Emerging industries: Are those in the introductory and growth phases of their life cycle. Mature
industries: Are those who reached the maturity stage of their life cycle. Declining industries: Are
those in the transition stage from maturity to decline. Global industries: Are those with
manufacturing bases and marketing operations in several countries. Competition varies during each
stage of industry life cycle. 4. Industry Structure: Defining an industry’s boundaries is incomplete
without an understanding of its structural attributes. Structural attributes are the enduring
characteristics that give an industry its distinctive character. Industry structure consists of four
elements: (a) Concentration (b) Economies of scale (c) Product differentiation (d) Barriers to entry.
(a) Concentration: It means the extent to which industry sales are dominated by only a few firms. In
a highly concentrated industry (i.e. an industry whose sales are dominated by a handful of firms), the
intensity of competition declines over time. High concentration serves as a barrier to entry into an
industry, because it enables the firms to hold large market shares to achieve significant economies
of scale. (b) Economies of scale: This is an important determinant of competition in an industry.
Firms that enjoy economies of scale can charge lower prices than their competitors, because of their
savings in per unit cost of production. They also can create barriers to entry by reducing their prices
temporarily or permanently to deter new firms from entering the industry. (c) Product
differentiation: Real perceived differentiation often intensifies competition among existing firms. (d)
Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to enter an industry,
and the competition from new entrants depends mostly on entry barriers. 5. Industry attractiveness:
Industry attractiveness is dependent on the following factors: (a) Profit potential (b) Growth
prospects (c) Competition (d) Industry barriers etc. As a general proposition, if an industry’s profit
prospects are above average, the industry can be considered attractive; if its profit prospects are
below average, it is considered unattractive. If the industry and competitive situation is assessed as
attractive, firms employ strategies to expand sales and invest in additional facilities as needed to
strengthen their long-term competitive position in business. If the industry is judged as unattractive,
firms may choose to invest cautiously, look for ways to protect their profitability. Strong companies
may consider diversification into more attractive businesses. Weak companies may consider merging
with a rival to bolster market share and profitability.

6. Industry performance: This requires an examination of data relating to: (a) Production (b) Sales (c)
Profitability (d) Technological advancements etc. 7. Industry practices: Industry practices refer to
what a majority of players in the industry do with respect to products, pricing, promotion,
distribution etc. This aspect involves issues relating to: (a) Product policy (b) Pricing policy (c)
Promotion policy (d) Distribution policy (e) R&D policy (f) Competitive tactics. 8. Industry’s future
prospects: The future outlook of an industry can be anticipated based on such factors as: (a)
Innovation in products and services (b) Trends in consumer preferences (c) Emerging changes in
regulatory mechanisms (d) Product life cycle of the industry (e) Rate of growth etc.

Competitive Analysis
The degree of competition in an industry is influenced by a number of forces. To establish a strategic
agenda for dealing with these forces and grow despite them, a firm must understand: 1. How these
forces work in an industry? 2. How they affect the firm in its particular situation? The essence of
strategy formulation is coping with competition. Intense competition in an industry is neither a
coincidence nor a bad luck. It is rooted in its underlying economics. There are two theories of
economics – theory of monopoly and theory of perfect competition. These represent two extremes
of industry competition. In a monopoly context, a single firm is protected by barriers to entry, and
has an opportunity to appropriate all the profits generated in the industry. In a “perfectly
competitive” industry, competition is unbridled and entry to the industry is easy. This kind of
industry structure, of course, offers the worst prospects for long-run profitability. The weaker the
forces collectively, however, the greater the opportunity for superior performance in terms of profit.
According to Porter, “each industry’s attractiveness or profitability potential is a direct function of
the interactions of various environmental forces that determine the nature of competition”.

Buyers, suppliers, new entrants and substitute products are all competitive forces. The state of
competition in an industry is shaped by these forces. The collective strength of these forces
determines the ultimate profit potential of an industry. It ranges from intense in certain industries to
mild in certain industries. Whatever their collective strength, the corporate strategist’s goal is to find
a position in the industry where his or her company can best defend itself against these forces or can
influence them in its favour. The strategist must delve below the surface and analyze the underlying
sources of competition. Knowledge of these underlying sources of competition helps: 1. To provide
the groundwork for a strategic agenda. 2. To highlight the competitive strengths and weaknesses of
the company. 3. To animate the positioning of the company in its industry. 4. To clarify the areas
where strategic changes may yield the greatest payoff and 5. To highlight the sources of greatest
significance, either as opportunity or thereat. Understanding these sources will also help in
considering areas for diversification. The strongest competitive forces determine the profitability of
an industry; so, competitive analysis is of crucial importance in strategy formulation

Environmental Scanning

Environmental analysis or scanning is the process of monitoring the events and evaluating trends in
the external environment, to identify both present and future opportunities and threats that may
influence the firm’s ability to reach its goals. Strategists need to analyze a variety of different
components of the external environment, identify “Key Players” within those domains, and be very
cognizant of both threats and opportunities within the environment. It is from such an analysis that
managers can make decisions on whether to react to, ignore, or try to influence or anticipate future
opportunities and threats discovered. The main purpose of environmental scanning is therefore to
find out the correct “fit” between the firm and its environment, so that managers can formulate
strategies to take advantage of the opportunities and avoid or reduce the impact of threats.

4.5.1 Features of Environmental Analysis

In the context of a changing environment, the process of environmental analysis is very well
comparable to the functions of radar. From this analogy, it is possible to derive three important
features of the process of environmental analysis (Ian Wilson).

Holistic Exercise

Environmental analysis is a holistic exercise in the sense that it must comprise a total view of the
environment rather than a piecemeal view of trends. It is a process of looking at the forest, rather
than the trees.
Continuous Activity

The analysis of environment must be a continuous process rather than a one – shot deal. Strategists
must keep on tracking shifts in the overall pattern of trends and carry out detailed studies to keep a
close watch on major trends.

(h) Brainstorming (i) Demand/hazard forecasting The above techniques are briefly discussed below:

PESTEL Analysis

PESTEL Analysis is a checklist to analyse the political, economic, socio-cultural, technological,

environmental and legal aspects of the environment. While doing PESTEL analysis, it is better to have
three or four well-thought-out items that are justified with evidence than a lengthy list. Although the
items in a PESTEL analysis rely on past events and experience, the analysis can be used as a forecast
of the future. The past is history and strategic management is concerned with future action, but the
best evidence about the future may derive from what happened in the past. It is worth attempting
the task of deciphering this hidden assumption anyway. For example, when the Warner Brothers
invested several hundred million dollars in the first Harry Porter film, they made an assumption that
the fantasy film market would remain attractive throughout the world. A structured PESTEL analysis
might have given the same outcome even though it is difficult to predict.

Checklist for a PESTEL Analysis Political future Political parties and alignments at local and national
level Legislation, e.g. on taxation and employment law Relations between government and the
organization (possibly influencing the preceding items in a major way and forming a part of future
corporate strategy) Government ownership of industry and attitude to monopolies and competition
Socio-cultural future Shifts in values and culture Change in lifestyle Attitudes to work and issues
‘Green’ environmental issues Education and health Demographic changes Distribution of income
Economic future Total GDP and GDP per head Inflation Consumer expenditure and disposable
income Interest rates Currency fluctuations and exchange rates Investment – by the state, private
enterprise and foreign companies Cyclicality Unemployment Energy costs, transport costs,
communication costs, raw material costs Technological future Government investment policy
Identified new research initiatives New patents and products Speed of change and adoption of new
technology

New patents and products Speed of change and adoption of new technology Level of expenditure
on R&D by organisation’s rivals Developments in nominally unrelated industries that might be
applicable Environmental future ‘Green’ issues that affect the environment Level and type of
energy consumed – renewable energy? Rubbish, waste and its disposal Legal future Competition
law and government policy Employment and safety law Product safety issues

Some strategists may comment that the future is so uncertain that prediction is useless. If this view
were true, then strategic management would not be playing such a significant role in organisations
today. It is recognized that the future cannot be controlled, but by anticipating the future,
organisations can avoid strategic surprises and be prepared to meet environmental changes.

SWOT Analysis

SWOT analysis is discussed in more detail in Unit 5.

ETOP
Environmental Threats and Opportunities Profile (ETOP) gives a summarized picture of
environmental factors and their likely impact on the organisation. ETOP is generally prepared as
follows. 1. List environmental factors: The different aspects of the general as well as relevant
environmental factors are listed. For example, economic environment can be divided into rate of
economic growth, rate of inflation, fiscal policy etc. 2. Assess impact of each factor: At this stage,
the impact of each factor is assessed closely and expressed in qualitative (high, medium or low) or
quantitative factors (1, 2, 3). It is to be noted that not all identified environmental factors will have
the same degree of impact. The impact is assessed as positive or negative. 3. Get a big picture: In the
final stage, the impact of each factor and its importance is combined to produce a summary of the
overall picture.

As observed from the above, the firm can capitalize on rising income levels, buyer loyalty to the
firm’s products and buyer’s preference for differentiated products even though the price is high. But
this would depend on the firm’s acquisition of latest technology, which is expensive. Thus, the
preparation of an ETOP provides the strategists with a clear picture of which environmental factors
have a favourable impact on the firm and which have an unfavourable or adverse effect. With the
help of an ETOP, a firm can judge where it stands with respect to its environment, and such an
understanding is helpful in formulating appropriate strategies.

Alternative Framework for ETOP

An alternative framework to analyse the impact of threats and opportunities is explained below: 1.
The Opportunity and Threat Matrices ( a) The Threat matrix

High Major threats Moderate threats

Low Moderate threats Minor threats

Seriousness

High Low

Probability of occurrence A company, after identifying various threats, can use its judgment
to place the threats in any one of the four cells. Thus, for an aluminum plant, erratic availability and
high cost of electrical power, can become a major threat if the probability of its occurrence is high.
Placing this threat in cell-1 would mean strategic decisions like setting up of a captive power plant or
shifting the plant to another location. (b) The Opportunity Matrix

High Very attractive Moderately attractive

Low Moderately attractive Least attractive

Attractiveness

High Low

Probability of occurrence
A company based on its own assessment and judgment can place the trends in various cells. A
company’s success probability with a particular opportunity depends on whether its business
strength (i.e., distinctive competence ) matches the success requirements of the industry. For
example, entry into light commercial vehicles was an attractive opportunity for TELCO in which it had
distinctive competence. (c) The Impact Matrix: The impact of the trends (opportunities and threats )
on various strategies can be visualized with the help of an impact matrix. This is discussed below.
After identifying the emerging trends in mega and micro or relevant environment, the degree of
their impact can be assessed with the help of an impact scale. The matrix enables us to have a
summary view of the impact on different strategies which a firm may be following. The strategies
may relate to various functionalareas (e.g. marketing, finance, production) with a specific business
unit or they may relate to a specific business unit or to the overall company for all its business units
(e.g. diversification). (d) The Impact Scale: We can use a 5 – point impact scale to assess the ‘degree’
and ‘quality’ of impact of each trend on different strategies. The pattern of scoring can be as follows:

Impact on strategies Trend Probability of occurrence S1 S2 S3 S4 T1 T2 T3 T4 T1, T2, T3, T4 refer

to trends in the environment S1, S2, S3, S4 refer to strategies

+ 2 extremely favourable impact + 1 moderately favourable impact 0 no impact – 1 moderately

unfavourable impact – 2 extremely unfavourable impact Like the Threat and Opportunity Matrices
discussed above, we can assign probability of occurrences for each trend. You would observe that
the above framework gives an objective picture of the impact of the environmental forces on
different strategies of the organisation.

EFE Matrix

Just like ETOP, the External Factor Evaluation Matrix (EFE Matrix) helps to summarize and evaluate
the various components of external environment. The EFE Matrix can be developed in five steps: 1.
List 10 to 20 important opportunities and threats. 2. Assign a weight to each factor from 0.0 (not
important) to 1.0 (most important). The higher the weight, the more important is the factor to the
current and future success of the company. 3. Assign a rating to each factor 1(poor), 2 (average), 3
(above average), 4 (superior). The rating indicates how effectively the firm’s current strategies
respond to that particular factor. 4. Multiply each factor’s weight by its rating to determine a
weighted score. 5. Finally, add the individual weighted scores for all the external factors to
determine the total weighted score for the organisation.

QUEST

QUEST (Quick Environment Scanning Technique) is a four step process, which uses scenariobuilding
for environmental analysis. The four steps are: 1. Managers make observations about major events
and trends in the environment. 2. They speculate on a wide range of issues that are likely to affect
the future of the business enterprise. 3. A report is prepared summarizing the issues and their
implications to the firm, together with 2 to 3 scenarios. 4. The report and the scenarios are reviewed
by strategists, based on which they identify feasible options. Thus, QUEST helps in generating
feasible alternative strategies for consideration of the management.

Competitive Profile Matrix (CPM)

This is a competitor analysis, which focuses on each company against whom a firm competes
directly. It helps to identify the strengths and weaknesses of the major competitors of the firm, vis-à-
vis the firm. Generally, the Critical Success Factors (CSFs) are compared. In addition, other factors
that can be compared are breadth of product line, sales, distribution, production capacity and
efficiency, technological advantages etc. Using the format shown in Table, a firm can prepare
competitor profile matrix.

Forecasting Techniques

Macro environmental and industry scanning and analysis are only marginally useful if what they do is
to reveal current conditions. To be truly useful, such analysis must forecast future trends and
changes. Forecasting is a way of estimating the future events that are likely to have a major impact
on the enterprise. It is a technique whereby managers try to predict the future characteristics of the
environment to help managers take strategic decisions. Various techniques are used to forecast
future situations. Important among these are: 1. Time series analysis: Extrapolation is the most
widely practiced form of forecasting. Simply stated, extrapolation is the extension of present trends
into the future. It rests on the assumption that the world is reasonably consistent and changes
slowly in the short run. They attempt to carry a series of historical events forward into the future.
Because time series analysis projects historical trends into the future, its validity depends on the
similarity between past trends and future conditions. 2. Judgemental forecasting: This is a
forecasting technique in which employees, customers, suppliers etc., serve as a source of
information regarding future trends. For example, sales representatives may be asked to forecast
sales growth in various product categories based on their interaction with customers. Survey
instruments may be mailed to customers, suppliers or trade associations to obtain their judgments
on specific trends. 3. Expert opinion: This is a non-quantitative technique in which experts in a
particular area attempt to forecast likely developments. Knowledgeable people are selected and
asked to assign importance and probability rating to various future developments. This type of
forecast is based on the ability of a knowledgeable person to construct probable future
developments on the interaction of key variables. The delphi technique is one such technique. 4.
Delphi Technique: This is a forecasting technique in which the opinion of experts in the appropriate
field are obtained about the probability of the occurrence of specified events. The responses of the
experts are compiled and a summary is sent to each expert. This process is repeated until consensus
is arrived at regarding the forecast of a particular event. 5. Statistical modeling: It is a quantitative
technique that attempts to discover causal factors that link two or more time series together. They
use different sets of equations. Regression analysis and other econometric methods are examples.
Although very useful for grasping historical trends, statistical modeling is based on historical data. As
the patterns of relationships change, the accuracy of the forecast deteriorates. 6. Cross-impact
Analysis: By this analysis, researchers analyze and identify key trends that will impact all other
trends. The question is then put: “If event A occurs, what will be the impact on all other trends”. The
results are used to build “domino chains”, with one event triggering others. 7. Brainstorming:
Brainstorming is a technique to generate a number of alternatives by a group of 6 to 10 persons. The
basic ground rule is to propose ideas without first mentally evaluating them. No criticism is allowed.
Ideas tend to build on previous ideas until a consensus is reached. This is a good technique to create
ideas. 8. Demand/Hazard forecasting: Researchers identify major events that would greatly affect
the firm. Each event is rated for its convergence with several major trends taking place in society and
its appeal to a group of the public; the higher the event’s convergence and appeal, the higher its
probability of occurring.

Organisational Appraisal: The Internal Assessment 1

Introduction
Internal analysis is also referred to as “internal appraisal”, “organisational audit”, “internal corporate
assessment” etc. Over the years, research has shown that the overall strengths and weaknesses of a
firm’s resources and capabilities are more important for a strategy than environmental factors. Even
where the industry was unattractive and generally unprofitable, firms that came out with superior
products enjoyed good profits. Managers perform internal analysis to identify the strengths and
weaknesses of a firm’s resources and capabilities. The basic purpose is to build on the strengths and
overcome the weaknesses in order to avail of the opportunities and minimize the effects of threats.
The ultimate aim is to gain and sustain competitive advantage in the marketplace.

Importance of Internal Analysis

Strategic management is ultimately a “matching game” between environmental opportunities and

organisational strengths. But, before a firm actually starts tapping the opportunities, it is important
to know its own strengths and weaknesses. Without this knowledge, it cannot decide which
opportunities to choose and which ones to reject. One of the ingredients critical to the success of a
strategy is that the strategy must place “realistic” requirements on the firm’s resources. The firm
therefore cannot afford to go by some untested assumptions or gut feelings. Only systematic
analysis of its strengths and weaknesses can be of help. This is accomplished in internal analysis by
using analytical techniques like RBV, SWOT analysis, Value chain analysis, Benchmarking, IFE Matrix
etc. Thus, systematic internal analysis helps the firm: 1. To find where it stands in terms of its
strengths and weaknesses 2. To exploit the opportunities that are in line with its capabilities 3. To
correct important weaknesses 4. To defend against threats 5. To asses capability gaps and take steps
to enhance its capabilities. This exercise is also the starting point for developing the competitive
advantage required for the survival and growth of the firm.

Notes The opportunities that can be successfully exploited depend upon the strengths of its
resources and the skills the firm employs to transform those resources into outputs. In this sense,
organisational resources and capabilities become a lynchpin over which hinges the success and
survival of a strategy.

SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis is a widely used
framework to summaries a company’s situation or current position. Any company undertaking
strategic planning will have to carry out SWOT analysis: establishing its current position in the light
of its strengths, weaknesses, opportunities and threats. Environmental and industry analyses provide
information needed to identify opportunities and threats, while internal analysis provides
information needed to identify strengths and weaknesses. These are the fundamental areas of focus
in SWOT analysis. SWOT analysis stands at the core of strategic management. It is important to note
that strengths and weaknesses are intrinsic (potential) value creating skills or assets or the lack
thereof, relative to competitive forces. Opportunities and threats, however, are external factors that
are not created by the company, but emerge as a result of the competitive dynamics caused by
‘gaps’ or ‘crunches’ in the market. We had briefly mentioned about the meaning of the terms
opportunities, threats, strengths and weaknesses. We revisit the same for purposes of SWOT
analysis. 1. Opportunities: An opportunity is a major favourable situation in a firm’s environment.
Examples include market growth, favourable changes in competitive or regulatory framework,
technological developments or demographic changes, increase in demand, opportunity to introduce
products in new markets, turning R&D into cash by licensing or selling patents etc. The level of detail
and perceived degree of realism determine the extent of opportunity analysis.
2. Threats: A threat is a major unfavourable situation in a firm’s environment. Examples include
increase in competition; slow market growth, increased power of buyers or suppliers, changes in
regulations etc. These forces pose serious threats to a company because they may cause lower sales,
higher cost of operations, higher cost of capital, inability to make break-even, shrinking margins or
profitability etc. Your competitor’s opportunity may well be a threat to you. 3. Strengths: Strength is
something a company possesses or is good at doing. Examples include a skill, valuable assets,
alliances or cooperative ventures, experienced sales force, easy access to raw materials, brand
reputation etc. Strengths are not a growing market, new products, etc. 4. Weaknesses: A weakness
is something a company lacks or does poorly. Examples include lack of skills or expertise, deficiencies
in assets, inferior capabilities in functional areas etc. Though weaknesses are often seen as the
logical ‘inverse’ of the company’s threats, the company’s lack of strength in a particular area or
market is not necessarily a relative weakness because competitors may also lack this particular
strength.

Carrying out SWOT Analysis

The first thing that a SWOT analysis does is to evaluate the strengths and weaknesses in terms of
skills, resources and competencies. The analyst then should see whether the internal capabilities
match with the demands of the key success factors. The job of a strategist is to capitalize on the
organisation’s strengths while minimizing the effects of its weaknesses in order to take advantage of
opportunities and overcome threats in the environment.

Steps in SWOT Analysis

The three important steps in SWOT analysis are: 1. Identification 2. Conclusion 3. Translation 1.
Identification: (a) Identify company resource strengths and competitive capabilities (b) Identify
company resource weaknesses and competitive deficiencies (c) Identify company’s opportunities (d)
Identify external threats

2. Conclusion: (a) Draw conclusions about the company’s overall situation 3. Translation: Translate
the conclusions into strategic actions by acting on them: (a) Match the company’s strategy to its
strengths and opportunities (b) Correct important weaknesses (c) Defend against external threats In
devising a SWOT analysis, there are several factors that will enhance the quality of the material: 1.
Keep it brief, pages of analysis are usually not required. 2. Relate strengths and weaknesses,
wherever possible, to industry key factors for success. 3. Strengths and weaknesses should also be
stated in competitive terms, that is, in comparison with competitors. 4. Statements should be
specific and avoid blandness. 5. Analysis should reflect the gap, that is, where the company wishes to
be and where it is now. 6. It is important to be realistic about the strengths and weaknesses of one’s
own and competitive organisations. Probably the biggest mistake that is commonly made in SWOT
analysis is to provide a long list of points but little logic, argument and evidence. A short list with
each point well argued is more likely to be convincing.

Did u know? What is TOWS Matrix? TOWS matrix is just an extension of SWOT matrix. TOWS stand
for threats, opportunities, weaknesses and strengths. This matrix was proposed by Heinz Weihrich as
a strategy formulation – matching tool. TOWS analysis poses a number of questions: What actions
should a company take? Should it focus on using company’s strengths to capitalize on opportunities,
or acquire strengths in order to be able to capture opportunities? Or should it actively try to
minimize weaknesses and avoid threats? TOWS matrix illustrates how internal strengths and
weaknesses can be matched with external opportunities and threats to generate four sets of
possible alternative strategies. This matrix can be used to generate corporate as well as business
strategies. An example of TOWS matrix is shown below:

Internal factors/ External factors

Strengths(S) Weaknesses(W)

Opportunities(O) SO strategies: strategies that use strengths to take advantage of opportunities.

WO strategies: strategies that take advantage of opportunities by over -coming weaknesses

Threats(T) ST strategies: strategies that use strengths to avoid threats.

WT strategies: strategies that minimize weaknesses and avoid threats.

To generate a TOWS matrix, the following steps are to be followed: 1. List external opportunities
available in the company’s current and future environment, in the ‘opportunities block’ on the left
side of the matrix. 2. List external threats facing the company now and in future in the “threats
block” on the left side of the matrix. 3. List the specific areas of current and future strengths for the
company, in the “strengths block” across the top of the matrix. 4. List the specific areas of current
and future weaknesses for the company in the “weaknesses box” across the top of the matrix. 5.
Generate a series of possible alternative strategies for the company based on particular
combinations of the four sets of factors. The four sets of strategies that emerge are:

SO Strategies

SO strategies are generated by thinking of ways in which a company can use its strengths to take
advantage of opportunities. This is the most desirable and advantageous strategy as it seeks to mass
up the firm’s strengths to exploit opportunities. For example, Hindustan Lever has been augmenting
its strengths by taking over businesses in the food industry, to exploit the growing potential of the
food business.

ST Strategies

ST strategies use a company’s strengths as a way to avoid threats. A company may use its
technological, financial and marketing strengths to combat a new competition. For example,
Hindustan Lever has been employing this strategy to fight the increasing competition from
companies like Nirma, Procter & Gamble etc. WO Strategies

WO Strategies attempt to take advantage of opportunities by overcoming its weaknesses. For

example, for textile machinery manufacturers in India the main weakness was dependence on
foreign firms for technology and the long time taken to execute an order. The strategy followed was
the thrust given to R&D to develop indigenous technology so as to be in a better position to exploit
the opportunity of growing demand for textile machinery.

WT Strategies

WT Strategies are basically defensive strategies and primarily aimed at minimizing weaknesses and
avoiding threats. For example, managerial weakness may be solved by change of managerial
personnel, training and development etc. Weakness due to excess manpower may be addressed by
restructuring, downsizing, delayering and voluntary retirement schemes. External threats may be
met by joint ventures and other types of strategic alliances. In some cases, an unprofitable business
that cannot be revived may be divested. Strategies which utilize a strength to take advantage of an
opportunity are generally referred to as “exploitative” or “developmental strategies”. Strategies
which use a strength to eliminate a weakness may be referred to as “blocking strategies”. Strategies
which overcome a weakness to take advantage of an opportunity or eliminate a threat may be
referred to as “remedial strategies”. The TOWS matrix is a very useful tool for generating a series of
alternative strategies that the decision-makers of the firm might not otherwise have considered. It
can be used for the company as a whole or it can be used for a specific business unit within a
company. However, it may be noted that the TOWS matrix is only one of many ways to generate
alternative strategies.

Critical Assessment of SWOT Analysis

SWOT analysis is one of the most basic techniques for analyzing firm and industry conditions. It
provides the “raw material” for analyzing internal conditions as well as external conditions of a firm.
SWOT analysis can be used in many ways to aid strategic analysis. For example, it can be used for a
systematic discussion of a firm’s resources and basic alternatives that emerge from such an analysis.
Such a discussion is necessary because a strength to one firm may be a weakness for another firm,
and vice-versa. For example, increased health consciousness of people is a threat to some firms (e.g.
tobacco) while it is an opportunity to others (e.g. health clubs). According to Johnson and Sholes
(2002), a SWOT analysis summarises the key issues from the business environment and the strategic
capability of an organisation that impacts strategy development. This can also be useful as a basis for
judging future courses of action. The aim is to identify the extent to which the current strengths and
weaknesses are relevant to, and capable of, dealing with the changes taking place in the business
environment. It can also be used to assess whether there are opportunities to exploit further the
unique resources or core competencies of the organisation. Overall, SWOT analysis helps focus
discussion on future choices and the extent to which the company is capable of supporting its
strategies.

Advantages and Limitations

Advantages

1. It is simple. 2. It portrays the essence of strategy formulation: matching a firm’s internal strengths
and weaknesses with its external opportunities and threats. 3. Together with other techniques like
Value Chain Analysis and RBV, SWOT analysis improves the quality of internal analysis.

Limitations

1. It gives a static perspective, and does not reveal the dynamics of competitive environment.
2. SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and ignores
other factors needed for competitive success. 3. A firm’s strengths do not necessarily help
the firm create value or competitive advantage. 4. SWOT’s focus on the external
environment is too narrow. 5. Hill and Westbrook criticize SWOT analysis by saying that it is
not a panacea. According to them, some of the criticisms against SWOT analysis are: (a) It
generates lengthy lists (b) It uses no weights to reflect priorities (c) It uses ambiguous words
and phrases (d) The same factor can be placed in two categories (e.g. an opportunity may
also be a threat). (e) There is no obligation to verify opinions with data or analysis. (f) It is
only a simple level of analysis. There is no logical link to strategy implementation. (g) SWOT
helps only as a starting point. By itself, SWOT analysis rarely helps a firm develop
competitive advantage that it can sustain over time. In spite of the above criticism and its
limitations, SWOT analysis is still a popular analytical tool used by most organisations. It is
 definitely a useful aid in generating alternative strategies, through what is called TOWS
matrix.

Organisational Appraisal: Internal Assessment 2

Introduction

In the previous note , we discussed about SWOT analysis which is a very important tool of
carrying out internal analysis. In this unit we are going to learn the other tools that help a
company conduct their internal analysis. The corporate level internal analysis is about identifying
your businesses value proposition or core competencies. These are sometimes referred to as
your core capabilities; strategic competitive advantages or competitive advantage these terms
all represent essentially the same thing. The reason for completing an internal analysis is to
allow you to create an exclusive market position.

Strategy and Culture

An organisation’s culture can exert a powerful influence on the behaviour of all employees. It
can, therefore, strongly affect a company’s ability to adopt new strategies. A problem for a
strong culture is that a change in mission, objectives, strategies or policies is not likely to be
successful if it is in opposition to the culture of the company. Corporate culture has a strong
tendency to resist change because its very existence often rests on preserving stable
relationships and patterns of behaviour. For example, the male-dominated Japanese centered
corporate culture of the giant Mitsubishi Corporation created problems for the company when it
implemented its growth strategy in North America. The alleged sexual harassment of its female
employees by male supervisors resulted in lawsuits and a boycott of the company’s automobiles
by women activists. There is no one best corporate culture. An optimal culture is one that best
supports the mission and strategy of the company. This means that, like structure and
leadership, corporate culture should support the strategy. Unless strategy is in complete
agreement with the culture, any significant change in strategy should be followed by a change in
the organisation’s culture. Although corporate cultures can be changed, it may often take long
time and requires much effort. A key job of management therefore involves “managing
corporate culture”. In doing so, management must evaluate what a particular change in strategy
means to the corporate culture, assess if a change in culture is needed and decide if an attempt
to change culture is worth the likely costs.

‘FIT’ between Strategy and Culture

A culture grounded in values, practices and behavioural norms that match what is needed for
good strategy implementation, helps energize people throughout the company to do their jobs
in a strategy supportive manner. But when the culture is in conflict with some aspects of the
company’s direction, performance targets, or strategy, the culture becomes a stumbling block.
Thus, an important part of managing the strategy implementation process is establishing and
nurturing a good ‘fit’ between culture and strategy.

Assessing Strategy – Culture Match

When implementing a new strategy, a company should take time to assess strategy-culture
compatibility by considering the following questions: 1. Is the planned strategy compatible with
the company’s current culture? If not, 2. Can the culture be easily modified to make it more
compatible with the new strategy? If not, 3. Is management willing and able to make major
organisational changes and likely increase in costs? If not, 4. Is management still committed to
implement the strategy? If not, 5. Formulate a different strategy. If yes, 6. Manage cultural
change.

Matching Strategy with Culture

When matching strategy with culture, it is important to understand: 1. There is no ‘best’ and
‘worst’ culture. The issue is how well the culture matches and supports the strategy of the
organisation. Cultural mismatches are likely to occur when organisations are trying to adapt a
new strategy. 2. This matching of strategy and culture is likely to become embedded over a
period of time. That is, key elements of the strategy and the culture will reinforce each other
gradually. In other words, the relationship between strategy and culture is usually self-
perpetuating, each matching and reinforcing the other over a period of time.

2. In many organisations, cohesiveness of culture is found at levels below the corporate entity.
There is a continuing debate about the extent to which cohesiveness or diversity of culture is
a strength or a weakness of the organisations.
Value Chain Analysis
Every organisation consists of a chain of activities that link together to develop the value of
the business. They are basically purchasing of raw materials, manufacturing, distribution,
and marketing of goods and services. These activities taken together form its value chain.
The value chain identifies where the value is added in the process and links it with the main
functional parts of the organisation. It is used for developing competitive advantage because
such chains tend to be unique to an organisation. It then attempts to make an assessment of
the contribution that each part makes to the overall added value of the business. Essentially,
Porter linked two areas together: 1. the added value that each part of the organisation
contributes to the whole organisation; and 2. the contribution that each part makes to the
competitive advantage of the whole organisation. In a company with more than one product
area, the analysis should be conducted at the level of product groups, not at corporate
strategy level. Value Chain thus views the organisation as a chain of value-creating activities.
Value is the amount that buyers are willing to pay for what a product provides them. A firm
is profitable to the extent the value it receives exceeds the total cost involved in creating its
products. Creating value for buyers that exceeds the cost of production (i.e. margin) is a key
concept used in analyzing a firm’s competitive position.
Notes The concept of value chain analysis was introduced by Michael Porter in 1985 in his
seminal book “Competitive Advantage”. This concept is derived from an established
accounting practice that calculates the value added to a product by individual stages in a
manufacturing or service process. Porter has applied this idea to the activities of an
organisation as a whole, arguing that it is necessary to examine activities separately in order
to identify sources of competitive advantage.
According to Porter, customer value is derived from three basic sources. 1. Activities that
differentiate the product 2. Activities that lower its costs 3. Activities that meet the
customer’s need quickly. Competitive advantage, argues Michael Porter (1985), can be
understood only by looking at a firm as a whole, and cost advantages and successful
differentiation are found in the chain of activities that a firm performs to deliver value to its
customers.
Analysis
According to Porter, value chain activities are divided into two broad categories, as shown in
the figure. 1. Primary activities 2. Support activities Primary activities contribute to the
physical creation of the product or service, its sale and transfer to the buyer and its service
after the sale. Support activities include such activities as procurement, HR etc. which either
add value by themselves or add value through primary activities and other support activities.
Advantage or disadvantage can occur at any one of the five primary and four secondary
activities, which together form the value chain for every firm.
Primary Activities
Inbound Logistics
These activities focus on inputs. They include material handling, warehousing, inventory
control, vehicle scheduling, and returns to suppliers of inputs and raw materials.
Operations
These include all activities associated with transforming inputs into the final product, such as
production, machining, packaging, assembly, testing, equipment maintenance etc.
Outbound Logistics
These activities are associated with collecting, storing, physically distributing the finished
products to the customers. They include finished goods warehousing, material handling and
delivery, vehicle operation, order processing and scheduling.
Marketing and Sales
These activities are associated with purchase of finished goods by the customers and the
inducement used to get them buy the products of the company. They include advertising,
promotion, sales force, channel selection, channel relations and pricing.
Services
This includes all activities associated with enhancing and maintaining the value of the
product. Installation, repair, training, parts supply and product adjustment are some of the
activities that come under services.
Support Activities
Procurement
Activities associated with purchasing and providing raw materials, supplies and other
consumable items as well as machinery, laboratory equipment, office equipment etc. Porter
refers to procurement as a secondary activity, although many purchasing gurus would argue
that it is (at least partly) a primary activity. Included are such activities as purchasing raw
materials, servicing, supplies, negotiating contracts with suppliers, securing building leases
and so on.
Technology Development
Activities relating to product R&D, process R&D, process design improvements, equipment
design, computer software development etc.
Human Resource Management
Activities associated with recruiting, hiring, training, development, compensation, labour
relations, development of knowledge-based skills etc.
Firm Infrastructure
Activities relating to general management, organisational structure, strategic planning,
financial and quality control systems, management information systems etc. Johnson and
Sholes (2002) observe that few organisations undertake all activities from production of raw
materials to the point–of–sale of finished products themselves. But, the value chain exercise
must incorporate the whole process, that is, the entire value system. This means, for
example, that even if an organisation does not produce its own raw materials, it must
nevertheless seek to identify the role and impact of its supply sources on the final product.
Similarly, even if it is not responsible for after-sales service, it must consider how the
performance of those who deliver the service contribute to overall product/service cost and
quality.
Conducting a Value Chain Analysis
Value chain analysis involves the following steps.
Identify Activities
The first step in value chain analysis is to divide a company’s operations into specific
activities and group them into primary and secondary activities. Within each category, a firm
typically performs a number of discrete activities that may reflect its key strengths and
weaknesses.
Allocate Costs
The next step is to allocate costs to each activity. Each activity in the value chain incurs costs
and ties up time and assets. Value chain analysis requires managers to assign costs and
assets to each activity. It views costs in a way different from traditional cost accounting
methods. The different method is called activity-based costing.
Identify the Activities that Differentiate the Firm
Scrutinizing the firm’s value chain not only reveals cost advantages or disadvantages, but
also identifies the sources of differentiation advantages relative to competitors.
Examine the Value Chain
Once the value chain has been determined, managers need to identify the activities that are
critical to buyer satisfaction and market success. This is essential at this stage of the value
chain analysis for the following reasons: 1. If the company focuses on low-cost leadership,
then managers should keep a strict vigil on costs in each activity. If the company focuses on
differentiation, advantage given by each activity must be carefully evaluated.
2. The nature of value chain and the relative importance of each activity within it, vary from
industry to industry. 3. The relative importance of value chain can also vary by a company’s
position in a broader value system that includes value chains of upstream suppliers and
downstream distributors and retailers. 4. The interrelationships among value-creating
activities also need to be evaluated. The final basic consideration in applying value chain
analysis is the need to use a comparison when evaluating a value activity as a strength or
weakness. In this connection, RBV and SWOT analysis will supplement the value chain
analysis. To get the most out of the value-chain analysis, as already noted, one needs to view
the concept in a broader context. The value chain must also include the firm’s suppliers,
customers and alliance partners. Thus, in addition to thoroughly understanding how value is
created within the organisation, one must also know how value is created for other
organisations involved in the overall supply chain or distribution channel in which the firm
participates. Therefore, in assessing the value chains there are two levels that must be
addressed. 1. Interrelationships among the activities within the firm. 2. Relationships among
the activities within the firm and with other organisations that are a part of the firm’s
expanded value chain.
Usefulness of the Value Chain Analysis
The value chain analysis is useful to recognize that individual activities in the overall
production process play an important role in determining the cost, quality and image of the
end-product or service. That is, each activity in the value chain can contribute to a firm’s
relative cost position and create a basis for differentiation, which are the two main sources
of competitive advantage. While a basic level of competence is necessary in all value chain
activities, management needs to identify the core competences that the organisation has or
needs to have to compete effectively. Analyzing the separate activities in the value chain
helps management to address the following issues: 1. Which activities are the most critical in
reducing cost or adding value? If quality is a key consumer value, then ensuring quality of
supplies would be a critical success factor. 2. What are the key cost or value drivers in the
value chain? 3. What linkages help to reduce cost, enhance value or discourage imitation? 4.
How do these linkages relate to the cost and value drivers? Porter identified the following as
the most important cost and value drivers:
Cost Drivers
1. Economies of scale 2. Pattern of capacity utilization (including the efficiency of
production processes and labour productivity) 3. Linkages between activities (for
example, timing of deliveries affect storage costs, just-in time system minimizes
inventory costs) 4. Interrelationships (for example, joint purchasing by two units reduces
input costs)
5. Geographical location (for example, proximity to supplies reduces input costs) 6.
Policy choices (such as the choices on the product mix, the number of suppliers used,
wage costs, skills requirements and other human resource policies affect costs) 7.
Institutional factors (which include political and legal factors, each of which can have a
significant impact on costs).
Value Drivers
Value drivers are similar to cost drivers, but they relate to other features (other than low
price) valued by buyers. Identifying value derivers comes from understanding customer
requirements, which may include: 1. Policy choices (choices such as product features,
quality of input materials, provision of customer services and skills and experience of
staff). 2. Linkages between activities (for example, between suppliers and buyers; sales
and aftersales staff). The cost and value drivers vary between industries. The value chain
concept shows that companies can gain competitive advantage by controlling cost or
value drivers and/or reconfiguring the value chain, that is, a better way of designing,
producing, distributing or marketing a product or service. For example, Ryanair has
become one of the most profitable airlines in Europe through concentrating on the parts
of its value chain, such as ticket transaction costs, no frills etc.
Organisational Capability Factors
Organisations capabilities lies in its resources. The resources are the means by which an
organisation generates value. It is this value that is then distributed for various purposes.
Resources and capabilities of a firm can be best explained with the help of Resource
Based View (RBV) of a firm which is popularized by Barney. RBV considers the firm as a
bundle of resources – tangible resources, intangible resources, and organisational
capabilities. Competitive advantage, according to this view, generally arises from the
creation of bundles of distinctive resources and capabilities.
Resources
A ‘resource’ can be an asset, skill, process or knowledge controlled by an organisation.
From a strategic perspective, an organisation’s resources include both those that are
owned by the organisation and those that can be accessed by the organisation to
support its strategies. Some strategically important resources may be outside the
organisation’s ownership, such as its network of contacts or customers. Typically,
resources can be grouped into four categories: 1. Physical resources include plant and
machinery, land and buildings, production capacity etc. 2. Financial resources include
capital, cash, debtors, creditors etc. 3. Human resources include knowledge, skills and
adaptability of human resources. 4. Intellectual capital is an intangible resource of an
organisation. This includes the knowledge that has been captured in patents, brands,
business systems, customer databases and relationships with partners. In a knowledge-
based economy, intellectual capital is likely to be the major asset of many organisations.
Capabilities
 Resources are not very productive on their own. They need organisational capabilities.
Organisational capabilities are the skills that a firm employs to transform inputs into
outputs. They reflect the ability of the firm in combining assets, people and processes to
bring about the desired results. Prahalad and Hamel describe an organisational
competence as a “bundle of skills and technologies”, which are integrated in people
skills and business processes. Capabilities are, therefore a function of the firm’s
resources, their application and organisation, internal systems and processes, and firm
specific skill sets. Capabilities are rarely unique, and can be acquired by other firms as
well in that industry. Some of these capabilities may become “distinctive competencies”,
when a firm performs them better than its rivals.
Core Competence
Superior performance does not merely come from resources alone because they can be
imitated or traded. Superior performance comes by the way in which the resources are
deployed to create competences in the organisation’s activities. For example, the
knowledge of an individual will not improve an organisation’s performance unless he or
she is allowed to work on particular tasks which exploit that knowledge. Although an
organisation will need to achieve a threshold level of competence in all of the activities
and processes, only some will become core competences. Core competence refers to
that set of distinctive competencies that provide a firm with a sustainable source of
competitive advantage. Core competencies emerge over time, and reflect the firm’s
ability to deploy different resources and capabilities in a variety of contexts to gain and
sustain competitive advantage. Core competences are activities or processes that are
critically required by an organisation to achieve competitive advantage. They create and
sustain the ability to meet the critical success factors of particular customer groups
better than their competitors in ways that are difficult to imitate. In order to achieve this
advantage, core competences must fulfill the following criteria. It must be: 1. an activity
or process that provides customer value in the product or service features. 2. an activity
or process that is significantly better than competitors. 3. an activity or process that is
difficult for competitors to imitate.
It is important to emphasize that resources by themselves do not yield a competitive
advantage. Those resources need to be integrated into value creating activities. Thus the
central theme of RBV is that competitive advantage is created and sustained through the
bundling of several resources in unique combinations. Thus, 1. Competence is something
an organisation is good at doing. 2. Core competence is a proficiently performed internal
activity.

3. Distinctive competence is an activity that a company performs better than its rivals. 4. Distinctive
competencies become the basis for competitive advantage.

Barney, in his VRIO framework of analysis, suggests four questions to evaluate a firm’s
key resources. 1. Value: Does it provide competitive advantage? 2. Rareness: Do other
competitors possess it? 3. Imitability: Is it costly for others to imitate? 4. Organisation: Is
the firm organised to exploit the resource? If the answer to these questions is “yes” for a
particular resource, that resource is considered a strength and a distinctive competence.
Using Resources to Gain Competitive Advantage: Grant proposes a five-step resource
based approach to strategy analysis. 1. Identify and classify the firm’s resources in terms
of strengths and weaknesses. 2. Combine the firm’s strengths into specific capabilities. 3.
Appraise the profit potential of these resources and capabilities. 4. Select the strategy
that best exploits the firm’s resources and capabilities relative to external opportunities.
5. Identify resource gaps and invest in overcoming weaknesses.
Strategic Importance of Resources
Johnson and Sholes (2002 ) explain the strategic importance of resources with the
concept of ‘strategic capability’. According to them, strategic capability is the ability of
an organisation to put its resources and capabilities to the best advantage so as to
enable it to gain competitive advantage. There are three type of resources:
Available Resources
Strategic capability depends on the resources available to an organisation because it is
the resources used in the activities of the organisation that create competences. As
already explained above, resources can be typically grouped under four headings:
Physical resources, human resources, financial resources and intellectual capital.
Threshold Resources
A set of basic resources are needed by a firm for its existence and survival in the
marketplace. These resources are called ‘threshold resources’. But this threshold tends
to increase with time. So, a firm needs to continuously improve this threshold resource
base just to stay in business. Unique Resources
Unique resources are those resources that are critically required to achieve competitive
advantage. They are better than competitors’ resources and are difficult to imitate. The
ability of an organisation to meet the critical success factors in a particular market
segment depends on these unique resources. To illustrate unique resources, Johnson
and Sholes quote the example of some libraries having unique collection of books, which
contain knowledge not available elsewhere, and the example of retail stores located in
prime locations, which can charge higher than average prices. Similarly, some
organisations have patented products or services that are unique, which give them
advantage. ! Caution For service organisations, unique resources may be particularly
talented individuals – such as surgeons or teachers or lawyers. But they may leave the
organisation or poached by a rival. So, trying to sustain long-term advantage only
through unique resources may be very difficult.
Critical Success Factors
Critical Success Factors (CSFs) are defined as the resources, skills and attributes of an
organisation that are essential to deliver success in the market place. CSFs are also called
“Key Success Factors” (KSFs) or “Strategic Factors”. They are the key factors which are
critical for organisational success and survival. Critical success factors will vary from one
industry to another. For example, in the perfume and cosmetics industry, the critical
success factors include branding, product distribution and product performance, but are
unlikely to include low labour costs, which is a very important CSF for steel companies.
CSFs can be used to identify elements of the environment that are particularly worth
exploring.
It is very important to identify the CSFs for a particular industry. Many elements relate
not only to the environment but also to the resources of organisations in the industry.
To identify the CSFs in an industry, it is therefore useful to examine the type of resources
and the way they are employed in the industry and then use this information to analyze
the environment outside the organisation. Hence CSFs require an exploration of the
resources and skills of the industry before they can be applied to the environment.
Importance of Critical Success Factors
The Japanese strategist Kenichi Ohamae, the former head of the management
consultants Mc Kinsey, in Japan, has suggested that the CSFs (or key success factors, as
he calls them) are likely to deliver the company’s objectives. He argues that, when
resources of capital, labour and time are scarce, it is important that they should be
concentrated on the key activities of the firm, that is, those activities that are considered
most important to the delivery of whatever the organisation regards as success. Ohamae
treats CSFs as a basic business strategy for competing wisely in any industry. He suggests
identifying the CSFs in an industry or business and then to “inject resources into the
most important business functions.” The aim is to invest in the parts of the company
that matter most for its success. Rockart (1979) has applied the CSFs approach to several
organisations through a three step process for determining CSFs. These steps are: 1.
Generate CSFs (asking, What does it take to be successful in business?) 2. Convert CSFs
into objectives (asking, “What should the organisation’s goals and objectives be with
respect to CSFs) 3. Set Performance standards (asking “How will we know whether the
organisation has been successful in this factor?”) Rockart has also identified four major
sources of CSFs: 1. Structure of the industry: Some CSFs are specific to the structure of
the industry. For example, the extent of service support expected by the customers.
Automobile companies have to invest in building a national network of authorized
service stations to ensure service delivery to their customers. 2. Competitive strategy,
industry position and geographic location: CSFs also arise from the above factors. For
example, the large pool of English-speaking manpower makes India an attractive
location for outsourcing the BPO needs of American and British firms. 3. Environmental
factors: CSFs may also arise out of the general/business environment of a firm, like the
deregulation of Indian Industry. With the deregulation of telecommunications industry,
many private companies had opportunities of growth. 4. Temporal factors: Certain
short-term organisational developments like sudden loss of critical manpower (like the
charismatic CEO) or break-up of the family owned business, may necessitate CSFs like
“appointment of a new CEO” or “rebuilding the company image”. Temporarily such CSFs
would remain CSFs till the time they are achieved.
Benchmarking
Benchmarking is the process of comparing the business processes and performance
metrics including cost, cycle time, productivity, or quality to another that is widely
considered to be an industry standard benchmark or best practice. Essentially,
benchmarking provides a snapshot of the performance of a business and helps one
understand where one is in relation to a particularstandard. The result is often a
business case and "Burning Platform" for making changes in order to make
improvements. Also referred to as "best practice benchmarking" or "process
benchmarking", it is a process used in management and particularly strategic
management, in which organisations evaluate various aspects of their processes in
relation to best practice companies' processes, usually within a peer group defined for
the purposes of comparison. This then allows organisations to develop plans on how to
make improvements or adapt specific best practices, usually with the aim of increasing
some aspect of performance. Benchmarking may be a one-off event, but is often treated
as a continuous process in which organisations continually seek to improve their
practices.
Types of Benchmarking
Benchmarking can be of following types: 1. Process benchmarking: the initiating firm
focuses its observation and investigation of business processes with a goal of identifying
and observing the best practices from one or more benchmark firms. Activity analysis
will be required where the objective is to benchmark cost and efficiency; increasingly
applied to back-office processes where outsourcing may be a consideration. 2. Financial
benchmarking: performing a financial analysis and comparing the results in an effort to
assess your overall competitiveness and productivity. 3. Benchmarking from an investor
perspective: extending the benchmarking universe to also compare to peer companies
that can be considered alternative investment opportunities from the perspective of an
investor. 4. Performance benchmarking: allows the initiator firm to assess their
competitive position by comparing products and services with those of target firms. 5.
Product benchmarking: the process of designing new products or upgrades to current
ones. This process can sometimes involve reverse engineering which is taking apart
competitors products to find strengths and weaknesses. 6. Strategic benchmarking:
involves observing how others compete. This type is usually not industry specific,
meaning it is best to look at other industries. 7. Functional benchmarking: a company
will focus its benchmarking on a single function in order to improve the operation of that
particular function. Complex functions such as Human Resources, Finance and
Accounting and Information and Communication Technology are unlikely to be directly
comparable in cost and efficiency terms and may need to be disaggregated into
processes to make valid comparison. 8. Best-in-class benchmarking: involves studying
the leading competitor or the company that best carries out a specific function. 9.
Operational benchmarking: embraces everything from staffing and productivity to office
flow and analysis of procedures performed. There is no single benchmarking process
that has been universally adopted. The wide appeal and acceptance of benchmarking
has led to various benchmarking methodologies emerging. The first book on
benchmarking, written by Kaiser Associates, offered a 7-step approach. Robert Camp
(who wrote one of the earliest books on benchmarking in 1989) developed a 12-stage
approach to benchmarking. The 12 stage methodology consisted of: 1. Select subject
ahead 2. Define the process 3. Identify potential partners 4. Identify data sources 5.
Collect data and select partners 6. Determine the gap 7. Establish process differences 8.
Target future performance 9. Communicate 10. Adjust goal 11. Implement 12.
Review/recalibrate. The following is an example of a typical benchmarking methodology:
1. Identify your problem areas: Because benchmarking can be applied to any business
process or function, a range of research techniques may be required. They include:
informal conversations with customers, employees, or suppliers; exploratory research
techniques such as focus groups; or in-depth marketing research, quantitative research,
surveys, questionnaires, re-engineering analysis, process mapping, quality control
variance reports, or financial ratio analysis. Before embarking on comparison with other
organisations it is essential that one knows one's own organisation's function, processes;
base lining performance provides a point against which improvement effort can be
measured. 2. Identify other industries that have similar processes: For instance if one
were interested in improving hand offs in addiction treatment he/she would try to
identify other fields that also have hand off challenges. These could include air traffic
control, cell phone switching between towers, transfer of patients from surgery to
recovery rooms. 3. Identify organisations that are leaders in these areas: Look for the
very best in any industry and in any country. Consult customers, suppliers, financial
analysts, trade associations, and magazines to determine which companies are worthy
of study. 4. Survey companies for measures and practices: Companies target specific
business processes using detailed surveys of measures and practices used to identify
business process alternatives and leading companies. Surveys are typically masked to
protect confidential data by neutral associations and consultants. 5. Visit the "best
practice" companies to identify leading edge practices: Companies typically agree to
mutually exchange information beneficial to all parties in a benchmarking group and
share the results within the group. 6. Implement new and improved business practices:
Take the leading edge practices and develop implementation plans which include
identification of specific opportunities, funding the project and selling the ideas to the
organisation for the purpose of gaining demonstrated value from the process.
Corporate Level Strategies
Introduction
Corporate strategy is primarily about the choice of direction for the corporation as a
whole. The basic purpose of a corporate strategy is to add value to the individual
businesses in it. A corporate strategy involves decisions relating to the choice of
businesses, allocation of resources among different businesses, transferring skills and
capabilities from one set of businesses to others, and managing and nurturing a portfolio
of businesses in such a way as to obtain synergies among product lines and business
units, so that the corporate whole is greater than the sum of its individual business units.
Managers at the corporate level act on behalf of shareholders and provide strategic
guidance to business units. In these circumstances, a key question that arises is to what
extent and how might the corporate level add value to what the businesses do; or at
least how it might avoid destroying value. Corporate strategy is thus concerned with two
basic issues: 1. What businesses should a firm compete in? 2. How can these businesses
be coordinated and managed so that they create “Synergy.”
Notes Synergy means that the whole is greater than the sum of its parts. In
organisational terms, synergy means that as separate departments within an
organisation co-operate and interact, they become more productive than if each were to
act in isolation. In strategic management, the corporate parent has to create synergy
among the separate business units by effectively coordinating their activities, so that the
corporate whole is greater than the sum of the independent units. Synergy is said to
exist for a multi-divisional corporation if the return on investment (ROI) of each division
is greater than what the return would be if each division were an independent business.
According to Goold and Campbell, synergy can take place in one of the six forms: 1.
Shared Know-how: Combined units often benefit from sharing knowledge and skills. This
is also called a leveraging of core competencies2. Coordinated Strategies: Alligning the
business strategies of two or more business units may provide a company with synergy
by reducing competition, and developing a coordinated response to common
competitors. 3. Shared Tangible Resources: Combined units can sometimes save money
by sharing resources, such as a common manufacturing facility or R&D lab. 4. Economies
of Scale or Scope: Coordinating the flow of products or services of one unit with that of
another unit can reduce inventory, increase capacity utilization and improve market
access. 5. Pooled Negotiating Power: Combined units can combine their purchasing to
gain bargaining power over common suppliers to reduce costs and improve quality. The
same can be done with common distributors. 6. New Business Creation: Exchanging
knowledge and skills can facilitate new products or services by combining the separate
activities in a new unit or by establishing joint ventures among internal business units.
7.1 Expansion Strategies
Growth strategies are the most widely pursued corporate strategies. Companies that do
business in expanding industries must grow to survive. A company can grow internally
by expanding its operations or it can grow externally through mergers, acquisitions, joint
ventures or strategic alliances.
Reasons for Pursuing Growth Strategies
Firms generally pursue growth strategies for the following reasons: 1. To obtain
economies of scale: Growth helps firms to achieve large-scale operations, whereby fixed
costs can be spread over a large volume of production. 2. To attract merit: Talented
people prefer to work in firms with growth. 3. To increase profits: In the long run,
growth is necessary for increasing profits of the organisation, especially in the turbulent
and hyper–competitive environment. 4. To become a market leader: Growth allows
firms to reach leadership positions in the market. Companies such as Reliance Industries,
TISCO etc. reached commanding heights due to growth strategies. 5. To fulfill natural
urge: A healthy firm normally has a natural urge for growth. Growth opportunities
provide great stimulus to such urge. Further, in a dynamic world characterized by the
growth of many firms around it, a firm would have a natural urge for growth. 6. To
ensure survival: Sometimes, growth is essential for survival. In some cases, a firm may
not be able to survive unless it has critical minimum level of business. Further, if a firm
does not grow when competitors are growing, it may undermine its competitiveness.
Categories of Growth Strategies
Growth strategies can be divided into three broad categories: 1. Intensive Strategies 2.
Integration Strategies 3. Diversification StrategiesConcentration Strategies
Without moving outside the organisation’s current range of products or services, it may
be possible to attract customers by intensive advertising, and by realigning the product
and market options available to the organisation. These strategies are generally referred
to as intensification or concentration strategies. By intensifying its efforts, the firm will
be able to increase its sales and market share of the current product-line faster. This is
probably the most successful internal growth strategy for firms whose products or
services are in the final stages of the product life cycle. Most of the approaches of
intensive strategies deal with product-market realignments. Thus, there are three
important intensive strategies: 1. Market penetration 2. Market development 3. Product
development 1. Market penetration: Market penetration seeks to increase market share
for existing products in the existing markets through greater marketing efforts. This
includes activities like increasing the sales force, increasing promotional effort, giving
incentives etc. Market penetration is generally achieved through the following three
major approaches: (a) Increasing sales to the current customers: This can be done
through: (i) Increasing the size of the purchase (ii) Advertising other uses (iii) Giving price
incentives for increased use For example, if customers of toothpaste who brush once a
day are convinced to brush twice a day, the sales of the product to the current
consumers might almost double. (b) Attracting competitor’s customers: If the firm
succeeds in making the customers to switch from the competitor’s brands to the firm’s
brands, while maintaining its existing customers intact, there will be an increase in the
firm’s sales. This can be done through: (i) Increasing promotional effort (ii) Establishing
sharper brand differentiation (iii) Offering price cuts (c) Attracting non-users to buy the
product: If there are a significant number of non-users of a product who could be made
users of the product, there will be an opportunity to increase market share. This can be
done through: (i) Inducing trial use through sampling, price incentives etc. (ii) Advertising
new uses2. Market Development: Market development seeks to increase market share
by selling the present products in new markets. This can be achieved through the
following approaches: (a) By entering new geographic markets: A company, which has
been confined to some part of a country, may expand to other parts and foreign
markets. Thus, market development can be achieved through: (i) Regional expansion (ii)
National expansion (iii) International expansion
Example: Nirma, which was confined to local markets or some parts of the country in the
beginning, later expanded to the regional market and then to the national market. (b) By
entering new market segments: This can be achieved through: (i) Developing product
versions to appeal to other segments (ii) Entering other channels of distribution (iii)
Advertising in other media
Example: Hindustan Lever entered the low price detergent segment by introducing a
low-priced detergent called “Wheel” to compete with “Nirma”. This strategy will be
effective when: (i) New untapped or unsaturated markets exist (ii) New channels of
distribution are available (iii) The firm has excess production capacity (iv) The firm’s
industry is becoming rapidly global (v) The firm has resources for expanded operations 3.
Product Development: Product development seeks to increase the market share by
developing new or improved products for present markets. This can be achieved
through: (a) Developing new product features (b) Developing quality variations (c)
Developing additional models and sizes (product proliferation)
Example: Hindustan Lever keeps on adding new brands or improved versions of
consumer products from time to time to maintain its market share. This strategy will be
effective when: (a) The firm’s products are in maturity stage (b) The firm witnesses one
of the rapid technological developments in the industry (c) The firm is in a high growth
industry (d) Competitors bring out improved quality products from time to time (e) The
firm has strong R&D capabilities.
Integrative Strategies
Integration basically means combining activities relating to the present activity of a firm.
Such a combination can be done on the basis of the industry value chain. A company
performs a number of activities to transform an input to output. These activities include
right from the procurement of raw materials to the production of finished goods and
their marketing and distribution to the ultimate consumers. These activities are also
called value chain activities; the value chain activities of an industry are shown in Figure
7.2. So, a firm that adopts integration may move forward or backward the industry value
chain.
Supply of raw materials and components Manufacturing and operations Distribution and
retail network

Expanding the firm’s range of activities backward into the sources of supply and/or
forward into the distribution channels is called “Vertical Integration”. Thus, if a
manufacturer invests in facilities to produce raw materials or component parts that it
formerly purchased from outside suppliers, it remains in the same industry, but its scope
of operations extend to two stages of the industry value chain. Similarly, if a
manufacturer opens a chain of retail outlets to market its products directly to
consumers, it remains in the same industry, but its scope of operations extend from
manufacturing to retailing. Viewed from a broader angle, the firm’s own value chain
activities are often closely linked to the value chain activities of the suppliers and
distributors. Suppliers’ value chain is important because the costs, performance features
and quality of the inputs influence a firm’s own costs and product differentiation
capabilities. Anything the firm does to lower costs or improve quality of its inputs, will
enhance its own competitiveness in the market. Similarly, the costs and margins paid to
distributors and retailers become a part of the price the consumers pay. Besides, the
activities of distributors and retailers affect consumers’ satisfaction. Vertical integration
can be: 1. Full integration: participating in all stages of the industry value chain. 2. Partial
integration: participating in selected stages of the industry value chain. A firm can
pursue vertical integration by starting its own operations or by acquiring a company
already performing the activities it wants to bring in house. Thus, integration is basically
of two types: 1. Vertical integration and 2. Horizontal integration Vertical Integration As
already explained above, vertical integration involves gaining ownership or increased
control over suppliers or distributors. Vertical integration is of two types: 1. Backward
Integration: Backward integration involves gaining ownership or increased control of a
firm’s suppliers. For example, a manufacturer of finished products may take over the
business of a supplier who manufactures raw materials, component parts and other
inputs. Brooke Bond’s acquisition of tea plantations is an example of backward
integration. Backward Integration increases the dependability of the supply and quality
of raw materials used as production inputs. This strategy is generally adopted when: (a)
Present suppliers are unreliable, too costly or cannot meet the firm’s needs. (b) The
firm’s industry is growing rapidly. (c) The number of suppliers is small, but the number of
competitors is large. (d) Stable prices are important to stabilize cost of raw materials. (e)
Present suppliers are getting high profit margins. (f) The firm has both capital and human
resources to manage the new business. 2. Forward Integration: Forward integration
involves gaining ownership or increased control over distributors or retailers. For
example, textile firms like Reliance, Bombay Dyeing, JK Mills (Raymond’s) etc. have
resorted to forward integration by opening their own showrooms. Forward Integration is
generally adopted when: (a) The present distributors are expensive, or unreliable or
incapable of meeting the firm’s needs. (b) The availability of quality distributors is
limited. (c) The firm’s industry is growing and will continue to grow. (d) The advantages
of stable production are high. (e) Present distributors or retailers have high profit
margins. (f) The firm has both the capital and human resources needed to manage the
new business. Advantages of Vertical Integration: The following are the advantages of
vertical integration: 1. A secure supply of raw materials or distribution channels. 2.
Control over raw materials and other inputs required for production or distribution
channels. 3. Access to new business opportunities and technologies. 4. Elimination of
need to deal with a wide variety of suppliers and distributors. Risks 1. Increased costs,
expenses and capital requirements. 2. Loss of flexibility in investments. 3. Problems
associated with unbalanced facilities or unfulfilled demand. 4. Additional administrative
costs associated with managing a more complex set of activities. ! Caution Sometimes,
half-hearted commitment of wholesalers and retailers frustrate a company’s attempt to
boost sales and market share. In such an event, forward integration is the best strategy.
Disadvantages of Vertical Integration: The following are the disadvantages of vertical
integration 1. It boosts the firm’s capital investment. 2. It increases business risk. 3. It
denies financial resources to more worthwhile pursuits. 4. It locks a firm into relying on
its own in-house sources of supply. 5. It poses all kinds of capacity-matching problems.
6. It calls for radically different skills and capabilities, which may be lacked by the
manufacturer. 7. Outsourcing of component parts may be cheaper and less complicated
than in-house manufacturing. Most of the world’s automakers, despite their expertise in
automobile technology and manufacturing, strongly feel that purchasing many of their
key parts and components from manufacturing specialists result in: 1. Higher quality 2.
Lower costs 3. Greater design flexibility So, they feel that vertical integration option is
not preferable. Weighing the Pros and Cons of Vertical Integration: All in all, vertical
integration strategy can have both strengths and weaknesses. The choice depends on: 1.
Whether vertical integration can enhance the performance of the organisation in ways
that lower costs, build expertise or increase differentiation. 2. Whether vertical
integrations impact on costs, flexibility, response times and administrative costs of
coordinating more activities, are more justified. 3. Whether vertical integration
substantially enhances a company’s competitiveness. If there are no solid benefits,
vertical integration will not be an attractive strategic option. In many cases, companies
prefer to focus on a narrow scope of activities and rely on outsiders to perform the
remaining activities. In today’s world of close working relationships with suppliers and
distributors and with efficient supply chain management systems, very few firms can
make a case for backward integration just for the purposes of ensuring a reliable supply
of raw materials or components, or to reduce production costs. Guidelines for Vertical
Integration: The guidelines for vertical integration are as follows: 1. If the performance
of suppliers or distributors is satisfactory, it is not appropriate to take over these
activities. 2. Highly fluctuating sales or demand for the products of the organisation can
either strain resources (when demand is high) or result in unutilized capacity (when
demand is low). The cycle of “boom and bust” is not conducive to integration. 3. The
strategy of vertical integration may be viable if there is a likelihood of expansion of
capacity in the near future.
Horizontal Integration Horizontal integration is a strategy of seeking ownership or
increased control over a firm’s competitors. Some authors prefer to call this as
horizontal diversification. By whichever name it is called, this strategy generally involves
the acquisition, merger or takeover of one or more similar firms operating at the same
stage of the industry value chain. Recent acquisition of Arcelor by Mittal Steels and the
acquisition of Corus by Tata Steel are good examples of horizontal integration. The most
important advantage of horizontal integration is that it generally eliminates or reduces
competition. Other advantages are: 1. It yields access to new markets. 2. It provides
economies of scale. 3. It allows transfer of resources and capabilities. When horizontal
integration is appropriate Horizontal integration is an appropriate strategy when: 1. A
firm competes in a growing industry. 2. Increased economies of scale provide a major
competitive advantage. 3. A firm has both the capital and human talent needed to
successfully manage an expanded organisation. 4. Competitors are faltering due to lack
of managerial expertise or resources, which the firm has. It should be noted that
horizontal integration might not be an appropriate strategy if competitors are doing
poorly due to an overall decline in industry sales. Some increased risks are associated
with both types of integration. For horizontally integrated firms, the risk comes from
increased commitment to one type of business. For vertically integrated firms, the risk
comes from shortage of managers with appropriate skills or expertise to manage the
expanded activities. If there is much more potential profit in downstream or upstream
activities, it is better to go in for vertical integration.
Diversification Strategies
Diversification is the process of adding new businesses to the existing businesses of the
company. In other words, diversification adds new products or markets to the existing
ones. A diversified company is one that has two or more distinct businesses. The
diversification strategy is concerned with achieving a greater market from a greater
range of products in order to maximize profits. From the risk point of view, companies
attempt to spread their risk by diversifying into several products or industries.
 Example: An air-conditioning company may add room-heaters in its present product
lines, or a company producing cameras may branch off into the manufacturing of
copying machines.
Diversification can be achieved through a variety of ways: 1. Through mergers and
acquisitions. 2. Through joint ventures and strategic alliances. 3. Through starting up a
new unit (internal development) Thus, the first concern in diversifying is what new
industries to get into and whether to enter by starting a new business unit or by
acquiring a company already in the industry or by forming a joint venture or strategic
alliance with another company. A company can diversify narrowly into a few industries
or broadly into many industries. The ultimate objective of diversification is to build
shareholder value i.e., increasing value of the firm’s stock. Reasons for Diversification:
The important reasons for a company diversifying their business are: 1. Saturation or
decline of the current business: If the company is faced with diminishing market
opportunities and stagnating sales in its principal business, it may become necessary to
enter new businesses to achieve growth. 2. Better opportunities: Even when the current
business provides scope for further growth, there may be better opportunities in new
lines of business. A firm in a “sunset industry” may be tempted to enter a “sunrise
industry.” 3. Sharing of resources and strengths: Diversification enables companies to
leverage existing competencies and capabilities by expanding into businesses where
these resources become valuable competitive assets. By sharing production facilities,
technological capabilities, managerial expertise, distribution channels, sales force,
financial resources etc., synergy can be obtained. 4. New avenues for reducing costs:
Diversifying into closely related businesses opens new avenues for reducing costs. 5.
Technologies and products: By expanding into industries, the company can obtain new
technologies and products, which can complement its present businesses. 6. Use of
brand name: Through diversification, the company can transfer its powerful and well-
known brand name to the products of other businesses. 7. Risk minimization: The big
risk of a single-business firm is having all its eggs in one industry basket. If the market is
eroded by the appearance of new technologies, new products or fast–changing
consumer preferences, then a company’s prospects can quickly diminish.
Example: Digital cameras have diminished markets for film and film processing; CD and
DVD technology has replaced cassette tapes and floppy disks and mobile phones are
dominating landline phones. Thus, there are substantial risks to single-business
companies, and diversification into other businesses minimizes this risk. But
diversification itself can become risky. Risks of Diversification: Diversification has several
risks. They are: 1. There is no guarantee that the firm will succeed in the new business.
In fact, many diversifications have been failures. 2. If the new lines of business result in
huge losses, that adversely affects the main business of the company.
2. Diversification may sometimes result in neglect of the old business. 4. Diversification
may invite retaliatory moves by competitors, which may adversely affect even the old
businesses. Types of Diversification: Broadly, there are two types of diversification: 1.
Concentric diversification. 2. Conglomerate diversification. 1. Concentric Diversification:
Adding a new, but related business is called concentric diversification. It involves
acquisition of businesses that are related to the acquiring firm in terms of technology,
markets or products. The selected new business has compatibility with the firm’s current
business. The ideal concentric diversification occurs when the combined profits increase
the strengths and opportunities and decrease the weaknesses and threats. Thus, the
acquiring firm searches for new businesses whose products, markets, distribution
channels and technologies are similar to its own, and whose acquisition results in
“Synergy’’. This is possible with related diversification because companies strive to enter
product markets that share resources and capabilities with their existing business units.
Diversification must create value for shareholders. But this is not always the case.
Acquiring firms typically pay premiums when they acquire a target firm. Besides, the
risks and uncertainties are high. Why do firms still go in for diversification? The answer,
in one word, is “Synergy”. In related diversification, synergy comes from businesses
sharing tangible and intangible resources. Additionally, firms can enhance their ‘market
power’ through pooled negotiating power. There are other advantages of concentric
diversification. Advantages (a) Increases the firm’s stock value. (b) Increases the growth
rate of the firm. (c) Better use of funds than ploughing them back into internal growth.
(d) Improves the stability of earnings and sales. (e) Balances the product line when the
life cycle of the current products has peaked. (f) Helps to acquire a needed resource
quickly (e.g. technology or innovative management etc.) (g) Achieves tax savings. (h)
Increases efficiency and profitability through synergy. (i) Reduces risk. 2. Conglomerate
diversification: Adding a new, but unrelated business is called conglomerate
diversification. The new business will have no relationship to the company’s technology,
products or markets. For example, ITC which is basically a cigarette manufacturer, has
diversified into hotels, edible oils, financial services etc. Similarly, Reliance Industries,
which is basically a textile manufacturer, has diversified into petro chemicals,
telecommunications, retailing etc. Unlike concentric diversification, conglomerate
diversification does not result in much of synergy. The main objective is profit motive.
But it has important advantages.
Advantages (a) Business risk is scattered over diverse industries. (b) Financial resources
are invested in industries that offer the best profit prospects. (c) Buying distressed
businesses at a low price can enhance shareholder wealth. (d) Company profitability can
be more stable in economic upswings and downswings. Disadvantages (a) It is difficult to
manage different businesses effectively. (b) The new business may not provide any
competitive advantage if it has no strategic fitsDiversification into both Related and
Unrelated Businesses: Some companies may diversify into both related and unrelated
businesses. The actual practice varies from company to company. There are three types
of enterprises in this respect: 1. Dominant business enterprises: In such enterprises, one
major “core” business accounts for 50 to 80 per cent of total revenues and the
remaining comes from small related and unrelated businesses, e.g. TISCO. 2. Narrowly
diversified enterprise: These are enterprises that are diversified around a few (two to
five) related or unrelated businesses e.g. BPL. 3. Broadly diversified enterprises: These
enterprises are diversified around a wide-ranging collection of related and unrelated
businesses e.g. ITC, Reliance Industries. Means to Achieve Integration or Diversification:
Profitable growth is one of the prime objectives of any business firm. Growth can be
achieved internally or externally. Internal growth in assets, sales and profits takes place
when the firm introduces a new product or increases the capacity for the existing
products through setting up a new plant. Increasing the capacities through internal
growth takes time and involves lot of risk. Alternatively, business firms can suddenly
increase their growth rate by acquisitions, mergers, etc. These strategies are often
referred to as cooperation strategies. As already mentioned, growth especially by way of
integration or diversification can be achieved through four basic means: 1. Mergers and
acquisitions 2. Joint ventures 3. Strategic alliances 4. Internal development With the
opening up of the Indian economy, business firms have the freedom to expand, diversify
 and modernize the operations and set up new undertakings. Market forces continue to
play the role and experienced entrepreneurs always remain in search of opportunities to
take over units and to expand their operations. So the free economic environment plays
a very important role in accelerating the merger and acquisition activities.
Retrenchment Strategies
They are the last resort strategies. A company may pursue retrenchment strategies
when it has a weak competitive position in some or all of its product lines resulting in
poor performance – sales are down and profits are dwindling. In an attempt to eliminate
the weaknesses that are dragging the company down, management may follow one or
more of the following retrenchment strategies. 1. Turnaround 2. Divestment 3.
Bankruptcy 4. Liquidation
Turnaround Strategy
A firm is said to be sick when it faces a severe cash crunch or a consistent downtrend in
its operating profits. Such firms become insolvent unless appropriate internal and
external actions are taken to change the financial picture of the firm. This process of
recovery is called “turnaround strategy”. Any successful turnaround strategy consists of
three inter-related phases: 1. The first phase is the diagnosis of impending trouble.
Many authors and research studies have indicated distinct early warning signals of
corporate sickness. 2. The second phase involves analyzing the causes of sickness to
restore the firm on its profit track. These measures are of both short-term and long-term
nature. 3. The third and final phase involves implementation of change process and its
monitoring.
When Turnaround becomes Necessary
Do companies turn sick overnight and qualify as potential candidates for turnaround or
do they become sick slowly which can be stopped by timely corrective action? Obviously,
the latter is true in most of the cases. But the reality is also that companies becoming
sick often do not themselves recognize this fact, and fail to take timely action to remedy
the situation. Despite the fact that factors that lead to sickness may vary from company
to company, there are some common signals which herald the onset of sickness. John M
Harris has listed a dozen danger signals of impending sickness. 1. Decreasing market
share: This is the most significant symptom of a major sickness. A company which is
losing its market share to competition needs to sit up and take careful note. Regular
monitoring of market share helps companies to keep a tag on their performance in the
market vis-à-vis their competitors. Any indication of declining market share should
trigger off immediate corrective action.
3. Decreasing constant rupee sales: Sales figures, to be meaningful, should be adjusted for
inflation. If constant rupee sales figures are showing a declining trend, then this is a
danger signal to watch out. 3. Decreasing profitability: Profit figures are a good
indication of a company’s health. Care must be taken to interpret the profit figures
correctly, so as to avoid any misjudgments. Decreasing profitability can show up as
smaller profits in absolute terms or lower profits per rupee of sales or decreasing return
on investment or smaller profit margins. 4. Increasing dependence on debt: A company
overly reliant on debt soon gets into a tight corner with very few options left. A
substantial rise in the amount of debt, a lopsided debtto-equity ratio and a lowered
corporate credit rating may cause banks and other financial institutions to impose
restrictions and become reluctant to lend money. Once financial institutions are hesitant
to lend money, the company’s rating on the stock market also slides down and it
becomes very difficult for the company to raise funds from the public too. 5. Restricted
dividend policies: Dividends frequently missed or restricted dividends signal danger.
Often, such companies may have earlier paid substantially higher proportion of earnings
as dividends when in fact they should have been reinvesting in the business. Current
inability to pay dividends is an indication of the gravity of the situation. 6. Failure to
reinvest sufficiently in the business: For a company to stay competitive and keep on the
fast growth track, it is essential to reinvest adequate amounts in plant, equipment and
maintenance. When a business is growing, the combination of new investments and
reinvestments often warrants borrowing. Companies which fail to recognize this fact and
try to finance growth with only their internal funds are applying brakes in the path of
growth. 7. Diversification at the expense of the core business: It is a well-observed fact
that once companies reach a particular level of maturity in the existing business, they
start looking for diversification. Often this is done at the cost of the core business, which
then starts to deteriorate and decline. Diversification in new ventures should be sought
as a supplement and not as a substitute for the primary core business. 8. Lack of
planning: In many companies, particularly those built by individual entrepreneurs, the
concept of planning is generally lacking. This can often result in major setbacks as limited
thought or planning go into the actions and their consequences. 9. Inflexible chief
executives: A chief executive who is unwilling to listen to fresh ideas from others is a
signal of impending bad news. Even if the CEO recognises the danger signals, his
unwillingness to accept any proposal from his subordinates further blocks the path
towards recovery. 10. Management succession problems: When nearly all the top
managers are in their midfifties, there may be a serious vacuum at the second line of
command. As these older managers retire or leave because of perception of decreasing
opportunities, there is bound to be serious management crisis. 11. Unquestioning
boards of directors: Directors, who have family, social or business ties with the chief
executive or have served very long on the board, may no longer be objective in their
judgment. Thus, these directors serve limited purpose in terms of questioning or
cautioning the CEO about his actions. 12. A management team unwilling to learn from its
competitors: Companies in decline often adopt a closed attitude and are not willing to
learn anything from their competitors. Companies which have survived tough
competitive times continuously analyse their competitors’ moves.
Types of Turnaround Strategies
Slater has classified the turnaround strategies into two broad categories. These are
strategic turnaround and operating turnaround. Whether a sick business needs strategic
or operating turn-around can be ascertained by analysing the current strategic and
operating health of the business. The operating turnarounds are easier to carry out and
can be applied only when there are average to strong strategic strengths (product-
market relationship) in the business. The strategic turnaround choices may involve
either a new way to compete existing business or entering an altogether new business.
Entering a new business as a turnaround strategy can be approached through the
process of product portfolio management. The strategic turnaround focuses either on
increasing the market share in a given product-market framework or by shifting the
product-market relationship in a new direction by re-positioning. The operating
turnaround strategies are of four types. These are: 1. Revenue-increasing strategies 2.
Cost-cutting strategies 3. Asset-reduction strategies 4. Combination strategies The focus
of all these choices is on short-term profit. Thus, if a sick firm is operating much below its
break-even, it must take steps to reduce the levels of fixed cost and help in reducing the
total costs of the firm. In real life, it is always a difficult choice to identify the assets
which can be sold without affecting the productivity of the business. To identify saleable
assets, the firm may have to keep in mind its strategic move in the next two to three
years. The turnaround strategies appropriate under different circumstances are: If the
sick firm is operating substantially but not extremely below its break-even point, then
the most appropriate turnaround strategy is the one which generates extra revenues.
These may be in the form of price reduction to increase sales, stimulating product
demand through promotional efforts or sometimes by introducing scaled down versions
of the main products of the firm. The increased quantities of product sales not only
result in higher sales but also reduce the per unit cost, thus leading to higher operating
profits. If the firm is operating closer but below break-even point then the turnaround
strategy calls for application of combination strategies. Under combination strategies
cost-reducing, revenue generating and asset-reduction actions are pursued
simultaneously in an integrated and balanced manner. The combination strategies have
a direct favourable impact on cash flows as well as on profits. If the firm is operating
around break-even point, it usually needs cost-reduction strategies, since cost-reduction
actions are easily carried out as compared to revenue generating actions, the former is
usually preferred for quick short-term profit increases. Slater has, however, linked the
choice of turnaround strategies to the causes of decline. The recommended choice of
strategies includes change in management and organisational processes, improved
financial controls, growth via acquisition and new financial strategies. Closely associated
to the choice of turnaround strategy is the concept of turnaround process. We will focus
on this aspect in the next section.
Turnaround Process
The process of turning a sick company into a profitable one is rather complex and
difficult. It is complex because a successful turnaround strategy demands corrective
actions in many deficient areas of the firm. It is necessary that all these actions are
integrated and do not contradict each other.
The turnaround process is difficult because it involves perceptual and attitudinal changes
at all levels as far as employees are concerned. These human change processes tend to
become very sensitive when the firm is in a crisis situation. Therefore, many a time, a
change in the leadership or even an active intervention from outside is suggested for
bringing about such changes in the organisation. As soon as the parameters of corporate
performance are indicative of unsatisfactory corporate performance, it becomes
necessary to immediately tighten the controls within the organisation. Effective controls
have a positive impact on cost-reduction, that is, profit improvement and also on the net
cash-flows of the firm. But this tightening of the financial and administrative control do
not guarantee a stable turnaround process. In fact, controls coupled with poor quality
image of the product may hasten the process of corporate failure. So while the controls
are being effected, it is necessary that the strategic posture of the company may also be
overhauled. This involves major changes in the product-mix, customer-mix and the
pattern of resources deployment in the company. These two stages of change further
need to be complemented by changes in top management and many organisational
processes. If these changes produce early results which are satisfactory, then for long-
term effects it is necessary to reinforce these changes. Prahlad and Thomas have
presented ten propositions for turning around sick units. These propositions are: 1.
Revival of a sick unit requires the formulation and implementation of a new strategy. 2.
Localising problems and sequencing the corrective actions helps in the revival of the sick
unit. 3. The successful implementation of the turnaround strategy requires appropriate
organisation structure, a participative type of decision making environment, effective
administrative and budgetary controls, training, performance evaluation, career
progression and rewards. 4. The turnaround strategy must focus on profit generation
and profits must be regarded as a legitimate goal. 5. The acceptance and the
commitment of managers and employees of the organisation towards revival measures
must be high if not total. Openness in management processes helps in gaining
commitment and thus facilitates the implementation process. 6. Openness in the change
process leads to confidence in the top management and its strategy. 7. Understanding of
technical processes and problem-solving attitude in overcoming technical snags is
essential for turning around sick companies. 8. Consultants can play a vital role in
objective analysis of problems as well as in implementing innovative changes. 9. The
active support given to the chief executive by the appointing authorities is critical for the
implementation of turnaround strategy. 10. Leadership provides the focus for action in
sick units. Thus, from these propositions, it is evident that in any turnaround process,
the important issues are strategy, the management process, the technical competence
and the leadership.
Divestment
Selling a division or part of an organisation is called divestiture. This strategy is often
used to raise capital for further strategic acquisitions or investments. Divestiture is
generally used as a part of turnaround strategy to get rid of businesses that are
unprofitable, that require too much capital or that do not fit well with the firm's other
activities. Divestiture is an appropriate strategy to be pursued under the following
circumstances: 1. When a business cannot be turned around 2. When a business needs
more resources than the company can provide 3. When a business is responsible for a
firm's overall poor performance 4. When a business is a misfit with the rest of the
organisation 5. When a large amount of cash is required quickly 6. When government's
legal actions threaten the existence of a business.
Reasons for Divestitures
1. Poor fit of a division: When the parent company feels that a particular division
within the company cannot be managed profitably, it may think of selling the
division to another company. This does not mean the division itself is unprofitable.
The other firm with greater expertise in the line of business could manage the
division more profitably. This means the division can be managed better by someone
else than the selling company. 2. Reverse synergy: Synergy refers to additional gains
that can be derived when two firms combine. When synergy exists, the combined
entity is worth more than the sum of the parts valued separately. In other words, 2 +
2 = 5. Reverse synergy exists when the parts are worth more separately than they
are within the parent company's corporate structure. In other words, 2 + 2 = 3. In
such a case, an outside bidder might be able to pay more for a division than what
the division is worth to the parent company. 3. Poor performance: Companies may
want to divest divisions when they are not sufficiently profitable. The division may
earn a rate of return, which is less than the cost of capital of the parent company. A
division may turn out to be unprofitable due to various reasons such as increase in
the material and labour cost, decline in the demand etc. 4. Capital market factors: A
divestiture may also take place because the post divestiture firm, as well as the
divested division, has greater access to capital markets. The combined capital
structure may not help the company to attract the capital from the investors. Some
investors are looking at steel companies and others may be looking for cement
companies. These two groups of investors are not interested in investing in
combined company, with cement and steel businesses due to the cyclical nature of
businesses. So each group of investors are interested in stand-alone cement or steel
companies. So divestitures may provide greater access to capital markets for the
two firms as separate companies rather than the combined corporation. 5. Cash
flow factors: Selling a division results in immediate cash inflows. The companies that
are under financial distress or in insolvency may be forced to sell profitable and
valuable divisions to tide over the crisis. 6. To release the managerial talent:
Sometime the management may be overburdened with the management of the
conglomerate leading to inefficiency. So they sell one or more divisions of the
company. After the divestiture, the existing management can concentrate on the
remaining businesses and can conduct the business more efficiently. 7. To correct
the mistakes committed in investment decisions: Many companies in India
diversified into unrelated areas during the pre-liberalization period. Afterwards they
realised that such a diversification into unrelated areas was a big mistake. To correct
the mistake committed earlier, they had to go for divestiture. This is because they
moved into product market areas with which they had less familiarity than their
existing activities.
8. To realise profit from the sale of profitable divisions: This type of divestiture
occurs when a firm acquires under-performing businesses, makes it profitable and
then sells it to other companies. The parent company may repeat this process to
make profit out of it. 9. To reduce the debt burden: Many companies sell their assets
or divisions to reduce their debt and bring the balance in the capital structure of the
firm. 10. To help to finance new acquisitions: Companies may sell less profitable
divisions and buy more profitable divisions in order to increase the profitability of
the company as a whole.
Types of Divestitures
1. Spin-off: It is a kind of demerger when an existing parent company distributes on
a prorata basis the shares of the new company to the shareholders of the parent
company free of cost. There is no money transaction, subsidiary's assets are not
revalued, and transaction is treated as stock dividend. Both the companies exist and
carry on their businesses independently after spin-off. During spin-off, a new
company comes into existence. The shareholders of the parent company become
the shareholders of the new company spunoff. The motivations for a spin-off are
similar to that of divestitures. (a) Involuntary Spin-off: When faced with an adverse
regulatory ruling, a firm may be forced to spin-off to comply with the legal
formalities. (b) Defensive Spin-off: Defensive spin-off is a takeover defence.
Company may choose to spin-off divisions to make it less attractive to the bidder. (c)
Tax consequences of Spin-off: Shares allotted to the shareholders during spin-off is
not taxed as capital gain or as dividend.
Example: ITC has spun-off hotel business from the company and formed ITC Hotels
Ltd. 2. Sell-off: It is a form of restructuring, where a firm sells a division to another
company. When the business unit is sold, payment is received generally in the form
of cash or securities. When the firm decides to sell a poorly performing division, this
asset goes to another owner, who presumably values it more highly because he can
use the asset more advantageously than the seller. The seller receives cash in the
place of asset. So the firm can use this cash more efficiently than it was utilising the
asset that was sold. The firm can also get premium for the assets because the buyer
can more advantageously use such assets. Sell-off generally have positive impact on
the market price of shares of both the buyer and seller companies. So sell-offs are
beneficial for the shareholders of both the companies. 3. Voluntary corporate
liquidation or bust-ups: It is also known as complete sell-off. The companies
normally go for voluntary liquidation because they create value to the shareholders.
The firm may have a higher value in liquidation than the current market value. Here
the firm sells its assets/divisions to multiple parties which may result in a higher
value being realised than if they had to be sold as a whole. Through a series of
spinoffs or sell-offs a company may go ultimately for liquidation. 4. Equity carveouts:
It is a different type of divestiture and different form of spin-off and selloff. It
resembles Initial Public Offering (IPO) of some portion of equity stock of a wholly
owned subsidiary by the parent company.
The parent company may sell a 100% interest in subsidiary company or it may
choose to remain in the subsidiary's line of business by selling only a partial interest
(shares) and keeping the remaining percentage of ownership. After the sale of
shares to the public, the subsidiary company's shares will be listed and traded
separately in the capital market. The parent company receives cash from the sale of
shares of the subsidiary company. The parent company may still control the
company by holding controlling interest in the subsidiary. Many firms look to equity
carveouts as a means of reducing their exposure to a riskier line of business. They
also help to raise funds for the parent company.
Notes Spin-offs vs. Equity Carveouts The following are the differences between the
spin-offs and equity carveouts: 1. In case of spin-off, there is no new set of
shareholders. The same shareholders in the parent company become shareholders
in the spun-off company. In case of equity carveouts, there will be new shareholders
as shares are sold to the public. 2. In case of spin-off, there is no cash inflow to the
parent company. The shareholders of the parent company are allotted free shares in
the new company. In case of equity carveouts, as the shares of the subsidiary
company are sold to the public, this results in cash inflow to the parent company. 3.
In case of spin-off, there is a formation of a new company. In case of equity
carveouts, there is no new company that comes into existence. Here the shares of a
subsidiary company are now offered to the public for sale. 5. Leveraged buyouts
(LBO's): A leveraged buyout is an acquisition of a company in which the acquisition is
substantially financed through debt. Debt typically forms 70-90% of the purchase
price. Much of the debt may be secured by the assets of the company (asset based
lending). Firms with assets that have a high collateral value can more easily obtain
such loans. So LBOs are generally found in capital intensive industries. Debt is
obtained on the basis of company's future earnings potential. In LBOs, a buyer
generally looks for a company with high growth rate and good market share. The
company should be profitable and the demand for the product should be known and
stable, so that the earnings can be forecasted. The company should have low debt
and its liquidity position should be very good. Low operating risk of such companies
allows the acquisition with high degree of financial leverage and risk. The lender is
prepared to lend even if the company is highly leveraged because he has full
confidence in the abilities of buyer to fully utilise the potential of the business and
convert it into an enormous value. He also charges high rate of interest for the loan
as it involves high risk.
Bankruptcy
This is a form of defensive strategy. It allows organisations to file a petition in the
court for legal protection to the firm, in case the firm is not in a position to pay its
debts. The court decides the claims on the company and settles the corporation's
obligations.
Liquidation
Liquidation occurs when an entire company is dissolved and its assets are sold. It is a
strategy of the last resort. When there are no buyers for a business which wants to
be sold, the company may be wound up and its assets may be sold to satisfy debt
obligations. Liquidation becomes the inevitable strategy under the following
circumstances: 1. When an organisation has pursued both turnaround strategy and
divestiture strategy, but failed. 2. When an organisation's only alternative is
bankruptcy. A company can legally declare bankruptcy first and then wind up the
company to raise needed funds to pay debts. 3. When the shareholders of a
company can minimize their losses by selling the assets of a business.
Combination Strategies
A company can pursue a combination of two or more corporate strategies
simultaneously. But a combination strategy can be exceptionally risky if carried too
far. No organisation can afford to pursue all the strategies that might benefit the
firm. Difficult decisions must be made. Priorities must be established. Organisations
like individuals have limited resources, so organisations must choose among
alternative strategies. In large diversified companies, a combination strategy is
commonly employed when different divisions pursue different strategies. Also,
organisations struggling to survive may employ a combination of several defensive
strategies.
Internationalisation
When the focus of a business is its domestic operations, but a portion of its activities
are outside the home country, it is called an "International Company". In other
words, an international company is one that is primarily based in a single country
but that acquires some meaningful share of its resources or revenues from other
countries. For example, a small company engaged in exporting some of its products
beyond its home country, is called "international" in its operations.
Internationalisation involves creating an international division and exporting the
products through that division. The firm really focuses on the domestic market, and
exports what is demanded abroad. All control is retained at home office regarding
product and marketing strategies. As a firm becomes more successful abroad, it
might set up manufacturing and marketing facilities in the foreign country, and allow
a certain degree of customization. Country units are allowed to make some minor
adaptations to products to suit local needs. But they have far less independence and
autonomy compared to multi-domestic companies. All sources of core competencies
are centralized. The majority of large US multinationals pursued the international
strategy in the decades following World War II. These companies centralized R&D
and product development but established manufacturing facilities as well as
marketing divisions abroad. Companies such as Mc Donald's and Kellogg's are
examples of firms that followed such a strategy in the beginning. Although these
companies do make some local adaptations, they are of a very limited nature. With
increasing pressure to reduce costs due to global competition, especially from low-
cost countries, the use of this strategy has become limited. The disadvantages of this
strategy are: 1. By concentrating most of its activities in one location, it fails to take
advantage of the benefit of an optimally distributed value chain. 2. It is susceptible
to higher levels of currency risks, because the company is too closely associated with
a single country and increase in the value of currency may suddenly make the
product unattractive abroad.
Exporting
This means selling the products in other countries through an agent or a distributor.
This choice offers avenues for larger firms to begin their international expansion
with a minimum investment. There are merits and demerits.
Merits 1. Less expensive 2. No need to set up manufacturing facilities abroad
Demerits 1. Not suitable for bulky, perishable or fragile goods 2. Import duties make
the product expensive 3. High transportation costs 4. Cannot avail lower production
costs in host country
Cooperation Strategies
Cooperative strategies such as strategic alliance and joint ventures are a logical and
timely response to intense and rapid changes in economic activity, technology and
globalisation. Apart from alliances between the firms operating within the same
country, cross border alliances have also become increasingly popular these days.
Alliances generally come in three basic typesjoint ventures, strategic alliance, and
consortia.
Joint Ventures
In a joint venture, two firms contribute equity to form a new venture, typically in the
host country to develop new products or build a manufacturing facility or set up a
sales and distribution network (Eg. Maruti Suzuki). The commonly cited advantages
are: 1. Improvement of efficiency 2. Access to knowledge 3. Dealing with political
risk factors 4. Collusions may restrict competition Merits 1. Two partners bring
complementary expertise to the new venture 2. Both parties share capital and risks.
3. Helps to meet host country regulations Demerits 1. Two partners may fail to get
along 2. The firm has to share profits with the partner 3. Host country culture may
pose problems
Strategic Alliances
This is a collaborative partnership between two or more firms to pursue a common
goal. Each partner in an alliance brings knowledge or resources to the partnership.
Such an alliance is generally formed to access a critical capability not possessed in-
house.
Example: Boeing and Airbus formed a strategic alliance to develop a bigger aircraft.
Merits and demerits are same as joint ventures, which are also a form of strategic
alliance.
Consortia
Consortia are defined as large interlocking relationships, cross holdings and equity
stakes between businesses of an industry. There could be two forms of consortia: 1.
Multipartner Consortia: These are multi-partner alliances intended to share an
underlying technology. One of the most important European based consortiums to
date is Air Bus Industries. Airbus brings together four European aerospace firms
from Britain, France, Germany and Spain 2. Cross-holding Consortia: These include
large Japanese Keiretsus (Sumitomo, Mitsubishi, and Mitsui) and Korean Chaebols
(Daewoo, LG, Hyundai, and Samsung). Two important features of cross-holding
consortia are building long-term focus and gaining technological critical mass among
affiliated member companies.
 Restructuring
Restructuring is another means by which the corporate office can add substantial
value to a business. Here, the corporate office tries to find either poorly performing
business units with unrealized potential or businesses on the threshold of significant,
positive change. The parent intervenes, often selling off the whole or part of the
businesses, changing the management, reducing payroll and unnecessary expenses,
changing strategies, and infusing the business with new technologies, processes,
reward systems, and so forth. When the restructuring is complete, the company can
either "sell high" and capture the added value or keep the business in the corporate
family and enjoy the financial and competitive benefits of the enhanced
performance. For the restructuring strategy to work, the corporate office must have
insights to detect businesses competing in industries with a high potential for
transformation. Additionally, of course, they must have the requisite skills and
resources to turn the businesses around, even if they may be in new and unfamiliar
industries. Restructuring can involve changes in assets, capital structure or
management. 1. Assets restructuring involves the sale of unproductive assets, or
even whole lines of businesses, that are peripheral. In some cases, it may even
involve acquisitions that strengthen the core businesses. 2. Capital restructuring
involves changing the debt-equity mix or the mix between different classes of debt
or equity. 3. Management restructuring involves changes in the composition of top
management team, organisational structure, and reporting relationships. Tight
financial control, rewards based strictly on meeting performance goals, reduction in
the number of middle-level managers are common steps in management
restructuring. In some cases, parental restructuring may even result in changes in
strategy as well as infusion of new technologies and processes.

Business Level Strategies

Introduction
Each business should have its own business strategy. A business strategy is basically
a competitive strategy and is concerned more with how a business competes
successfully in the chosen market. The strategic decisions at business-level revolve
around choice of products and markets, meeting the needs of customers, protecting
market share, gaining advantage over competitors, exploiting or creating new
opportunities and earning profit at the business unit level. In short, a business
strategy outlines the competitive posture of its operations in the industry. Business
strategy is guided by the direction set by the corporate strategy. It takes the cue
from the priorities set by the corporate strategy. It translates the direction and
intent generated at the corporate level into objectives and strategies for individual
business units.
Example: A multi-business corporation like ITC assigns priorities in its corporate
strategy to its various businesses like cigarettes, vegetable oils, hotels, agro-based
products, financial services etc. The business strategies of these units are formulated
in accordance with those priorities. Business-level decisions also help bridge
decisions at the corporate level and functional levels.
Industry Structure
An industry is a collection of firms offering goods or services that are close
substitutes of each other. Alternatively, an industry consists of firms that directly
compete with each other. For the purpose of industry analysis, an industry can be
defined rather broadly (the beverage industry) or more precisely (the carbonated
soft drink industry). How one defines and circumscribes an industry depends on the
kinds of analysis to be performed. In “industry analysis”, it is generally better to
define an industry as precisely as possible.
Example: In discussing companies like Coca-Cola and Pepsi, one would want to
define the boundaries of the “carbonated soft drink industry” rather than that of the
“beverage industry”. The term “industry structure” refers to the number and size
distribution of firms in an industry. The number of firms in an industry may run into
hundreds or thousands. The existence of a large number of firms in an industry
reduces opportunities for coordination among firms in the industry. Hence, generally
speaking, the level of competition in an industry rises with the number of firms in
the industry. The size distribution of firms in an industry is important from the
perspective of both business policy and public policy. Industry structure consists of
four elements: (a) Concentration (b) Economies of scale (c) Product differentiation
(d) Barriers to entry. (a) Concentration: It means the extent to which industry sales
are dominated by only a few firms. In a highly concentrated industry, i.e. an industry
whose sales are dominated by a handful of firms, the intensity of competition
declines over time. High concentration serves as a barrier to entry into an industry,
because it enables the firms to hold large market shares to achieve significant
economies of scale. (b) Economies of Scale: This is an important determinant of
competition in an industry. Firms that enjoy economies of scale can charge lower
prices than their competitors, because of their savings in per unit cost of production.
They also can create barriers to entry by reducing their prices temporarily or
permanently to deter new firms from entering the industry. (c) Product
differentiation: Real perceived differentiation often intensifies competition among
existing firms. (d) Barriers to entry: Barriers to entry are the obstacles that a firm
must overcome to enter an industry, and the competition from new entrants
depends mostly on entry barriers. These features determine the strength of the
competitive forces operating in the industry. Trends affecting industry structure are
important considerations in strategy formulation.
Positioning of the Firm
When starting a new firm or launching new product, a prime strategic decision is to
identify the target audience. But even though a useful segment has been identified,
this does not in itself resolve the organisation’s strategy. The competitive position
within the segment then needs to be explored, because only this will show how the
organisation will compete within the segment. Competitive positioning is thus the
choice of differential advantage that the product or services will posses against its
competitors. Competitive positioning allows an organisation to compete and survive
in a market place or in a segment of a market place. To develop positioning, it is
useful to follow a two-stage process-first identify the segment gaps, second identify
positioning within segments.
Identification of Segment Gaps and their Competitive Positioning Implications
From a strategy viewpoint, the most useful strategy analysis often emerges by
exploring where there are gaps in the segments of an industry. The starting point for
such work is to map out the current segmentation position and then place
companies and their products into the segments; it should then become clear where
segments exist that are not served or are poorly served by current products.
Identifying the Positioning within the Segment
From a strategy perspective, some gaps may be more attractive than others. For
example, they may have limited competition or poorly supported products. In
addition, some gaps may possess a clear advantage in terms of competitive
positioning. Others may not. The process of developing positioning runs as follows:
1. Perceptual mapping: In-depth qualitative research on actual and prospective
customers on the way they make their decisions in the market place, e.g. strong
versus weak, cheap versus expensive, modern versus traditional. 2. Positioning:
Brands or products are then placed on the map using the research dimensions. 3.
Options development: Take existing and new products and use their existing
strengths and weaknesses to devise possible new positions on the map. 4. Testing:
First with simple statements with customers, then at a later stage in the
marketplace. It will be evident that this is essentially a process, involving
experimentation with actual and potential customers.
Generic Strategies
Generic strategies were first outlined in two books from Michael Porter of Harvard
Business School. These were “Competitive Strategy” in 1980 and “Competitive
Advantage’’ in 1985. The second book contained a small modification of the
concept. The original version is explored here. Michael Porter made the bold claim
that there are only three fundamental strategies that any business can undertake.
During the 1980s, they were regarded as being at the forefront of strategic thinking.
Arguably, they still have a contribution to make in the new century in the
development of strategic options. Professor Porter argued that the three basic
strategies open to any business are: 1. Cost leadership 2. Differentiation 3. Focus.
Each of these generic strategies has the potential to overcome the five forces of
competition and allow the firm to outperform rivals within the same industry. These
are called ‘generic’ because they can be used in a variety of situations, across diverse
industries at various stages of development.
Cost Leadership
Cost leadership is a strategy whereby a firm aims to deliver its product or service at
a price lower than that of its competitors. Overall cost leadership is achieved by the
firm by maintaining the lowest costs of production and distribution within an
industry and offering “no-frills” products. This strategy requires economies of scale
in production and close attention to efficiency and operating costs. The firm places a
lot of emphasis on minimizing direct input and overhead costs, by offering no-frills
products.
Example: Deccan Airways, Timex, Nirma. A cost leadership strategy is likely to work
better where the product is standardized, competition is based mainly on price and
consumers can switch easily between different suppliers. However, a low cost base
will not in itself bring competitive advantage. The product must be perceived as
comparable or acceptable by consumers. Firms pursuing this strategy must be
effective in engineering, purchasing, manufacturing, and physical distribution.
Marketing can be considered as less important, as the consumer is familiar with the
product attributes.
Notes An important feature of cost leadership is the effect of the experience curve,
in which the unit cost of manufacturing a product or delivering a service falls as
experience increases. In the same way that a person learning to knit or play the
piano improves with practice, so the unit cost of value added to a standard product
declines by a constant percentage (typically 20 to 30%) each time cumulative output
doubles (Grant, 2002). This allows firms to set initial low selling prices in the
knowledge that margins will increaseas costs fall. The rate of travel down the cost
experience curve is a crucial aspect of staying ahead of the competition in an
undifferentiated market and underlines the importance of market share if high
volumes are not sold, the cost advantage is lost. Examples of products and services
that are produced much more cheaply now are semiconductors, watches, cars, and
travel reservations (on the Internet).
Having a low cost position also gives a company a defence against rivals. Its lower
costs allow it to continue to earn profits during times of heavy competition. Its high
market share means that it will have high bargaining power relative to its suppliers.
Its low price also serves as a barrier to entry because few new entrants will be able
to match the leader’s cost advantage. As a result, cost leaders are likely to earn
above average profits on investment. Companies that want to be successful by
following a cost leadership strategy must maintain constant efforts aimed at
lowering their costs (relative to competitor’s costs) and creating value for
customers. Cost leadership requires: 1. Aggressive construction of efficient scale
facilities 2. Vigorous pursuit of cost reductions from experience 3. Tight cost and
overhead control 4. Avoidance of marginal customer accounts 5. Cost minimization
in all activities in the firm’s value chain, such as R&D, services, sales force,
advertising etc. Implementing and maintaining a cost leadership strategy means that
a company must consider its value chain of primary and secondary activities and
effectively link those activities with critical focus on efficiency and cost reduction.
For example, McDonald’s Restaurants achieved low costs through standardised
products, centralised buying of supplies for a whole country and so on.
How Low-cost Leadership Delivers Above-average Profits?
The profit advantage gained from low-cost leadership derives from the assertion
that low-cost leaders should be able to sell their products in the market place at
around the average price of the market–see line A-A in Figure 8.2. If such products
are not perceived as comparable or their performance is not acceptable to buyers, a
cost leader will be forced to discount prices below competition in order to gain sales.
This will deliver above-average profits to the low-cost leader. To follow this strategy
option, an organisation will place the emphasis on cost reduction at every point in its
processes. It should be noted that cost leadership does not necessarily imply a low
price. The company could charge an average price and reinvest the extra profits
generated.
Differentiation Strategy
Differentiation consists of offering a product or service that is perceived as unique or
distinctive by the customer. This allows firms to command a premium price or to
retain buyer loyalty because customers will pay more for what they regard as a
better product. A differentiation strategy can be more profitable than a cost
leadership strategy because of the premium price. Products can be differentiated in
a number of ways so that they stand apart from standardized products: 1. Superior
quality 2. Special or unique features 3. More responsive customer service 4. New
technologies 5. Dealer network.
Example: Hero Honda, Nike athletic shoes, Sony, Asian Paints, Mercedes-Benz, BMW
etc. Nokia achieves differentiation through the individual design of its product, while
Sony achieves it by offering superior reliability, service and technology. Mercedes-
Benz differentiates by stressing a distinctive product service image, while Coca Cola
differentiates by building a widely recognized brand. This strategy is often supported
by high spending on advertising and promotion to sustain the brand identity.
McDonald’s is differentiated by its brand name and its ‘Big Mac’ and ‘Ronald
McDonald’ products and imagery. In order to differentiate a product, Porter argued
that it is necessary for the producer to incur extra costs, for example, to advertise a
brand and thus differentiate it. The form of differentiation varies from industry to
industry. In construction industry, equipment durability, spare parts availability and
service will feature, while in cosmetics, differentiation is based on sophistication and
exclusivity. Differentiation is aimed at the broad mass market. It is a viable strategy
for earning above average profits because the resulting brand loyalty lowers
customers’ sensitivity to price. Buyer loyalty also serves as an entry barrier because
new entrants must develop their own distinctive competence to differentiate their
products in some way to achieve buyer loyalty. It is essential for the success of this
strategy that the premium price for the differentiated product must exceed the cost
of differentiation. For successfully carrying out the differentiation strategy, the
following are required: 1. Creative flair 2. Engineering skills 3. R&D capabilities
4. Innovative marketing capabilities 5. Motivation for innovation 6. Corporate
reputation for quality or technological capabilities.
How Differentiation Delivers Above-average Profits?
There are two problems associated with differentiation strategies: 1. It is difficult to
estimate whether the extra costs incurred in differentiation can be recovered from
the customer by charging a higher price. 2. The successful differentiation may attract
competitors to copy the differentiated product and enter the market segment.
Focus Strategy
A focus strategy occurs when a firm focuses on a specific niche in the market place
and develops its competitive advantage by offering products especially developed
for that niche. It targets a specific consumer group (e.g. teenagers, babies, old
people etc.) or a specific geographic market (urban areas, rural areas etc.). Hence,
the focus strategy selects a segment or group of segments in the industry and tailors
its strategy to serve them to the exclusion of others. By optimizing its strategy, for
the targets, the focuser seeks to achieve competitive advantage in its target
segments, even though it does not possess a competitive advantage overall.
As Porter observes, while the low cost and differentiation strategies are aimed at
achieving their objectives industry-wide, the entire focus strategy is built around
serving a particular target very well. Sometimes, according to Porter, neither a low-
cost leadership strategy nor a differentiation strategy is possible for an organisation
across the broad range of the market.
Example: The costs of achieving low-cost leadership may require substantial funds
which are not available. Equally, the costs of differentiation, while serving the mass
market of customers, may be too high. If the differentiation involves quality, it may
not be credible to offer high quality and cheap products under the same brand
name. So a new brand name has to be developed and supported. For these and
related reasons, it may be better to adopt a focus strategy. The focus strategy has
two variants: 1. Cost focus: A firm seeks to achieve low cost position in its target
segment only. 2. Differentiation focus: A firm seeks to differentiate its products in its
target segment only. The essence of focus strategy is the exploitation of a narrow
target’s differences from the balance of the industry. Focus builds competitive
advantage through high specialization and concentration of resources in a given
niche. A focus strategy can serve the needs of a niche segment (a) by identifying
gaps not covered by existing players, and (b) by developing superior skills or
efficiency while serving such narrow segments. By targeting a small, specialized
group of buyers it should be possible to earn higher than average profits, either by
charging a premium price for exceptional quality or by a cheap and cheerful low
priced product. In the global car market, Rolls Royce and Ferrari are clearly niche
players. They have only a minute percentage of the market world-wide. Their niche
is premium product and premium price. The focus strategy rests on the premise that
the firm is able to serve its narrow strategic target more effectively and efficiently
than competitors who are competing more broadly. As a result, the firm achieves
either differentiation from better meeting the needs of the particular target, or
lower costs in serving this target, or both. Even though the focus strategy does not
achieve low cost or differentiation industry-wide, it does so in its narrow market
target. The focus strategy requires for its success the same common factors, as are
required for the success of cost leadership and differentiation, except that they are
directed at the particular target market. In the Indian context, examples of focus
strategy are Ayur Herbal Brand, Anjali Kitchenware, Anchor toothpaste, T-series
Cassettes etc. There are, however, some problems with the focus strategy: 1. By
definition, the niche is small and may not be large enough to justify attention. 2.
Cost focus may be difficult if economies of scale are important in an industry such as
the car industry. 3. The niche is clearly specialist in nature and may disappear over
time. None of these problems is insurmountable. Many small and medium-sized
companies have found that this is the most useful strategy to explore.
Risks in Competitive Strategies
No one competitive strategy is guaranteed for success. Some companies that have
successfully implemented one of Porters’ competitive strategies have found that
they could not sustain the strategy. Each of these generic strategies has its own
risks.
1. Risks of cost leadership: (a) Cost leadership may not be sustained (i) If
competitors imitate (ii) If technology changes (iii) If other bases for cost
leadership erode. (b) Proximity in differentiation is lost. (c) Cost focusers achieve
even lower costs in segments. Proximity in differentiation means that companies
that choose cost leadership strategy must offer relatively standardized products
with features or characteristics that are acceptable to customers. In other
words, the company must offer a minimum level of differentiation–at the lowest
competitive price. If this minimum level of differentiation is lost, then the
strategy of cost leadership will fail. 2. Risks of differentiation: (a) Differentiation
may not be sustained (i) If competitors imitate. (ii) If features of differentiation
become less important to buyers. (b) Cost proximity is lost. (c) Firms that follow
focus strategy may achieve even greater differentiation in segments. (d) Dilution
of brand identification through product-line. A company following a
differentiation strategy must ensure that the higher price it charges for its higher
quality is not priced too far above the competition, otherwise customers will not
see the extra quality as worth the extra cost. In other words, if the price
differential between the standardized and differentiated product is too high, the
risk is that the company provides a greater level of uniqueness than the
customers are willing to pay for. 3. Risks of Focus: The competitive risks of focus
strategy are similar to those previously noted for cost leadership and
differentiation strategies, with the following additions: (a) Focus strategy is not
sustained if competitors imitate it. (b) The target segment may become
structurally unattractive. (i) if structure erodes. (ii) if demand disappears. (c)
Competitors may successfully focus on an even smaller segment of the market,
out focusing the focuser, or focus only on the most profitable slice of the
focuser’s chosen segment. (d) An industry-wide competitor may recognize the
attractiveness of the segment served by the focuser and mobilize its superior
resources to better serve the segment’s need. (e) Preferences and needs of the
narrow segment may become more similar to the broad market, reducing or
eliminating the advantage of focusing.
Stuck-in-the Middle
Professor Porter concluded his analysis of what he termed the main generic
strategies by suggesting that there are real dangers for the firm that engages in
severed generic strategies but fails to achieve any of them. He therefore
emphasized the importance of clear positioning i.e., either follow cost
leadership or differentiation. He called firms that do not have clear strategic
positioning and which make choices that include a few elements of different
strategies (i.e. some elements of differentiation and some elements of cost
leadership) as firms stuck–in-the-middle. He suggested that such firms do not
develop successful competitive advantage. But this concept of stuck-in-the–
middle has been an issue of debate. Several commentators, such as Kay,
Stopford and Baden-Fuller and Miller now reject this aspect of the analysis. They
point to several empirical examples of successful firms that have adopted more
than one generic strategy. As was pointed out above, there is now useful
empirical evidence that some companies do pursue differentiation and low-cost
strategies at the same time. They use their low costs to provide greater
differentiation and then reinvest the profits to lower their costs even further.
Example: Benetton (Italy), Toyota (Japan) and BMW (Germany)
Did u know? What are Hybrid Strategies? Hybrid strategies include a
combination of generic strategies, for example, simultaneous pursuing of both
low cost leadership and differentiation strategy. Research has found that such
hybrid strategies have contributed to competitive advantage in some situations.
For example, successful implementation of differentiation strategy may result in
increased sales volume and as sales volume increases costs drop due to
economies of scale. Thus successful differentiators can also be the lowest cost
producers in an industry. Porter (1994) later offered some clarification: “A
company cannot completely ignore quality and differentiation in the presence of
cost advantages, and vice-versa. Progress can be made against both types of
advantage simultaneously.” However, he notes that these are trade–offs
between the two and that companies should “maintain a clear commitment to
superiority in one of them”.
Critical Assessment of Generic Strategies
The generic business-level strategies discussed above are useful when we view
an industry as stable. However, in practice, business environment is dynamic
and successful firms need to adapt their strategies to the environmental
conditions. More (2001) notes that each generic strategy gives a company some
kind of defence against each of the five competitive forces.
Example: Cost leadership can raise barriers to cope with cost increases form
suppliers. Differentiation based on strong brand loyalty, can create an entry
barrier and also insulate the firm from rivalry. But there are risks in this.
Example: Consumer loyalty can falter if the price premium is perceived as too
high, and differentiation can be lost through imitation of a product by
competitors. The other risks have already been discussed in the previous
sections.
Comment on Porter’s Generic Strategies
Hendry ll and others have set out the problems of the logic and the empirical
evidence associated with generic strategies that limit its absolute value. We can
summarize them as follows:
Low-cost Leadership
1. If the option is to seek low-cost leadership, then how can more than one
company be the low-cost leader? It may be a contradiction in terms to have an
option of low-cost leadership. 2. Competitors also have the option to reduce
their costs in the long-term, so how can one company hope to maintain its
competitive advantage without risk? 3. Low-cost leadership should be
associated with cutting costs per unit of production. However, there are
limitations to the usefulness of this concept. 4. Low-cost leadership assumes
that technology is relatively predictable, if changing. Radical change can so alter
the cost positions of actual and potential competitors. 5. Cost reductions only
lead to competitive advantage when customers are able to make comparisons.
This means that the low-cost leader must also lead price reductions or
competitors will be able to catch up, even if this takes some years and is at
lower profit margins. But permanent price reductions by the cost leader may
have a damaging impact on the market positioning of its product or service that
will limit its usefulness.
Differentiation
1. Differentiated products are assumed to be higher priced. This is probably too
simplistic. The form of differentiation may not lend itself to higher prices. 2. The
company may have the objective of increasing its market share, in which case it
may use differentiation for this purpose and match the lower prices of
competitors. 3. Porter discusses differentiation as if the form this will take in any
market will be immediately obvious. The real problem for strategy options is not
to identify the need for differentiation but to work out what form this should
take that will be attractive to the customer. Generic strategy options throw no
light on this issue whatsoever. They simply make the dubious assumption that
once differentiation has been decided on, it is obvious how the product should
be differentiated.
Focus
1. The distinction between broad and narrow targets is sometimes unclear. Are
they distinguished by size of market? Or by customer type? If the distinction
between them is unclear then what benefit is served by focus? 2. For many
companies, it is certainly useful to recognise that it would be more
productive to pursue a niche strategy, away from the broad markets of the
market leaders. That is the easy part of the logic. The difficult part is to
identify which niche is likely to prove worthwhile. Generic strategies provide
no useful guidance on this at all. 3. As markets fragment and product life
cycles become shorter, the concept of broad targets may become
increasingly redundant.
Resource-based View
In an earlier unit, we explored the arguments supporting this view of
strategic analysis. They also apply to strategy options and suggest that
options based on the uniqueness of the company rather than the
characteristics of the industry are likely to prove more useful in developing
competitive strategy. The resource-based view does undermine much of
Porter’s approach.
Fast-moving Markets
In dynamic markets such as those driven by new internet technology, the
application of generic strategies will almost certainly miss major new market
opportunities. They cannot be identified by the generic strategies approach.
Faced with this veritable onslaught on generic strategies, it might be
thought that Professor Porter would gracefully concede that there might be
some weaknesses in the concept. However, Porter hit back in 1996 by
drawing a distinction between basic strategy and what he called ‘operational
effectiveness’ – the former is concerned with the key strategic decisions
facing any organisation while the latter are more concerned with such issues
as TQM, outsourcing, re-engineering and the like. He did not concede any
ground but rather extended his approach to explore how companies might
use market positioning within the concept of generic strategies. Given these
criticisms, it should not be concluded that the concept of generic strategies
has no merit. As part of a broader analysis, it can be a useful tool for
generating basic options in strategic analysis. It forces exploration of two
important aspects of business strategy: the role of cost reduction and the
use of differentiated products in relation to customers and competitors. But
it is only a starting point in the development of such options. When the
market is growing fast, it may provide no useful routes at all. More
generally, the whole approach takes a highly prescriptive view of strategic
action.
Business Tactics
Tactics should work with a firm’s strategy and they are the set of
requirements need for the plan to take place. A tactic is a device used by the
firm for meeting your goals set by your strategy. Strategy and tactics should
always be relative to one another because the tactics are the set of actions
needed to fulfill your strategy. 1. Tactics are the tools used to achieve goals.
2. Tactics include things like advertising and marketing. 3. Tactics are the
steps taken to achieve goals.
Brand Management
One tactic that almost every firm employs is strategic brand management.
Firms must find a way to communicate their products and corporate
philosophy to potential customers. Over time, a business can establish a
reputation that gives its brand name an advantage over the lesser known
competitors. Brand management includes good advertising and public
relations to present an image of that is consistent with the mission and
vision of the company. A company may also conduct research or poll the
general public to learn about how it is perceived and what changes are
necessary.
Diversification and Specialisation
Two different business strategies that deal with the scope of a company are
diversification and specialisation. A business can diversify by simply
expanding its products and services, such as adding a new division, or
through merging or acquiring another business. Specialisation is the
opposite of diversification. It refers to narrowing a business’s products to
focus on a more specific type of product. By focusing limited resources on a
smaller product line, a business may hope to improve the quality of its
remaining products, or simply divest itself of an unprofitable product.
Research and Development
Some firms use investments into research and development as a major
tactic to get ahead of competitors. This is particularly true in the
manufacturing field, where new product technologies can save money and
produce products that will excite consumers. Smaller businesses may lack
the money or in-house talent to invest directly in research and
development, but for larger companies the ability to innovate can be the
difference between success and failure.
Risk Management
Managing risk is a tactic that every firm employs in its own way. The simple
act of founding a business is itself a risk, since market trends and customer
behaviour can be difficult to predict. For an established business, managing
risk means making good decisions about where to invest funds and what
types of products to focus on.

Strategic Analysis and Choice

Introduction
Strategic analysis and choice is essentially a decision-making process. This
involves generating feasible alternatives, evaluating those alternatives and
choosing a specific course of action that could best enable the firm to
achieve its mission and objectives. Alternative strategies do not come from a
vacuum. They are derived from the firm’s present strategies keeping in view
the vision, mission, objectives and also the information gathered from
external and internal analysis. They are consistent with or built on past
strategies that have worked well. 9.1 Process for Strategic Choice
According to Glueck and Jauch, “strategic choice is the decision to select
from among the alternatives considered, the strategy which will best meet
the enterprise objectives.” This decision-making process consists of four
distinct steps: 1. Focusing on a few alternatives. 2. Considering the selection
factors. 3. Evaluating the alternatives. 4. Making the actual choice.
9.1.1 Focusing on a few Alternatives
Strategists never consider all feasible options that could benefit the firm
because there are innumerable options. So strategists should narrow down
the choice to a reasonable number of alternatives. But it is still difficult to
tell what that reasonable number is. For deciding on a reasonable number of
alternatives, we can make use of the following concepts: 1. Gap analysis 2.
Business Definition
Gap Analysis
In gap analysis, a company sets objectives for a future period of time, say
three to five years of time, and then works backward to find out where it
can reach at the present level of efforts. By analysing the difference
between the projected and desired performance, a performance gap could
be found as shown in the figure below.
Desired performance Gap Projected performance
Where the gap is narrow, stability strategies would seem to be a feasible
alternative. If the gap is large, expansion strategies are more suitable to be
considered. If the gap is large due to past and expected bad performance,
retrenchment strategies need to be considered.
Business Definition
In deciding on what would be a manageable number of alternatives, it is
advisable to start with the business definition. Business definition, as
discussed earlier, determines the scope of activities that can be undertaken
by a firm. It tries to answer three basic questions clearly: (i) who is being
satisfied? (ii) what is being satisfied? and (iii) how the need is being
satisfied?
Customer Needs
Alternative Technologies

Customer Groups

The three dimensions along which a business is defined help a strategist to

chalk out alternatives in a systematic manner.
Considering Selection Factors
The concepts of Gap Analysis and Business definition would help the
strategist to identify a few workable alternatives. These must be analysed
further against a set of selection criteria. Selection factors are the criteria
against which the alternative strategies are evaluated. These selection
factors consist of: 1. Objective factors 2. Subjective factors. 1. Objective
factors are based on analytical techniques such as BCG matrix, GE matrix
etc. and are hard facts or data used to facilitate a strategic choice. They are
also called rational, normative or prescriptive factors. 2. Subjective factors,
on the other hand, are based on one’s personal judgment or descriptive
factors such as consistency, feasibility, etc. which are discussed in the
previous unit.
Evaluating the Alternatives
After narrowing down the alternative strategies to a few alternatives, each
alternative has to be evaluated for its suitability to achieve the
organisational objectives. Evaluation of strategic alternatives basically
involves bringing together the results of the analysis carried out on the basis
of objective and subjective criteria.
Making the Actual Choice
An evaluation of alternative strategies leads to a clear assessment of which
alternative is most suitable to achieve the organisational goals. The final
step, therefore, is to make the actual choice. One or more strategies have to
be chosen for implementation. Besides the chosen strategies, some
contingency strategies should also be worked out to meet any eventualities.
In both the above two steps, a number of portfolio analyses like BCG, nine–
cell matrix etc., can be useful.
Strategic Analysis
Fred R David has developed a comprehensive strategy formulation and
analytical framework which is very useful for strategic analysis and choice.
We now discuss the framework briefly. This framework consists of three
stages: 1. Input stage 2. Matching stage 3. Decision stage
Input Stage
This stage summarises the basic input information needed to generate
alternative strategies. This basic input information relates to the
opportunities and threats, strengths and weaknesses as also the competitive
profile of the firm. This information can be obtained from the following
three matrices: 1. External Factor Evaluation Matrix (EFE Matrix) 2. Internal
Factor Evaluation Matrix (IFE Matrix) 3. Competitive Profile Matrix (CPM
Matrix) Making small decisions on the relative importance of external and
internal factors allows strategists to generate and evaluate alternative
strategies more effectively. Besides, good intuitive judgment is always
needed in determining appropriate weights and ratings.
Matching Stage
This stage involves the match between the internal resources and skills and
the external opportunities and threats of an organisation. The following
matrices can be used for the purpose: 1. SWOT Matrix (Already discussed in
unit 5) 2. SPACE Matrix 3. BCG matrix 4. Internal-External Matrix 5. Grand
Strategy Matrix
These tools use the information provided by the input stage and help the
strategists to match external opportunities and threats with internal
strengths and weaknesses.
Example: If a firm that has an internal weakness of insufficient capacity has
to tap an external opportunity caused by the exit of two major foreign
competitors from the industry; it may pursue horizontal integration by
buying competitor’s facilities.
Decision Stage
The matching techniques discussed above reveal feasible alternative
strategies, which need to be examined and appropriate strategies selected
for implementation. With the help of techniques like QSPM (Quantitative
Strategic Planning Model) the strategies can be prioritised so that the best
strategies could be chosen.
Industry Analysis
The basic purpose of industry analysis is to assess the strengths and
weaknesses of a firm relative to its competitors in the industry. It tries to
highlight the structural realities of particular industry and the extent of
competition within that industry. Through industry analysis, an organisation
can find whether the chosen field is attractive or not and assess its own
position within the industry.
Importance of Industry Analysis
Macro environment is common to all industries. It remotely affects the
industry. It is the structural realities of the specific industry and the nature
and intensity of competition unique to that industry that are of special
relevance to the firm in formulating strategy. ! Caution Industry structure,
industry boundaries and industry attractiveness are essential for conducting
an environmental survey. With industry and competition analysis, the firm
actually gets into the study of proximate environment. Factors that more
directly influence a firm’s prospects originate in the environment of its
industry. Good industry and competitive analysis is a pre-requisite to good
strategy making. A competently done analysis tells a clear, easily understood
story about the company’s environment needed for shrewdly matching
strategy to the company’s external situation. The importance of industry
analysis can thus be summarised as follows. 1. Industry – related factors
have a more direct impact on the firm than the general environment. 2. An
industry’s dominant economic characteristics are important because of their
implication for crafting strategy. 3. Industry analysis reveals industry
attractiveness and its prospects for growth. 4. It helps the firm to identify
such aspects as: (a) Current size of the industry (b) Product offerings
(c) Relative volumes (d) Performance of the industry in recent years (e)
Forces that determine competition in the industry. 5. It focuses attention on
the firm’s competitors. 6. It helps to determine key success factors. 7. A
thorough understanding of the industry provides a basis for thinking about
appropriate strategies that are open to the firm.
Corporate Portfolio Analysis
Many companies offer more than one product, and serve more than one
customer. They have a portfolio (i.e. a basket) of products. This is a good
strategy because a firm which is dependent on one product or customer
runs immense risk. Decisions on strategy, therefore, generally involve a
range of products in a range of markets. Portfolio analysis is an analytical
tool which views a corporation as a basket or portfolio of products or
business units to be managed for the best possible returns, and help a
corporate to build a multi-business strategy. When an organisation has a
number of products in its portfolio, it is quite likely that they will be in
different stages of development. Some will be relatively new and some
much older. Many organisations will not wish to risk having all their
products at the same stage of development. It is useful to have some
products with limited growth but producing profits steadily, and some
products with real growth potential but may still be in the introductory
stage. Indeed, the products that are earning steadily may be used to fund
the development of those that will provide the growth and profits in the
future. So, the key strategy is to produce a balanced portfolio of products,
some with low risk but dull growth and some with high-risk but great
potential for growth and profits. This is what we call portfolio analysis. The
aim of portfolio analysis is: 1. To analyse its current business portfolio and
decide which business should receive more or less investment. 2. To develop
growth strategies for adding new businesses to the portfolio. 3. To decide
which business should no longer be retained.
Did u know? Several leading consulting firms developed a number of
“portfolio matrices” during the 1970s and 1980s to achieve a better
understanding of the competitive position of overall portfolio of businesses,
to suggest strategic alternatives of each of the businesses and to identify
priorities for allocation of resources. The basis for many of these matrices
grew out of the BCG matrix developed by the Boston Consulting Group in
the 1970s.
Display Matrices
“Display matrices” are simple frameworks in which products or business
units are displayed as a series of investments from which top management
expects a profitable return. It charts and characterises different products or
businesses in the organisation’s portfolio of investments in such a way that
top management constantly juggles to ensure the best returns from them.
As already stated, key purpose of portfolio models is to assist in achieving a
balanced portfolio of businesses. This means that portfolio should consist of
those businesses whose profitability, growth, cash flow and risk elements
would complement each other, and add up to a satisfactory overall
corporate performance. Imbalance in portfolio, for example, could be
caused either by excessive cash generation with too few growth
opportunities or by insufficient cash generation to fund the growth
requirements of other businesses in the portfolio.
9.4.2 Balancing the Portfolio
Balancing the portfolio means that the different products or businesses in
the portfolio have to be balanced with respect to four basic aspects: 1.
Profitability: The main aim of the portfolio analysis is to maintain the overall
profitability of the corporation, even though some of the businesses are loss
making. This is ensured through balancing investments. 2. Cash flow: A
growing firm may be profitable, but it will also require additional cash
outflows for investment requirements. Mature businesses, though less
profitable, do not require much of investments though they may not be net
cash generators. Thus, portfolio analysis must balance different businesses,
which together must give a comfortable overall cash flow position in
harmony with the desired strategy of the company. 3. Growth: All
businesses or products go through the life cycle of introduction, growth,
maturity and decline stages. If a company depends on one product alone, it
would face problems in the declining stage of the product. It may be too late
to start a new product at this stage because of the time lag involved in
waiting till it achieves its growth rate. It is therefore better to match
different businesses at different stages in their life cycles, to achieve stability
which is sometimes called “extended corporate immortality”. Thus the
balancing of the portfolio implies that though individual businesses grow,
mature and decline, yet the company continues to grow. 4. Risk: Another
major objective of portfolio analysis is to reduce the risk due to economic
trends and market forces in a country. The aim is to put together diverse
businesses with different or even opposite market forces to ensure a stable
and smoother financial performance of the overall corporation.
Example: One solution could be to diversify internationally, since markets in
different countries are subject to different economic forces. Similarly, in the
context of domestic markets, businesses with different seasonal cycles could
be combined to ensure a more stable and smooth performance of the
overall corporation.
Portfolio and other Analytical Models
Innumerable analytical models have been developed by several leading
consulting firms. Some of the best-known models are: 1. BCG matrix 2. GE
Nine-cell Matrix 3. Hofer’s Product/Market Evolution Matrix 4. Directional
Policy Matrix 5. Arthur D Little’s Portfolio Matrix 6. Profit Impact of Market
Strategy (PIMS) Matrix 7. SPACE Matrix 8. Quantitative Strategic Planning
Matrix (QSPM)
BCG Matrix
The BCG matrix was developed by the Boston Consultancy group in 1970s. It
is also called the “Growth share matrix”. This is the most popular and the
simplest matrix to describe a corporation’s portfolio of businesses or
products. BCG matrix is based on the premise that majority of the
companies carry out multiple business activities in a number of different
product-market segments. Together, these different businesses form the
business portfolio of the company, which need to be balanced for overall
profitability of the company. To ensure long-term success, a company’s
business portfolio should consist of both high-growth products in need of
cash inputs and low-growth products that generate excess cash. The BCG
matrix helps to determine priorities in a product portfolio. Its basic purpose
is to invest where there is growth from which the firm can benefit, and
divest those businesses that have low market share and low growth
prospects. Each of the products or business units is plotted on a two-
dimensional matrix consisting of 1. Relative market share 2. Market growth
rate.
Relative Market Share: Relative market share is defined as the ratio of the
market share of the concerned product or business unit in the industry
divided by the share of the market leader. By this calculation, a relative
market share of 1.0 belongs to the market leader. For example, if market
share of 3 businesses A, B, C are Business Market share A - 10% B - 20% C -
60% A’s relative market share=10/60=1/6 B’s relative market share=20
/60=1/3 C’s relative market share=60/20=3 The relative market share
reflects the firm’s capacity to generate cash. It is assumed that if a business
unit enjoys high market share, its cash earnings would be correspondingly
higher and vice versa.
Market Growth Rate: It is the percentage of market growth, that is, the
percentage by which sales of a particular product or business unit have
increased. A high growth rate enables the company to expand its
operations. It makes it easier for the company to increase its market share
and provide the opportunities of profitable investment. The company may
plough back its earnings into the business and further increase the rate of
return on the investment. Additional cash will necessarily be required to
avail of the investment opportunities for growth. On the other hand, low
market growth rate indicates stagnation with little scope for expansion and
profitable investments may be risky to undertake. Increase in market share
in such a situation can be possible only by cutting into the competitor’s
market price.
Building the BCG Matrix
The stepwise procedure for building the BCG matrix is given below: 1. The
various activities of the company are classified into different business units
or SBUs 2. The growth rate of the market is determined and plotted on the
Y-axis. 3. The assets employed by the company in each of the business units
are compiled to determine the relative size of the business unit in relation to
the company. 4. The relative market share for different business units is
estimated and plotted on the Xaxis 5. The position of each business unit or
product is plotted on a matrix of market growth rate and relative market
share. The size of the business is represented by a circle with a diameter
corresponding to the assets invested in the business. The radius of the circle
is given by r = p .R2 where R represents total sales, P represents sales of the
business unit as a percentage of the total sales of the company. 6.
Depending on its location in the 2 × 2 matrix, a separate strategy has to be
developed for each of the units. It is important not to change the criteria
around in order to shift pet projects and products into more favourable
groups, thereby defeating the very purpose of the exercise.
Analysis of BCG Matrix
The BCG matrix reflects the contribution of the products or business units to
its cash flow. Based on this analysis, the products or business units are
classified as: 1. Stars 2. Cash cows 3. Question marks 4. Dogs
Stars (High Growth, High Market Share)
Stars are products that enjoy a relatively high market share in a strongly
growing market. They are (potentially) profitable and may grow further to
become an important product or category for the company. The firm should
focus on and invest in these products or business units. The general features
of stars are: 1. High growth rate means they need heavy investment 2. High
market share means they have economies of scale and generate large
amounts of cash 3. But they need more cash than they generate. The high
growth rate will mean that they will need heavy investment and will
therefore be cash users. Overall, the general strategy is to take cash from
the cash cows to fund stars. Cash may also be invested selectively in some
problem children (question marks) to turn them into stars. The other
problem children may be milked or even sold to provide funds elsewhere.
Notes Over the time, all growth may slow down and the stars may
eventually become cash cows. If they cannot hold market share, they may
even become dogs.
Cash Cows (Low Growth, High Market Share)
These are the product areas that have high relative market shares but exist
in low-growth markets. The business is mature and it is assumed that lower
levels of investment will be required. On this basis, it is therefore likely that
they will be able to generate both cash and profits. Such profits could then
be transferred to support the stars. The general features of cash cows are: 1.
They generate both cash and profits 2. The business is mature and needs
lower levels of investment 3. Profits are transferred to support
stars/question marks 4. The danger is that cash cows may become under-
supported and begin to lose their market. Although the market is no longer
growing, the cash cows may have a relatively high market share and bring in
healthy profits. No efforts or investments are necessary to maintain the
status quo. Cash cows may however ultimately become dogs if they lose the
market share.
Question Marks (High Growth, Low Market Share)
Question marks are also called problem children or wild cats. These are
products with low relative market shares in high-growth markets. The high
market growth means that considerable investment may still be required
and the low market share will mean that such products will have difficulty in
generating substantial cash. These businesses are called’ question marks
because the organisation must decide whether to strengthen them or to sell
them. The general features of question marks are: 1. Their cash needs are
high 2. But their cash generation is low 3. Organisation must decide whether
to strengthen them or sell them Although their market share is relatively
small, the market for question marks is growing rapidly. Investments to
create growth may yield big results in the future, though this is far from
certain. Further investigation into how and where to invest is advised.
Dogs (Low Growth, Low Market Share)
These are products that have low market shares in low-growth businesses.
These products will need low investment but they are unlikely to be major
profit earners. In practice, they may actually absorb cash required to hold
their position. They are often regarded as unattractive for the long term and
recommended for disposal. The general features of dogs are: 1. They are not
profit earners 2. They absorb cash 3. They are unattractive and often
recommended for disposal. Turnaround can be one of the strategies to
pursue because many dogs have bounced back and become viable and
profitable after asset and cost reduction. The suggested strategy is to drop
or divest the dogs when they are not profitable. If profitable, do not invest,
but make the best out of its current value. This may even mean selling the
division’s operations.
Strategic Implications
The BCG growth-share matrix links the industry growth characteristic with
the company's market share (i.e. competitive strength), and develops a
visual display of the company's market involvement, thereby indirectly
indicating current resource deployment. The underlying logic is that
investment is required for growth while maintaining or building market
share. But while doing so, a strong competitive business i.e. a business
having high market share operating in an industry with low growth rate will
provide surplus cash for deployment elsewhere in the corporation. Thus, in a
way, the BCG matrix can be regarded as a pictorial representation of the
sources and uses of funds statement. Market share is considered valuable
because it is a source of profits. Projects are the fruits of accumulated
experience giving rise to cost advantage. The model assumes that high
market growth of star businesses will ultimately slow down, and stars may
become cash cows, permitting the market leader to take cash out of them to
invest in other businesses. However, some of the underlying assumptions of
the BCG matrix may not hold good for some businesses.
Example: Some electronic appliances and the so-called fashion goods have
very short life-cycle, whereas staples like bread have very extended life-
cycles. The business may therefore not follow the typical behaviour pattern
assumed by the BCG matrix.
Ge Nine Cell Matrix
This matrix was developed in 1970s by the General Electric Company with
the assistance of the consulting firm, McKinsey & Co., USA. This is also called
GE Multifactor Portfolio matrix.
The GE matrix has been developed to overcome the obvious limitations of
BCG matrix. This matrix consists of nine cells (3 × 3) based on two key
variables: 1. Business strength; and 2. Industry attractiveness. The horizontal
axis represents “business strength” and the “vertical axis represents“,
“industry attractiveness”. The business strength is measured by considering
such factors as: 1. Relative market share 2. Profit margins 3. Ability to
compete on price and quality 4. Knowledge of customer and market 5.
Competitive strengths and weaknesses 6. Technological capacity 7. Calibre
of management Industry attractiveness is measured considering such factors
as: 1. Market size and growth rate 2. Industry profit margin 3. Competitive
intensity 4. Economies of scale 5. Technology 6. Social, environmental, legal
and human aspects The individual product-lines or business units are plotted
as circles. The area of each circle is proportionate to industry sales. The pie
within the circles represents the market share of the product line or
business unit. The nine cells of the GE matrix represent various degrees of
industry attractiveness (high, medium or low) and business strength (strong,
average and weak). After plotting each product line or business unit on the
nine cell matrix, strategic choices are made depending on their position in
the matrix.
The key strategies that emerge are briefly explained below. Business A
represents a product/market that has a high potential and deserves
expansion strategies through large investments. Business B has a strong
competitive position but has a product that is entering the shake-out stage
and, therefore, needs a cautious expansion strategy. Business C is probably a
‘dog’ while D represents a business which can be used for cash generation
that could be diverted to A and B. Business E is a potential loser and may be
considered for divestment. In this manner, the product/market evolution
matrix portrays a company’s corporate portfolio with a high level of
accuracy and completeness.
Directional Policy Matrix (DPM)
This matrix was developed by Shell Chemicals, UK. It uses two dimensions-
viz. “business sector prospects and the “company’s competitive
capabilities”. Business sectors prospects are divided into attractive, average
and unattractive; and company’s competitive capabilities into strong,
average and weak, Based on the two dimensions, businesses fall into Nine
quadrants. The strategy to be followed for businesses in each quadrant are
explained below.
Divestment
Both competitive capabilities and business prospects of the business units
are weak. Loss making units with uncertain cash flows fall in this quadrant.
Since the situation is not likely to improve in the near future, these
businesses should be divested. The resources released could be put to an
alternative use.
Phased Withdrawal
Here the SBU is in an average to weak competitive position in the low
growth unattractive business, with very little chance of generating enough
cash flows. Gradual withdrawal from such SBUs is the strategy to be
followed. The cash released can be invested in more profitable ventures.
Double or Quit
Though business prospects look attractive here the company’s competitive
capabilities are weak. Either invest more to exploit the prospects or, if not
possible, better “exit” from the SBU.
Phased Withdrawal
Already covered in previous page.
Custodial
Here both competitive capabilities and business prospects are unattractive
or average. Bear with the situation with a little bit of help from the other
product divisions or get out of the SBU so as to focus more on other
attractive businesses.
Try Harder
Here business prospects are attractive, but competitive capabilities are
average; strengthen their capabilities with infusion of additional resources.
Cash Generation
Here the SBU has strong competitive capabilities, but its business prospects
are unattractive. Its operations can be continued at least for generating cash
flows and profits. However, further investments cannot be made in view of
unattractive business prospects.
Growth
Here the SBU has strong competitive capabilities, but its business prospects
are average. This SBU requires additional infusion of funds. This would help
the SBU to grow.
Market Leadership
Here the SBU has strong capabilities, and its business prospects are also
attractive. It must receive top priority so that the SBU can retain its market
leadership.
Arthur D Little Portfolio Matrix (ADL)
Arthur D Little Company’s matrix links the stages of the product life cycle
with the business strength. On the vertical axis, businesses are classified
with respect to their business strength as weak, tenable, favoured, strong or
dominant. Along the horizontal axis, four steps in the product life cycle, i.e.
embryonic, growth, mature and decline are marked. The strategic approach
would naturally vary according to the position of the business with respect
to its business strength (competitive strength) and the stage in the product
life cycle. Thus, the strategy should be to invest in a business which is in
embryonic or growth stage provided it has favorable or strong business
strength. The “BUILD” strategy is recommended for such a business unit. But
“HOLD” strategy is suggested for businesses whose products are in maturity
stage even though it has favourable, strong or dominant business strength.
For business with products in the decline stage and having a strong or
dominant business strength, “HARVEST’ strategy is suggested. If the
business is in maturity stage, but having weak business strength, “DIVEST”
strategy is called for. This is so because any business having weak business
strength will have poor return on investment, and hence divestment
strategy will be the preferred strategy.
Profit Impact of Market Strategy (PIMS)
PIMS was invented by General Electric in the 1960s to examine which
strategic factors most influence cash flows and the investment needs and
success. PIMS model is based on analysis of data presented by companies to
derive general laws. Actually, the model uses statistical relationships derived
from the past experience of companies. Typically, the Strategic Planning
Institute develops an industry characteristic, using multidimensional cross
sectional regression studies of the profitability of more than 2000
companies. The industry characteristic is compared with performance in the
concerned company so as to find the clue to appropriate strategic
approaches. The model is characterized by scientific objectivity but it
involves analysis of relationship that is based on heterogeneity of business
and time periods. PIMS, of course, has certain inherent drawbacks. It
assumes that short-term profitability is the primary goal of the firm. The
analysis is based on the historical data and the model does not take note of
further changes in the company’s external environment. The model cannot
take account of internal-dependencies and potential synergy within
organisations. Each firm is examined in isolation.
SPACE Matrix
The Strategic Position and Action Evaluation (SPACE) matrix is another
important technique. It reveals which of the following strategies is most
appropriate for an organisation: 1. Aggressive strategies 2. Conservative
strategies 3. Defensive strategies 4. Competitive strategies
The axes of the space matrix represent two internal dimensions, namely,
financial strength and competitive advantage and two external dimensions,
namely, environmental stability and industry strengths, as shown in the
Figure 9.9. The directional vector of each profile indicates the type of
strategies to pursue: conservative, aggressive, defensive or competitive.
Aggressive Quadrant
When a firm’s directional vector falls in the “aggressive quadrant” of the
matrix. It is in an excellent position to use its internal strength to: 1. take
advantage of external opportunities 2. overcome internal weaknesses 3.
avoid or minimize external threats The firm can adopt any of the aggressive
growth strategies like market penetration, market development, product
development, backward and forward integration, horizontal integration,
concentric and conglomerate diversification or a combination strategy.
Conservative Quadrant
When a firm’s directional vector falls in the “conservative quadrant”, it
means the firm should stay close to its core competencies and not take
excessive risks. Conservative strategies include market penetration, market
development, product development and concentric diversification.
Defensive Quadrant
When the directional vector falls in the “defensive quadrant”, it suggests
that the firm should focus on rectifying internal weaknesses and external
threats, through defensive strategies. Defensive strategies or retrenchment
strategies include turnaround, divestiture, bankruptcy or liquidation.
Competitive Quadrant
When a directional vector falls in the “competitive quadrant”, the firm
should follow competitive strategies, which include backward, forward, and
horizontal integration, market penetration; market development, product
development, joint ventures and strategic alliances.
Quantitative Strategic Planning Matrix (QSPM)
The QSPM is a tool that allows strategists to evaluate alternative strategies
objectively, based on key internal and external success factors. Like other
analytical tools, QSPM requires good intuitive judgment. The six steps
required to develop a QSPM are: Step 1: Make a list of the firm’s external
opportunities/threats and internal strengths/ weaknesses. Step 2: Assign
weights to each key factor. Step 3: Identify alternative strategies that the
organisation wants to pursue. Step 4: Determine the attractiveness scores.
They are numerical values that indicate the relative attractiveness of each
strategy in a given set of strategies. Step 5: Compute the total attractiveness
scores, which are obtained by multiplying the weights by the attractiveness
scores in each row. Step 6: Compute the sum total attractiveness scores in
each strategy column of QPSM. The sum total attractiveness scores reveal
which strategy is most attractive.
Contingency Strategies
Strategic choice is made on the basis of certain assumptions and conditions.
If the conditions change drastically, the chosen strategies may have to be
discarded altogether. If they are not too radical, the strategies may have to
be modified suitably. But changes do not occur in a sequential order, nor do
they give any impending warnings. They surface suddenly leaving deep scars
on the faces of managers—if they are unprepared. To be on the safe side,
strategists always keep contingency strategies ready. Such contingency
strategies are formulated in advance to take care of unknown events and
unexpected challengers. As rightly summarised by Peter Drucker, successful
managers do not wait for future. They make the future through their
proactive planning and advanced preparation. They introduce original action
by removing present difficulties, anticipate future problems, change the
goals to suit internal and external changes, experiment with creative ideas
and take initiative, attempt to shape the future and create a more desirable
environment. The contingencies could come in the form of a labour strike, a
downturn in the economy or an overnight change in government policy.
Once such scenarios are identified managers could come out with
alternative strategies for the firm. Firms using this kind of strategy identify
certain trigger points to alert management that a contingency strategy
should be pressed into service. When alternative plans are put in place, mid-
course corrections could be carried out in a smooth way.

Strategy Implementation
Introduction
Strategy implementation is the process of putting organisation’s various
strategies into action by setting annual or short-term objectives, allocating
resources, developing programmes, policies, structures, functional
strategies etc. Even the best strategic plan will be useless unless it is
implemented properly. The strategy implementation is, therefore, the most
difficult element ofthe strategic management process. This is so because
there has to be a “fit” between the strategy and the organisation.
Activating Strategies
There is no guarantee that a well designed strategy is likely to be approved
and implemented automatically. The strategic leader must, therefore,
defend the strategy from every angle, communicate how the strategy when
implemented would benefit the whole organisation and secure the
wholehearted support of employees working at various levels. To keep
things on track, he can list out priorities, programme implementation
process, budgets, etc. on paper so that nothing is left to chance. While giving
a concrete shape to the strategy, he should also take note of regulatory
mechanisms that govern business activity and see that everything is in
order. Some of the important things to be kept in mind are listed below: 1.
Formation of a company: This must be in line with provisions of the
Companies Act, 1956, covering issues such as formation of a company, its
registration, obtaining suitable licenses before commencing operations,
raising funds from various sources in accordance with the provisions of SEBI
Act, 1992. 2. Operations of a company: The company must compete in a fair
way and earn the profits through legally blessed routes only observing the
(a) provisions of competition law; (b) Import/export restrictions, (c) FERA
regulations (FEMA regulations, 2000); (d) Patent, trademark, copyright
(Indian Patents Act 1995, The Trade and Merchandise Marks Act 1958, The
Copyrights Act 1957 etc.) stipulations; (e) Labour Laws (regarding
employment of women, children, payment of wages, providing welfare
amenities, keeping healthy industrial relations etc.); (f) environmental
protection (The Environment Protection Act 1986), (g) pollution control
requirements; (h) consumer protection measures etc. 3. Winding up
operations: Even when the company decides to get out of a
venture/business, the rules of the game need to be followed scrupulously
(whether in offering golden handshake to employees or asking all the
employees to quit in one go). After the institutionalisation of strategy in the
above manner, action plans could be formulated. These are basically
functional level strategies undertaken at the departmental level and usually
deal with operational aspects of a strategy. The action plans, however, must
try to translate the overall strategic plan in letter and spirit without any
deviations. Issues like who will do what, what kind of support is required at
various stages, what kind of privities have to be fixed while implementing
active plans, how does a particular active plan contribute to the broad
objectives of the strategy etc. must also be carefully looked into. Once the
action plans are ready, the strategist must resolve issues relating to
allocation of scarce resources over the entire organisation.
Nature of Strategy Implementation
A successful strategy formulation does not guarantee successful strategy
implementation. It affects an organisation from top to bottom; it affects all
divisional and functional areas of business. It requires the right alignment
between the strategy and various activities, processes within the
organisation. The complexities in the task of implementation arise from a
number of organisational adjustments that are required over an extended
period of time and the need to match them all to the strategy. Key people
need to be added or reassigned, resources have to be mobilised and
allocated, functional strategies and policies are to be designed,
organisational structure may have to be changed, a strategy- supportive
culture may have to be developed, reward and incentive plans are to be
revised and if necessary, restructuring, re-engineering and redesigning
becomes imperative. In short, the difficulties in affecting the organisational
adjustments arise from the tasks associated with change. The success of
strategy implementation, to a large extent, therefore, depends on the way
the task of change management is carried out. Though both the formulation
and implementation are inextricably linked, they can be distinguished as
follows (Fred R. David):
Strategy formulation Strategy implementation 1. Positioning forces before
the action. 2. Focuses on effectiveness. 3. Primarily an intellectual process.
4. Requires good intuitive and analytical skills. 5. Requires coordination
among few individuals Managing forces during the action. Focuses on
efficiency. Primarily an operational process. Requires motivation and
leadership skills. Requires coordination among many individuals.
Implementation moves responsibility from the corporate level to
operational levels. This shift in responsibility from strategists to divisional,
functional and operational managers may cause implementation problems
especially when strategic decisions come as a surprise to middle and lower-
level managers. Therefore, strategic decisions must be communicated and
understood throughout the organisation. It is also essential that divisional
and functional managers be involved as much as possible in strategy
formulation activities and, likewise strategists be involved in strategy
implementation activities.
Barriers and Issues in Strategy Implementation
Management must keep in mind the following key issues that arise in
implementing strategy and how empowering systems might relate to such
issues. 1. Time Horizon: Such systems have both long-term and short-term
dimensions. For example, rewards like productivity bonus should be based
on quantitative measures of performance related to the short-term. On the
other hand, it is appropriate to link long-term rewards with qualitative
measures and a few relevant quantitative measures. 2. Risk Considerations:
When risk-prone behaviour is desired, qualitative measures of performance
may be more beneficial, for example, rewards like bonus or stock options.
This is because quantitative measures may lead to risk-averse behaviour to
avoid failure rather than risk prone behaviour to achieve results.
3. Bases of Individual Rewards: Reward systems should be linked to an
individual’s capability, effort and job satisfaction. If rewards are geared to
only one aspect, it may have a negative effect on performance in other
aspects. 4. Bases of Group Rewards: An important issue in reward systems is
whether to have individual rewards or group rewards. Rewarding individuals
for effort and performance may be difficult unless the organisational
structure permits individual performance to be isolated from that of others.
Thus, for example, with respect to managerial contribution to corporate
performance, individual rewards may be beneficial and appropriate because
individual’s contribution is relatively independent of others. On the other
hand, if individual’s contributions are relatively interdependent, it would be
appropriate to adopt schemes based on group performance. Again,
rewarding individuals may be necessary where entrepreneurial or creative
behaviours are sought to be encouraged. On the contrary, if greater co-
operation and team work is sought to be rewarded, group reward schemes
would be more desirable. 5. Corporate and SBU Perspectives: In multi-
divisional organisations, reward systems with a balanced approach towards
corporate interests and the interests of the Strategic Business Units (SBUs)
should be designed, where business units have greater autonomy and
independence. Likewise, if the SBUs are not likely to influence corporate
performance, unit-based reward schemes would be more beneficial. But in
the case of directors and general managers, placed in the units, who have
dual responsibility of achieving unit as well as corporate objectives, due care
must be taken to design balanced empowering environment. Model for
Strategy Implementation
According to Steiner and Miner, “the implementation of policies and
strategies is concerned with the design and management of systems to
achieve the best integration of people, structures, processes and resources
in reaching organisational purposes”. Implementation of strategy therefore
involves a number of interrelated decisions, choices, and a broad range of
activities. It requires an integration of people, structures, processes etc. Mc
Kinsey’s 7-S model is good at capturing the importance of all these elements
in the implementation of strategy. The purpose of the model is to show the
interrelationship between different elements of an organisation, and the
need to bring them together.
7-S Framework
This framework basically deals with organisational change. The main thrust
of change is not connected only with the organisation’s strategy. It has to be
understood by the complex relationships that exist between strategy,
structure, systems, style, staff, skills and super-ordinate goals. These are
called the 7-S of the organisation. The 7-S framework suggests that there are
several factors that influence an organisation’s ability to change. The
variables involved are interconnected so that altering one element may well
impact other connected elements. Hence, significant changes cannot be
achieved in any variable without making changes in all the variables. There is
no starting point or implied hierarchy in the shape of the diagram, so it is
not obvious which of the 7 factors would be the driving force in changing a
particular organisation at a particular point of time. All the elements are
equally important. The critical variables of change could be different across
organisations. They could also be different in the same organisation.
Fundamentally, the framework makes the point that effective strategy
implementation is more than an individual subject, but is coupled with skills,
styles, structures, systems, staff and super-ordinate goals. Super-ordinate
Goals: “Super-ordinate goals” mean the “goals of a higher order which
express the values, vision and mission that senior management brings to the
organisation”. These can be considered as the fundamental ideas around
which a business is built. Hence, they represent the main values and
aspirations of an organisation. They are the broad notions of future
direction. They can be considered to be equivalent to “organisational
purposes”. For example, the super-ordinate goal of IBM has been “customer
service”, while that of HewlettPackard was “innovative people at all levels in
the organisation”. When properly articulated, super-ordinate goals can
provide a strong basis for organisation’s stability in a rapidly changing
environment by providing a basic meaning to people working for the
organisation.
Structure: “Structure” means the organisational structure of the company.
The design of organisational structure is a critical task of top management.
Organisational structure refers to the relatively more durable organisational
arrangements and relationships. It prescribes the formal relationships
among various positions and activities, communication channels, roles to be
performed by various members of an organisation. Organisational structure
performs four major functions: 1. It reduces external uncertainty. 2. It
reduces internal uncertainty due to variable, unpredictable and random
human behaviour. 3. It provides a wide variety of devices like
departmentalization, specialization, division of labour, delegation of
authority etc. 4. It helps in coordinating various activities of the organisation
and focus on its objectives. Organisational structure must be designed in
accordance with the needs of the strategy. According to Chandler, structure
must follow strategy. In other words, changes in strategy must be followed
by changes in organisational structure. According to McKinsey, the
relationship between strategy and structure, though important, rarely
provides unique structural solutions. Quite often the main problem in
strategy relates to its execution. Systems: “Systems” mean the procedures
that make the organisation work. They include the rules, regulations and
procedures, both formal and informal, that complement the organisational
structure. Systems include production planning and control systems, cost
accounting procedures, capital budgeting systems, performance evaluation
systems etc. Often, changes in strategy require changes in systems. Style:
“Style” means the way the company conducts its business. Top managers in
organisations can use style to bring about change. Organisations differ from
each other in their “styles” of working. The style of an organisation,
according to the McKinsey framework, becomes evident through the
patterns of actions taken by the top management team over a period of
time. Thus, an important part of managing change is establishing and
nurturing a good ‘fit’ between culture and strategy. Staff: “Staff” refers to
the pool of people who need to be developed, challenged and encouraged.
It should be ensured that the staff has the potential to contribute to the
achievement of goals. Three important aspects about staff are: 1. Selecting
meritorious people for specific organisational positions. 2. Developing
abilities and skills in them, to take up challenging assignments. 3. Motivating
them to give their best to achieve strategic goals. Skills: “Skills” are the most
crucial attributes or capabilities of an organisation. Skills in the 7-S
framework can be considered as an equivalent of “distinctive
competencies”. For example, Hindustan Lever is known for its marketing
skills, TELCO for its engineering skills, IBM for its customer service, Du Pont
for its research and development skills and Sony for its new product
development skills. Skills are developed over a period of time and are a
result of a number of factors. Hence, to implement a new strategy, it is
necessary to build new skills. Strategy: “Strategy” is the long-term direction
and scope of an organisation. It is the route that the company has chosen to
achieve competitive success.
Alignment of the Framework
Successful implementation of strategy requires the right alignment of
different elements within the organisation. The Mc Kinsey consultants call
strategy, structure, and systems as the “hard elements” of the organisation
and the other 4 Ss i.e. style, skills, staff and super-ordinate goals as the “soft
elements” of the organisation. The hard elements are more tangible and
definite, and so they are often the ones that gain the greater attention,
however, the soft elements are equally important, even if they are less easy
to measure, assess and plan.
Merits of 7-S Framework
The virtue of 7-S framework is that it highlights some important
organisational interconnections and their role in affecting change. It
illustrates, in a simple way, that the real task of implementing strategy is one
of bringing all 7-Ss into harmony. When the 7-S are in good alignment, an
organisation is poised and energized to execute strategy to the best of its
ability. Secondly, the Mc Kinsey’s model provides a convenient checklist for
judging whether an organisation is ripe for implementing strategy. It also
helps in diagnosing why the results emanating from the implementation of a
strategy fall short of expectations and therefore, what new ‘fits’ would be
required. Thirdly, the framework also helps strategists in evaluating their
organisations along each of the seven dimensions, thereby identifying
organisational strengths and weaknesses. Finally, Mc Kinsey’s 7-S framework
is a powerful expository tool. However, it should be remembered that
changing the organisational elements is not an easy task. But that should not
stop one from striving to bring about change.
Limitations of 7-S Framework
The 7-S framework shows that relationships exist and it provides some
limited clues as to what constitutes more effective strategy implementation.
Beyond this, however, it is not precise. For example, the framework says
little about the how and why of interrelationships. The model is therefore
poor at explaining the logic and methodology in developing the links
between the elements. A further weakness is that the framework does not
highlight or emphasize other areas that have subsequently been identified
as being important for strategy. Those areas are: 1. Innovation 2. Knowledge
3. Customer-driven service 4. Quality The above elements are equally
important for any organisation to succeed. In spite of the above limitations,
the 7-S framework provides a way of examining the organisation and what
contributes to its success. It is good at capturing the importance of the links
between the various elements. That is why Mc Kinsey consultants used it as
a starting point for their search for more detailed interconnections.
Resource Allocation
Most strategies need resources to be allocated to them if they are to be
implemented successfully. Let us examine some special circumstances that
may affect the allocation of resources. Resource allocation deals with the
procurement and commitment of financial, physical and human resources to
strategic tasks for achievement of organisational objectives. This involves
the process of providing resources to particular business units, divisions,
functions etc for the purpose of implementing strategies. All organisations
have at least five types of resources: 1. Physical Resources 2. Financial
Resources 3. Human Resources 4. Technological Resources 5. Intellectual
Resources These resources may already exist in the organisation or may
have to be acquired. Resource allocation decisions are very critical in that
they set the operative strategy for the firm. Resource allocation decisions
about how much to invest in which areas of business reinforce the strategy
and commit the organisation to the chosen strategy.
Importance of Resource Allocation
A company’s ability to acquire sufficient resources needed to support new
strategic initiatives and steer them to the appropriate organisational units
has a major impact on the strategy implementation process. Too little
funding arising from constrained financial resources or from sluggish
management action slows progress and impedes the efforts of
organisational units to execute their part of the strategic plan effectively. At
the same time, too much funding wastes organisational resources and
reduces financial performance. Both these extremes emphasize the need for
managers to be careful about resource allocation. Resource allocation
becomes a critically important exercise when there are major shifts from the
past strategies in terms of product/market scope. For example, if the firm’s
strategy is expansion in one line, withdrawal from another and stability in
the rest of the products, then greater resources will have to flow to the first
and lesser to the second and the third. Similarly, if the strategy is to develop
competitive edge through product development, greater resources will have
to be committed to R&D. Resource allocation is a powerful means of
communicating the strategy in the organisation as it gives the signals to all
concerned. It will demonstrate what strategy is really in operation. Resource
allocation decisions should be taken judiciously because using a formula
approach (i.e. allocating funds as a percentage of sales or profits), may be
inappropriate and counterproductive. Care should be taken to see that the
resources are not allocated or withdrawn because of easy availability or
paucity.
Example: Cutting down R&D budget in view of sudden fall of profitability
should be avoided as such expenditure may be most critical for developing
future competitive advantage. The resource allocation decisions are
generally linked to the objectives. For example, decision about dividend
payment is linked to the ability of the company to attract capital. How to
distribute the expected profits among investors, employees and the
company’s own needs is an important resource allocation decision from the
viewpoint of long-term implications of the strategy.
Broadly, there are three approaches to resource allocation: 1. Top-down
approach 2. Bottom-up approach 3. Strategic budgeting 1. Top-Down
approach: In this approach, resources are allocated through a process of
segregation down to the operating levels. The Board of Directors, the
Managing Director or members of top management typically decide the
requirements of each subunit and distribute resources accordingly. 2.
Bottom-up approach: In this approach, resources are distributed through a
process of aggregation from the operating level. The operating levels work
out the requirements of each subunit and the resources are allocated
accordingly. 3. Strategic budgeting: This approach is a mix of the above two
approaches, and involves an interactive form of decision-making between
different levels of management.
Managing Resource Conflict
The common approach to resource allocation is through budgetary system.
There are however, many other tools, which can be used for this purpose.
Some of the important tools used for resource allocation are discussed
below:
BCG Matrix
The BCG matrix, which is generally used for portfolio analysis, can also be
used as a guideline for resource allocation. The surplus resources from “cash
cows” can be reallocated to “stars” or “question marks”. In so far as
businesses categorized as “dogs” are concerned, with low growth and low
market share, they may not need any thrust, and resources can be gradually
withdrawn from such businesses and invested in other promising
businesses. The BCG matrix is a useful tool because it impresses upon a
portfolio approach to resource allocation. It helps in averting over-
investment in any particular type of business and underinvestment in
promising businesses from the long-term perspective. Despite the utility of
the BCG matrix, however, it should be used with care and only as a
guideline. It does not provide a concrete measure for making a finer choice,
particularly among the businesses of the same nature.
PLC-based Budgeting
Resource allocation can also be linked to different stages of a Product Life
Cycle (PLC). A product in introductory and growth stages may require more
resources than a product in mature and decline stages.
Zero-based Budgeting (ZBB)
The key differences between ZBB and traditional budgeting is that ZBB
requires managers to justify their budget requests in detail from the scratch,
without relying on the previous budget allocations. Therefore, instead of
taking the last year’s budget as the base for projecting the future
allocations, ZBB forces the managers to review the objectives and
operations afresh andjustify the budget requests. ZBB is, therefore, a type of
budget that requires managers to rejustify the past objectives, projects and
budgets and set priorities for the future. It amounts to recalculation of all
organisational activities to see which should be eliminated or funded at a
reduced or increased level.
Capital Budgeting
Capital Budgeting techniques can be used for long-term commitment of
resources, such as capital investments in mergers, acquisitions, joint
ventures, and setting up of new plants etc. Various techniques like payback
period, net present value, internal rate of return, etc. can be used to find
which investments would earn maximum returns.
Operating Budgets
Operating budgets are necessary for more routine resource allocation for
conducting operations. There are two types of systems: 1. Fixed budgeting
system: This system commits resources based on activity levels. In this type
of budgeting, there may be a tendency to retain the committed resources
even if the activity levels are not being achieved, thus depriving other
divisions of the resources, which have a better potential. 2. Flexible
budgeting system: This system provides for transfer of funds from one unit
to another if a fall is expected in actual activity level in a particular unit, thus
ensuring better resource utilization. But this system has the disadvantage of
encouraging non-seriousness about budgetary allocations.
What are the different types of routine budgets? 1. Operating budget
specifies materials, labour, overheads and other costs. 2. Financial budget
projects cash receipts and disbursements. 3. Sales budget specifies sales
revenues and selling, distribution and marketing costs. 4. Expenses budget
projects expenses not carried out in other budgets.
Criteria for Resource Allocation Process
In large, diversified companies, the corporate office plays a major role in
allocating resources among various strategies proposed by its operating
units or divisions. In many cases, product groups, business units or
functional areas may bid for funds to support their strategic proposals.
There are three criteria which can be used when allocating resources. 1.
Contribution towards fulfillment of organisational objectives: At the centre
of the organisation, the resource allocation task is to steer resources away
from areas that are poor at delivering the organisation’s objectives and
towards those that are good at delivering the organisation’s objectives. 2.
Support of key strategies: In many cases, the problem with resource
allocation is that the requests for funds usually exceed the funds normally
available. Thus, there needs to be some further selection mechanism
beyond the delivery of the organisation’s mission and objectives. This
second criterion relates to two aspects of resource analysis: (a) Support of
core competencies: Resources should develop and enhance core
competencies which, in turn, help achieve competitive advantage. (b)
Enhancement of value chain activities: Resources should assist particularly
those activities of the value chain which help the organisation to achieve low
cost or differentiation and thereby enhance and sustain competitive
advantage of the firm. (c) Risk-acceptance level of the organisation: Clearly,
if the risk is higher, there is a lower likelihood that the strategy will be
successful. Some organisations will be more comfortable with accepting
higher levels of risk than others. So, the criterion in this case needs to be
considered in relation to the risk-acceptance level of the organisation. !
Caution Sometimes, special circumstances may cause an organisation to
amend the criteria for allocation of resources, Those considerations are: 1.
When major strategic changes are unlikely: In this situation, resources may
be allocated on the basis of a formula, e.g. marketing funds might be
allocated as a percentage of sales based on past history and experience. The
major difficulty with such an approach is its arbitrary nature. It may,
however, be a useful shortcut. 2. When major strategic changes are
predicted: In this situation, additional resources may be required to respond
to an expected competitive initiative. In this case, special negotiation with
the corporate office is required for resourcing rather than the adherence to
dogmatic criteria. 3. When resources are shared between divisions: In this
situation, the corporate office may seek to enhance its role beyond that of
resource allocator. It may need to establish the degree of collaboration and,
where the areas disagree, impose a solution.
10.5.4 Factors affecting Resource Allocation
Resource allocation may not necessarily be a purely ‘rational’ decision-
making process. It is also a behavioural and political process involving people
who may be motivated by different objectives. Some of the major factors
affecting resource allocation are discussed below: 1. Objectives of the
organisation: People motivated by different objectives exercise their
influence over the funding of projects. There are two types of objectives.
Official (explicit) objectives and operative (implicit) objectives. Allocations of
resources are more guided by implicit objectives than explicit objectives. The
formal and informal organisations also influence the perception of which
projects should be chosen for funding. 2. Powerful units: Sometimes,
powerful SBU heads secure larger allocation of funds than their ‘fair share’.
3. Dominant strategists: The preferences of dominant strategists like the
CEO, Directors, SBU heads, etc. are reflected in the way resources are
allocated. The divisional and departmental heads know that such
preferences matter and try to present their demands in line with them. 4.
Internal politics: Resources are often construed as power, and those units,
which manage to secure substantial resources, are perceived as more
powerful than others. Internal politics within the organisation to secure
more and more resources, affect the process of resource allocation.
4. External influences: Apart from internal politics, external influences like government
policy, demands of shareholders, financial institutions, community and others, also
affect resource allocation. For example, legal requirements may require additional
finances in labour welfare and social security, pollution control, safety equipments and
energy conservation. The shareholders may expect higher dividends, and resources have
to be directed to them. Financial institutions may impose restrictions or require
companies to invest in technology up-gradation and R&D. Similarly, the discharge of
social responsibilities by the firm requires allocation of sufficient funds. Thus, external
influences affect the process of resource allocation. To sum up, we can say that the
‘behavioural’ and ‘political’ considerations are inevitable in a typical organisation, but
one must ensure that they do not dominate the ‘rational’ considerations in allocation of
resources. Otherwise, irrational allocation of funds may jeopardize effective
implementation of the strategy and lead to problems in achieving the desired strategic
change.
Difficulties in Resource Allocation
The resource allocation process can sometimes become fairly complex, and may even
create several difficulties to the strategists. Some of the difficulties that can create
problems are: 1. Scarcity of Resources: Resources are hard to find. Even if finance is
available, the cost of capital could be a constraint. Non-availability of highly skilled
people could be another problem. 2. Restrictions on Generating Resources: Within
organisations, the new units which have greater potential for growth in the future, may
not be able to generate resources in the short run. Allocation of resources on par with
existing SBUs, divisions and departments through the usual budgeting process, will put
them at a disadvantage. 3. Bloated Demands: Unit managers may sometimes submit
inflated or overstated demands for funds to guard against any budget-cuts. This subverts
the decision process. 4. Negative Attitude: Units, which do not get the desired
allocations, may develop a negative attitude towards the corporate managers. They may
work at cross purposes, which may obstruct the implementation of the intended
strategy. 5. Budget Battles: The actual allocation of funds to any unit has a major effect
on the work environment of the unit and the career of the manager concerned. If a
manager loses the ‘budget battle’, his subordinates feel that the manager has failed
them, and may not cooperate with him. 6. Budgetary Process: The budgetary process
itself can lead to problems if it is not tied to the strategic plans of the firm. If top
management fails to communicate the shifts in the strategic plans and the lower levels
are unaware of the shifts, any intended strategy is unlikely to succeed . 7. New SBUs:
The budgetary process is tied to the way units and divisions are arranged
organisationally. New SBUs can be at a disadvantage if they are unaware of the
intricacies of the budget procedures used in their organisations. To avoid the above
difficulties, strategists should pay maximum attention to resource allocation, and
‘prioritize’ budgeting allocations in the initial stages taking overall objectives into
account
Many ‘budget battles’ can be avoided if targets, resource sharing, prioritization, midway
revisions etc. are decided in an atmosphere of cooperation and participation, especially
at departmental and divisional levels. Allocating resources to specific divisions and
departments alone does not mean successful implementation of the strategy. If major
strategic shifts are occurring, the organisation structure is likely to change along with the
way resources are allocated.
Structural Implementation
Introduction
To implement its strategy successfully a firm must have an appropriate organisational
structure. An organisational structure is a set of formal tasks and reporting relationships
which provide a framework for control and coordination within the organisation. The
visual representation of an organisational structure is called organisational chart. The
purpose of an organisational structure is to coordinate and integrate the efforts of
employees at all levels – corporate, business and functional levels – so that they work
together to achieve the specific set of strategies.
Organisational structure is a tool that managers use to harness resources for getting
things done. It is defined as: 1. The set of formal tasks assigned to individuals and
departments. 2. Formal reporting relationships, including lines of authority,
responsibility, number of hierarchical levels and span of manager’s control. 3. The design
of systems to ensure effective coordination of employees across departments. The set of
formal tasks and formal relationships provides a framework for vertical control of the
organisation. There are two different aspects of the organisational structure: 1.
Superstructure 2. Infrastructure 1. Superstructure: This is the highly visible part of the
organisational structure. This depicts how people are grouped into different divisions,
departments and sections and how they are related to each other. The superstructure
also indicates the principal ways in which the organisational operations are integrated
and coordinated. By showing their levels, it indicates which groups have relatively more
strategic importance. 2. Infrastructure: This is comparatively less visible part of the
organisational structure. It is concerned with issues like delegation of authority,
specialization, communication, information systems and procedures. The infrastructure
enables the organisation to engage in a number of disparate activities and still keep
them coordinated. The design of organisational structure is a critical task of the top
management of an organisation. It is the skeleton of the whole organisation. It provides
relatively more durable organisational arrangements and relationships. Thus an
organisational structure fulfils two fundamental and opposing requirements: 1. Division
of labour into various tasks 2. Coordination of these tasks to accomplish effective control
of an organisation. However, as an organisation grows and becomes more complex, it
needs appropriate changes in its design.
Basic Principles of Organisational Structure
There are several important principles of organisation, which need to be understood
before building an organisation’s structure. They are: 1. Hierarchy: Hierarchy defines
who reports to whom and the span of control. Span of control is the number of people
reporting to a supervisor. It determines how closely a supervisor can monitor
subordinates. Tall structures have many levels in the hierarchy and a narrow span.
Communication up and down the hierarchy becomes difficult. Flat structures are
horizontally dispersed having fewer levels in the hierarchy. The trend in recent years has
been towards flat structures allowing for wider spans of control as a way to facilitate
better communication and co-ordination. 2. Chain of Command: The chain of command
is an unbroken line of authority that links all persons in an organisation and shows who
reports to whom. It has two underlying principles. Unity of command means that each
employee is held accountable to only one supervisor. The scalar principle means a
clearly defined line of authority in the organisation. Authority and responsibility for
different tasks should be distinct. All persons in theorganisation should know to whom
they report as well as the successive management levels all the way to the top. 3.
Specialization: Specialization, sometimes called division of labour, is the degree to which
organisational tasks are subdivided into separate jobs. Work can be performed more
efficiently if employees are allowed to specialize. This is because an employee in each
department performs only the tasks relevant to his specialized function. Despite the
apparent advantages of specialization, many organisations are moving away from this
principle. With too much specialization, employees are isolated performing only a single,
boring job. Many companies are, therefore, enlarging jobs to provide greater challenges
or assigning tasks to teams so that employees can rotate among several jobs performed
by the team. 4. Authority, Responsibility and Delegation: Authority is the formal and
legitimate right of a manager to make decisions, issue orders, allocate resources and
command obedience. Responsibility is the duty to perform the task or activity an
employee has been assigned. Accountability means that the people with authority and
responsibility are subject to reporting and justifying task outcomes to those above them
in the chain of command.
Notes Delegation is the process managers use to transfer authority and responsibility to
positions below them in the hierarchy. The principle is that there must be parity
between authority and responsibility. It means managers can be made accountable for
results only when they are delegated with sufficient authority commensurate with the
responsibility. Most organisations today encourage managers to delegate authority to
the lowest possible level to provide maximum flexibility to meet customer needs and
adapt to the environment. Managers are encouraged to delegate authority, although
they often find it difficult. 5. Centralization and Decentralization: Centralization and
decentralization refer to the level at which decisions are made. Centralization means
that decision-making is done at the top levels of the organisation. Decentralization
means that decision making is pushed down to the lower levels in the organisation.
Centralization helps in better coordination, but too much centralization results in slow
response and demotivates people at lower levels. Decentralization relieves the burden
on top managers, makes greater use of worker’s skills, ensures decision making by well-
informed people and permits rapid response to external changes. But it does not mean
that every organisation should decentralize. Managers should diagnose the
organisational situation and select the decision-making level. 6. Formalization:
Formalization is the extent to which written documentation is used to direct and control
employees. Written documentation includes rules, regulations, policies, procedures, job
descriptions etc. They are inexpensive ways to coordinate activities. These documents
complement the organisational structure by providing descriptions of tasks,
responsibilities and authority. The use of rules and regulations is a part of bureaucratic
model of organisation. ! Caution Although written documentation is intended to be
rational and helpful to the organisation, it often creates “red tape” that causes more
problems than it solves. Narrowly defined job descriptions, for example, tend to limit the
creativity, flexibility and rapid responses needed in today’s knowledge-based
organisations. Many organisations today are reducing formalization and bureaucracy 7.
Departmentalization: Another fundamental characteristic of organisational structure is
departmentalization, which means grouping positions into departments and
departments into the total organisation.
Did u know? What is organisational design? The process of designing an organisation’s
structure to match with its situation is called organisational design. The best design for
an organisation is determined by many aspects of its situation, viz. the size, technology,
environment and strategy. Managers make choices about how to use the chain of
command to group people together to perform their work. The functional, divisional and
matrix structures are traditional approaches that rely on the chain of command to define
departmental groupings and reporting relationships along the hierarchy. Newer
approaches such as teams, networks and virtual organisations have emerged to meet
changing organisational needs in an increasingly global, knowledge based business
environment. Relation between Strategy and Structure
Strategic management posits that the strategy and the organisation structure of the firm
must match. In a classic study of large U.S. corporations such as DuPont, General
Motors, Sears, and Standard Oil, Alfred Chandler concluded that structure follows
strategy. This means that changesin corporate strategy lead to changes in organisational
structure. He also concluded that organisations follow a pattern of development from
one kind of structural arrangement to another as they expand. According to Chandler,
these structural changes occur because the old structure was not suitable. Chandler
therefore proposed the following as the sequence of what occurs: 1. New strategy is
created 2. New administrative problems emerge 3. Economic performance declines 4.
New appropriate structure is invented 5. Profit returns to its previous level Chandler
found that in their early years, corporations such as DuPont and General Motors had a
centralized functional structure, which was suitable for a limited range of products. As
they added new product lines and created their own distribution networks, the old
structure became too complex. Therefore, they shifted to a decentralized structure with
several autonomous divisions. 11.3Improving Effectiveness of Traditional Organisational
Structures
In the changed times and situations, traditional organisational structure is crumbling
under the weight of ever-increasing regulations that drive greater accountability and
transparency. Smart companies are on the forefront of building new and improved
structures that support and enhance this new compliance environment, and best
practices are emerging. The best structure for an organisation is determined by many
aspects of its situation – the technology, size, environment and strategy. Frequently,
structures evolve as the organisation moves from one stage of growth to the next. The
external and internal environments affect structural design in different ways.
Example: 1. An organisation which faces a stable environment may use functional
structure. 2. A volatile environment demands a rapid-response capability, flexibility and
quick decision-making. Such demands can be better met by the creation of a divisional
or a matrix type of structure. According to Mintzberg, there are four main characteristics
of the environment that influence structure.

Type of Environment
Range Consequences for Organizational Structure Rate of change Static Dynamic As
rate of change increases, the organization needs to be kept more flexible Degree of
complexity Simple Complex Greater complexity needs more formal co-ordination
Market complexity Involved in single market involved in diversified markets As markets
become more diversified, divisionalisation becomes advisable Competitive situation
Passive Hostile Greater hostility probably needs the protection of greater centralisation
Rate of Change
When the organisation operates in a more dynamic environment, it needs to be able to
respond quickly to the rapid changes that occur. In static environments, change is slow
and predictable and does not require great sensitivity on the part of the organisation. In
dynamic environments, the organisation structure and its people need to be flexible,
well co-ordinated and able to respond quickly to outside influences. The dynamic
environment implies a more flexible, organic structure.
Degree of Complexity
Some environments can be easily monitored from a few key data movements. Others
are highly complex, with many influences that interact in complex ways. One method of
simplifying the complexity is to decentralize decisions in that particular area. The
complex environment will usually benefit from a decentralized structure.
Market Complexity
Some organisations sell a single product or variations on one product. Others sell ranges
of products that are essentially diverse. As markets become more diverse, there is
usually a need to divisionalise the organisation as long as synergy or economies of scale
are unaffected.
Competitive Situations
With friendly rivals, there is no great need to seek the protection of the centre. In deeply
hostile environments, however, extra resources and even legal protection may be
needed; these are usually more readily provided by central headquarters. As markets
become more hostile, the organisation usually needs to be more centralized. The
effectiveness of traditional organisational structures can be improved by regular revision
and development of the skill sets held by the employees. If change is not handled
correctly, it can be more devastating than ever before. The management has to identify
those employees that are high performers and have the potential to reflect, discover,
assess, and act. The management has to instill the new focus of connecting the heads,
hearts, and hands of people in the organisation. On big problem may be the problem of
strategy implementation. The management as well as the team heads must learn how to
motivate others and build an efficient team. Structural changes are essential to better
position the organisation as compared with its competitors, focus on client needs and
move forward in development and sustainability programmes. Sometimes
reorganisation maybe required to provide a framework for longerterm commitment to
organisational objectives and vision. The management should encourage the entire
organisation in general and sub units in particular to put work teams in place to ensure
that each sector integrates staff and services into a cohesive, focused business unit.
Consultation and participation should be made part and parcel for the programme for
the successful development and implementation of organisational goals and objectives.
Each work team should be asked to develop an effective process for discussion of major
challenges and opportunities facing the organisation, if possible, over the next decade.
Updated strategic plans should be then developed. These plans should form the
framework for focusing organisational resources on the most strategic areas by using a
staged approach. Updated plansshould then be implemented by work teams at all levels
of management. Work-team objectives must include: 1. Involving all levels of staff in
consultation 2. Designing and implementing a process to develop-goals and objectives
for the organisation and unit; a strategic process for the next five to ten years 3. Defining
and clarifying organisational structures and identifying functions, customers, and service
delivery models 4. Identifying changes and staged approaches needed to move from the
current situation to what will be required over the next three to five years 5. Identifying
and recommending priorities for policy and programme development 6. Incorporating
goals for expenditure reduction, service quality improvement, workforce management,
accountability, technology, and business process improvement. 11.4 Types of
Organisational Structures
There are seven basic types of organisational structures: 1. Simple structure 2.
Functional structure 3. Divisional structure 4. SBU structure 5. Matrix structure 6.
Network structure 7. Virtual structure Let us understand each of them briefly. 1. Simple
Structure: In this structure, the owner-manager controls all activities and makes all the
decisions. This structure may be appropriate for small and young organisations.
Coordination of tasks is done through direct supervision. There is little specialization of
tasks, few rules and regulations and communication is informal.
Owner-Manager

Employees

Example: Small businesses like mom and pop stores, small restaurants etc have a simple
organisation structure. 2. Functional Structure: Functional structures are grouped based
on major functions performed. Each function is led by a functional specialist. Functional
structures are formed in organisations in which there is a single or closely related
products or services Example: Small business with one product line could start making
the components it requires for production of its products instead of procuring it from an
external organization. It is not only beneficial for organization but also for employees'
faiths. 3. Divisional Structure: Divisional structures are used by diversified organisations.
In a divisional structure, divisions are created as self-contained units with separate
functional departments for each division. A division may be organised around
geographic area, products, customers etc. The head office determines corporate
strategy, allocates resources among divisions and appoints and rewards the heads of
these divisions. Each division is responsible for product, market and financial objectives
for the division as well as their division’s contribution to overall corporate performance.
Example: Divisions can be categorized from different points of view. One might make
distinctions on a geographical basis (a US division and an EU division, for example) or on
product/service basis (different products for different customers: households or
companies). In another example, an automobile company with a divisional structure
might have one division for SUVs, another division for subcompact cars, and another
division for sedans. 4. Matrix Structure: The matrix structure is, in effect, a combination
of functional and divisional structures. In this structure, there are functional managers
and product or project managers. Employees report to one functional manager and to
one or more project managers. For example, a product group wants to develop a new
product. For this project it obtains personnel from functional departments like Finance,
Production, Marketing, HR, Engineering etc. These personnel work under the product
manager for the duration of the project. Thus, they are responsible for two managers –
the product manager and the manager of their functional area.
While functional heads have vertical control over the functional managers, the product
or project heads have horizontal control over them. Thus, matrix structure provides a
dual reporting. The dual lines of authority makes the matrix structure unique. The matrix
structure has been used successfully by companies such as IBM, Unilever, Ford Motor
Company etc.
Example: Starbucks is one of the numerous large organizations that successfully
developed the matrix structure supporting their focused strategy. Its design combines
functional and product based divisions, with employees reporting to two heads. Creating
a team spirit, the company empowers employees to make their own decisions and train
them to develop both hard and soft skills. That makes Starbucks one of the best at
customer service. 5. Network Structure: A network organisation outsources or
subcontracts many of its major functions to separate companies and coordinates their
activities from a small headquarters. Rather than being housed under one roof, activities
like design, manufacturing, marketing, distribution etc. are outsourced to separate
organisations that are connected electronically to the central office.
Example:Athletic shoe companies like Nike and Reebok have outsourced manufacturing
of their shoes to countries such as China and Indonesia, where labour costs are low.
What Nike or Reebok does is the design and marketing of shoes. Networked computer
systems and the Internet enable the organisation to exchange data and information. The
organisation may be viewed as a hub surrounded by a network of outside specialists. As
may be seen from the above, the core organisation is only a shell with a small
headquarters acting as a broker connected to supplier, design, manufacturing etc.
organisations.
Example: Hennes and Mauritz( H&M), a famous Swedish retail clothing company, is
outsourcing its clothing to a network of 700 suppliers, more than two-thirds of which are
based in low-cost Asian countries. Not owning any factories, H&M can be more flexible
than many other retailers in lowering its costs, which aligns with its low-cost strategy.
The potential management opportunities offered by recent advances in complex
networks theory have been demonstrated including applications to product design and
development, and innovation problem in markets and industries. 6. Virtual Organisation:
This is an extension of the network structure. In this approach, independent
organisations form temporary alliances to exploit specific opportunities, then disband
when their objectives are met. The term virtual means “being in effect but not actually
so”. The virtual organisations consist of a network of independent companies –
suppliers, customers or even competitors – linked together to share skills, costs, markets
and rewards. The members of a virtual organisation pool and share the knowledge and
expertise of each other. Creating Agile Virtual Organisation: New ways to manage
change and to compete in a rapidly changing business world are emerging under the
concept of the agile enterprise. Agile organisations can be almost any size or type, but
what distinguishes them from their lumbering traditional business counterparts is the
ability to read and to react quickly. They can also be virtual, meaning they can
reconfigure themselves quickly and temporarily in response to a challenge, which gives
them agility, but then dissolve or transmute themselves into something else. Virtual
organisations have been existing throughout history, from the whaling companies of the
19th century through the film studios of the 20th. The virtual organisations have few
full-time employees or usually temporarily hire outside specialists to complete a specific
project, such as a new software application. These people do not become a part of the
organisation, but join together as a separate entity for a specific purpose. Sometimes
companies use a virtual approach to harness the talents and energies of the best people
for a particular job, rather than trying to develop those capabilities in-house. Now that
serious management tools are beginning to appear, the agile virtual enterprise is no
longer just a theoretical possibility. When an organisation uses a virtual approach, the
virtual group typically has full authority to make decisions and take actions within
certain predetermined boundaries and goals. Most virtual organisations use electronic
media for sharing of information and data. Some organisations have redesigned offices
to provide temporary space for virtual workers to meet or work on-site.
Advantages and Disadvantages: Advantages (a) It can draw on expertise worldwide. (b) It
is highly flexible and responsive. (c) It reduces overhead costs. Disadvantages (a) Lack of
control because the boundaries of a virtual organisation are weak and ambiguous. (b)
Virtual teams place new demands on managers, who have to work with new people,
new ideas and new problems. (c) Virtual organisation poses communication difficulties,
and managers may lose motivation.
Example: Computer organizations that have successfully implemented forms of this new
structure include Apple Computer and Sun Microsystems. When Apple Computer linked
its easy-to-use software with Sony's manufacturing skills in miniaturization, Apple was
able to get its product to market quickly and gain a market share in the notebook
segment of the PC industry. Sun Microsystems has been considered another highly
decentralized organization comprised of independently operating companies. Sun
positions information systems as a top priority, trying to achieve faster and better
communication. With numerous "SunTeams," members operate across time, space, and
organizations to address critical business issues. Sun managers identify key customer
issues and then form teams with the critical skills and knowledge needed to address the
issue. This team might include sales people, marketing personnel, finance, and
operations from various places around the globe; customers and suppliers may become
episodic members as necessary. Weekly meetings may take place via conference calls.
Critical to the team's success is the selection of talent from the organization, defining a
clear purpose for the team's efforts, and establishing communication links among the
team members. Sun has been working on further development of technologies such as
EDI (Electronic Data Interchange) and RFID (Radio Frequency Identification technology).
Both EDI and RFID will impact information exchange globally and across numerous
industries.
Modular Organisation
The organisational capabilities to interact with others have been greatly improved as a
result of modern information and communications technologies: Nowadays a company
can maintain more relationships with more companies at much lower costs than before.
The increased business networks require modularization of the products, the processes
and the firm in order to be effective. Modular products tend to favor a modular
organisation form, as the various units involved in the design process of products with
interchangeable components are loosely coupled, operate autonomously, and can be
easily reconfigured. The concept of modularity can be applied not only to complex
product system design, but also to business system interpretation and design. A modular
organisation is one in which different functional components are separated from one
another, a technique adopted from software engineering. A modular organisation is in
contrast to a composite organisation in which there is no separation between functions.
Modular organisation is also distinct from hierarchical organisation. Modular
organisation is chiefly concerned with the horizontal design of a system. Modularity
allows components to be produced separately and used interchangeably in different
configurations without compromising system integrity. In modular organisations,
coordination tasks are delegated to individual modules (functions, teams, etc.) and
coherence is achieved easily through fully specified interfaces. In addition to the
reduction of managerial complexity, this structural, hierarchical function-based
decomposition results in the localization of the impacts of environmental disturbances
within specific modules, increasing the immunity and adaptability of the overall
organisation in a turbulent environment.
Towards Boundaryless Structures
Traditional companies with boundaries, rules, and extensive plans are at a supreme
disadvantage in today' globalized world, where technology changes daily and the value
chain commands changes of its own. In a traditional company where people are
categorized into neatly defined positions with their job descriptions filed in triplicate in
the Human Resources department, the way a company plans its business can cause it to
sink despite planning because the boundaries can mean lost opportunities, being
overtaken by the competition, loss of revenues, or watching its niche slip away because
of a new technology, an alteration in the global marketplace, or simply a failure to
market its product effectively. When changes occur, they happen too quickly for its
organisational processes to meet them; as a result, opportunities are quickly lost,
problem situations take over rapidly, and before the company can respond
appropriately, it has lost customers, opportunities, and market share. Although that
company likely has more than enough talent within its walls to offset all of those
disasters, the talent is never put to use, because employees are constrained to operate
within the confines of their job descriptions, where only the prescribed talents can be
put to good use. The answer to this dilemma lies in boundaryless organisations. A
boundaryless organisation is a contemporary approach to organisational design. It is an
organisation that is not defined by, or limited to, the horizontal, vertical, or external
boundaries imposed by a predefined structure. This term was coined by former GE
chairman Jack Welch because he wanted to eliminate vertical and horizontal boundaries
within GE and break down external barriers between the company and its customers
and suppliers. A big question is if all companies become boundaryless? Yes, but not all
companies can do it today, because an organisation has to be completely compatible
with such a radical methodology. Upper level management has to embrace it
wholeheartedly, knowing that their status will essentially vanish in the new organisation,
and employees have to be retrained to understand how to operate under the new
paradigm. Companies should already be in the process of getting to that point, however,
and those that do it first will have the greatest advantage. Structures for Strategies
To understand the logic behind this approach to the development of organisational
structures, it is helpful to look at the historical background. As already mentioned, prior
to the early 1960s, the US strategist Alfred Chandler studied how some leading US
corporations had developed their strategies in the first half of the twentieth century. He
then drew some major conclusions from this empirical evidence, the foremost one being
that the organisation first needed to develop its strategy and, after this, to devise the
organisation structure that delivered that strategy. Chandler drew a clear distinction
between devising a strategy and implementing it. He defined strategy as: “The
determination of the basic long-term goals and objective of an enterprise, and the
adoption of courses of action and the allocation of resources necessary for carrying out
these goals”. The task of developing the strategy took place at the corporate and
business levels of the organisation. The job of implementing it then fell to the various
functional areas. Chandler’s research suggested that, once a strategy had been
developed, it was necessary to consider the structure needed to carry it out. A new
strategy might require extra resources, or new personnel or equipment which would
alter the work of the enterprise.
Changes in Business Environment and Social Values
Early twentieth century Early twenty- first century Uneducated workers, typically just
moved from agricultural work into the cities Knowledge of simple engineering and
technology The new science of management recognized simple cause-and-effect
relationship Growing, newly industrializing markets and suppliers Sharp distinctions
between management and workers Better educated, computer- literate, skilled
Complex, computer-driven, large-scale Multifaceted and complex nature of
management now partially understood Mix of some mature, cyclical markets and
some high-growth, newtechnology markets and suppliers Greater overlap between
management and workers in some industrialized countries To understand why it is no
longer appropriate to develop an organisation structure after deciding a strategy, the
earlier theory needs to be placed in its historic strategic context. Since Chandler’s
research in the early twentieth century, the environment has changed substantially. The
workplace itself, the relationship between workers and managers, and the skills of
employees have all altered substantially. Old organisational structures embedded in past
understandings may therefore be suspect. We can summarize how the environment has
changed from the early twentieth century to early twenty-first century.
Strategy and Structure are Interlinked
According to modern strategists, strategy and structure are interlinked. It may not be
optimal for an organisation to develop its structure after it has developed its strategy.
The relationship is more complex in two respects: 1. Strategy and the structure
associated with it may need to develop at the same time in an experimental way : As the
strategy develops, so does the structure. The organisation learns to adapt to its changing
environment and to its changing resources, especially if such change is radical. 2. If the
strategy process is emergent, then learning and experimentation involved may need a
more open and less formal organisation structure. Managing the Complexity of Strategic
Change
Quinn suggests that strategic change may need to proceed incrementally, i.e. in small
stages. He called the process “logical incrementalism”. The clear implication is that it
may not be possible to define the final organisation structure, which may also need to
evolve as the strategy moves forward incrementally. He recognizes the importance of
informal organisation structures in achieving agreement to strategy shifts. If the
argument is correct, it will be evident that any idea of a single, final organisation
structure – after deciding on a defined strategy – is dubious.
Criticism of the Strategy – First, Structure- Afterwards Process
1. Structures may be too rigid, hierarchical and bureaucratic to cope with the newer
social values and rapidly changing environment. 2. The type of structure is just as
important as the business area in developing the organisation’s strategy. It is the
structure that will restrict, guide and form the strategy. 3. Value chain configurations
that favour cost cutting or, alternatively, new market opportunities may also alter the
organisation required. 4. The complexity of strategic change needs to be managed,
implying that more complex organisational considerations will be involved. Simple
configurations such as a move from a functional to a divisional structure are only a
starting point in the process. 5. The role of top and middle management in the
formulation of strategy may also need to be reassessed: Chandler’s view that strategy is
decided by the top leadership alone has been challenged. Particularly for new,
innovative strategies, middle management and the organisation’s culture and structure
may be important. The work of the leader in empowering middle management may
require a new approach – the organic style of leadership.
The Concept of ‘Strategic Fit’
Although it may not be possible to define which comes first, there is a need to ensure
that strategy and structure are consistent with each other. For example, Pepsi Co
reorganised its North American business to ensure that its strengths in the growing non-
carbonated drinks market could be exploited across its full range of drinks. For an
organisation to be economically effective, there needs to be a matching process
between the organisation’s strategy and its structure. This is the concept of strategic fit.
In essence, organisations need to adopt an internally consistent set of practices in order
to undertake the proposed strategy effectively. It should be said that such practices will
involve more than the organisation’s structure. They will also cover such areas as reward
systems, information systems and processes, culture, leadership styles, etc. There is
strong empirical evidence, both from Chandler and Senge, that there does need to be a
degree of strategic fit between the strategy and the organisation structure. Although the
environment is changing all the time, organisations may only change slowly and not
keep pace with external change, which can often be much faster – for example, the
introduction of digital technology. It follows that it is unlikely that there will be a perfect
fit between the organisation’s strategy and its structure. There is some evidence that a
minimal degree of fit is needed for an organisation to survive. It has also been suggested
that, if the fit is ensured early during the strategic development process, then higher
economic performance may result. However, as the environment changes, the strategic
fit will also need to change.

Behavioural Implementation
Introduction
Successful strategy formulation does not at all guarantee successful strategy
implementation. It is always more difficult to actually carry out something than to say
you are going to do it. Strategy implementation requires support, discipline, motivation
and hard work from all managers and employees. Managers should pay careful attention
to a number of key issues while executing the strategies. Chief among them are how the
organisation should be structured to put its strategy into effect and how such variables
as leadership, power and organisational culture should be managed to enable
employees to work together while implementing the firm’s strategic plans.
Organisations in stable, predictable environments often become relatively tall, with
many hierarchical levels and narrow spans of control. On the other hand, companies in
dynamic, rapidly changing environments usually adopt flat structures with few
hierarchical levels and wide spans of control. 12.1 Stakeholders and Strategy
A firm’s stakeholders are the individuals, groups, or other organisations that are affected
by and also affect the firm’s decisions and actions. Depending on the specific firm,
stakeholders may include government, employees, shareholders, suppliers, distributors,
the media and even the community in which the firm is located among many others. 1.
When it comes to corporate mission values stakeholders will maximise the value for all
stakeholders, as opposed to shareholders who only maximise the value for themselves.
2. Stakeholders also play a role in the decision making process in a business. Although
since employees and customers are included in being stakeholders they too are
considered when it comes to decision making. 3. When it comes to accountability it does
not just come down to being accountable to themselves. Accountability lies with the
customer, suppliers, government, community and employee stakeholders.
Stakeholder Management
An organisation needs to have an effective stakeholder management system in place,
which provides a great support in achieving its strategic objectives. It interprets and
influences both the external and internal environments and creates positive
relationships with stakeholders through the appropriate management of their
expectations and agreed objectives. Stakeholder Management is a process and control
that must be planned and guided by underlying principles. Stakeholder Management,
within business or projects, prepares a strategy that utilises information or intelligence
collected during the following common processes: 1. Stakeholder Identification: identify
the parties, either internal or external to organisation, that are affected by the business.
For this purpose, a stakeholder map can be used. 2. Stakeholder Analysis: identify and
acknowledge stakeholder’s needs, concerns, wants, authority, common relationships,
interfaces, and put this information in line within the Stakeholder Matrix. 3. Stakeholder
Matrix: position the stakeholders on a matrix based on their level of influence, impact or
enhancement they may provide to the business or its projects. 4. Stakeholder
engagement: engaging stakeholders does not seek to develop the project/ business
requirements, solution or problem creation, or establishing roles and responsibilities.
The process focuses on knowing and understanding each other, at theExecutive level. It
gives an opportunity to discuss and agree expectations of communication and, primarily,
agree a set of Values and Principles that all stakeholders will abide by. 5. Communicating
Information: expectations are established and agreed for the manner in which
communications are managed between stakeholders - who receives communications,
when, how and to what level of detail. Protocols may be established including security
and confidentiality classifications.
Notes An organisation can follow these basic tips to manage their stakeholders
effectively: 1. The organisation must prioritise business and stakeholders’ needs. In
order to feel like the organisation is still yours without offending or losing big
stakeholders that contribute money to keep your company in business, the organisation
needs to think strategically and balance out business needs and stakeholders’ needs.
This means that they have to capture business processes and link them to projects
software and capabilities. They will also need to modify their prioritisation as their
understanding of the application and stakeholder needs change. They also need to take
into consideration the customer needs as well by involving them in the project. 2. The
organisation should develop the growth activities around stakeholder needs. By
leveraging certain developments or user center designs, an organisation can accept the
fact that stakeholder needs will change over time. As you business changes so will the
needs of the stakeholders and they will need to also meet their changing needs. 3. The
organisation should understand the available assets. By understanding what assets are
available to the business, they can also balance asset reuse with stakeholders needs.
Some examples of business assets would be legacy applications, reusable components,
etc. 12.2 Strategic Leadership
Leadership is the art and process of influencing people so that they will strive willingly
and enthusiastically towards achievement of the organisation’s purpose. Specific styles
of leadership are often associated with specific approaches to the crafting and execution
of strategies. The organisation’s purpose and strategy do not just drop out of a process
of discussion, but are actively directed by an individual with strategic vision, whom we
call “strategic leader”. Strategic leadership establishes the firm’s direction by developing
and communicating a vision of the future and inspiring organisation members to move
in that direction. Unlike managerial leadership which is generally concerned with the
short-term day-to-day activities, strategic leadership is concerned with determining the
firm’s strategy, direction, aligning the firm’s strategy with its culture, modeling and
communicating high ethical standards, and initiating changes in the firm’s strategy when
necessary. The most successful leadership is not just to define the vision and mission of
an organisation in a cold, abstract manner but to communicate trust, enthusiasm and
commitment to strategy.
Example: Bill Gates of Microsoft, Akio Morita of Sony, Jack Welch of General Electric,
Gianni Agnelli of Fiat, Narayana Murthy of Infosys, are all examples of strategic leaders
who have guided and shaped the direction of their companies. It is rightly said:
“Visionary leadership inspires the impossible: fiction becomes truth”. Strategic
leadership thus enhances prospects for the organisation’s long-term success, while at
the same time maintaining its short-term financial stability.
Role of a Strategic Leadership
Leaders play a central role in performing six critical and interdependent activities in
implementation of strategies: 1. Clarifying strategic intent 2. Setting the direction 3.
Building an organisation 4. Shaping organisation culture 5. Creating a learning
organisation 6. Instilling ethical behaviour1. Clarifying strategic intent: Leaders motivate
employees to embrace change by setting forth a clear vision of where the business’s
strategy needs to take the organisation. 2. Setting the Direction: Leaders set the
direction and scope of the organisation through formulating appropriate corporate and
business strategies. 3. Building the organisation: Since leaders are attempting to
embrace change, they are often required to rebuild their organisation to align it with the
ever – changing environment and needs of the strategy. And such an effort often
involves overcoming resistance to change and addressing problems like the following:
(a) Ensuring a common understanding about organisational priorities (b) Clarifying
responsibilities among managers and organisational units (c) Empowering managers and
pushing authority lower in the organisation (d) Uncovering and remedying problems in
coordination and communication across the organisation (e) Gaining personal
commitment from managers to a shared vision (f) Keeping closely connected with
“what’s going on in the organisation”. 4. Shaping organisational culture: Leaders play a
key role in developing and sustaining a strategy supportive culture. Leaders know well
that the values and beliefs shared throughout their organisation will shape how the
work of the organisation is done. And when attempting to embrace accelerated change,
reshaping their organisation’s culture is an activity that occupies considerable time for
most leaders. 5. Creating a learning organisation: Leaders must also play a central role in
creating a learning organisation. Learning organisation is one that quickly adapts to
change. The five elements central to a learning organisation are: (a) Inspiring and
motivating people with a mission or purpose (b) Empowering people at all levels
throughout the organisation (c) Accumulating and sharing internal knowledge (d)
Gathering external information (e) Challenging the status quo to stimulate creativity 6.
Instilling ethical behaviour: Ethics may be defined as a system of right and wrong.
Business ethics is the application of general ethical standards to commercial enterprises.
A leader plays a central role in instilling ethical behaviour in the organisation. The ethical
orientation of a leader is generally considered to be a key factor in promoting ethical
behaviour among employees. Leaders who exhibit high ethical standards become role
models for others in the organisation and raise its overall level of ethical behaviour. In
essence, ethical behaviour must start with the leader before the employees can be
expected to perform accordingly.
 Leadership Approaches
Research has found that some leadership approaches are more effective than others for
bringing about change in organisation. Three types of leadership that can have a
substantial impact are transactional, transformational and charismatic leadership. These
types of leadership are briefly explained below: 1. Transactional Leadership:
Transactional leaders clarify the role and task requirements of subordinates, initiate
structure, provide appropriate rewards, and try to be considerate to and meet the social
needs of subordinates. The transactional leader’s ability to satisfy subordinates may
improve productivity. Transactional leaders excel at management functions. They are
hardworking, tolerant, and fair minded. They take pride in keeping things running
smoothly and efficiently. Transactional leaders often stress the impersonal aspects of
performance, such as plans, schedules and budgets. They have a sense of commitment
to the organisation and conform to organisational norms and values. In short,
transactional leaders use the authority of their office to exchange rewards such as pay
and status for employees and generally seek to enhance an organisation’s performance
steadily, but not dramatically. In other words, transactional leadership is important to all
organisations, but leading change requires a different approach, viz. transformational
leadership. 2. Transformational Leadership: Transformational leaders have a special
ability to bring about innovation and change. They encourage the followers to question
the status quo. They have the ability to lead change in the organisation’s mission,
strategy, structure and culture as well as promote innovation in products and
technologies. Transformational leaders do not rely solely on tangible rules and
incentives to control specific transactions with followers. They focus on intangible
qualities such as vision, shared values, and ideas to build relationships and find common
ground to enlist in the change process 3. Charismatic and Visionary Leadership:
Charismatic leadership goes beyond transactional and transformational leadership.
Charisma is a “fire that ignites followers’ energy and commitment, producing results
above and beyond the call of duty”. The charismatic leader has the ability to inspire and
motivate people to do more than what they would normally do, despite obstacles and
personal sacrifice. Followers transcend their own selfinterests for the sake of the leader.
Charismatic leaders are often skilled in the art of visionary leadership. A vision is an
attractive, ideal future that is credible yet not readily attainable. Visionary leaders see
beyond current realities and help followers believe in a brighter future. They speak to
the hearts of their followers, letting them be part of something bigger than themselves.
Thus, visionary leaders have a strong vision for the future and can motivate others to
help realise it. They have an emotional impact on subordinates because they strongly
believe in the vision and can communicate it to others in a way that makes the vision
real, personal and meaningful to others. When charismatic and visionary leaders
respond to organisational problems, they can have a powerful, positive influence on
organisational performance.
Corporate Culture and Strategic Management
A company’s culture is manifested in the values and business principles that
management preaches and practices.
Example: Culture is manifested in: 1. Corporate stories 2. Attitudes and behaviours of
employees 3. Core values 4. Organisation’s politics 5. Approaches to people
management and problem solving 6. Relationships with stakeholders; and 7.
Atmosphere that permeates its work environment An organisation’s culture is similar to
an individual’s personality. Just as an individual’s personality influences the behaviour of
an individual, the shared assumptions (beliefs and values) among a firm’s members
influence the opinions and actions within that firm. Quite often, the elements of
company culture originate with a founder or other early influential leader who
articulates the values, beliefs and principles to which the company should adhere. These
elements then get incorporated into company policies, a creed or value statement,
strategiesand operating practices. Over time, these values and practices become shared
by company employees and managers. Culture is thus perpetuated as: 1. New leaders
act to reinforce them 2. New employees are encouraged to adopt and follow them 3.
Stories of people and events told and retold 4. Organisation members are honoured and
rewarded for displaying cultural norms.
Influence of Culture on Behaviour
An organisation’s culture can exert a powerful influence on the behaviour of all
employees. It can, therefore, strongly affect a company’s ability to adopt new strategies.
A problem for a strong culture is that a change in mission, objectives, strategies or
policies is not likely to be successful if it is in opposition to the culture of the company.
Corporate culture has a strong tendency to resist change because its very existence
often rests on preserving stable relationships and patterns of behaviour.
Example: The male-dominated Japanese centered corporate culture of the giant
Mitsubishi Corporation created problems for the company when it implemented its
growth strategy in North America. The alleged sexual harassment of its female
employees by male supervisors resulted in lawsuits and a boycott of the company’s
automobiles by women activists. There is no one best corporate culture. An optimal
culture is one that best supports the mission and strategy of the company. This means
that, like structure and leadership, corporate culture should support the strategy. Unless
strategy is in complete agreement with the culture, any significant change in strategy
should be followed by a change in the organisation’s culture. Although corporate
cultures can be changed, it may often take long time and requires much effort. A key job
of management therefore involves “managing corporate culture”. In doing so,
management must evaluate what a particular change in strategy means to the corporate
culture, assess if a change in culture is needed and decide if an attempt to change
culture is worth the likely costs.
Creating Strategy Supportive Culture
Once a strategy is established, it is difficult to change. It is the strategy-maker’s
responsibility to select a strategy compatible with the organisation’s prevailing
corporate culture. If it is not possible, once a strategy is chosen, it is the strategy
implementer’s responsibility to change the corporate culture that hinders effective
execution of a chosen strategy.
Changing a Problem Culture
Changing a company’s culture to align it with strategy is one of the toughest
management tasks. This is because the deeply held values and habits are heavily
anchored, and people cling emotionally to the old and familiar. It takes concerted
management action over a period of time to root out certain unwanted behaviours and
instil behaviours that are more strategy-supportive. Changing culture requires
competent leadership at the top. Great power is needed to force major cultural change,
to overcome the spring back resistance of entrenched cultures, and great power
normally resides only at the top. Changing a problem culture involves the following four
steps: Step 1: Identify facts of present culture that are strategy – supportive and those
that are not. Step 2: Clearly define desired new behaviours and specify key features of
“new” culture. Step 3: Talk openly about problems of present culture, and how new
behaviours will improve performance. Step 4: Follow with visible, aggressive actions to
modify culture.
Managing Culture Change
As already explained in earlier sections, the culture that an organisation wishes to
develop is conveyed through rites, rituals, myths, legends, actions etc. Only with bold
leadership and concerted action on many fronts can a company succeed in tackling a
major cultural change. Top leadership should play a key role in communicating the need
for a cultural change and personally launching actions to prod the culture into better
alignment with strategy. Changing culture requires both (a) Symbolic actions and (b)
Substantive actions. They require serious commitment on the part of the top
management. The following measures are helpful in building a strategy supportive
culture: 1. Emphasise key themes or dominant values: Leaders must emphasise
dominant values through internal company communications. They must repeat at every
opportunity the messages of why cultural change is good for the company. 2. Stories and
legends: Leaders must tell stories, anecdotes and legends in support of basic beliefs.
Organisational members must identify with them, and share those beliefs and values. 3.
Rewards: Visibly praising and generously rewarding people who display new cultural
norms will slowly change the culture. 4. Recruiting and hiring: New managers and
employees are to be recruited who have the desired cultural values. 5. Revising policies
and procedures in ways that will help the new culture. 6. Leading by example: If the
organisation’s strategy involves low-cost leadership, senior management must display in
their own actions and decisions, inexpensive decorations in the executive suites,
conservative expense accounts and entertainment allowances, lean corporate
allowances, few executive perks, and so on. 7. Ceremonial events: In ceremonial
functions, companies must honour individuals and groups who exhibit cultural norms
and reward those who achieve strategic milestones. 8. Group gatherings: Top
management must participate in employee training programmes etc. to stress strategic
priorities, values, ethical principles and cultural norms. Every group gathering must be
seen as an opportunity to repeat and ingrain values, praise good deeds, reinforce
cultural norms and promote changes that assist strategy implementation. Thus, best
companies and best executives expertly use symbols, role models, and ceremonial
occasions to achieve the strategy-culture fit.
Managing Culture Clash
When merging or acquiring another company, top management must give some
consideration to a potential clash of corporate cultures. Integrating cultures is a top
challenge to a majority of companies. It is dangerous to assume that the firms can simply
be integrated into the same reporting structures. The greater the gap between the
cultures of the two firms, the faster executives in the acquired firm quit their jobs, and
valuable talent is lost. There are four general methods of managing two different
cultures. They are: (1) Integration (2) Assimilation (3) Separation, and (4) Deculturation.
1. Integration involves merging the two cultures in such a way that separate cultures of
both firms are preserved in the resulting culture. 2. Assimilation: Here, the acquired firm
willingly surrenders its culture and adopts the culture of the acquiring company. 3.
Separation: Here there is a separation of the two companies’ cultures. They are
structurally separated, without cultural exchange. 4. Deculturation: This involves
imposition of the acquiring firm’s culture forcefully on the acquired firm. This often
results in much confusion, conflict, resentment and stress.
Example: When AT & T acquired NCR Corporation in 1990 for its computer business, it
replaced NCR managers with AT & T Managers, reorganised sales, forced employees to
adhere to the AT & T code of values called the “Common Bond” and even changed the
name of NCR. The result was that by 1995 AT & T incurred huge losses, and the NCR unit
was put up for sale in 1996.
4Personal Values and Ethics
Values, personal values, and core values all refer to the same thing. They are desirable
qualities, standards, or principles. Values are a person’s driving force and influence their
actions and reactions. Ethics is defined as “the discipline dealing with what is good and
bad, and right and wrong, or with moral duty and obligation.” Ethics refers to the moral
principles and values that govern the behaviour of a person or group. Ethics helps us in
deciding what is good or bad, moral or immoral, fair or unfair in conduct and decision-
making. In other words, ethics serve as a “moral compass” to guide our actions. There
are many sources for an individual’s ethics. These include family background, religious
beliefs, community standards and expectations etc.
Importance of Ethics
There has been a growing interest in corporate ethics over the past several years. This is
perhaps because of a spate of recent corporate scandals at such firms as Enron, Tyco,
Texaco etc. Without a strong ethical culture, the chances of ethical crises occurring in
companies cannot be ruled out. Due to this, companies face enormous costs in terms of
financial and reputational loss as well as erosion of human capital and relationships with
suppliers, customers, society at large and governmental agencies. An ethical
organisation is driven by ethical values and integrity. Such values shape the search for
opportunities, the design of systems and the decision-making processes of the
organisation. They provide a common frame of reference that serves as a unifying force
across different functions and employee groups. Organisational ethics define what a
company is and what it stands for. The potential benefits of an ethical organisation are
many. A strong ethical orientation can have a positive effect on employee commitment
and motivation to excel. This is particularly important in today’s knowledge-intensive
organisations, where human capital is critical in creating value and competitive
advantage. An ethically sound organisation can also strengthen its bonds among its
suppliers, customers and governmental agencies. The ethical orientation of a leader is
generally considered to be a key factor in promoting ethical behaviour among
employees. Leaders who exhibit high ethical standards become role models for others in
the organisation and raise its overall ethical behaviour. In essence, ethical behaviour
must start with the leader, who plays a central role in instilling ethical behaviour in the
organisation. ! Caution Some may think that ethics is a question of personal scruples. But
ethics is as much an organisational issue as a personal issue. Leaders who fail to provide
leadership in establishing proper systems and controls cannot create an ethical
organisation. Unethical business practices reflect the values, attitudes and behavioural
patterns that define an organisation’s operating culture. Thus ethics plays a critical role
in organisations.
Approaches to Ethics
When an ethical dilemma arises, there are four approaches to guide our action. These
four approaches are: 1. Utilitarian approach 2. Individualism approach 3. Moral – rights
approach 4. Justice approach
Utilitarian Approach
According to this approach, moral behaviour is one that produces the greatest good for
the greatest number. Individualism Approach
According to this approach, acts are moral when they promote the individual’s best
long-term interests, which ultimately lead to the greater good.
Moral – Rights Approach
According to this approach, the fundamental rights and liberties should be respected in
all decisions. Thus, an ethically correct decision is one that best maintains the rights of
those people affected by it. Six moral rights should be considered during decision-
making: 1. Right of free consent 2. Right of privacy 3. Right of freedom of conscience 4.
Right of free speech 5. Right to due process 6. Right to life and safety To make ethical
decisions, managers need to avoid interfering with the rights of others.
Justice Approach
According to this approach, moral decisions must be based on equity, fairness and
impartiality. Four types of justices are of concern to managers: 1. Distributive justice
requires that individuals should not be treated differently on the basis of race, sex,
religion or national origin. Individuals who are similar should be treated similarly. Thus,
men and women should not receive different salaries if they are performing the same
job. 2. Procedural justice requires that rules be administered fairly. Rules should be
clearly stated and be consistently and impartially administered. 3. Compensatory justice
requires that individuals should be compensated for the cost of their injuries by the
party responsible. Moreover, individuals should not be held responsible for matters over
which they have no control. 4. Natural duty principle: This principle reflects a duty to
help others who are in need or danger; duty not to cause unnecessary suffering; and the
duty to comply with the just rules of an institution.
Building an Ethical Organisation
A firm must have several key elements before it can become a highly ethical
organisation. These elements must be constantly reinforced in order for the firm to be
successful:
Role Models
For good or bad, leaders are role models in their organisation. The values as well as the
character of leaders become transparent to an organisation’s employees through their
behaviour. Leaders must take responsibility for ethical lapses within the organisation,
which enhances the loyalty and commitment of employees through the organisation.
Code of Ethics
They are another important element of an ethical organisation. Such mechanisms
provide a statement and guidelines for norms and beliefs as well as decision–making.
They provide employees with a clear understanding of the ethical standards of the
organisation. Many large companies have developed such codes code of conduct.
Reward and Evaluation Systems
An appropriate reward and evaluation system should consider both the outcomes and
the means adopted to achieve the organisational goals and objectives. Inappropriate
reward systems may cause individuals to commit unethical acts.
Policies and Procedures
Most of the unethical behaviours in organisations could be traced to the absence of
policies and procedures to guide behaviour. It is important to carefully develop policies
and procedures to guide behaviour so that all employees are encouraged to behave in
an ethical manner. However, it is not enough merely to have policies “on the books”.
Rather, they must be effectively communicated, enforced and monitored. The company
should also follow sound corporate governance practices.
Ethics Training
The purpose of ethic training is to encourage ethical behaviour. Companies should
provide appropriate training in ethical standards. It enables managers to align ethical
behaviour with organisational goals.
Ethics Audit
Companies should undertake periodic audits to ensure that proper ethical standards are
being followed by all deportments of the organisation.
Chief Ethics Officer
Some large corporations appoint a senior officer with the exclusive responsibility of
overseeing the ethical conduct of employees. He functions like a watchdog on ethics.
Ethics Committee
An ethics committee establishes polices regarding ethical conduct and resolves major
ethical dilemmas faced by the employees of an organisation. Ethics committee performs
such functions as organisation of regular meetings to discuss ethical issues, identifying
possible violations of the code, enforcing the code, rewarding ethical behaviour etc.
Ethics Hotline
This is a special telephone line that enables employees to bypass the proper channel for
reporting their ethical dilemmas and problems. The line is usually handled by an
executive also investigates the matter and helps resolve the problems of the concerned
employees.
Social Responsibility and Strategic Management
Corporate social responsibility (CSR) consists of “actions that appear to further some
social good, beyond the interests of the firm” It includes such topics as environmental
‘green’ issues, treatment of employees and suppliers, charitable work and other matters
related to the community. A brief idea of the areas included in CSR is given in figure.
Observe ethical principles

Make charitable contributions; community service activities; improve quality of work life

Protect environment; minimize adverse effects on environment.

Promote workforce diversity

Employee well-being: healthy and safework

environment
Corporate Social Responsibility

It is important to note that CSR requires firms to go beyond what the law requires – just
doing the minimum required by the law is not sufficient. “Corporate social responsibility
is concerned with the ways in which an organisation exceeds the minimum obligations
to the stakeholders” (Johnson and Sholes, 2002). Corporate Social Responsibility is
therefore a company’s duty to operate its business by means that avoid harm to other
stakeholders and the environment, and also to consider overall betterment of society in
its decisions and actions. The essence of socially responsible behaviour is that a
company should strive to balance its actions to benefit its shareholders without any
adverse impact on other stakeholders like employees, suppliers, customers, local
communities and society at large, and, further, to proactively mitigate any harmful
effects on the environment its actions and business may have.
Responsibilities of Business
A business organisation has four responsibilities: 1. Economic responsibilities: are the
most basic responsibilities of a business firm. This involves the essential responsibility of
business to provide goods and services to society at a reasonable cost. In discharging
that economic responsibility, the company provides productive jobs to its workforce,
pays taxes to central, state and local governments. 2. Legal responsibilities: reflect the
firm’s obligation to comply with the laws that regulate business activities, especially in
the areas of consumer safety and pollution control. 3. Ethical responsibilities: reflect the
company’s notion of right or proper business behaviour. Ethical responsibilities go
beyond legal requirements. Firms are expected, though not legally bound, to behave
ethically. 4. Discretionary responsibilities: are those that are voluntarily assumed by
business organisations that adopt the citizenship approach. They support ongoing
charities, publicservice advertisement campaigns, donations, medical camps, public
welfare activities etc. A commitment to full corporate responsibility requires strategic
managers to attack social problems with the same zeal in which they tackle business
problems. Business managers should keep in mind that economic and legal
responsibilities are mandatory, ethical responsibilities are expected, and discretionary
responsibilities are desirable. The above four responsibilities are listed in order of
priority. A business firm must first make a profit to satisfy its economic responsibilities. A
firm must also follow the laws as a good corporate citizen. Carrol, however, argues that
business firms have obligations beyond the economic and legal responsibilities; that
firms must also fulfil its social responsibilities. Social responsibility includes both ethical
and discretionary responsibilities, but not economic and legal responsibilities.
Need for CSR: The Strategy
After considering the arguments for and against CSR, it becomes evident that it is in the
enlightened self-interest of companies to be good corporate citizens and devote some of
their resources and energies to employees, the communities in which they operate, and
society in general. There are five important reasons why companies should undertake
social responsibilities.
Self-interest of the Organisation
Every organisation obtains critical inputs from the environment and converts them into
goods and services to be used by society at large. In this process they help shareholders
to get appropriate returns on their investment. It is expected that organisations
acknowledge and act upon the interests and demands of other stakeholders such as
citizens and society in general that are beyond its immediate constituencies – owners,
customers, suppliers and employees. That is, they must consider the needs of the
broader community at large, and act in a socially responsible way.
It generates Internal Benefits
CSR generates internal benefits like employee recruitment, workforce retention and
training. Companies with good CSR reputation are better able to attract and retain
employees compared to companies with tarnished reputations. Some employees just
feel better about working for a company committed to improving society. This can
contribute to lower turnover and better worker productivity. This also benefits the firm
by way of lower costs for staff recruitment and training. Provision of good working
conditions results in greater employee commitment.
It Reduces Risks
CSR reduces the risk of damage to reputation and increases buyer patronage. Consumer,
environmental and human rights activist groups are quick to criticise businesses that are
not socially responsive. Pressure groups can generate adverse publicity, organise
boycotts, and influence buyers to avoid an offender’s products. Research has shown that
adverse publicity is likely to cause a decline in a company’s stock price.
In the Best Interest of Shareholders
CSR is in the best interest of shareholders. Well-conceived social responsibility strategies
work to the advantage of shareholders in several ways. Socially responsible behaviour
can help avoid or prevent legal and regulatory actions that could prove costly or
burdensome. A study of leading companies found that environmental compliance and
developing eco-friendly products can enhance earnings per share, profitability, and the
likelihood of winning contracts.
It gives Competitive Advantage
Being known as a socially responsible firm may provide a firm a competitive advantage.
Example: Firms that are eco-friendly enhance their corporate image. In western
countries, many consumers boycott products that are not “green”. Companies that take
the lead in being environmentally friendly, such as by using recycled materials,
producing ‘green’ products, and helping social welfare programmes, enhance their
corporate image. In sum, companies that take social responsibility seriously can improve
their business reputation and operational efficiency while reducing their risk of exposure
and encouraging loyalty and innovation. Overall, companies that take special pains to
protect the environment (beyond what is required by law), are active in community
affairs, and are generous supporters of charitable causes are more likely to be seen as
good companies to work for or do business with. It will also benefit the shareholders.

Functional and Operational Implementation

Introduction
Once corporate level and business level strategies are developed, management must
turn its attention to formulating strategies for each functional area of the business unit.
For effective implementation of strategies, functional strategies provide direction to
functional managers regarding the plans and policies to be adopted in each functional
area.
Functional Strategies
Functional Strategy is the approach taken by a functional area to achieve corporate and
business unit objectives and strategies by maximising resource productivity. It is
concerned with developing and nurturing a distinctive competence to provide a
company or business unit with a competitive advantage. Just as a multi-divisional
corporation has several business units, each with its own business strategy, each
business unit has its own set of departments, each with its own functional strategy.
Nature of Functional Strategies
Functional strategies are essential to implement business strategy. In fact, the
effectiveness of a corporate or business strategy execution depends critically on the
manner in which strategies are implemented at the functional level. The corporate
strategy provides the long-term direction and scope of a firm. The business strategy
outlines the competitive posture of its operations in an industry. The functional strategy
clarifies the business strategy, giving specific short-term guidance to operating managers
in the areas of operations, marketing, finance, HR, R&D etc., and increases the likelihood
of their success. Orientation of the functional strategy, therefore, depends on the
business strategy.
Example: If a business unit follows a differentiation strategy through high quality
products, its production strategy emphasises expensive quality assurance processes over
cheaper, high-volume production; a human resource functional strategy that emphasises
hiring and training of a highly skilled, but costly, workforce; and a marketing functional
strategy that emphasises extensive advertising to increase demand rather than using
marketing incentives to retailers. Similarly, if the business unit follows a low-cost
competitive strategy, a different set of functional strategies emphasising cost-cutting
measures would be needed to support the business strategy.
Need for Functional Strategies
Functional managers need guidance from the corporate and business strategies in order
to make decisions. In simple terms, functional strategies tell the functional manager
what to do in his area to achieve business objectives. Glueck and Jauch have suggested
five reasons to show why functional strategies are needed. Functional strategies are
developed to ensure that: 1. The strategic decisions are implemented by all the parts of
an organisation. 2. There is a basis available for controlling activities in different
functional areas of a business. 3. The time spent by functional managers on decision-
making may be reduced. 4. Similar situations occurring in different functional areas are
handled by the functional managers in a consistent manner. 5. Coordination across
different functions takes place where necessary. Functional Plans and Policies
The process of developing functional plans and policies is quite similar to that of strategy
formulation, with the difference that functional heads are responsible for their
formulation and implementation. Environmental factors relevant to each functional area
will have an impact on the choice of strategies. Finally, the actual process of choice
involves a negotiation between functional managers and business unit managers. Thus,
functional strategies are generally formulated in all key functional areas. For each of the
functional strategies, a set of policies will have to establish for appropriate areas of the
business. The policies will ensure that the strategies are carried out as intended and that
the different functional areas are working towards the same ends. Companies have
plans and policies that cover nearly every major aspect of the firm. The firm should have
strategies in every major aspect of business, at least in key functional areas. We will
highlight some of the more important issues for each functional area that need to be
addressed in their respective functional strategies. The functional strategies should be
comprehensive; but at the same time, they should not leave so much choice to
operating mangers that they work sub-optimally or at cross purposes. At the same time,
the functional strategies should be flexible enough to leave room to managers for
responding quickly to situations and make exceptions for good reasons. The functional
strategies required in key functional areas are outlined below:
Financial Strategy
In the financial management area, the major concern of the strategy relates to the
acquisition and utilisation of funds. Major issues involved are the sources from where
the funds will come, from equity or by borrowing. How much of the borrowing will be
short-term and how much long-term. In terms of usage of funds, the policy decisions
would relate to whether and to what extent funds have to be deployed in fixed assets
and current assets. The long-term or capital investment decisions relate to buying or
leasing the fixed assets. A retrenchment strategy or paucity of funds may compel the
organisation to lease rather than buy. In case of an organisation where capital
investment decisions are decentralised, a “hurdle rate” may be fixed so as to avoid
investment in weaker projects by one division and non-investment by another division.
Cash Flow
Apart from capital budgeting, another consideration in financial strategy which
influences other functional areas is the cash flow. A company may frame bonus and
dividend policies based on availability of cash. In case a company proposes expansion
through internally generated funds, it may reduce bonus and dividend. This is
particularly so when it has formulated ambitious growth strategies which require large
cash. Similarly, if the firm has high risk business, it should have a conservative
debt/equity ratio to guard against heavy interest burden. The funds position and
optimisation orientation of top management also determines the accounts receivable
and payable policies. Financial strategies and policies may even determine the
accounting policies as these affect the profitability, balance-sheet and hence cash flow
through taxes, dividend, bonus etc.
Marketing Strategy
Functional strategies in marketing area are required for marketing – mix decisions, i.e.
the four Ps of marketing, viz. Product design, Product distribution, Pricing and Promotion
aspects of marketing. In terms of specifics, the product decisions relate to such issues as
the variety ofproduct (shape, size, model etc.), quality requirements,
introduction/withdrawal of products, nature of customers etc. Specific policies are also
required regarding distribution channels i.e. through retailers or direct selling? What
would be the spread of distribution network? Whether new dealers will be established
or old ones developed? The promotion strategies will relate to mode of promotion,
coverage and nature (corporate, product or brand promotion). Again, very clear and
specific strategies will have to be made about pricing, etc., full cost or standard cost
based pricing. Offensive vs. defensive postures also influence pricing policies.
HR Strategy
HR strategy deals with matters like HR planning, recruitment and selection, training and
development, compensation management, performance management, rewards and
incentives etc. What compensation/reward system will be able to attract people of the
desired type to join the organisation so as to meet the task requirements demanded by
the strategy? What strategies are necessary to groom internal people for new positions?
The problem becomes acute in the context of turnaround strategies. On the one hand,
the most competent people leave and the firm finds it difficult to attract suitable
replacements. On the other hand, it faces the problem of surplus staff. HR strategies for
retrenchment, though painful, are quite necessary but difficult to develop.
Production Strategy
The functions relating to production need strategies relating to quality assurance,
machine utilisation, location of facilities, balancing the line, scheduling of production,
and materials management. The strategy for entering into export market will dictate a
different policy regarding quality of products and maintenance. Location of facilities may
be determined by closeness to market or input supply points. Decisions must be made to
determine whether and how much to make or buy, on the basis of cost differential,
availability, criticality of the item, capacity if expansion becomes necessary. In case of
bought out items, policies regarding number of suppliers and the criteria for selecting
them are necessary.
R&D Strategy
In the area of research and development, functional strategies regarding the nature of
research are necessary. In case of expansion through new product development, heavy
emphasis has to be laid on basic and applied research. ! Caution On the contrary, for
expansion in the same line, research emphasis has to be on product/process
improvement to cut cost and to add value. It may be noted that in case of basic research
the firm should be prepared to commit resources and wait for outcome for several
years. It cannot have basic research unless it is prepared to commit resources on long-
term basis. Operational Plans and Policies
Operations management is the core function of any organisation. This function converts
inputs (raw materials, supplies, machines and people) into value added outputs.
Operations management covers all manufacturing processes in an organisation and
includes raw material sourcing, purchasing, production, distribution and logistics. This
function contributes to the organisation’s ability to add value to the goods and services.
Importance of Operational Strategy
The key to successful survival of an enterprise is how efficiently the production activity is
managed. The two major factors that contribute to business failures are: obsolescence
of the product line and excessive production costs. These factors themselves have been
the outcome of ineffective production Planning. Operations strategy plays a crucial role
in shaping the ultimate success of a firm. It enables an organisation to make optimal
decisions regarding product, production capacity, plant location, choice of machinery
and equipment, maintenance of existing facilities and host of other aspects of
production. Constant review of production plan aids in maintaining proper balance of
capital investment in plant, equipment and inventory; efficient operation of the
production system, product mix, Quality control; and ensures effective material handling
and Planning of facilities. Within the broad framework of corporate and business
strategies, production strategy helps in maintaining full co-ordination with marketing
and engineering functions to formulate plans to improve products and services. It calls
upon management to keep in constant touch with finance and personnel to achieve the
optimal use of assets, cost control, recruitment of suitable personnel and management
of labour disputes and negotiations.
Components of Operational Plan and Policies
The different components of a production strategy should ideally consist of the
following:
Product Mix
A firm should decide about the product mix (how many and what kind of products to be
produced) keeping in view Objectives such as productivity, cost efficiency, Quality,
reliability, flexibility etc.
Capacity Planning
Capacity Planning is the process of forecasting demand and deciding what Resources will
be required to meet that demand. Meclain and Thomas suggested that capacity Planning
involves the following five sequential steps. 1. Predict future demand and competitive
reactions: The firm should forecast the demand for various products/services as also
estimate customer reaction to the products offered by it. It should also take care of
potential countermoves by competitors. 2. Translate above estimates into capacity
needs: Based on forecasts, the firm must decide the quantity that can be manufactured
keeping input limitations, such as plant equipment, manpower etc in mind. 3. Create
alternative capacity plans: Depending on what the market might absorb and what the
organisation can produce, management should create alternative capacity plans for
various products/services that are offered to customers. 4. Evaluate each alternative:
The firm should identify the opportunities and Threats associated with each alternative,
and carefully evaluate in terms of additional costs involved, payoffs etc. 5. Select and
implement a particular capacity plan: The capacity plan that best serves organisational
Objectives should be selected and implemented. One of the most vital decisions which
has to be made regarding production capacity is whether the company should build so
much capacity to satisfy all demand during peak periods and keep the production
facilities idle during lean periods. There are some organisations that prefer to build
smaller capacity to take care of normal requirements and meet peak demand by way of
imports or subcontracting. Some organisations employ measures such as off-peak
discounts, mail early campaign, etc. to induce customers to avoid peak periods.
Technology and Facilities Planning
Choosing Machines and Equipments
A strategic decision to be made by a production manager is what type of equipments the
organisation will require for production purposes, how much it will cost, what will be its
operating cost and what services it will render to the organisation and for how long.
Choice of equipment for making a particular product essentially depends on the basic
manufacturing process. The decision-maker must, therefore, familiarise himself with the
production process to be adopted. Another consideration in the choice of new
equipment for a plant is the type and degree of operating skill required and presently
available skills within the organisation. Other factors worth consideration are the ease
with which the equipment can be operated and the safety features of the equipment.
Equipment Investment
Acquisition of equipment involves capital expenditure which will have long-term effects
on the financial position of the company. Hence, before taking a final decision regarding
investment in a machine, detailed analysis of such investment in terms of cost-benefits
must be made and its desirability and worthwhileness should be evaluated with the help
of internal rate of return or net present value method. The decision to replace the
existing machine is equally important to the enterprise. In this regard the management
has to decide when the replacement should be made and the best replacement policy
that must be considered while making comparisons between an existing unit of
equipment and its possible replacement. In order to make a sound economic
comparison, all the factors must be converted into cost considerations. The rate of
return so obtained is compared with the cut-off rate to ascertain whether the
replacement is economically viable. Thus, clear-cut policy guidelines regarding
methodology or computation of net investment outlay, incremental operating
expenditure and income, depreciation, obsolescence, salvage value etc. will help
management in taking decisions regarding acquisition and/or replacement of machines.
Physical Facilities Decisions
Facilities strategy covers plans for location analysis and selection, design and
specifications including layout of equipment, plant, warehouses and related services.
Facilities Planning deals with the separate but interrelated costs of material, supplies,
manpower, services and facilities. Its Mission is to find ways to minimise the aggregate
of such costs in making and distributing the products at the proper time.
Plant Location
Plant location is essentially an investment decision having long-term significance. Once a
plant is acquired, it is a permanent asset that cannot readily be sold. The management
may also contemplate relocation of the plant when business expansion and advanced
technology require additional facilities to serve new market areas, to produce new
products, or simply to replace the old, obsolete plants to increase the company’s
production capacity. The selection of an appropriate plant site calls for location study of
the region in which the factory is to be situated, the community in which it should be
placed and finally, the exact site in the city or countryside.
Plant Building
Once the company has chosen the plant site, due consideration must be given to
providing physical facilities. A company requiring extensive space will always construct
new buildings. On planning a building for the manufacturing facilities, a number of
factors will have to be kept in mind such as nature of the manufacturing process, plant
layout and space requirements, lighting, ventilating, air-conditioning, service facilities
and future expansion.
Plant Layout
Plant layout involves the arrangement and location of production machinery, work
centres and auxiliary facilities and activities (inspection, handling of material storage and
shipping) for the purpose of achieving efficiency in manufacturing products or supplying
consumer services. Plant layout should co-ordinate material, men and machines and
achieves the following Objectives: 1. Facilitate the manufacturing process. 2. Minimise
materials handling. 3. Maintain flexibility of arrangement and operation. 4. Maintain
high turnover of work-in-process. 5. Hold down investment in equipment. 6. Make
economical use of building space. 7. Promote effective utilisation of manpower. 8.
Promote employee convenience, safety and comfort in doing the work. In designing
plant layout a number of factors such as nature of product, volume of production,
Quality, equipment, type of manufacture, building plant site, personnel and materials
handling plan should be kept in view.
Maintenance of Equipment
Maintenance of equipment is an important component of planning consideration. It is
intimately linked with replacement policies. Every manufacturing enterprise follows
some maintenance routine in order to avoid unexpected breakdowns and thus minimise
costs associated with machine down time, possible loss of potential sales, idle direct and
indirect labour delays, customer dissatisfaction from possible delays in deliveries and the
actual cost of repairing the machine. A number of strategies can be adopted for
maintenance of machines and equipment. Two most important ones are carrying excess
capacity and preventive maintenance.
Excess Capacity
In carrying excess capacity method an organisation carries stand-by capacity, which is
used if trouble occurs. This excess capacity can be whole machines or it can be major
parts or components which ordinarily take time to obtain. Carrying excess capacity
involves cost which must be compared with costs arising out of a slow-down or a shut-
down of a whole series of dependent operations. Therefore, the decision in this regard is
cost trade-offs.
Preventive Maintenance
Preventive maintenance is based on the premise that good maintenance prevents
breakdowns. Preventive maintenance means preventing breakdowns by replacing worn-
out machines or their parts before their breakdown. It anticipates likely difficulties and
does the expected needed repairs at a convenient time before the repairs are actually
needed. Preventive maintenance depends upon the past knowledge that certain
wearing parts will need replacement after a normal interval of use.
Inventory Management
This is concerned with management of inventory consisting of raw materials, work-in-
process, goods in transit, finished goods etc. Inventory management is a critical function
because substantial money can be locked up in inventory, which can be put to
productive use. There are various techniques that can be used for effective inventory
management. 1. Economic Order Quantity 2. ABC analysis 3. Just-in-time (JIT) Inventory
systems etc.
Quality Management
Quality is a major consideration in Production/Operations strategy. By using techniques
like Total quality management (TQM), Six Sigma etc, organisations strive to produce
‘Zero defect products’ Operations strategy should consist of appropriate Quality
improvement programmes to achieve total Quality in products and services of the
organisation. Personnel (HR) Plans and Strategies
Personnel policies are guides to action. Brewster and Ricbell defined HR policies as “a set
of proposals and actions that act as a reference point for managers in their dealings with
employees”. Management should pay attention to the following aspects of HR policies:
1. HR policies must be related to the strategic objectives of the firm. 2. They should be
stated in definite, clear and understandable language. 3. They should be sufficiently
comprehensive and provide yardsticks for future action. 4. They should be stable enough
to assure people that there will not be drastic overnight changes. 5. They should be built
on the basis of facts and sound judgment. 6. They should be just, fair and equitable. 7.
They must be reasonable and capable of being accomplished. 8. Periodic review of HR
policies is essential to keep in tune with changing circumstances.
HR Planning
HR planning is the first key component for developing a human resource strategy. It
involves translating corporate – wide strategic objectives into a workable plan and
serves as a blue-print for all specific HR programmes and policies. It is the process of
analysing and identifying the need for and availability of human resources so that the
organisation can meet its objectives. It helps determine the manpower needs of firms
and develop strategies for meting those needs. According to Jeffrey Mello, key
objectives of HR planning are: 1. Prevents overstaffing and understaffing. 2. Ensures the
organisation has the right number of employees with the right skills in the right places
and at the right time. 3. Ensures the organisation is responsive to changes in its
environment. 4. Provides direction and coherence to all HR activities and systems. 5.
Unites the perspectives of line and staff managers. 6. Facilitates leadership continuity
through succession planning. Although HR planning follows from the strategic plan, the
information collected in the HR planning process contributes to the assessment of
internal organisation’s environment done in strategic planning.
Staffing
Staffing, the process of recruiting applicants and selecting prospective employees,
remains a key strategic area for human resource strategy. Given that an organisation’s
performance is a direct result of the individuals it employs, the specific strategies used
and decisions made in the staffing process will directly impact the success of the
strategic plan.
Recruitment
Recruitment means attracting people to apply for jobs in the organisation. The strategic
issues in recruitment are: 1. Temporary versus permanent employees 2. Internal versus
external recruiting 3. When and how extensively to recruit 4. Methods of recruiting
Selection
Once a sufficient pool of applicants has been received, critical decisions need to be made
regarding applicant screening, methods of selection and placement. The selection
methods should be reliable and valid.
Placement
After selecting a candidate, he should be placed on a suitable job. Placement is an
important human resource activity. If neglected, it may create employee adjustment
problems. An employee placed in a wrong job may quit the organisation in frustration.
Training and Development
Training and development of employees is a key strategic issue for organisations. It is
the means by which organisations determine the extent to which their human assets are
viable investments. Training involves employees acquiring knowledge and skills that they
will be able to use on the job. There are two key factors to develop successful training
programmes in organisations. The first is planning and strategising the training. This
involves four distinct steps: 1. Needs assessment 2. The establishment of objectives and
measures 3. Delivery of the training 4. Evaluation The second key factor is to ensure that
desired results are achieved or accomplished. Training needs are to be integrated with
performance management systems and compensation.
Performance Management
An organisation’s long-term success in meeting its strategic objectives rests on managing
employee performance and ensuring that performance measures are consistent with
the strategic needs. One purpose of performance management systems is to facilitate
employee development. A second purpose is to determine appropriate rewards and
compensation, which must be clearly linked to achievement of strategic goals.
Compensation and Rewards
Organisations face a number of key strategic issues in setting their compensation and
reward policies and programmes. These include: 1. Compensation relative to the market
2. Balance between fixed and variable compensation 3. Appropriate mix of financial and
non financial compensation 4. Developing an overall cost-effective compensation
programme that results in high performance. In addition to these strategic issues, the
fast pace of change and the need for organisations to respond in order to remain
competitive create challenges for all HR programmes, but particularly for compensation.
Organisations should revaluate their compensation programmes within the context of
their corporate strategy and specific HR strategy to ensure that they are consistent with
the necessary performance measures required by the organisation. Overly rigid
compensation systems inhibit the flexibility needed by the company’s competitive
strategies. HR strategy must encourage creativity to meet strategic objectives.
Therefore, compensation systems must ensure that behaviours that help achieve
strategic objectives are appropriately rewarded.
Industrial Relations
Industrial relations is a key strategic issue for organisations because the nature of the
relationship between employees can have a significant impact on morale, motivation
and productivity. Consequently, how organisations manage the day- to- day aspects of
the employment relationship can be a key variable affecting their ability to achieve
strategic objectives. Unionised employees present a number of key strategic challenges
for management: 1. The power base within the organisation is redistributed 2.
Management’s ability to manage workers at their discretion to achieve the
organisation’s strategic objectives will be severely curtailed. 3. Outside leadership may
pose additional challenges to the management. 4. Unionised work setting can greatly
impact the organisation’s cost structure. Since liberalisation of the Indian economy since
1990s, there is a perceptible change in the industrial relations scenario of our country.
Labour militancy, strikes and lockouts have reduced drastically. However, in certain
sectors of the economy, especially the government and public sector, there is not much
change in the clout of the unions. Through appropriate collective bargaining and
participative management practices, industrial relations can be managed effectively. HR
strategy must incorporate long-term plans and programmes to maintain industrial peace
for effective implementation of the business strategy.
Strategic Evaluation and Control Introduction
Strategic evaluation and control is the final phase in the process of strategic
management. Its basic purpose is to ensure that the strategy is achieving the goals and
objectives set for the strategy. It compares performance with the desired results and
provides the feedback necessary for management to take corrective action. According to
Fred R. David, strategy evaluation includes three basic activities (1) examining the
underlying bases of a firm’s strategy, (2) comparing expected results with actual results,
and (3) taking corrective action to ensure that performance conforms to plans.
Sometime, the best formulated strategies become obsolete as a firm’s external and
internal environments change. Managers should, therefore, identify important
milestones and set strategic thresholds to assist them in knowing the changes in the
underlying assumptions of a strategy and, if necessary alter the basic strategic direction.
The evaluation process thus works as an early warning system for the organisation.
Strategic evaluation generally operates at two levels – strategic and operational level. At
the strategic level, managers try to examine the consistency of strategy with
environment. At the operational level, the focus is on finding how a given strategy is
effectively pursued by the organisation. For this purpose, different control systems are
used both at strategic and operational levels.
Nature of Strategic Evaluation and Control
Strategic evaluation and control is defined as the process of determining the
effectiveness of a given strategy in achieving the organisational objectives and taking
corrective actions wherever required. According to Pearce and Robinson, strategic
control is concerned with tracking a strategy as it is being implemented, detecting
problems or changes in its underlying premises, and making necessary adjustments. In
contrast to post-action control, strategic control seeks to guide action on behalf of the
strategies,. as they are taking place and when the end result is still several years off .
Strategic control in an organisation is similar to what the “steering control” is in a ship.
Steering keeps a ship, for instance, stable on its course. Similarly, strategic control
systems sense to what extent the strategies are successful in attaining goals and
objectives, and this information is fed to the decision-makers for taking corrective action
in time. Strategic managers can steer the organisation by instituting minor modifications
or resort to more drastic changes such as altering the strategic direction altogether.
Strategic control systems thus offer a framework for tracking, evaluating or reorienting
the functioning of the firm’s strategy.
Types of General Control Systems
Basically, there are three types of general control systems: 1. Output control (i.e. control
on actual performance results) 2. Behaviour control (i.e. control on activities that
generate the performance) 3. Input control (i.e. control on resources that are used in
performance)
Output Control
Output controls specify what is to be accomplished by focusing on the end result. This
control is done through setting objectives, targets or milestones for each division,
department, section and executives, and measuring actual performance. These controls
are appropriate when specific output measures haven’t been agreed on. Often rewards
and incentives are linked to performance goals.
Example: Sales quotas, specific cost reduction or profit targets, milestones or deadlines
for completion of projects are examples of output controls.
Behaviour Control
Behaviour controls specify how something is to be done. This control is done through
policies, rules, standard operating practices and orders from superiors. These controls
are the most appropriate when performance results are hard to measure. Rules
standardise the behaviour and make outcomes predictable. If employees follow rules,
then actions are performed and decisions handled the same way time and again. The
result is predictability and accuracy, which is the aim of all control systems. The main
mechanisms of behaviour control are: 1. Operating budgets 2. Standard operating
practices 3. Rules and procedures
Example: One example of an increasingly popular behaviour control is the ISO 9000
Standards Series on quality management and assurance developed by the International
Standards Association of Geneva, Switzerland. The ISO 9000 series is a way of
documenting a company’s quality operations, and strictly complying with it. Many
corporations worldwide view ISO 9000 certification as assurance that the firm sells
quality products.
Input Control
Input controls specify the amount of resources, such as knowledge, skills, abilities, of
employees to be used in performance. These controls are most appropriate when
output is difficult to measures.
Basic Characteristics of Effective Evaluation and Control System
Effective strategy evaluation systems must meet several basic requirements. They must
be: 1. Simple: Strategy evaluation must be simple, not too comprehensive and not too
restrictive. Complex systems often confuse people and accomplish little. The test of an
effective evaluation system is its simplicity not its complexity. 2. Economical: Strategy
evaluation activities must be economical. Too many controls can do more harm than
good. 3. Meaningful: Strategy evaluation activities should be meaningful. They should
specifically relate to a firm’s objectives. They should provide managers with useful
information about tasks over which they have control and influence. 4. Timely: Strategy
evaluation activities should provide timely information. For example, when a firm has
diversified into a new business by acquiring another firm, evaluative information may be
needed at frequent intervals. Time dimension of control must coincide with the time
span of the event being measured. 5. Truthful: Strategy evaluation should be designed
to provide a true picture of what is happening. Information should facilitate action and
should be directed to those individuals who need to take action based on it. 6. Selective:
The control systems should focus on selective criteria like key important factors which
are critical to performance. Insignificant deviations need not be focused.
7. Flexible: They must be flexible to take care of changing circumstances. 8. Suitable:
Control systems should be suitable to the needs of the organisation. They must conform
to the nature and needs of the job and area to be controlled. 9. Reasonable: Control
standards must be reasonable. Frequent measurement and rapid reporting may
frustrate control. 10. Objective: A control system would be effective only if it is unbiased
and impersonal. It should not be subjective and arbitrary. Otherwise, people may resent
them. 11. Acceptable: Controls will not work unless they are acceptable to those who
apply them. 12. Foster Understanding and Trust: Control systems should not dominate
decisions. Rather they should foster mutual understanding, trust and common sense. No
department should fail to cooperate with another in evaluating and control of strategies.
13. Fix Responsibility for Failure: An effective control system must fix responsibility for
failure. Detecting deviations would be meaningless unless one knows where they are
occurring and who is responsible for them. Control system should also pinpoint what
corrective actions are needed. There is no ideal strategy evaluation and control system.
The final design depends on the unique characteristics of an organisation’s size,
management style, purpose, problems and strengths. 14.2Strategic Control
Strategic control is a type of “steering control”. We have to track the strategy as it is
being implemented, detect any problems or changes in the predictions made, and make
necessary adjustments. This is especially important because the implementation process
itself takes a long time before we can achieve the results. Strategic controls are,
therefore, necessary to steer the firm through these events.
Types of Strategic Control
There are four types of strategic controls: 1. Premise control 2. Strategic surveillance 3.
Special alert control 4. Implementation control
Premise Control
Strategy is built around several assumptions or predictions, which are called planning
premises. Premise control checks systematically and continuously whether the
assumptions on which the strategy is based are still valid. If a vital premise is no longer
valid, the strategy may have to be changed. The sooner these invalid assumptions are
detected and rejected, the better are the chances of changing the strategy. The premise
control is concerned with two types of factors: 1. Environmental factors 2. Industry
factors 1. Environmental Factors: The performance of a firm is affected by changes in
environmental factors like the rate of inflation, change in technology, government
regulations, demographic and social changes etc. Although the firm has little or no
control overenvironmental factors, these factors have considerable influence over the
success of the strategy because strategies are generally based on key assumptions about
them.
Example: A firm may assume massive increase in demand, and embark on an expansion
plan. If suddenly there is recession and demand for the products of the firm fall down, it
may have to change its strategic direction. 2. Industry Factors: Industry factors also
affect the performance of a company. Competitors, suppliers, buyers, substitutes, new
entrants etc. are some of the industry factors about which assumptions are made. If any
of these assumptions go wrong, strategy may have to be changed.
Strategic Surveillance
Strategic surveillance is a broad-based vigilance activity in all daily operations both inside
and outside the organisation. With such vigilance, the events that are likely to threaten
the course of a firm’s strategy can be tracked. Business journals, trade conferences,
conversations, observations etc. are some of the information sources for strategic
surveillance.
Special Alert Control
Sudden, unexpected events can drastically alter the course of the firm’s strategy. Such
events trigger an immediate and intense reconsideration of the firm’s strategy.
Example: The tragic events of September 11, 2001, created havoc in many US
companies, especially the airline and hotel industry. Sudden acquisition of a leading
competitor or an unexpected product difficulty (like defective tyres of Firestone) etc.
may shatter a firm’s strategy and require a rapid reconsideration of the strategy.
Generally, firms develop contingency plans along with crisis teams to respond to such
sudden, unexpected events.
Implementation Control
Strategy implementation takes place as a series of steps, programmes, investments and
moves that occur over an extended period of time. Resources are allocated, essential
people are put in place, special programmes are undertaken and functional areas initiate
strategy related activities. Implementation control is aimed at assessing whether the
plans, programmes and policies are actually guiding the organisation towards the
predetermined objectives or not. Implementation control assesses whether the overall
strategy should be changed in the light of the results of specific units and individuals
involved in implementation of the strategy. Two important methods to achieve
implementation control are: 1. Monitoring strategic thrusts 2. Milestone reviews 1.
Monitoring Strategic Thrusts: Strategic thrusts are small critical projects that need to be
done if the overall strategy is to be accomplished. They are critical factors in the success
of strategy. One approach is to agree early in the planning process on which thrusts are
critical factors in the success of the strategy. Managers responsible for these -
implementation controls will single them out from other activities and observe them
frequently. Another approach is to use stop/go assessments that are- linked to a series
of these thresholds (time, costs, success etc.) associated with a particular thrust.
2. Milestone Reviews: Milestones are critical events that should be reached during
strategy implementation. These milestones may be fixed on the basis of. (a) Critical
events (b) Major resource allocations (c) Time frames etc. Network controls like
PERT/CPM for project implementation are examples of milestone reviews. After doing a
milestone review, managers often undertake a full scale reassessment of the strategy to
decide whether to continue or refocus the firm’s strategy. Implementation control is
also done through operational control systems like budgets, schedules, key success
factors etc. The major characteristics of the above four types of strategic control are
summarised in figure. Strategic controls are, thus, designed to systematically and
continuously monitor the implementation of the strategy over long periods to decide
whether the strategic direction should be changed in the light of unfolding events.
However, for post-action evaluation and control over short periods, the firm needs
operational controls. Approaches to Strategic Control
According to Dess, Lumpkin and Taylor, there are two approaches to strategic control.
Traditional Approach
Traditional approach to strategic control is sequential: 1. Strategies are formulated and
top management sets goals 2. Strategies are implemented 3. Performance is measured
against goals 4. Corrective measures are taken, if there are deviations. Control is based
on a feedback loop from performance measurement to strategy formulation. This
process typically involves lengthy time lags and often tied to a firm’s annual planning
cycle. This reactive measure is not sufficient to control a strategy. As already explained,
this is because a strategy takes a long period for implementation and to produce results.
The uncertain future requires continuous evaluation of the planning premises and
strategy implementation. There is a better contemporary approach for strategic control.
Contemporary Approach
Under this approach, adapting to and anticipating both internal and external
environment change is an integral part of strategic control. This approach addresses the
assumptions and premises that provide the foundation for the strategy. The key
question addressed here is: do the organisation’s goals and strategies still fit within the
context of the current environment? This involves two key actions: 1. Managers must
continuously scan and monitor the external and internal environment 2. Managers must
continuously update and challenge the assumptions underlying the strategy. This may
even need changes in the strategic direction of the firm. While strategic control requires
the contemporary approach, operational control is generally done through traditional
approach. Operational Control
Operational control provides post-action evaluation and control over short periods. They
involve systematic evaluation of performance against predetermined objectives.
To be effective, operational control systems, involve four steps common to all post-
action controls: 1. Set standards of performance 2. Measure actual performance 3.
Identify deviations from standards set 4. Initiate corrective action
Setting of Standards
The first step in the control process is setting of standards. Standards are the targets
against which the actual performance will be measured. They are broadly classified into
quantitative standards and qualitative standards.
Quantitative
These are expressed in physical or monetary terms in respect of production, marketing,
finance etc. They may relate to: 1. Time standards 2. Cost standards 3. Productivity
standards 4. Revenue standards
Qualitative
Qualitative criteria are also important in setting standards. Human factors such as high
absenteeism and turnover rates, poor production quality or low employee satisfaction
can be the underlying causes of declining performance. So, qualitative standards also
need to be established to measure performance. Measurement of Performance
The second step in operational control is the measurement of actual performance. Here,
the actual performance is measured against the standards fixed. Standards of
performance act as the benchmark against which the actual performance is to be
compared. It is important, however, to understand how the measurement of
performance actually takes place. Operationally measuring is done through accounting,
reporting and communication systems. A variety of evaluation techniques are used for
this purpose, which are explained in the next section. The other important aspects of
measurement relates to:
Difficulties in Measurement
There are several activities for which it is difficult to set standards and measure
performance.
Example: Performance of a worker in terms of units produced in a day, week or month
can easily be measured. On the other hand, it is not easy to measure the contribution of
a manager or to assess departmental performance. The solution lays in developing
verifiable objectives, stated in quantitative and qualitative terms, against which
performance can be measured.
Timing of Measurement
Timing refers to the point of time at which measurement should take place. Delay in
measurement or measuring before time can defeat the very purpose of measurement.
So measurement should take place at critical points in a task schedule, which could be at
the end of a definable activity or the conclusion of a task.
Example: In a project implementation schedule, there could be several critical points at
which measurement would take place.
Periodicity in Measurement
Another important issue in measurement is “how often to measure”, Generally, financial
statements like budgets, balance-sheets, and profit and loss accounts are prepared
every year. But there are certain reports like production reports, sales reports etc. which
are done on a daily, weekly, monthly basis.
Identifying Deviations
The third step in the control process is identifying deviations. The measurement of
actual performance and its comparison with standards of performance determines the
degree of deviation or variation between actual performance and the standard. Broadly,
the following three situations may arise: 1. The actual performance matches the
standards 2. The actual performance exceeds the standards 3. The actual performance
falls short of the standards The first situation is ideal, but sometimes may not be
realistic. Generally, a range of tolerance limits within which the results may be accepted
satisfactorily, are fixed and deviations from it are considered as variance. The second
situation is an indication of superior performance. If exceeding the standards is
considered unusual, a check needs to be made to test the validity of tests and the
measurement system. The third type of situation, which indicates shortfall in
performance, should be taken seriously and strategists need to pinpoint the areas where
the performance is below standard and go into the causes of deviation. The analysis of
variance is generally presented in a format called ‘variance chart’ and submitted to the
top management for their evaluation. After noting the deviations, it is necessary to find
the causes of deviation, which can be ascertained through the following questions:
(Thomas) 1. Is the cause of deviation internal or external? 2. Is the cause random or
expected? 3. Is the deviation temporary or permanent? Analysis of variance leads to a
plan for corrective action.
Taking Corrective Action
The last and final step in the operational control process is taking corrective action.
Corrective action is initiated by the management to rectify the shortfall in performance.
If the performance is consistently low, the strategists have to do an in depth analysis and
diagnosis to isolate the factors responsible for such low performance and take
appropriate corrective actions. There are three courses for corrective action: 1. Checking
performance 2. Checking standards 3. Reformulating strategies, plans and objectives.
Checking Performance
Performance can be affected adversely by a number of factors such as inadequate
resource allocation, ineffective structure or systems, faulty programmes, policies,
motivational schemes, inefficient leadership styles etc. Corrective actions may therefore
include the change in strategy, systems, structure, compensation practices, training
programmes, redesign of jobs, replacement of personnel, re-establishment of standards,
budgets etc.
Checking Standards
When there is nothing significantly wrong with performance, then the strategist has to
check the standards. A manager should not mind revising the standards when the
standards set are unreasonably low or high level. Higher standards breed
discontentment and frustration. Low standards make employee unproductive. So,
standards check may result in lowering of standards if it is concluded that organisational
capabilities do not match the performance requirements. It may also lead to elevation of
standards if the conditions have improved to allow better performance. For example,
better equipment, improved systems, upgraded skills etc. need modification in existing
standards.
Reformulating Strategies, Plans and Objectives
A more radical and infrequent corrective action is to reformulate strategies, plans and
objectives. Strategic control, rather than operational control, generally leads to changes
in strategic direction, which will take the strategist back to the process of strategy
formulation and choice. Techniques like total quality management (TQM) and ISO 9000
standards series are examples of very good control mechanisms.
Notes
TQM is a management philosophy that aims at total customer satisfaction through
continuous improvement of all organisational processes. The main elements of TQM are:
1. Intense focus on the customer: The customer includes not only outsiders but also
internal customers. Concern for continuous improvement: TQM is committed to
improve quality continuously. 2. Improvement in the quality of everything the
organisation does: TQM relates not only to the final product but also how the
organisation handles deliveries, responds to complaints etc. 3. Accurate measurement:
TQM uses statistical techniques to measure every critical performance variable in the
organisation’s operations. These performance variables are then compared against
standards or benchmarks to identify problems. The problems are traced to their roots,
and causes are eliminated. 4. Empowerment of Employees: TQM involves all the
employees in the improvement process. Teams are widely used in TQM programmes as
empowerment vehicles for finding and solving problems.
Techniques of Strategic Control
Organisations use many techniques or mechanisms for strategic control. Some of the
important mechanisms are: 1. Management Information systems: Appropriate
information systems act as an effective control system. Management will come to know
the latest performance in key areas and take appropriate corrective measures. 2.
Benchmarking: It is a comparative method where a firm finds the best practices in an
area and then attempts to bring its own performance in that area in line with the best
practice. Best practices are the benchmarks that should be adopted by a firm as the
standards to exercise operational control. Through this method, performance can be
evaluated continually till it reaches the best practice level. In order to excel, a firm shall
have to exceed the benchmarks. In this manner, benchmarking offers firms a tangible
method to evaluate performance. 3. Balanced scorecard: It is a method based on the
identification of four key performance measures i.e. customer perspective, internal
business perspective, innovation and learning perspective, and the financial perspective.
This method is a balanced approach to performance measurement as a range of
financial and non-financial parameters are taken into account for evaluation. What is
Balanced Scorecard? The Balanced Scorecard method is a strategic approach and
performance management system that enables the organisations to translate its vision
and strategy into implementation. The Balanced Scorecard is a conceptual framework
for translating an organization's vision into a set of performance indicators distributed
among four perspectives: Financial, Customer, Internal Business Processes, and Learning
and Growth. Indicators are maintained to measure an organization's progress toward
achieving its vision. Other indicators are maintained to measure the long term drivers of
success. Through this scorecard, an organization monitors both its current performance
(finances, customer satisfaction, and business process results) and its efforts to improve
processes, motivate and educate employees, and enhance information systems - its
ability to learn and improve. A Balanced Scorecard enables us to measure not just how
we have been doing, but also how well we are doing ("current indicators" and can
expect to do in the future ("leading indicators"). This in turn gives us a clear picture of
reality. The Balanced Scorecard is a way of: 1. Measuring organizational, business unit's
or department's success 2. Balancing long-term and short-term actions 3. Balancing
different measures of success (a) Financial (b) Customer (c) Internal Operations (d)
Human Resource System & Development (learning and growth) Four Kinds of Measures
The scorecard seeks to measure a business from the following perspectives: 1. Financial
perspective: Measures reflecting financial performance, for example, number of
debtors, cash flow or return on investment. The financial performance of an
organization is fundamental to its success. Even non-profit organisations must make the
books balance. Financial figures suffer from two major drawbacks 2. Customer
perspective: This perspective captures the ability of the organization to provide quality
goods and services, effective delivery, and overall customer satisfaction for both Internal
& External customers. For example, time taken to process a phone call, results of
customer surveys, number of complaints or competitive rankings. 3. Business Process
perspective: This perspective provides data regarding the internal business results
against measures that lead to financial success and satisfied customers. To meet the
organizational objectives and customers expectations, organizations must identify the
key business processes at which they must excel. Key processes are monitored to ensure
that outcomes are satisfactory. Internal business processes are the mechanisms through
which performance expectations are achieved. For example, the time spent prospecting
new customers, number of units that required rework or process cost. 4. Learning and
Growth perspective: This perspective captures the ability of employees, information
systems, and organizational alignment to manage the business and adapt to change.
Processes will only succeed if adequately skilled and motivated employees, supplied
with accurate and timely information, are driving them. In order to meet changing
requirements and customer expectations, employees are being asked to take on
dramatically new responsibilities that may require skills, capabilities, technologies, and
organizational designs that were not available before. It measures the company's
learning curve for example, number of employee suggestions or total hours spent on
staff training. Objectives, Measures, Targets and Initiatives Within each of the balanced
scorecard financial customer, internal process, and learning perspectives, the
organisation must define the following: 1. Strategic objectives - the strategy for
achieving that perspective. 2. Measures - how progress for that particular objective will
be measured. 3. Targets - the target value sought for each measure 4. Initiatives - what
will be done to facilitate reaching out the target. The balanced scorecard provides an
inter-connected model for measuring performance and revolves around four distinct
perspectives - financial, customer, internal processes, and innovation and learning. Each
of these perspectives is stated in terms of the organisation's objectives, performance
measures, targets, and initiatives, and all are harnessed to implement corporate vision
and strategy. The name also reflects the balance between the short-and long-term
objectives, between financial and non-financial measures, between lagging and leading
indicators and between external and internal performance perspectives. Under the
balance scorecard system, financial measures are the outcome, but do not give a good
indication of what is or will be going on in the organization. Measures of customer
satisfaction, growth and retention is the current indicator of company performance, and
internal operations (efficiency, speed, reducing non-value added work, minimizing
quality problems) and human resource systems and development are leading indicators
of company performance. Robert S Kaplan and David P Norton the architects of the
balanced scorecard approach, recognized early that long-term improvement in overall
performance was unlikely to happen through technology only and hence placed greater
emphasis on organizational learning and growth. These, in turn, consist of the integrated
development of employees, information, and systems capabilities. Context and Strategy
Just as financial measures have to be put in context, so does measurement itself.
Without a tie to a company strategy, more importantly, as the measure of company
strategy, the balanced scorecard is useless. A mission, strategy and objectives must be
defined. Measures of that strategy must be agreed upon to and actions need to be taken
for a measurement system to be fully effective. Otherwise, it will appear as if the
organisation is standing at a crossroad but unaware of which path to take. Purpose of
the Balanced Scorecard Kaplan and Norton found that organisations are using the
scorecard to: 1. Clarify and update strategy 2. Communicate strategy throughout the
company 3. Align unit and individual goals with strategy 4. Link strategic objectives to
long term targets and annual budgets 5. Identify and align strategic initiatives 6. Conduct
periodic performance reviews to learn about and improve strategy. The Process of
Building a Balanced Scorecard Kaplan and Norton suggest following four step process for
building a scorecard: 1. Define the measurement architecture 2. Specify strategic
objectives 3. Choose strategic measures 4. Develop the implementation plan Benefits of
Balanced Scorecard Some of the benefits include: 1. Translation of strategy into
measurable parameters 2. Communication of the strategy to all stakeholders 3.
Alignment of individual goals with the organisation's strategic objectives 4. Feed-back of
implementation results to the strategic planning process 5. Preparing the organisation
for the Change - It provides for a front-end justification as well as a focus and
integration for the continuous improvement, re-engineering and transformation process
Balanced Scorecard for Enhancing Performance In such constantly shifting
environments, management must learn to continuously adapt to new strategies that can
emerge from capitalizing on opportunities or countering threats. A properly constructed
balanced scorecard can provide management with the ideal tool in reacting to the
turbulent environment and helping the organisation to correct the course to success.
Scorecard provides managers with feedback, thus, enabling them to monitor and adjust
the implementation of their strategy - even to the extent of changing the strategy itself.
In today's information age, organisations operate in very turbulent environments.
Planned strategy though initiated with the best of intentions and with the best available
information at the time of planning may no longer be appropriate or valid for
contemporary conditions. As companies have applied the balanced scorecard, they have
begun to recognize that the scorecard represents a fundamental change in the
underlying assumptions about performance measurement. The scorecard puts strategy
and vision, not control, at the centre. It establishes goals but assumes that people will
adopt whatever behaviours and take whatever actions arenecessary to arrive at those
goals. The measures are designed to pull people toward the overall vision. Senior
managers may know what the end result should be, but they cannot tell employees
exactly how to achieve that result, because the conditions in which employees operate
are constantly changing. This new approach to performance measurement is consistent
with the initiatives under way in many organisations: cross-functional integration,
customer supplier partnerships, global scale, continuous improvement, and team rather
than individual accountability. By combining the financial, customer, internal process
and innovation, and organizational learning perspectives, the balanced scorecard helps
managers understand, at least implicitly, many interrelationships. This understanding
can help managers transcend traditional notions about functional barriers and ultimately
lead to improved decision making, problem solving and enhanced performance. The
balanced scorecard keeps organisations moving forward. 4. Key factor rating: It is a
method that takes into account the key factors in several areas and then sets out to
evaluate performance on the basis of these. This is quite a comprehensive method as it
takes a holistic view of the performance areas in an organisation. 5. Responsibility
Centres: Control systems can be established to monitor specific functions, projects or
divisions. Responsibility centers are used to isolate a unit so that it can be evaluated
separately from the rest of the corporation. There are five major types of responsibility
centers: Cost centres, Revenue centres, Expense centres, Profit centres and Investment
centres. Each responsibility centre has its own budget and is evaluated on the basis of its
performance. 6. Network techniques: Network techniques such as Programme
Evaluation and Review Technique (PERT), Critical Path Method (CPM), and their variants,
are used extensively for the operational controls of scheduling and resource allocation in
projects. When network techniques are modified for use as a cost accounting system,
they become highly effective operational controls for project costs and performance. 7.
Management by Objectives (MBO): It is a system proposed by Drucker, which is based
on a regular evaluation of performance against objectives which are decided upon
mutually by the superior and the subordinate. By the process of consultation, objective-
setting leads to the establishment of a control system that operates on the basis of
commitment and self-control. Thus, the scope of MBO to be used as an operational
control is quite extensive. 8. Memorandum of Understanding: This is an agreement
between a PSU and the administrative ministry of the government in which both specify
their respective commitments and responsibilities. The system works as an effective
control on the performance of the PSU
Role of Organisational Systems in Evaluation
There are six types of organisational system involved in evaluation.
Information System
Organisations evaluate by comparing actual performance with standards. Purpose of
information management system is to enable managers to keep the track of
performance through control reports. Whether strategic surveillance or financial
analysis, are based on information system to provide relevant & timely data to managers
to allow them to evaluate performance & strategy & initiate corrective action
Control System
The control system is core of any evaluation process & is used for setting standards,
measuring performance, analysing variances, & taking corrective actionAppraisal System
This is the system that actually evaluates performance. When measuring the
performance of managers, it is contribution to the organisational objectives which is
sought to be measured. The evaluation process through appraisal system, measure the
actual performance and provides for the control system to work.
Motivation System
The primary role of the motivation system is to induce strategically desirable behavior so
that managers are encouraged to work towards the achievement of organisational
objectives. This system plays an important role in ensuring that deviations of actual
performance with standards. Performance checks, which are a feedback in the
evaluation process, are done through the motivation process.
Development System
The development system prepares the managers for performing strategic & operational
tasks. Among the several aims of development, the most important is to match a person
with the job to be performed. This in other words is matching actual performance with
standards. This matching can be done provided it is known what a manager is required
to do and what is deficient in terms of knowledge, skills & attitude. Such a deficiency is
located through the appraisal system. The role of development system in evaluation is to
help the strategists to initiate & implement corrective action.
Planning System
The evaluation process also provides feedback to planning systems for the reformulation
of strategies, plans & objectives. Thus planning system closely interacts with the
evaluation process on a continual basis.