CHAPTER ONE: NATURE OF STRATEGIC MANAGEMENT

1.1. Strategic Management: An overview

Introduction:

What makes one organization a winner, while another fails to take advantage of its
opportunities? What factors allow an organization to be successful while the others fail? The
answer lies in the strategic decisions made by top management of these organizations. Strategic
management is the most exciting aspect of managing in all type of organizations. In a dynamic,
competitive environment, an organization must either move forward, with purpose and direction
or fall back. There is no standing still. The difference between success and failure depends upon
how well the manager is able to perform the strategic management function.

1.2. Strategic Management: Definition and Importance

An organizational strategy is a course of action used to achieve major objectives. The term
strategy is derived from the Greek word, Strategia, meaning is the art being a general (plan to
defeat the enemy).

It is clear that different authors have defined strategic management differently.

Strategic management is defined as the art and science of formulating, implementing, and
evaluating cross functional decisions that enable organizations, ministries, bureaus to achieve
their goals/objectives. As the definition implies strategic management is an integrated
management that consists of marketing, finance/accounting, production/operations, management
information system.

Strategy is the pattern of objective, purposes, goals, and the major policies and plans for
achieving these goals stated in such a way so as to define what business the company is in or is
to be and the kind of company it is or is to be.

Strategic management is a stream of decisions and actions which leads to the development of an
effective strategy or strategies to help achieve corporate objectives. According to this definition,
the end result of strategic management is a strategy or a set of strategies for the organization.

Strategic management is the process of managing the pursuit of the organization’s mission while
managing the relationship of the organization to its environment; especially with respect to
environmental stakeholders and the major constitutes in its internal and external environments
that affect the actions.

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Strategic management is a systematic approach to a major and increasingly important
responsibility of general management to position and relate the firm to its environment in a way
which will assure its continued success and make it secure from surprises.

Strategic management is considered as both decision-making and planning, or the set of activities
related to the formulation and implementation of strategies to achieve organizational objectives.
The emphasis in strategic management is on those general management responsibilities which
are essential to relate the organization to the environment in which a way that its objectives may
be achieved.

1.3. Stages of Strategic Management:

The strategic management consists of three stages: These include strategy formulation, strategy
implementation, and strategy evaluation.

Strategy formulation is the process of developing the mission, identifying an organization’s

external opportunities and threats, determining internal strengths and weaknesses, establishing
long term objectives, generating alternative strategies, and choosing particular strategies to
pursue. Strategy formulation includes deciding what new activities to carry out, what activities
to abandon, how to allocate resources, whether to expand operation or diversify, whether to
merge or create joint venture with others.

Strategy implementation is the process of establishing annual objectives, device policies,

motivate employees and allocate resources so that formulated strategies can be executed.
Strategy implementation involves developing a strategy-supportive culture, creating an effective
organizational structure, redirecting marketing efforts, preparing budgets, developing and
utilizing information system, and linking employees’ compensation to their performances.

The implementation stage is also called the action stage of strategic management. Strategy
implementation means mobilizing resources (employees and other logistics) in order to put
formulated strategies into action. It requires personal discipline, commitment and scarifies.
Strategies formulated but not implemented serves no purpose. Interpersonal skills are especially
critical for successful strategy implementation. Strategy implementation must be the tasks of all
employees and managers in the organization.

Strategy evaluation is the final stage of strategic management. Managers desperately should
know when particular strategies are not working well. All strategies are subjected to future
modification because both external and internal factors are subjected to changes. The three
fundamental strategy evaluation activities are:

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Reviewing internal and external factors that are the bases for current strategies

Measuring performance, and taking corrective actions

Strategy evaluation is needed because of the success of today in no way guarantees the success
of tomorrow. Success always creates new and different problems.

Strategy formulation, implementation, and evaluation are activities that must be performed at
three hierarchical levels in big organizations and bureaus: Federal, Regional, and Zonal or
Corporate, Divisional and Strategic Business Unit. By fostering communication and integration
among managers at the different hierarchical levels, strategic management helps the
organization/ the bureau as a competitive team.

Characteristics of Strategic Management

1. Future oriented: Strategic management is focused on proposing the future course of

action. An emphasis is placed on the development of projections that will enable the firm
to select the most promising strategic options.
2. Requires considering external environment: strategic management requires
considering changes that will take place in the external environment.
3. Requires larger resource commitment: Strategic management determines the future
direction of an organization. In the process, substantial allocation of resources is
proposed. Therefore, if there are failures of strategic management, the whole lot of
resource of the organization will be allocated in the wrong direction.
4. Requires involvement of top management : Since the future prospective success or
failure is determined in the strategic management, top management groups are actively
involved in determining major corporate objectives and framing out strategies.

1.4. Key Terms in Strategic Management and the Strategic Management Model
Key Terms in Strategic Management

Strategic management comprises nine key terms, these are:

1. Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. This term can
be defined as “anything that a firm does especially well compare to rival firm”.’ When a firm can
do something that rival firms cannot do, or owns something that rival firm’s desire, that can
represent a competitive advantage. Getting and keeping competitive advantage is essential for
long-term success in an organization. Pursuit of competitive advantage leads to organizational
success or failure.

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A firm must strive to achieve sustained competitive advantage by

i. Continually adapting to changes in external trends and events and internal capabilities,
competencies, and resources; and by
ii. Effectively formulating, implementing, and evaluating strategies that capitalize upon
those factors.
2. Strategists
Strategists are the individuals who are most responsible for the success or failure of an
organization. Strategists have various job titles, such as chief executive officer, president, and
owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Writers on
organizational behavior say, “All strategists have to be chief learning officers. We are in an
extended period of change. If our leaders aren’t highly adaptive and great models during this
period, then our companies won’t adapt either, because ultimately leadership is about being a
role model”

Strategists help an organization gather, analyze, and organize information. They track industry
and competitive trends, develop forecasting models and scenario analyses, evaluate corporate
and divisional performance, spot emerging market opportunities, identify business threats, and
develop creative action plans. Strategic planners usually serve in a support or staff role. Usually
found in higher levels of management, they typically have considerable authority for decision
making in the firm.

3. Vision and Mission Statements

Many organizations today develop a vision statement that answers the question, “What do we
want to become?” Developing a vision statement is often considered the first step in strategic
planning, preceding even development of a mission statement. Many vision statements are a
single sentence. For example, the vision statement of the Ethiopian Electric Power Corporation
(EEPCo) is “To be a center of Excellence in providing quality electric service at every one’s
door and being competitive export industry.”

Mission statements are “enduring statements of purpose that distinguish one business from other
similar firms. A mission statement identifies the scope of a firm’s operations in product and
market term.” It addresses the basic question that faces all strategies: “What is our business?” A
clear mission statement describes the values and priorities of an organization. Developing a
mission statement compels strategists to think about the nature and scope of present operations
and to assess the potential attractiveness of future markets and activities. A mission statement
broadly charts the future direction of an organization. An example of a mission statement is
provided below for Ethiopian Electric Power Corporation (EEPCo) is

To provide adequate and quality electricity generation, transmission, distribution, and sales
services, through continuous improvement of utility management practices responsive to the
socio-economic development and environmental protection need of the public”.

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4. External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural, demographic,
environmental, political, legal, governmental, technological, and competitive trends and events
that could significantly benefit or harm an organization in the future.

Opportunities and threats are largely beyond the control of a single organization-thus the word
external. The wireless revolution, biotechnology, population shifts, changing work values and
attitudes, space exploration, recyclable packages, and increased competition from foreign
companies are examples of opportunities or threats for companies. These types of changes are
creating a different type of consumer and consequently a need for different types of products,
services, and strategies. Many companies in many industries face the severe external threat of
online sales capturing increasing market share in their industry.

A basic tenet or principle of strategic management is that firms need to formulate strategies to
take advantage of external opportunities and to avoid or reduce the impact of external threats.
For this reason, identifying, monitoring, and evaluating external opportunities and threats are
essential for success. This process of conducting research and gathering and assimilating external
information is sometimes called environmental scanning or industry analysis. Lobbying is one
activity that some organizations utilize to influence external opportunities and threats.

5. Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities that are
performed especially well or poorly. They arise in the management, marketing,
finance/accounting, production/operations, research and development, and management
information systems activities of a business. Identifying and evaluating organizational strengths
and weaknesses in the functional areas of a business is an essential strategic-management
activity. Organizations strive to pursue strategies that capitalize on internal strengths and
eliminate internal weaknesses.

Strengths and weaknesses are determined relative to competitors. Relative deficiency or

superiority is important information. Also, strengths and weaknesses can be determined by
elements of being rather than performance. For example, a strength may involve ownership
resources or a historic reputation for quality. Strengths and weaknesses may be determined
relative to a firm’s own objectives. For example, high levels of inventory turnover may not be
strength to a firm that seeks never to stock-out.

Internal factors can be determined in a number of ways, including computing ratios, measuring
performance, and comparing to past periods and industry averages. Various types of surveys also
can be developed and administered to examine internal factors such as employee morale,
production efficiency, advertising effectiveness, and customer loyalty.

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6. Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in pursuing its
basic mission essential. Long-term means more than one year. Objectives are for organizational
success because they state direction; aid in evaluation; create synergy; reveal priorities; focus
coordination; and provide a basis for effective planning, organizing, motivating, and controlling
activities. Objectives should be SMART

7. Strategies

Strategies are the means by which long-term objectives will be achieved. Business strategies may
include geographic expansion, diversification, acquisition, product development, market
penetration, retrenchment, divestiture, liquidation, and joint venture.

Strategies are potential actions that require top management decisions and large amounts of the
firm’s resources. In addition, strategies affect an organization’s long-term prosperity, typically
for at least five years, and thus are future-oriented.

8. Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach long-term
objectives. Like long-term objectives, annual objectives should be measurable, quantitative,
challenging, realistic, consistent, and prioritized. They should be established at the corporate,
divisional, and functional levels in a large organization. Annual objectives should be stated in
terms of management, marketing, finance/accounting, production/operations, research and
development, and management information systems (MIS) accomplishments. A set of annual
objectives is needed for each long-term objective. Annual objectives are especially important in
strategy implementation, whereas long-term objectives are particularly important in strategy
formulation. Annual objectives represent the basis for allocating resources.

9. Policies

Policies are the means by which annual objectives will be achieved. Policies include guidelines,
rules, and procedures established to support efforts to achieve stated objectives. Policies are
guides to decision making and address repetitive or recurring situations.

Policies are most often stated in terms of management, marketing, finance/ accounting,
production/operations, research and development, and computer information systems activities.
Policies can be established at the corporate level and apply to an entire organization at the
divisional level and apply to a single division or at the functional level and apply to particular
operational activities or departments. Policies, like annual objectives, are especially important in
strategy implementation because they outline an organization’s expectations of its employees
and managers.

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1.4 Benefits of Strategic Management

Strategic management allows the organization to be more proactive than reactive in

shaping its own future. It allows organizations to initiate and influence activities
rather than being influenced by occasions and control their future destiny.

Historically, the principal benefit of strategic management has been to help

organizations in choosing better strategies through the use of more systematic,
logical and rational approach. Communication is a key to successful strategic
management. Through involvement in the strategy formulation, implementation
and evaluation, managers and employees become committed to supporting their
organization. Organizations are expected to keep their employees well informed
about the objectives and directions of their organizations and about the progresses
that were made towards achieving those objectives. The employees should also be
informed about customers’ behavior, competitors, and about the operations of the
organizations.

The major aim of the strategic management process is to achieve good

understanding and commitment from all managers and employees. Understanding
about the organization may be the most important benefit of the strategic
management process, followed by the commitment of managers and employees.
When managers and employees understand about what their organizations are
doing and why they are doing, they start to feel as being part of their organization
and become committed to assist their organizations. After understanding and
commitment, both managers and employees become creative and innovative on
the way they are performing activities. This will be the case especially when a
linkage is made between the compensation scheme and employees’ performances.

A greater importance of strategic management is, therefore, the opportunity it

provides to empower individuals. Empowerment is the act of strengthening an
individuals’ sense of effectiveness. Empowerment is encouraging and rewarding
individuals to take the initiatives imagination of doing things in a better way.

 Enhanced awareness of external threats to the organization

 Increased employees’ productivity
 Reduced resistance to change, and

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  Clear understanding of performance-reward relationships
 Brings order and discipline to the organization
 Creates confidence for managers and employees
 Points the necessary corrective measures to be taken
1.5 Business Ethics and Strategic Management

Business ethics can be defined as principles of conduct within organizations that guide decision
making and behavior. Good business ethics is a prerequisite for good strategic management;
good ethics is just good business!

An ethics “culture” needs to permeate or fill organizations! To help create an ethics culture,
some organizations have developed a code-of- conduct manual outlining ethical expectations and
giving examples of situations that commonly arise in their businesses.

Good organizational ethics is the basis for the formulation and implementation of good strategic
management. Organizations should develop a certain code of ethics that can support them to
enhance the commitment of their managers and employees toward the strategy formulation,
implementation and evaluation. Once ethical values/codes are set, organizations need to conduct
periodic workshop to sensitize people to these ethical values.

Chapter Two Strategy Formulation: The Business Vision, Mission and Values
Statements
2.1 Vision-Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately
achieve. Thus, a vision statement articulates the ideal description of an organization and gives shape to its
intended future. In other words, a vision statement points the firm in the direction of where it would
eventually like to be in the years to come. Vision is “big picture” thinking with passion that helps people
feel what they are supposed to be doing. People feel what they are to do when their firm’s vision is
simple, positive, and emotional. A vision stretches and challenges people and evokes emotions and
dreams. Imagine the dreams evoked and the emotions felt when employees learn that as part of the firm’s
vision, the new CEO of LG Electronics says, “We must be a great company with great people.” It is also
important to note that vision statements reflect a firm’s values and aspirations and are intended to capture
the heart and mind of each employee and, hopefully, many of its other stakeholders. A firm’s vision tends
to be enduring while its mission can change in light of changing environmental conditions.

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2.2 Mission- An enduring statement of purpose that distinguishes one organization from other similar
enterprises, the mission statement is a declaration of an organization’s “reason for being.” It answers the
pivotal question “What is our business?” A clear mission statement is essential for effectively establishing
objectives and formulating strategies. Sometimes called a creed statement, a statement of purpose, a
statement of philosophy, a statement of beliefs, a statement of business principles, or a statement
‘defining our business,’ a mission statement reveals what an organization wants to be and whom it wants
to serve. All organizations have a reason for being, even if strategists have not consciously transformed
this reason into writing.

Example, PepsiCo’s mission is to increase the value of our shareholders’ investment. We do this through
sales growth, cost controls, and wise investment resources. We believe our commercial success depends
upon offering quality and value to our consumers and customers; providing products that are safe,
wholesome, economically efficient, and environmentally sound; and providing a fair return to our
investors while adhering to the highest standards of integrity.

2.2.1 Characteristics of a Mission Statement

a) A Declaration of Attitude
A mission statement is more than a statement of specific details; it is a declaration of attitude and
outlook. It usually is broad in scope for at least two major reasons. First a good mission statement
allows for the generation and consideration of a range of feasible alternative objectives and
strategies without unduly stifling management creativity. Second, a mission statement needs to be
broad to effectively reconcile differences among, and appeal to, an organization’s diverse
stakeholders, the individuals and groups of individuals who have a special stake or claim on the
company.

B) A Customer Orientation

A good mission statement describes an organization’s purpose, customers, products or services, markets,
philosophy, and basic technology. According to one scholar, a mission statement should be:

1) define what the organization is and what the organization aspires to be,
2) be limited enough to exclude some ventures and broad enough to allow for creative growth,
3) distinguish a given organization from all others,
4) serve as a framework for evaluating both current and prospective activities, and
5) be stated in terms sufficiently clear to be widely understood throughout the organization.

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A good mission statement reflects the anticipations of customers. Rather than developing a product and
then trying to find a market, the operating philosophy of organizations should be to identify customers’
needs and then provide a product or service to fulfill those needs. Good mission statements identify the
utility of a firm’s products to its customers.

2.2.2 Components of a Mission Statement

Mission statements can and do vary in length, content, format, and specificity. Most practitioners and
academicians of strategic management feel that an effective statement exhibits nine characteristics or
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 of these essential components:

1) Customers —who are the firm’s customers?

2) Products or services—what are the firm’s major products or services?
3) Markets—geographically, where does the firm compete?
4) Technology—is the firm technologically current?
5) Concern for survival, growth, and profitability--Is the firm committed to growth and financial
soundness?
6) Philosophy—what are the basic beliefs, values, aspirations, and ethical priorities of the firm?
7) 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 employees a valuable asset of the firm?

2.3 Business Values- the values of a company state how managers and employees should
conduct themselves, how they should do business, and what kind of organization they should
build to help the company achieve its mission. In so far as they help drive and shape behavior
within a company, values are commonly seen as the bedrock of a company’s organizational
culture: the set of values, norms, and standards that control how employees work to achieve an
organization’s mission and goals. An organization’s culture is often seen as an important source
of its competitive advantage. This guide explains a simple 3-step process that you can take to
develop values for your business. Business values can be:

 the principles you stand for personally - for example, integrity, perseverance,
determination, innovation, respect, passion and fair-mindedness
 the beliefs and attitudes you and your staff have in common in the workplace - how
people should behave, the way managers should act, how work should be done, how staff
should treat each other at work

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  Your organization’s standards of behavior - what is acceptable business practice.
From a customer viewpoint, values are the kind of service they can expect to get when
they deal with your business.

A clear set of values, agreed and understood by management and employees, are often behind
most successful organizations’. If your business is yet to establish a set of values, the 3-step
process below can help you to identify and develop them.

Value is measured by a product’s performance characteristics and by its attributes for which customers
are willing to pay. Firms must provide value to customers that is superior to the value provided by
competitors in order to create a competitive advantage.

2.4 Strategic Issues

In today’s highly competitive business environment, success depends on a strong business strategy.
Business managers and their employees should invest in quality customer care, and ensure customer
satisfaction by offering a variety of the right products.

Strategic issues require careful decisions and clarifications to resolve, and have a critical impact on the
performance of a business, according to Thomas Ambler of Center for Simplified Strategic Planning.
Other strategic issues such as marketing, human resources management, product development and
strategic alliances should be resolved in line with specific business goals. Failure to resolve these strategic
issues hurts business operations, leading to losses. The management is charged with the responsibility of
making decisions and issuing guidelines for the subordinate staff to avoid confusions and enhance
productivity

2.5 Setting goals and objectives

Goals and objectives provide the foundation for measurement. Goals are outcome statements that
define what an organization is trying to accomplish, both programmatically and organizationally.
Goals are usually a collection of related programs, a reflection of major actions of the
organization, and provide rallying points for managers.

In contrast to goals, objectives are very precise, time-based, measurable actions that support the
completion of a goal. Objectives typically must (1) be related directly to the goal; (2) be clear,
concise, and understandable; (3) be stated in terms of results; (4) begin with an action verb; (5)
specify a date for accomplishment; and (6) be measurable. Apply our umbrella analogy and think
of each spoke as an objective. Without specific objectives, the general goal could not be

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 accomplished—just as an umbrella cannot be put up or down without the spokes. Importantly,
goals and objectives become less useful when they are unrealistic or ignored.

CHAPTER THREE: EXTERNAL ENVIRONMETAL ANALYSIS

3.1. The Nature of an External Audit

The purpose of an external audit is to develop a finite list of opportunities that could benefit a
firm and Threats that should be avoided. As the term finite suggests, the external audit is not
aimed at developing an exhaustive list of every possible factor that could influence the business;
rather, it is aimed at identifying key variables that offer actionable responses. Firms should be
able to respond either offensively or defensively into the factors by formulating strategies that
take advantage of external opportunities or that minimize the impact of potential threats.

3.2. The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and employees as
possible. As emphasized in earlier discussions, involvement in the strategic-management process
can lead to understanding and commitment from organizational members. Individuals appreciate
having the opportunity to contribute ideas and to gain a better understanding of their firm's
industry, competitors, and markets. To perform an external audit, a company first must gather
competitive intelligence and information about social, cultural, demographic, environmental,
economic, political, legal, governmental, and technological trends. Individuals can be asked to
monitor various sources of information such as key magazines, trade journals, and newspapers.
These persons can submit periodic scanning reports to a committee of managers charged with
performing the external audit.

3.3. Analysis of Key External Forces

There are a number of key external forces that play a vital role in the external audit. Following
are the five main categories of key external audit.
a) Economic forces regulate the exchange of materials, money, energy, and information.
b) Technological forces generate problem-solving inventions.
c) Political–legal forces allocate power and provide constraining and protecting laws and

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regulations.
d) Socio cultural forces regulate the values, mores, and customs of society.
e) Competitive Forces

Industry analysis refers to an in-depth examination of key factors within a corporation’s

task environment. The natural, societal, and task environments must be monitored so that
strategic factors that are likely to have a strong impact on corporate success or failure can
be detected.
How Can STEEP Analysis Be Used to Monitor Natural and Societal Environmental
Trends? By including ecological trends from the natural environment, this scanning can
be called STEEP Analysis, the scanning of Socio cultural, Technological, Economic,
Ecological, and Political–legal environmental forces. (It may also be called PESTEL
Analysis for Political, Economic, Socio cultural, Technological, Ecological, and Legal
forces.) Obviously, trends in any one area may be very important to firms in one industry
but less important to those in others.
 Demographic trends are part of the socio cultural aspect of the societal
environment. With faster growth, developing nations will continue to have more
young than old people, but it will be the reverse in the slower-growth industrialized
nations.

 Changes in the technological part of the societal environment can also have a great
impact on multiple industries. For example, improvements in computer
microprocessors have not only led to the widespread use of home computers, but
also to better automobile engine performance in terms of power and fuel economy
through the use of microprocessors to monitor fuel injection.

 Trends in the economic part of the societal environment can have an obvious
impact on business activity. For example, an increase in interest rates means fewer
sales of major home appliances because a rising interest rate tends to be reflected in
higher mortgage rates. Because higher mortgage rates increase the cost of buying a
house, the demand for new and used houses tends to fall. Because most major home
appliances are sold when people change houses, a reduction in house sales soon

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 translates into a decline in sales of refrigerators, stoves, and dishwashers and
reduced profits for everyone in that industry.
 Trends in the ecology of the natural environment can be driven by climate change
and can have a huge impact on a societal environment and multiple industries.

 Trends in the political–legal part of the societal environment have a significant

impact on business firms. As large companies find it more difficult to acquire
another firm in the same or in a related industry, they are typically driven to
diversify into unrelated industries.
 INDUSTRY ANALYSIS

An industry is a group of firms producing a similar product or service, such as financial

services or soft drinks. An examination of the important stakeholder groups, such as
suppliers and customers, in the task environment of a particular corporation is a part of
industry analysis.
3.3.1. Michael Porter’s Approach to Industry Analysis

Michael Porter, an authority on competitive strategy, contends that a corporation is

most concerned with the intensity of competition within its industry. Basic competitive
forces, which are depicted in Figure 3.4, determine the intensity level. “The collective
strength of these forces,” he contends, “determines the ultimate profit potential in the
industry, where profit potential is measured in terms of long-run return on invested capital.
“The stronger each of these forces is, the more companies are limited in their ability to
raise prices and earn greater profits. Although Porter mentions only five forces, a sixth—
other stakeholders—is added here to reflect the power that government, local communities,
and other groups from the task environment wield over industry activities.
Using the model in Figure 3.4, a strong force can be regarded as a threat because it is
likely to reduce profits. In contrast, a weak force can be viewed as an opportunity because
it may allow the company to earn greater profits. In the short run, these forces act as
constraints on a company’s activities. In the long run, however, it may be possible for a
company, through its choice of strategy, to change the strength of one or more of the forces
to the company’s advantage.

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 A. Threat of New Entrants
New entrants are newcomers to an existing industry. They typically bring new capacity, a
desire to gain market share, and substantial resources. Therefore, they are threats to an
established corporation. The threat of entry depends on the presence of entry barriers and
the reaction that can be expected from existing competitors. An entry barrier is an
obstruction that makes it difficult for a company to enter an industry. Some of the possible
barriers to entry are the following:
• Economies of Scale. Scale economies in the production and sale of microprocessors, for
example, gave Intel a significant cost advantage over any new rival.
• Product Differentiation. Corporations like Procter & Gamble and General Mills,
which manufacture products like Tide and Cheerios, create high entry barriers through their
high levels of advertising and promotion.
• Capital Requirements. The need to invest huge financial resources in manufacturing
facilities in order to produce large commercial airplanes creates a significant barrier to
entry to any new competitor for Boeing and Airbus.
• Switching Costs. Once a software program like Excel or Word becomes established in an
office, office managers are very reluctant to switch to a new program because of the
high training costs.
• Access to Distribution Channels. Small entrepreneurs often have difficulty obtaining
supermarket shelf space for their goods because large retailers charge for space on their
shelves and give priority to the established firms who can pay for the advertising needed to

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 generate high customer demand.
• Cost Disadvantages Independent of Size. Microsoft’s development of the first
widely adopted operating system (MS-DOS) for the IBM-type personal computer gave it a
significant advantage over potential competitors. Its introduction of Windows helped to
cement that advantage
Government Policy. Governments can limit entry into an industry through licensing
requirements by restricting access to raw materials, such as offshore oil drilling sites.
B. Rivalry among Existing Firms
Rivalry is the amount of direct competition in an industry. In most industries, corporations
are mutually dependent. A competitive move by one firm can be expected to have a
noticeable effect on its competitors and thus may cause retaliation or counter efforts. For
example, the entry by direct marketing companies such as Dell and
Gateway into a PC industry previously dominated by IBM, Apple, and Compaq increased
the level of competitive activity to such an extent that any price reduction or new
product introduction is now quickly followed by similar moves from other PC makers.
According to Porter, intense rivalry is related to the presence of the following factors:
• Number of Competitors. When competitors are few and roughly equal in size, such as
in the auto and major home appliance industries, they watch each other carefully to make
sure that any move by another firm is matched by an equal countermove.
• Rate of Industry Growth. Any slowing in passenger traffic tends to set off price wars in
the airline industry because the only path to growth is to take sales away from a competitor.
• Product or Service Characteristics. A product can be unique, with many qualities
differentiating it from others of its kind or it may be a commodity, a product like gasoline,
whose characteristics are the same, regardless of who sells it.
• Amount of Fixed Costs. Because airlines must fly their planes on a schedule regardless
of the number of paying passengers for any one flight, they offer cheap stand by fares
whenever a plane has empty seats.
• Capacity. If the only way a manufacturer can increase capacity is in a large increment
by building a new plant (as in the paper industry), it will run that new plant at full capacity
to keep its unit costs as low as possible—thus producing so much that the selling price falls
throughout the industry.

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 • Height of Exit Barriers. Exit barriers keep a company from leaving an industry. The
brewing industry, for example, has a low percentage of companies that leave the
industry because breweries are specialized assets with few uses except for making beer.
• Diversity of Rivals. Rivals that have very different ideas of how to compete are likely to
cross paths often and unknowingly challenge each other’s position. This happens often in
retailing.
C. Threat of Substitute Products or Services
Substitute products are those products that appear to be different but can satisfy the same
need as another product. 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. “To
the extent that switching costs are low, substitutes may have a strong effect on an
industry. Tea can be considered a substitute for coffee. If the price of coffee goes up high
enough, coffee drinkers will slowly begin switching to tea. The price of tea thus puts a
price ceiling on the price of coffee. Sometimes a difficult task, the identification of
possible substitute products or services means searching for products or services that can
perform the same function, even though they may not appear to be easily substitutable.
D. Bargaining Power of Buyers
Buyers affect an industry through their ability to force down prices, bargain for higher
quality or more services, and play competitors against each other. A buyer or distributor
is powerful if some of the following factors hold true:
• A buyer purchases a large proportion of the seller’s product or service (e.g., oil
filters purchased by a major automaker).
• A buyer has the potential to integrate backward by producing the product itself
(e.g., a newspaper chain could make its own paper).
Alternative suppliers are plentiful because the product is standard or undifferentiated (e.g.,
motorists can choose among many gas stations).
• Changing suppliers costs very little (e.g., office supplies are sold by many
vendors).
• The purchased product represents a high percentage of a buyer’s costs, thus providing an
incentive to shop around for a lower price (e.g., gasoline purchased for sale by convenience
stores makes up half their costs but very little of their profits).

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 • A buyer earns low profits and is thus very sensitive to costs and service differences (e.g.,
grocery stores have very small margins).
• The purchased product is unimportant to the final quality or price of a buyer’s products
or services and thus can be easily substituted without adversely affecting the final product
(e.g., electric wire bought for use in lamps).
E. Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of
purchased goods and services. A supplier or supplier group is powerful if some of the
following factors apply:
• The supplier industry is dominated by a few companies, but it sells too many (e.g.,
the petroleum industry).
• Its product or service is unique or it has built up switching costs (e.g., word processing
software).
• Substitutes are not readily available (e.g.,
electricity).
• Suppliers are able to integrate forward and compete directly with their present customers
(e.g., a microprocessor producer like Intel could easily make PCs).
• A purchasing industry buys only a small portion of the supplier group’s goods and
services and is thus unimportant to the supplier (e.g., sales of lawn mower tires are less
important to the tire industry than are sales of auto tires).
F. Relative Power of Other Stakeholders
A sixth force should be added to Porter’s list to include a variety of stakeholder groups
from the task environment. Some of these other stakeholders are governments (If not
explicitly included elsewhere), local communities, creditors (if not included with
suppliers), trade associations, special-interest groups, shareholders, and complementary.
A complementary is a company (e.g., Microsoft) or an industry whose product works well
with a firm’s (e.g., Intel’s) product and without which the product would lose much of its
value.
The importance of these stakeholders varies by industry. For example, environmental
groups in Maine, Michigan, Oregon, and Iowa successfully fought to pass bills
outlawing disposable bottles and cans, and thus deposits for most drink containers are now

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 required. This effectively raised costs across the board, with the most impact on the
marginal producers who could not internally absorb all of these cost.
3.3.3. COMPETITIVE INTELLIGENCE
Much external environmental scanning is done on an informal and individual basis.
Information is obtained from a variety of sources, such as customers, suppliers, bankers,
consultants, publications, personal observations, subordinates, superiors, and peers. For
example, R&D scientists and engineers can learn about new products and competitors’ ideas
at professional meetings; someone from the purchasing department may uncover valuable bits
of information about a competitor by speaking with supplier representatives. A study of
product innovation found that 77 percent of all product innovations in the scientific
instruments and 67 percent in semi-conductors and printed circuit boards were initiated by the
customer in the form of inquiries and complaints. In these industries, the sales force and
service departments must be especially vigilant.
Competitive intelligence is a formal program of gathering information on a company’s
competitors. Sometimes called business intelligence, this is one of the fastest growing fields
in strategic management. Most corporations rely on outside organizations to provide them
with environmental data. Strategists can use these data to spot regional and national trends as
well as to assess market share.
Environmental scanning provides reasonably hard data on the present situation and
current trends, but intuition and luck are needed to accurately predict if these trends will
continue. The resulting forecasts are, however, usually based on a set of assumptions that
may or may not be valid.
Forecasting techniques: Various techniques are used to forecast future situations, and
each has its proponents and critics. The most popular forecasting technique is extrapolation
—the extension of present trends into the future. Trend extrapolation rests on the
assumption that the world is reasonably consistent and changes slowly in the short run.
Approaches of this type include time-series methods, which attempt to carry a series of
historical events forward into the future. The basic problem with extrapolation is that a
historical trend is based on a series of patterns or relationships among so many different
variables that a change in any one can drastically alter the future direction of the trend. As a
rule of thumb, the further into the past one can find relevant data supporting the trend, the

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more confidence one can have in the prediction.
Brainstorming and statistical modeling are also popular forecasting techniques.
Brainstorming is a non-quantitative approach in which ideas are proposed without first
mentally screening them and without criticism by others. All that is required is the
presence of people with some knowledge of the situation to be predicted. Idea stand to
build on previous ideas until a consensus is reached. This is a good technique to use with
operating managers who have more faith in “gut feeling” than in quantitative “number-
crunching” techniques. Expert opinion is a non-quantitative technique in which experts in a
particular area attempt to forecast likely developments.
Statistical modeling is a quantitative technique that attempts to discover causal or at
least explanatory factors that link two or more time series together. Examples of statistical
modeling are regression analysis and other econometric methods. Although very useful in the
grasping of historic trends, statistical modeling, like trend extrapolation, is based on historical
data. As the patterns of relationships change, the accuracy of the forecast deteriorates.
Scenarios are focused descriptions of different likely futures presented in a narrative fashion.
Scenario writing appears to be the most widely used forecasting technique after trend
extrapolation. The scenario thus may be merely a written description of some future state,
in terms of key variables and issues, or it may be generated in combination with other
forecasting techniques.
An industry scenario is a forecasted description of a particular industry’s likely future. It is a
scenario that is developed by analyzing the probable impact of future societal forces on key
groups in a particular industry. The process may operate as follows:
1. Examine possible shifts in the natural and societal variables globally.
2. Identify uncertainties in each of the six forces of the task environment (e.g., potential
entrants, competitors, likely substitutes, buyers, suppliers, and other key stakeholders).
3. Make a range of plausible assumptions about future trends.
4. Combine assumptions about individual trends into internally consistent scenarios.
5. Analyze the industry situation that would prevail under each scenario.
6. Determine the sources of competitive advantage under each scenario.
7. Predict competitors’ behavior under each scenario.
8. Select those scenarios that are either most likely to occur or are most likely to have a

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 strong impact on the future of the company. Use these scenarios as assumptions in strategy
formulation.

CHAPTER FOUR: INTERNAL ENVIRONMENTAL ANALYSIS

4.1. Nature of Internal Audit

Internal Audit / Internal strategic management audit is process in which the information about
key internal factors is gathered & compiled in order to ascertain the strengths & weaknesses of
the organization in the functional areas of marketing, management, finance/accounting,
production/operations and research & development etc. This internal strategic management audit
is conducted for the assistance of the organization to positively utilize its strengths for the
success while improving its identified weaknesses.

Following points highlight the nature of internal strategic management audit.

 All the strategies & objectives of the organization are based on it.
 The internal strengths/weaknesses are assessed & clear statement of mission is also
established
 It may be different for different kinds of organizations.
 The same organization may have different divisions that require different type of internal
strategic management audit.
 It shapes the strengths of organization in such a way that cannot be easily imitated or
matched by competitors.
 Effective strategies are build that converts the weakness of the organization into its
strength.

In order to understand the nature & effects of decisions in other functional areas of the
organization, internal strategic management audit is quite helpful. There are certain strengths &
weaknesses in different functional areas of almost every organization. There is no single
organization that can be completely equal in its all functional areas.

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The internal strategic management audit is essential for the success of the organization. The
understanding & coordination among managers from different functional areas is enhanced
through internal audit.

Key Internal Forces:

Business policy text is not sufficient enough to explain the functional areas of finance,
marketing, production, information system etc. Many subareas are included in these major
functional areas like warranties, customer services, packaging, advertising & pricing under
marketing etc. The functional business areas also differ for different kinds of organizations like
universities, hospitals, government agencies etc. For example in a hospital the functional areas
may include nursing, cardiology, physician support, hematology, and receivables.

4.2 Process of Performing an Internal Audit

The process of conducting internal Audit / internal strategic management audit is similar
to External Audit. The strengths & weaknesses of the organizations are ascertained through
involvement of a number of managers & employees of the organization. Certain information
from the functional areas of marketing, production, finance, Research and Development etc. is
collected & arranged. The members of the organizations that participate in the process of internal
strategic management audit better understands the working of the jobs, department & divisions
as a component of the whole world. This understanding helps the managers & employees to
perform their duties & tasks more effectively because they knows that their works will influence
other functional areas of the organization. For example when the managers of finance &
production together take into account the issues related to the strengths & weaknesses of their
organization then this will help them to effectively face the issues & problems of all the
functional areas of their organization. The process of communication within the organization is
made better through internal strategic management audit. The internal strategic management
audit is quite essential for the formulation, implementation & evaluation of strategies.

A number of managers & employees provide different kinds of information & ideas about the
factors that serve as strengths & weaknesses for the organization through effective coordination.

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Moreover all the participants should have understanding about the relationship between different
functional areas of the organization so that effective strategies & objectives can be established.

4.3 Functional Areas in the Operation of Businesses

Departments in a business organization are structured according to certain functions. The

departments of various organizations will differ depending on the type of business.
A) The production department is responsible for transforming raw materials into finished products.
They are also responsible for quality control to ensure that required standards are met.

B) The Finance/accounts department makes and receives all payments on behalf of the
business and records all financial transactions

C) Marketing department creates awareness for the firm products and motivates consumers to
buy. They also carry out market research to identify customer’s needs
D) Human Resources/Personnel department recruits and selects staff for the business
organization. They are also responsible for staff training and welfare.
E) The Purchasing Department has responsible for the purchasing of the firms raw material,
stationery and goods for re-sale.
F) Customer Service/ Customer Relations Department bridges the gap between a business
and its customers. It deals with customers’ queries, advising and assisting customers to place
orders and handling customers’ complaints.
G) Legal Department is concerned with legal problems that might arise for the company. For
example, compensation for employees and customers, who have brought lawsuits against the
company?
H) Research and Development (R&D) involved with research to explore ways of improving
the company’s existing products, developing new ones and identifying efficient processes to
increase production. This department works closely with the marketing department as products
developed must satisfy consumers’ needs
4.4. The Value Chain analysis
Definition
Value consists of the performance characteristics and attributes provided by companies in the
form of goods or services for which customers are willing to pay.

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Categories of value
• Value is low price
• Value is what is wanted
• Value is the quality received for the price paid

Value chain- represents the internal activities a firm engages in when transforming inputs into
outputs

VALUE CHAIN ANALYSIS

Value chain analysis (VCA) - is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs or
increase differentiation. It is a framework for determining which value creating competencies,
should be maintained, upgraded, and developed and which should be outsourced.
• Allows the firm to understand the parts of its operations that create value and those that do not.
• Is a template that firms use to understand their cost position and identify multiple means of
implementation for a chosen business-level strategy?
• The value chain is segmented into primary and support activities. It categorizes the generic
value-adding activities of an organization
• The most important thing is that the cost and value drivers should be identified for each value
activity. Thus, the ultimate goal is to maximize value creation while minimizing cost
Understanding the tool
Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage. In
other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it competes through cost
advantage, it will try to perform internal activities at lower costs than competitors would do.
When a company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.
M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary

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activities that add value to the final product directly and support activities that add value
indirectly. Firm’s VC is a part of a larger industry VC. The more activities a company undertakes
compared to industry VC, the more vertically integrated it is. Below you can find an industry
value chain and its relation to a firm level VC.

Porter's value chain

Harvard Business School's Michael E. Porter was the first to introduce the concept of a value
chain. Porter, who also developed the Five Forces Model that many businesses and companies
use to figure out how well they can compete in the current marketplace, first discussed the value
chain concept in his book. "Competitive advantage cannot be understood by looking at a firm as
a whole," Porter wrote. "It stems from the many discrete activities a firm performs in designing,
producing, marketing, delivering and supporting its product. Each of these activities can
contribute to a firm's relative cost position and create a basis for differentiation"
According to Learn Marketing, Porter suggests that activities within an organization add value to
the service and products that the company produces, and that all of these activities should be run
at optimum level if the organization is to gain any real competitive advantage. If they are run
efficiently, the value obtained should exceed the costs of running them - for example, customers
should return to the company and transact freely and willingly.

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In his book, Porter said a business's activities could be split into two categories: primary
activities and support activities. Primary activities include the following:

 Inbound logistics: This refers to everything involved in receiving, storing and distributing
the raw materials used in the production process.
 Operations: This is the stage where raw products are turned into the final product.
 Outbound logistics: This is the distribution of the final product to consumers.
 Marketing and sales: This stage involves activities like advertising, promotions, sales-force
organization, selecting distribution channels, pricing, and managing customer relationships of
the final product to ensure it is targeted to the correct consumer groups.
 Service: This refers to the activities that are needed to maintain the product's performance
after it has been produced. This stage includes things like installation, training, maintenance,
repair, warranty and after-sales services.
The support activities help the primary functions and comprise the following:
 Procurement: This is how the raw materials for the product are obtained.
 Technology development: Technology can be used across the board in the development of a
product, including in the research and development stage, in how new products are developed
and designed, and process automation.
 Human resource management: These are the activities involved in hiring and retaining the
proper employees to help design, build and market the product.
 Firm infrastructure: This refers to an organization's structure and its management, planning,
accounting, finance and quality-control mechanisms.

4.5 The Internal Factor Evaluation (IFE) Matrix-

The Internal Factor Evaluation (IFE) Matrix is a summary step in conducting an internal
strategic-management audit is to construct an Internal Factor Evaluation (IFE) Matrix. This
strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the
functional areas of a business, and it also provides a basis for identifying and evaluating
relationships among those areas. Intuitive judgments are required in developing an IFE Matrix,
so the appearance of a scientific approach should not be interpreted to mean this is an all-

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powerful technique. A thorough understanding of the factors included is more important than the
actual numbers.

Understanding the tool

The internal factor evaluation matrices have been introduced by Fred R. David in his book
‘Strategic Management’. According to the author, both tools are used to summarize the
information gained from company’s external and internal environment analyses. The
summarized information is evaluated and used for further purposes, such as, to build SWOT
analysis or IE matrix. Even though, the tools are quite simplistic, they do the best job possible in
identifying and evaluating the key affecting factors.

CHAPTER FIVE: STRATEGY FORMULATION: STRATEGIC ANALYSIS & CHOICE

5.1 THE NATURE OF STRATGY ANALYIS AND CHOICE

The strategist devises a plan of action that may include:

1. Positioning the company so that its capabilities provide the best defense against the
competitive force; and/or

2. Influencing the balance of the forces through strategic moves, thereby improving the
company’s position; and/or

3. Anticipating shifts in the factors underlying the forces and responding to them, with the hope
of exploiting change by choosing a strategy appropriate for the new competitive balance before
opponents recognize it.

Positioning the Company

 The first approach takes the structure of the industry as given and matches the company’s
strengths and weaknesses to it.
 Strategy can be viewed as building defenses against the competitive forces or as finding
positions in the industry where the forces are weakest.
 Knowledge of the company’s capabilities and of the competitive forces will highlight the
areas where the company should confront competition and where to avoid it.
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  If the company is a low-cost producer, it may choose to confront powerful buyers while it
takes care to sell them only products not vulnerable to competition from substitutes.
 Many small companies in the soft-drink business offer cola drinks that thrust them into
head-to-head competition against the majors.
Influencing the Balance

 When dealing with the forces that drive industry competition, a company can devise a
strategy that takes the offensive.
 This posture is designed to do more than merely cope with the forces themselves; it is
meant to alter their causes.
 Innovations in marketing can raise brand identification or differentiate the product.
 Capital investments in large-scale facilities or vertical integration affect entry barriers.
 The balance of forces is partly a result of external factors and partly in the company’s
control.
Exploiting Industry Change

 Industry evolution is important strategically because evolution brings with it changes in

the sources of competition.
 In the familiar product life-cycle pattern, growth rates change, product differentiation is
said to decline as the business becomes more mature, and vertical integration takes
place.
 These trends are critical since they affect the sources of competition.
 Consider vertical integration. In the maturing minicomputer industry, extensive vertical
integration, both in manufacturing and in software development, is taking place.
 This very significant trend is greatly raising economies of scale as well as the amount of
capital necessary to compete in the industry.
 This in turn is raising barriers to entry and may drive some smaller competitors out of
the industry once growth levels off.

5.2 TYPES OF STRATEGY

5.2.1 CORPORATE LEVEL STRATEGY

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Corporate-level strategy (company-wide) a corporate-level strategy is an action taken to gain a
competitive advantage through the selection and management of a mix of businesses competing
in several industries or product markets a corporate-level strategy is concerned with two key
questions: What business should the firm be in? How should the corporate office manage its
group of businesses? Corporate strategies are often called grand/master strategies

These grand strategies (major Corporate Strategies) are: growth strategy, stability strategy &
defensive strategy

5.2.1.1 GROWTH STRATEGY

Growth strategies are: Concentration, Market/product development, Innovation, Integration

Diversification: concentric (related), horizontal, and unrelated diversification

Intense growth: Growth that occurs when current products and/or current markets have the
potential for increasing sales.

Diversified growth: Growth that occurs when new product is developed to be sold in new
markets.

Integrated growth: Growth that occurs in three possible directions: forwards, backwards or
horizontally.
Concentration strategy will be appropriate when the company concentrates on the current
business. The firm directs its resources to the profitable growth of a single product, in a single
market, with a single technology.

Advantages:

 Based on known competencies and same experience

 Lowest in risk and additional resources
• Disadvantages:

 Steady but slow increases in growth & profitability

 Narrow range of investment options
In general, firms that use this strategy gain competitive advantage in production skill, marketing
know-how and reputation in the market place • In fact, it refers to marketing present products

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with only cosmetic modifications • Thus, concentration focuses on: • Increasing present
customers’ rate of usage • Attracting competitors’ customers through price cuts • Attracting non-
users through advertising, price incentives etc.

• Market development: is selling present products in new markets – additional regional, national
and international expansions

Attracting other market segments through: developing product versions to appeal to other
segments, entering other channels of distribution & advertising in other media.

Product development: is developing new products for present markets. This involves:
Developing new product features: Modifying (change color, form, shape, etc.), magnify and
minify, rearrange (layout, patterns, etc.), developing additional models and sizes (product
proliferation). Thus, it involves substantial modification of existing products or creation of new
but related items that can be marketed to current customers through established channels. The
idea is to attract satisfied customers to new products as a result of their positive experience with
company’s initial offering. The product development strategy is often adopted either to prolong
the life cycle of current products or to take advantage of favorable reputation and brand name.

Integration strategy: focuses on moving to different industry level, different product and
technology but the basic market remains the same. There are two types of integrative growths:
vertical integration & horizontal integration.

Vertical Integration-Exists when a firm produces its own inputs (backward integration) or owns
channels of distribution of outputs (forward integration). A firm pursuing vertical integration
usually is motivated to strengthen its position in its core business by gaining market power over
competitors.

Horizontal integration refers to the acquisition of similar products and services. The two
corporate tools to achieve integrative growth are: acquisition & internal development.

Diversification growth strategy: refers to an attempt to change the characteristics of the

business through either of new products, markets and technology or all the three

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Diversification growth strategy is classified into three categories: Concentric: seeking growth
with new market and product having meaningful synergy or fit with existing business (tapes into
discs, ski sports into summer sporting)

Related Diversification- There is some commonality in markets, products, or technology

Horizontal: seeking growth by appealing to current market, with new products that are
technologically unrelated to present products (hotels and tour operators).

Conglomerate: seeking growth by appealing to new markets with new product that have no
technology relationships to current product – Unrelated Diversification

ACQUISITIONS AND MERGERS • Acquisition, Merger and Joint venture are called means
of diversification – related & unrelated

Definitions: Merger–a strategy through which two or more firms agree to integrate their
operations on a relatively co-equal basis • Therefore, in merger, a single new company will be
established with new name, organizational structure, issuing new stock and other changes •
However, the shareholders of the former firms will become shareholders of the new enlarged
organization.

Acquisition– a strategy through which one firm buys a controlling of 100% interest in another
firm with the intent of making the acquired firm a subsidiary business within its portfolio.
Therefore, an acquisition is a marriage of unequal partners with one organization buying the
other. The shareholders of the acquired firm cease to be owners of the acquiring company –
unless payment is effect in terms of shares

What are the main reasons of an acquisition or merger strategy? The main reasons why firms
use these strategies is to achieve strategic competitiveness and earn above average returns.
These can be achieved through increasing the market value of the stock–synergistic effect
Securing or protecting sources of raw materials/components
• To gain access to distribution channels
 To make use of underutilized resources of the company
 To increase market power – horizontal, vertical and related acquisitions

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 To avoid excessive competition (intense rivalry; changing competitive scope: automotive –
financial, computer, electronics and satellite systems
 To enter a new market, offer new products and avoiding cost of new product development
(Acquisition as substitute for innovation)
 To overcome entry barriers etc.(Cross-border acquisitions)
STABILITY STRATEGY- It is also called neutral strategy: occurs when an organization is
satisfied with its current situation and wants to maintain the status quo. Reasons for using
stability strategy: the company is doing well “if it works, don’t fix it”, the management wants to
avoid additional hassles associated with growth, & resources has been exhausted because of
earlier growth strategies.

DEFENSIVE STRATEGY- Could be classified into decline and closure strategies. It can be
used as a short-term solution to: Reverse a negative trend, overcome a crisis or problem
situation. Reasons: the company faced financial problems–certain parts of the organization are
doing poorly, the company forecasts hard times ahead related to: challenges from new
competitors and products, changes in government regulations, owners are tired of the business or
have to have an opportunity to profit substantially by selling.

5.3 BUSINESS-LEVEL STRATEGY

Definition: Business-level strategy: is a strategy designed to gain competitive advantage by

exploiting core competencies in specific product market for the purpose of providing value to
customers.
Customers: Business-level strategic issues. In selecting business-level strategy, the firm should
determine:
 Who will be served? Refers to types of customers
 What needs those target customers have that the firm will satisfy? Refers to the benefits
and features of products
 How those needs will be satisfied? Refers to core competencies
 Who: Determining the customers to serve
Firms divide customers into groups based on differences in the customers’ needs • Customers
could be broadly clustered into: Consumer markets or Industrial markets. This is the process of
market segmentation.

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Customer markets:

 Demographic factors: age (children, young or old people); sex (male or female); birth
and death rates etc.
 Socio-economic factors: social class, stages in the family life cycle, income etc.
Geographic factors: cultural, regional, national differences.
 Psychological factors: life style, personality traits etc. Consumption patterns: heavy,
moderate, and light users •
 Perceptual factors: perceptual mapping of benefits
 Farther segmentation: Global market segmentation which refers to customer groups
across countries
 Homogenous – similar buying behavior –
 Heterogeneous – different buying behavior
 Example: McDonald and Toyota Customers: Business-level strategic issues
What: Determining which customer needs to satisfy

• Needs are related to the benefits and features of a good or service

• The basic need of all customers is to buy products or services that create value for them

• Two main forms of value that products provide:

. Low cost with acceptable features 2. Highly differentiated features with acceptable cost

5.3.1Types of business-level strategy

Business-level strategy: is a deliberate choice about how a firm will perform the value chain’s
primary and support activities in ways that create unique value. Reflects where and how the firm
has an advantage over its rivals. Is intended to create differences b/n the firm’s position relative
those of its rivals. Thus, the essence of a firm’s business-level strategy is choosing to: • Perform
activities differently than rivals -to achieve lowest cost or perform different (valuable) activities
being able to differentiate. Hence, competitive advantage is achieved within some scope –firms
should prefer one of the two

Business-level strategies are called “generic strategies”

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Business-level strategy, The Five Generic competitive Strategies .The five generic strategies are:

• Cost leadership
• Differentiation
• Focused cost leadership
• Focused differentiation
• Integrated cost leadership & differentiation
• Cost leadership: lowest cost to produce acceptable features to all customers
• Differentiation: differentiated features rather than low cost for customers who value
differentiation
• Focused cost leadership: refers to targeting those specific customers with low cost
• Focused differentiation: refers to targeting those specific customers with a differentiated
product (e.g., Rolls Royce motor cars, Ferrari sport cars, Italian shoes from natural materials
and man work ship)
• Integrated cost leadership and differentiation: according to porter, this strategy was referred
initially as “stuck in the middle”. Meaning, neither the lowest cost nor a differentiated firm

5.4 FUNCTIONAL-LEVEL STRATEGIES

Functional-level strategies are concerned with coordinating of single functional areas of the
organization (marketing, finance, human resources, production, research and development, etc.)
so that each functional area upholds and contributes to individual business-level strategies and
the overall corporate-level strategy. This involves coordinating the various functions and
operations needed to design, manufacturer, deliver, and support the product or service of each
business within the corporate portfolio. Functional strategies are primarily concerned with:

 Efficiently utilizing specialists within the functional area.

 Integrating activities within the functional area (e.g., coordinating advertising, promotion,
and marketing research in marketing; or purchasing, inventory control, and shipping in
production/operations).

 Assuring that functional strategies fit together with business-level strategies and the
overall corporate-level strategy.

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Functional strategies are frequently concerned with appropriate timing. For example, advertising
for a new product could be expected to begin sixty days prior to shipment of the first product.
Production could then start thirty days before shipping begins. Raw materials, for instance, may
require that orders are placed at least two weeks before production is to start. Thus, functional
strategies have a shorter time orientation than either business-level or corporate-level strategies.
Accountability is also easiest to establish with functional strategies because results of actions
occur sooner and are more easily attributed to the function than is possible at other levels of
strategy. Lower-level managers are most directly involved with the implementation of functional
strategies.

Strategies for an organization may be categorized by the level of the organization addressed by
the strategy. Corporate-level strategies involve top management and address issues of concern to
the entire organization. Business-level strategies deal with major business units or divisions of
the corporate portfolio. Business-level strategies are generally developed by upper and middle-
level managers and are intended to help the organization achieve its corporate strategies.
Functional strategies address problems commonly faced by lower-level managers and deal with
strategies for the major organizational functions (e.g., marketing, finance, and production)
considered relevant for achieving the business strategies and supporting the corporate-level
strategy. Market definition is thus the domain of corporate-level strategy, market navigation the
domain of business-level strategy, and support of business and corporate-level strategy by
individual, but integrated, functional level strategies

5.5 Long term objectives

Long-term objectives represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives. The time frame for
objectives and strategies should be consistent, usually from two to five years.

5.5.1 The Nature of Long-Term Objectives

Objectives should be quantitative, measurable, realistic, understandable, challenging,

hierarchical, obtainable, and congruent among organizational units. Each objective should also
be associated with a time line. Objectives are commonly stated in terms such as growth in assets,
growth in sales, profitability, market share, degree and nature of diversification, degree and
nature of vertical integration, earnings per share, and social responsibility. Clearly established

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objectives offer many benefits. They provide direction, allow synergy, aid in evaluation,
establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the
allocation of resources and the design of jobs. Long-term objectives are needed at the corporate,
divisional, and functional levels in an organization.

They are an important measure of managerial performance. Clearly stated and communicated
objectives are vital to success for many reasons. First, objectives help stakeholders understand
their role in an organization's future. They also provide a basis for consistent decision making by
managers whose values and attitudes differ. By reaching a consensus on objectives during
strategy-formulation activities, an organization can minimize potential conflicts later during
implementation. Objectives set forth organizational priorities and stimulate exertion and
accomplishment. They serve as standards by which individuals, groups, departments, divisions,
and entire organizations can be evaluated. Objectives provide the basis for designing jobs and
organizing activities to be performed in an organization. They also provide direction and allow
for organizational synergy.

5.7 7-S MODEL/ FRAMEWORK/

The international consulting firm of McKinsey & Company has developed the McKinsey 7-S
Framework for evaluating strategy. The underlying premise of this model is that the value of any
given strategy depends not only on its content but equally on whether it can be successfully
executed. By McKinsey partners Tom Peters & Robert Waterman concluded that: “Structure
alone could not solve the problem of how to coordinate resource allocation, incentives, & actions
across large organizations.” Thus, the 7-S Framework is based on the concept that any strategy,
in order to be successfully implemented, must fit with the culture of the organization.

According to the model: A strategy is usually successful when the other S’s in the framework fit,
or support, the strategy. If a chosen strategy has run into problems during implementation, it is
often because there is a lack of fit between the strategy & one or more of the other S’s. The 7-S
model posits that organizations are successful when they achieve an integrated harmony among

•Three hard S's of strategy, structure, & systems, & Four soft S's of skills, staff, style, & super-
ordinate goals (now referred to as shared values)

HARD S’s

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Strategy- the positioning & actions taken by an enterprise, in response to or anticipation of
changes in the external environment, intended to achieve competitive advantage

Structure- the way in which tasks & people are specialized & divided, & authority is
distributed; how activities & reporting relationships are grouped; the mechanisms by which
activities in the organization are coordinated

Systems-the formal & informal procedures used to manage the organization, including
management control systems, performance measurement & reward systems, planning, budgeting
& resource allocation systems, & management information systems

SOFT S’s

Staff- the people, their backgrounds & competencies; how the organization recruits, selects,
trains, socializes, manages the careers, & promotes employees

Skills- the distinctive competencies of the organization; what it does best along dimensions such
as people, management practices, processes, systems, technology, & customer relationships

Style/culture -what they focus attention on, what questions they ask of employees, how they
make decisions; also the organizational culture

Shared values- the leadership style of managers - how they spend their time, the core or
fundamental set of values that are widely shared in the organization & serve as guiding
principles of what is important.

Chapter six: Strategy Implementation

6.1 The Nature of Strategic Management Implementation

A strategy is only as Good as its implementation. The strategic-management process does not
end when the firm decides what strategy or strategies to pursue. There must be a translation of
strategic thought into strategic action. This translation is much easier if managers and employees
of the firm understand the business, feel a part of the company, and through involvement in

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strategy formulation activities have become committed to helping the organization succeed.
Without understanding and commitment, strategy implementation efforts face major problems.

Implementing strategy affects an organization from top to bottom; it affects all the functional and
divisional areas of a business. It is beyond the purpose and scope of this lecture note to examine
all of the business administration concepts and tools important in strategy implementation. This
chapter focuses on management issues most central to implementing strategies.

Successful strategy implementation depends on cooperation among all functional and divisional
managers in an organization. Marketing departments are commonly charged with implementing
strategies that require significant increases in sales revenues in new areas and with new or
improved products. Finance and accounting managers must devise effective strategy
implementation approaches at low cost and minimum risk to that firm. R&D managers have to
transfer complex technologies or develop new technologies to successfully implement strategies.
Information systems managers are being called upon more and more to provide leadership and
training for all individuals in the firm. The nature and role of marketing, finance/accounting,
R&D, and management information systems activities, coupled with the management activities
largely determine organizational success.

Successful strategy formulation does not guarantee successful strategy implementation. It is

always more difficult to do something (strategy implementation) than to say you are going to do
it (strategy formulation)! Although inextricably linked; strategy implementation is fundamentally
different from strategy formulation.

Strategy formulation and implementation can be contrasted in the following ways:

 Strategy formulation is positioning forces before the action.

 Strategy implementation is managing forces during the action.

 Strategy formulation focuses on effectiveness.

 Strategy implementation focuses on efficiency.

 Strategy formulation is primarily an intellectual process.

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 Strategy implementation is primarily an operational process.

 Strategy formulation requires good intuitive and analytical skills.

 Strategy implementation requires special motivation and leadership skills.

 Strategy formulation requires coordination among a few individuals relatively.

 Strategy implementation requires coordination among many individuals.

Strategy-formulation concepts and tools do not differ greatly for small, large, for profit, or
nonprofit organizations. However, strategy implementation varies substantially among different
types and sizes of organizations. Implementing strategies requires such actions as altering sales
territories, adding new departments, closing facilities, hiring new employees, changing an
organization‘s pricing strategy, developing financial budgets, developing new employee benefits,
establishing cost-control procedures, changing advertising strategies, building new facilities,
training new employees, transferring managers among divisions, and building a better
management information system. These types of activities obviously differ greatly between
manufacturing, service, and governmental organizations

6.2 MANAGEMENT PERSPECTIVES

In all but the smallest organizations, the transition from strategy formulation to strategy
implementation requires a shift in responsibility from strategists to divisional and functional
managers. Implementation problems can arise because of this shift in responsibility, especially if
strategy-formulation decisions come as a surprise to middle-and lower-level managers. Managers
and employees are motivated more by perceived self-interests than by organizational interests,
unless the two coincide. Therefore, it is essential that divisional and functional managers be
involved as much as possible in strategy-formulation activities. Of equal importance, strategists
should be involved as much as possible in strategy-implementation activities.

Management issues central to strategy implementation include establishing annual objectives,

devising policies, allocating resources, altering an existing organizational structure, restructuring
and reengineering, revising reward and incentive plans, minimizing resistance to change,
matching managers with strategy, developing a strategy-supportive culture, adapting
production/operations processes, developing an effective human resource function and
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downsizing. Management changes are necessarily more extensive when strategies are to be
implemented.

Managers and employees throughout an organization should participate early and directly in
strategy-implementation decisions. Their role in strategy implementation should build upon prior
involvement in strategy-formulation activities. Strategists’ genuine personal commitment to
implementation is a necessary and powerful motivational force for managers and employees.
Too often, strategists are too busy to actively support strategy-implementation efforts, and their
lack of interest can be detrimental to organizational success. The rational for objectives and
strategies should be understood and clearly communicated throughout an organization. Major
competitors’ accomplishments, products, plans, actions, and performance should be apparent to
all organizational members. Major external opportunities and threats should be clear, and
managers’ and employees’ questions should be answered. Top-down flow of communication is
essential for developing bottom-up support.

6.2.1 ANNUAL OBJECTIVES

Establishing annual objectives is a decentralized activity that directly involves all managers in an
organization. Active participation in establishing annual objectives can lead to acceptance and
commitment. Annual objectives are essential for strategy implementation because:

1. They represent the basis for allocating resources;

2. They are a primary mechanism for evaluating managers;
3. They are the major instrument for monitoring progress towards achieving long-term
objectives; and
4. They establish organizational, divisional, and departmental priorities.

Considerable time and effort should be devoted to ensuring that annual objectives are well
conceived, consistent with long-term objectives, and supportive of strategies to be implemented.
Approving, revising, or rejecting annual objectives is much more than a rubber-stamp activity.
The purpose of annual objectives can be summarized as follows:

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Clearly stated and communicated objectives are critical to success in all types and sizes of
organizations. Annual objectives, stated in terms of profitability, growth, and market share by
business segment, geographic area, customer groups, and product, are common in organizations.

Objectives should be consistent across hierarchical levels and form a network of supportive aims.
Horizontal consistency of objectives is as important as vertical consistency. For instance, it
would not be effective for manufacturing to achieve more than its annual objective of units
produced if marketing could not sell the additional units.

6.2.2 POLICIES

Changes in an organization’s strategic direction do not occur automatically. On a day-to-day

basis, policies are needed to make a strategy work. Policies facilitate solving recurring problems
and guide the implementation of strategy. Broadly defined, policy refers to specific guidelines,
methods, procedures, rules, forms, and administrative practices established to support and
encourage work toward stated goals. Policies are instruments for strategy implementation.
Policies set boundaries, constraints, and limits on the kinds of administrative actions that can be
taken to reward and sanction behavior; they clarify what can and cannot be done in pursuit of an
organization’s objectives.

Policies let both employees and managers know what is expected of them, thereby increasing the
likelihood that strategies will be implemented successfully. They provide a basis for time that
managers spend in making decisions. Policies also clarify what work is to be done by whom.
They promote delegation of decision making to appropriate managerial levels where various
problems usually arise. Many organizations have a policy manual that serves to guide and direct
behavior. For example many organizations/bureaus have instituted “no smoking” policies.

Policies can apply to all divisions and departments. Some policies apply to a single department.
Whatever their scope and form, policies serve as a mechanism for implementing strategies and
obtaining objectives. Policies should be stated in writing whenever possible. They represent the
means for carrying out strategic decisions.

6.2.3 RESOURCE ALLOCATION

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Resource allocation is a central management activity that allows for strategy execution. In
organizations that do not use a strategic-management approach to decision making, resource
allocation is often based on political or personal factors. Strategic management enables resources
to be allocated according to priorities established by annual objectives. Nothing could be more
detrimental to strategic management and to organizational success than for resources to be
allocated in a way not consistent with priorities indicated by approved annual objectives.

All organizations have at least four types of resources that can be used to achieve desired
objectives: These are: 1) Financial resources, 2) Physical resources 3) Human resources, and 4)
Technological resources.

Allocating resources to particular divisions and departments does not mean that strategies will be
successfully implemented. A number of factors commonly prohibit effective resource allocation,
including an overprotection of resources, too great emphasis on short-run financial criteria,
organizational politics, vague strategy targets, a reluctance to take risks, and a lack of sufficient
knowledge.

6.2.4 MANAGING CONFLICT

Interdependency of objectives and competition for limited resources often leads to conflict.
Conflict can be defined as a disagreement between two or more parties on one or more issues.
Establishing annual objectives can lead to conflict because individuals have different
expectations and perceptions, schedules create pressure, personalities are incompatible, and
misunderstandings between line and staff authorities occur.

Establishing objectives can lead to conflict because managers and strategists must make trade-
offs, such as whether to emphasize on short-term profits or long-term growth, profit margin or
market share, market penetration or market development, growth or stability, high risk or low
risk, and social responsiveness or profit maximization. Conflict is unavoidable on organizations,
so it is important that conflict be managed and resolved before dysfunctional consequences affect
organizational performance.

Conflict is not always bad. An absence of conflict can signal indifference and lack of concern.
Conflict can serve to energize opposing groups into action and may help managers identify

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problems. There are various approaches for managing and resolving conflict can be classified
into three categories: These are:

 Avoidance, Diffusion, and Confrontation.

Avoidance includes such actions as ignoring the problem in hopes that the conflict will resolve
itself or physically separating the conflicting individuals (or groups).

Diffusion can include playing down differences between conflicting parties while stressing on
similarities and common interests, compromising so that there is neither a clear winner nor loser,
restoring to majority rule, appealing to a higher authority, or redesigning present positions.

Confrontation is exemplified by exchanging members of conflicting parties so that each of them

can gain an appreciation of the other’s point of view, focusing on super goals such as company
survival, or holding a meeting at which conflicting parties present their views and work through
their differences.

6.2.5 MATCHING STRUCTURE WITH STRATEGY

Change in strategy often requires changes in the way an organization is structured for two major
reasons.

First, structure largely dictates how objectives and policies will be established. For example, the
format for objectives and policies established under a geographic organizational structure is
couched in geographic terms. Objectives and policies are stated largely in terms of products in an
organization whose structure is based on product groups. The structural format for developing
objectives and policies can significantly impact all other strategy-implementation activities.

The second major reason why changes in strategy often require changes in structure is that
structure dictates how resources will be allocated. If an organization is structured based on
customer groups, then resources will be allocated in that manner.

Similarly, if an organization’s structure is set up along functional business lines, then resources
are allocated by functional areas. Unless new or revised strategies place emphasis in the same
areas as old strategies, structural reorientation commonly becomes a part of strategy
implementation. Changes in strategy lead to changes in organizational structure. Structure should

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be designed to facilitate the strategic pursuit of an organization and, therefore, follows strategy.
Without a strategy or reasons for being (mission), structure is not important.

There is no one optimal organizational design or structure for a given strategy or type of
organization. What is appropriate for one organization may not be appropriate for a similar
organization, although successful organizations in a given industry do tend to organize
themselves in a similar way. Small organizations tend to be functionally structured (centralized).
Medium-size organizations tend to be divisionally structured (decentralized). Large
organizations tend to use an SBU (strategic business unit) or matrix structure. As organizations
grow, their structures generally change from simple to complex as a result linking together of
several basic strategies.

6.2.6. THE FUNCTIONAL STRUCTURE

The most widely used structure is the functional or centralized type, because this structure is the
simplest and least expensive of the seven alternatives. A functional structure is grouping tasks
and activities by business function such as production/operations, marketing, finance/accounting,
research and development, and management information systems.

A university may structure its activities by major functions that include academic affairs, student
services, alumni (former students) relations, athletics, maintenance, and accounting. Besides
being simple and inexpensive, a functional structure also promotes specialization of labor,
encourages efficiency, minimizes the need for an elaborate control system, and allows rapid
decision making. Some disadvantages of a functional structure are that it forces accountability to
the top, minimizes career development opportunities, and is sometimes characterized by low
employee morale, line/staff conflicts, poor delegation of authority, and inadequate planning for
products and markets.

6.2.7. THE DIVISIONAL STRUCTURE

The divisional or decentralized structure is the second most commonly used. As a small
organization grows, it has more and more difficulty of managing the different products and
services in different markets. Some form of divisional structure generally becomes necessary to

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motivate employees, control operations, and compete successfully in diverse locations. The
divisional structure can be organized in one of four ways: by geographic area, by product or
service, by customer, or by process. Within a divisional structure, functional activities are
performed both centrally and in each separate division.

A divisional structure has some clear advantages. First and perhaps foremost, accountability is
clear. That is, divisional managers can be held responsible for sales and profit levels. Since a
divisional structure is based on extensive delegation of authority, managers and employee morale
is generally higher in a divisional structure than it is in a centralized structure.

Other advantages of the divisional design are that it creates career development opportunities for
managers, allows local control of local situations, leads to a competitive climate within
organization, and allows new businesses and products to be added easily.

The divisional design is not without some limitations, however. Perhaps the most important
limitation is that a divisional structure is costly, for a number of reasons. First, each division
requires functional specialists who must be paid. Second, there exists some duplication of staff
services, facilities, and personnel; for instance, functional specialists are also needed centrally (at
headquarters) to coordinate divisional activities. Third, managers must be well-qualified, since
the divisional design forces delegation of authority; better-qualified individuals require higher
salaries. A divisional structure can also be costly because it requires an elaborate, headquarters-
driven control system. Finally, certain regions, products, or customers may sometimes receive
special treatment, and it may be difficult to maintain consistent, company-wide practices.
Nonetheless, for most large organizations and many small organizations, the advantages of a
divisional structure is more than offset the potential limitations.

6.2.8 THE STRATEGIC BUSINESS UNIT (SBU) STRUCTURE

As the number, size, and diversity of divisions in an organization increase, controlling and
evaluating divisional operations become increasingly difficult for strategists. Increases in sales
often are not accompanied by similar increases in profitability. The span of control becomes too

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large at top levels of the organization. For example, in a large conglomerate organization
composed of ninety divisions, the chief executive officer could have difficulty even in
remembering the first name of divisional presidents. In multidivisional organizations an SBU
structure can greatly facilitate strategy-implementation efforts.

The SBU structure puts similar divisions into strategic business units and delegates’ authority
and responsibility for each unit to a senior executive who reports directly to the chief executive
officer. This change in structure can facilitate strategy implementation by improving
coordination between similar divisions and channeling accountability to distinct business units.
In the ninety-division conglomerate just mentioned, the ninety divisions could perhaps be
regrouped into ten SBUs according to certain common characteristics such as competing in the
same industry, being located in the same area, or having the same customers.

Two disadvantages of an SBU structure are that it requires an additional layer of management,
which increases salary expenses, and the role of the group vice-president is often ambiguous.
However, these limitations often do not outweigh the advantages of improved coordination and
accountability.

6.2.9 THE MATRIC STRUCTURE

A matrix structure is the most complex of all designs because it depends upon both vertical and
horizontal flows of authority and communication (hence the term matrix). In contrast, functional
and divisional structures depend primarily on vertical flows of authority and communication. A
matrix structure can result in higher overhead because it creates more management positions.
Other characteristics of a matrix structure that contribute to overall complexity include dual lines
of budget authority (A violation of the unity-of-command principle), dual sources of reward and
punishment, shared authority, dual reporting channels, and a need for an extensive and effective
communication system.

Despite its complexity, the matrix structure is widely used in many industries, including
construction, health care, research and defense. Some advantages of a matrix structure are that
project objectives are clear, there are many channels of communication, workers can see visible
results of their work, and shutting down a project can be accomplished relatively easily.

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In order for a matrix structure to be effective, organizations need participative planning, training,
clear mutual trust and confidence. The matrix structure is being used more frequently by
organizations because they are pursuing strategies that add new products, customer groups, and
technology to their range of activities. Out of these changes are coming product managers,
functional managers, and geographic-area mangers, all of whom have important strategic
responsibilities. When several variables, such as product, customer, technology, geography.
Functional area, and line of business, has roughly equal strategies properties, a matrix
organization can be an effective structural form.

6.2.10. RESTRUCTURING AND REENGINEERING

Restructuring and reengineering are becoming common in today’s business environment.

Restructuring also called downsizing, rightsizing, or delayering. It involves reducing the size of
the organization in terms of number of employees, number of divisions or units, and in the
number of hierarchical levels in the organization’s structure. This deduction in size is intended to
improve both efficiency and effectiveness. Restructuring is concerned primarily with shareholder
well-being, rather than employee well-being.

In contrast, reengineering is concerned more with employee and customer well-being than
shareholder well-being. Reengineering is also called process management, process innovation, or
process redesigning. It involves reconfiguring or redesigning works, jobs, and does not usually
affect the organizational structure or chart, nor does it imply job loss or employee layoffs.
Whereas restructuring is concerned with eliminating, shrinking, and moving organizational
departments and divisions, the focus of reengineering is changing the way work is actually
carried out.

Reengineering is characterized by many tactical (short-term; business-function-specific)

decision, whereas restructuring is better described as strategic (long-term; affects all business
functions) decisions.

6.2.10.1 RESTRUCTURING

Organizations often employ restructuring when various ratios appear out of line with competitors
as determined through benchmarking exercises. Benchmarking simply involves comparing an

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organization against the other best organization in the same industry in a wide variety of
performance-related parameters. Some benchmarking ratios commonly used in rationalizing the
need for restructuring are headcount to sales volume, or corporate staff to operating employees,
or span of control figures.

The primary benefit sought from restructuring is cost reduction. For some highly bureaucratic
organizations, restructuring can actually rescue the organization form global competition and
demise. But the downside of restructuring can be reduced employee commitment, creativity, and
innovation that accompanies the uncertainty and trauma/disturbance associated with pending the
actual employee layoffs.

6.2.10.2 REENGINERING

The argument for an organization engaging in reengineering usually goes as follows: Many
companies historically have been organized vertically by business function. This arrangement
has led over time to managers’ and employees’ mind-sets being defined by their particular
function, rather than by overall customer service, product quality, or corporate performance. The
logic is that all organizations tend to bureaucratize over time. As routines become well-
established, collaborators become delineated, and politics take precedence over performance.
Walls that exist in the physical workplace are reflections of our mental walls.

In reengineering, an organization uses information technology to break down functional barriers

and create a work system based on business processes, products, or outputs, rather than on
functions or inputs. Cornerstones of reengineering are decentralization, reciprocal
interdependence, and information sharing.

A benefit of reengineering is that it offers employees the opportunity to see more clearly how
their particular job impacts the final product or service being marketed by the organization.
However, reengineering also can raise manager’s and employees’ anxiety, which unless
managed lead to corporate trauma.

6.2.11 LINKING PERFORANCE AND PAY TO STRATEGIES

Most companies today are practicing some form of pay-for-performance of employees and
managers.

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Staff control of pay systems, often prevents line managers from using financial compensation as
a strategic tool. Flexibility regarding managerial and employee compensation is needed to allow
short-term shifts in compensation that can stimulate efforts to achieve long-term objectives.

How can an organization’s reward system be more closely linked to strategic performance? How
can decisions on salary increases, promotions, merit pay, and bonuses be more closely aligned to
support the long-term strategic objectives of the organization?

There are no widely accepted answers to these questions, but a dual bonus system that is based
on both annual objectives and long-term objectives is becoming common. The percentage of a
manager’s annual bonus attributable to short-term versus long-term results should vary by
hierarchical level in the organization. It is important that bonuses not be based solely on short-
term results, because such a system ignores long-term company strategies and objectives.

Profit sharing is another widely used form of incentive compensation. Most companies have
profit-sharing plans, but critics emphasize that too many factors affect profits for this to be a
good criterion. Taxes, pricing, or an acquisition would wipe out profits, for example. Also,
organizations try to minimize profits in a sense to reduce taxes.

Still another criterion widely used to link performance and pay to strategies is gain sharing. Gain
sharing requires employees or departments to establish performance targets; if actual results
exceed objectives, all members get bonuses.

Criteria such as sales, profit, production efficiency, quality, and safety could also serve as bases
for an effective bonus system. If an organization meets certain understood and agreed-upon
profit objectives, every member of the enterprise should share in the harvest. A bonus system can
be an effective tool for motivating individuals to support strategy-implementation efforts.

6.2.12 MANAGING RESISTANCE TO CHANGE

No organization or individual can escape change. But the thought of change raises anxieties
because people fear economic loss, inconvenience, uncertainty, and a break in normal social

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patterns. Almost any change in structure, technology, people, or strategies has the potential to
disrupt comfortable interaction patterns. For this reason, people resist change. The strategic-
management process itself can impose major changes on individuals and processes. Reorienting
an organization to get people to think and act strategically is not an easy task.

One obstacle is that top executives are often too busy fighting fires to devote time to developing
managers who can think strategically. Yet, the best-run companies recognize the need to develop
managers who can fashion and implement strategy.

Resistance to change can be considered the single greatest threat to successful strategy
implementation. Resistance in the form of sabotaging production machines, absenteeism, filing
unfounded grievances, and an unwillingness to cooperate regularly occurs in organizations.
People often resist strategy implementation because they do not understand what is happening or
why changes are taking place.

In that case, employees may simply need accurate information. Successful strategy
implementation hinges upon managers’ ability to develop an organizational climate conducive to
change. Change must be viewed as an opportunity rather than as a threat by managers and
employees.

Resistance to change can emerge at any stage or level of the strategy-implementation process.
Although there are various approaches for implementing changes, three commonly used
strategies are:

 A force change strategy, an educative change strategy, and a rational or self-

interest change strategy.
A force change strategy involves giving orders and enforcing those orders; this strategy has the
advantage of being fast, but it is plagued by low commitment and high resistance.

The educative change strategy is one that presents information to convince people about the need
for change; the disadvantage of an educative change strategy is that implementation becomes
slow and difficult. However, this type of strategy evokes greater commitment and less resistance
than does the force strategy.

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Finally, a rational or self-interest change strategy is one that attempts to convince individuals that
the change is to their personal advantage. When this appeal is successful, strategy
implementation can be relatively easy. However, implementation changes are seldom to
everyone’s advantage.

6.2.13 MANAGING THE NATURAL ENVIRONMENT

The 1990s may well be remembered as the decade of the environment. Earth itself has become a
stakeholder for all business firms. Consumer interest in businesses’ preserving nature’s
ecological balance and fostering a clean, healthy environment is high and growing. Evidence of
this growing interest is that circulation of the top three natural environmental magazines,
Audubon, Greenpeace, and Sierra, is soaring. Advertising revenues from these three magazines
increased nearly 25 percent annually in the early 1990s, when the magazine industry in general
experienced slow or no growth in advertising revenues. This customer interest is spurring
companies to reconcile environmental and economic considerations.

The ecological challenge facing all organizations requires managers to formulate strategies that
preserve and conserve natural resources and control pollution. Special natural environmental
issues include ozone depletion, global warming, depletion of rain forests, destruction of animal
habitats, protecting endangered species, developing biodegradable products and packages, waste
management, clean air, clean water, erosion, destruction of natural resources, and pollution
control. More and more firms are developing green product lines that are biodegradable and/or
are made from recycled products. Green products sell well.

The Environmental Protection Agency recently reported that U.S. citizens and organizations
spend more than about $200 billion annually on pollution abatement. Environmental concerns
touch all aspects of a business’s operations, including workplace risk exposures, packaging,
waste reduction, energy use, alternative fuels, environmental cost accounting, and recycling
practices. As indicated in the Natural Environment Perspective, preserving the natural
environment makes good business sense.

Societies have been plagued by environmental disasters to such an extent recently that firms
failing to recognize the importance of environmental issues and challenges could suffer severe
consequences. Managing environmental affairs can no longer be an incidental or secondary

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function of company operations. Hooper and Rocca emphasize that “Product design,
manufacturing, transportation, customer use, and ultimate disposal of a product should not
merely reflect environmental considerations, but be driven by them.

Organizations should formulate and implement strategies from an environmental perspective.

Environmental strategies could include developing or acquiring green businesses, divesting or
altering environment-damaging businesses, striving to become a low-cost producer through
waste minimization and energy conservation, or pursuing a differentiation strategy through green
product features. In addition to creating strategies, firms could include an environmental
representative on the board of directors, conduct regular environmental audits, implement
bonuses for favorable environmental results, become involved in environmental issues and
programs, incorporate environmental values in mission statements, establish environmentally
oriented objectives, acquire environmental skills, and provide environmental training programs
for company employees and managers.

6.2.14 CREATING A STRATEGY-SUPPORTIVE CULTURE

Strategies should strive to preserve, emphasize, and build upon aspects of an existing culture
that support proposed new strategies. Aspects of an existing culture that are antagonistic to a
proposed strategy should be identified and changed. Substantial research indicated that new
strategies are often market driven and dictated by competitive forces. For this reason, changing a
firm’s culture to fit a new strategy is usually more effective than changing a strategy to fit an
existing culture. Numerous techniques are available to alter an organization’s culture, including
recruitment, training, transfer, promotion, restructuring of an organization’s design, role
modeling, and positive reinforcement.

In a recent article, Jack Duncan described triangulation as an effective, multi-method technique

for studying and altering an organization’s culture. Triangulation includes the combined use of
obtrusive observation, self-administered questionnaires, and personal interviews to determine the
nature of a firm’s culture. The process of triangulation reveals needed changes in a firm’s culture
that could benefit strategy.

Schein indicates that the following elements are most useful in linking culture to strategy:

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 1. Formal statements of organizational philosophy, characters, creeds, materials used for
recruitment and selection, and socialization.
2. Designing of physical spaces, facades, buildings
3. Deliberate role modeling, teaching, and coaching by leaders
4. Explicit reward and status system, promotion criteria
5. Stories, legends, myths, and parables about key people and events
6. What leaders pay attention to, measure, and control
7. Leader reactions to critical incidents and organizational crises
8. How the organization is designed and structured
9. Organization systems and procedures
10. Criteria used for recruitment, selection, promotion, leveling off, retirement, and “ex-
communication” of people.

In the personal and religious side of life, the impact of loss and change is easy to see. Memories
of loss and change often haunt individuals and organizations for years. Ibsen says, “Rob the
average man of his life illusion and you rob him of his happiness at the same stroke.” When
attachments to a culture are severed in an organization’s attempt to change direction, employees
and managers often experience deep feelings of grief. This phenomenon commonly occurs when
external conditions dictate the need for a new strategy.

Managers and employees often struggle to find meaning in a situation that changed many years
before. Some people find comfort in memories; others find solace in the present. Weak linkages
between strategic management and organizational culture can jeopardize performance and
success. Deal and Kennedy emphasize that making strategic changes in an organization always
threatens a culture:

People form strong attachments to heroes, legends, the rituals of daily life, the hoopla of
extravaganza and ceremonies, and all the symbols of the workplace. Change strips relationships
and leaves employees confused, insecure, and often angry. Unless something can be done to
provide support for transitions from old to new, the force of a culture can neutralize and
emasculate strategy changes.

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6.2.15 PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING
STRATEGIES

Production/operations capabilities, limitations, and policies can significantly enhance or inhibit

attainment of objectives. Production process typically constitutes more than 70 percent of a
firm’s total assets. A major part of the strategy-implementation process takes place at the
production site. Production-related decisions such as plant size, plant location, product design,
choice of equipment, kind of tooling, size of inventory, inventory control, quality control, cost
control, use of standards, job specialization, employee training, equipment and resource
utilization, shipping and packaging, and technological innovation can have a dramatic impact on
the success or failure of strategy-implementation efforts.

There was a time when people were “factors of production,” managed little differently from
machines or capital. No more. The best people will not tolerate it. And if that way of managing
ever generated productivity, it has the reverse effect today. While capital and machines either are
or can be managed toward sameness, people are individuals. They must be managed that way.
When companies encourage individual expression, it is difficult for them not to be successful
(renew). The only true source of success in a company is the individual. : .

Factors that should be studied before locating production facilities include the availability of
major resources, the prevailing wage rates in the area, transportation costs related to shipping and
receiving, the location of major markets, political risks in the area or country, and the availability
of trainable employees.

For high-technology companies, production costs may not be as important as production

flexibility, because major product changes can be needed often. Industries such as biogenetics
and plastics rely on production systems that must be flexible enough to allow frequent changes
and rapid introduction of new products. An article in Harvard Business Review explains why
some organizations get into trouble:

They too slowly realize that a change in product strategy alters the tasks of a production system.
These tasks, which can be stated in terms of requirements for cost, product flexibility, volume
flexibility, product performance, and product consistency, determine which manufacturing
policies are appropriate. As strategies shift over time, so must production policies covering the

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location and scale of manufacturing facilities, the choice of manufacturing process, the degree of
vertical integration of each manufacturing facility, the use of R&D units, the control of the
production system, and the licensing of technology.

A common management practice, cross-training of employees, can facilitate strategy

implementation and can yield many benefits. Employees gain a better understanding of the
whole business and can contribute better ideas in planning sessions. Production/operations
managers need to realize, however, that cross-training employees can create problems related to
the following issues:

1. It can thrust managers into roles that emphasize counseling and coaching over directing
and enforcing.
2. It can necessitate substantial investments in training and incentives.
3. It can be very time-consuming.
4. Skilled workers may resent unskilled workers who learn their jobs.
5. Older employees may not want to learn new skills.

6.2. 16 HUMAN RESOURCE CONCERNS WHEN IMPLEMENTING STRATEGIES

The job of human resource manager is changing rapidly as companies downsize and reorganize
in the 1990s. Strategic responsibilities of the human resource manager include assessing the
staffing needs and costs for alternative strategies proposed during strategy formulation and
developing a manpower plan for effectively implementing strategies. This plan must consider
how best to manage spiraling health-care insurance costs. Employers’ health-coverage expenses
consume an average 26 percent of firm’s net profits, even though most companies now require
employees to pay part of their health-insurance premiums. The plan must also include how to
motivate employees and managers during a time when layoffs are common and workloads are
high.

The human resource department must develop performance incentives that clearly link
performance and pay to strategies. The process of empowering managers and employees through
involvement in strategic-management activities yields the greatest benefits when all
organizational members understand clearly how they will benefit personally if the firm does
well. Linking company and personal benefits is a major new strategic responsibility of human

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resource managers. Other new responsibilities for human resource managers may include
establishing and administering an Employee Stock Ownership Plan (ESOP), instituting an
effective child-care policy, and providing leadership for managers and employees to balance
work and family.

A well-designed strategic-management system can fail if insufficient attention is given to the

human resource dimension. Human resource problems that arise when businesses implement
strategies can usually be traced to one of three causes:

(1) Disruption of social and political structures,

(2) Failure to match individuals’ aptitudes with implementation tasks, and

(3) Inadequate top management support for implementation activities.

Strategy implementation poses a threat to many managers and employees in an organization.

New power and status relationships are anticipated and realized. New formal and informal
groups are formed whose values, beliefs, and priorities may be largely unknown. Managers and
employees may become engaged in resistance behavior as their roles, prerogatives, and power in
the firm change. Disruption of social and political structures that accompany strategy execution
must be anticipated and considered during strategy formulation and managed during strategy
implementation.

A concern in matching managers with strategy is that jobs have specific and relatively static
responsibilities, while people are dynamic in their personal development. Commonly used
methods that match managers with strategies to be implemented include transferring managers,
developing leadership workshops, offering career development activities, promotions, job
enlargement, and job enrichment.

A number of other guidelines can help ensure that human relationships facilitate rather than
disrupt strategy-implementation efforts. Specifically, managers should do a lot of chatting and
informal questioning to stay abreast of how things are progressing and to know when to
intervene. Managers can build support for strategy-implementation efforts by giving few orders,
announcing few decisions, depending heavily on informal questioning, and seeking to probe and

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clarify until a consensus emerges. Key thrusts that succeed should be rewarded generously and
visibly. A sense of humor is important, too.

It is supervising that so often during strategy formulation individual values, skills, and abilities
needed for successful strategy implementation are not considered. It is rare that a firm selecting
new strategies or significantly altering existing strategies possesses the right line and staff
personnel in the right positions for successful strategy implementation. The need to match
individual aptitudes with strategy-implementation tasks should be considered in strategy choice.

Inadequate support from strategists for implementation activities often undermines

organizational success. Chief executive officers, small business owners, and government agency
heads must be personally committed to strategy implementation and express this commitment in
highly visible ways. Strategist’s formal statements about the importance of strategic management
must be consistent with actual support and rewards given for activities completed and objectives
reached. Otherwise, stress created by inconsistency can cause uncertainty among managers and
employees at all levels.

Perhaps the best method for preventing and overcoming human resource problems in strategic
management is to actively involve as many managers and employees as possible in the process.
Although time-consuming, this approach builds understanding, trust, commitment, and
ownership and reduces resentment and hostility. The true potential of strategy formulation and
implementation resides in people.

Chapter Seven: Strategy Evaluation

7.1 The Nature of Strategy Evaluation

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The best-formulated and best-implemented strategies become obsolete as a firm’s external and
internal environments change. It is essential, therefore, that strategists systematically review,
evaluate, and control the execution of strategies. This chapter presents a framework that can
guide managers’ efforts to evaluate strategic-management activities, to make sure they are
working, and to make timely changes. Management information systems being used to evaluate
strategies are discussed. Guidelines are presented for formulating, implementing, and evaluating
strategies.

The strategic-management process results in decisions that can have significant, long-lasting
consequences. Erroneous strategic decisions can inflict severe penalties and can be exceedingly
difficult, if not impossible, to reverse. Most strategists agree, therefore, that strategy evaluation is
vital to an organization’s well-being; timely evaluations can alert management to problems or
potential problems before a situation becomes critical.

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 actions to ensure that performance conforms to plans.

Adequate and timely feedback is the cornerstone of effective strategy evaluation. Strategy
evaluation can be no better than the information on which it operates. Too much pressure from
top managers may result in lower managers contriving numbers they think will be satisfactory.

Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on
evaluating strategies may become expensive and counterproductive. No one likes to be evaluated
too closely! The more managers attempt to evaluate the behavior of others, the less control they
have. Yet too little or no evaluation can create even worse problems. Strategy evaluation is
essential to ensure that stated objectives are being achieved.

In many organizations, strategy evaluation is simply an appraisal of how well an organization

has performed. Have the firm’s assets increased? Has there been an increase in profitability?
Have sales increased? Have productivity levels increased? Have profit margin, return on

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investment, and earnings-per-share ratios increased? Some firms argue that their strategy must
have been correct if the answers to these types of questions are affirmative. Well, the strategy or
strategies may have been correct, but this type of reasoning can be misleading, because strategy
evaluation must have both a long-run and short-run focus. Strategies often do not affect short-
term operating results until it is too late to make needed changes.

It is impossible to demonstrate conclusively that a particular strategy is optimal or even to

guarantee that it will work. One can, however, evaluate it for critical flaws. Scholars on Strategic
Management offered four criteria that could be used to evaluate a strategy: consistency,
consonance, feasibility, and advantage. Consonance and advantage are mostly based on a
firm’s external assessment, whereas consistency and feasibility are largely based on an internal
assessment.

Strategy evaluation is important because organizations face dynamic environments in which key
external and internal factors often change quickly and dramatically. Success today is no
guarantee of success tomorrow! An organization should never be lulled into complacency with
success; countless firms have thrived one year only to struggle for survival the following year.
Moreover, organizational trouble can come swiftly.

Strategy evaluation is becoming increasingly difficult with the passage of time, for many
reasons. Domestic and world economies were more stable in years past, product life cycles were
longer, product development cycles were longer, technological advancement was slower, change
occurred less frequently, there were fewer competitors, foreign companies were weak, and there
were more regulated industries. Other reasons why strategy evaluation is more difficult today
include the following trends:

1) A dramatic increase in the environment’s complexity

2) The increasing difficulty of predicting the future with accuracy
3) The increasing number of variables
4) The rapid rate of obsolescence of even the best plans
5) The increase in the number of both domestic and world events affecting organizations
6) The decreasing time span for which planning can be done with any degree of certainty

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A fundamental problem facing managers today is how to effectively control employees in light
of modern organizational demands for greater flexibility, innovation, creativity, and initiative
from employees. How can managers today ensure that empowered employees acting in an
entrepreneurial manner do not put the well-being of the business at risk?

When empowered employees are held accountable for and pressured to achieve specific goals
and are given wide latitude in their actions to achieve them, there can be dysfunctional behavior.

7.2 The Process of Evaluating Strategies

Strategy evaluation is necessary for all sizes and kinds of organizations. Strategy evaluation
should initiate managerial questioning of expectations and assumptions, should trigger a review
of objectives and values, and should stimulate creativity in generating alternatives and
formulating criteria of evaluation. Regardless of the size of the organization, a certain amount of
management by wandering around at all levels is essential to effective strategy evaluation.
Strategy-evaluation activities should be performed on a continuing basis, rather than at the end of
specified periods of time or just after problems occur. Waiting until the end of the year, for
example, could result in a firm closing the barn door after the horses have already escaped.

Evaluating strategies on a continuous rather than on a periodic basis allows benchmarks of

progress to be established and more effectively monitored. Some strategies take years to
implement; consequently, associated results may not become apparent for years. Successful
strategies combine patience with a willingness to take corrective actions promptly when
necessary. There always comes a time when corrective actions are needed in an organization! .

Managers and employees of the firm should be continually aware of progress being made toward
achieving the firm’s objectives. As critical success factors change, organizational members
should be involved in determining appropriate corrective actions, if assumptions and
expectations deviate significantly from forecasts, then the firm should renew strategy-
formulation activities, perhaps sooner than planned. In strategy evaluation, like strategy
formulation and strategy implementation, people make the difference. Through involvement in
the process of evaluating strategies, managers and employees become committed to keeping the
firm moving steadily toward achieving objectives.

7.3 A Strategy – Evaluation framework

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The following table summarizes strategy-evaluation activities in terms of key questions that
should be addressed, alternative answers to those questions, and appropriate actions for an
organization to take
Notice that corrective actions are almost always needed accept when
1. external and internal factors have not significantly changed and
2. the firm is progressing satisfactorily toward achieving stated objectives
7.3.1 Reviewing Bases of Strategy
As shown in the figure below, reviewing the underlying bases of an organization’s strategy
could be approached by developing a revised EFE (External Factor Evaluation) Matrix and l FE
(Internal Factor Evaluation) Matrix. A revised IFE Matrix should focus on changes in the
organization’s management, marketing, finance/accounting, production/operations, R&D, and
management information systems strengths and weaknesses. A revised EFE Matrix should
indicate how effective a firm’s strategies have been in response to key opportunities and threats.

Numerous external and internal factors can prohibit firms from achieving long- term and annual
objectives. Externally, actions by competitors, changes in demand, changes in technology,
economic changes, demographic shifts, and governmental actions may prohibit objectives from
being accomplished. Internally, ineffective strategies may have been chosen or implementation
activities may have been poor. Objectives may have been too optimistic. Thus, failure to achieve
objectives may not be the result of unsatisfactory work by managers and employees. All
organizational members need to know this to encourage their support for strategy-evaluation
activities. Organizations desperately need to know as soon as possible when their strategies are
not effective: Sometimes managers and employees on the front lines discover this well before
strategists.

External opportunities and threats and internal strengths and weaknesses that represent the bases
of current strategies should continually be monitored for change. It is not really a question of
whether these factors will change, but rather when they will change and in what ways. Some key
questions to address in evaluating strategies are given here.

7.3.2 Measuring Organizational Performance

Another important strategy-evaluation activity is measuring organizational performance. This
activity includes comparing expected results to actual results, investigating deviations from

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 plans, evaluating individual performance, and examining progress being made toward
meeting stated objectives. Both long-term and annual objectives are commonly used in this
process. Criteria for evaluating strategies should be measurable and easily verifiable. Criteria
that predict results maybe more important than those that reveal what already has happened.
For example, rather than simply being informed that sales in the last quarter were 20 percent
under what was expected, strategists need to know that sales in the next quarter maybe 20
percent below standard unless some action is taken to counter the trend. Really effective
control requires accurate forecasting.

Failure to make satisfactory progress toward accomplishing long-term or annual objectives

signals a need for corrective actions. Many factors, such as unreasonable policies,
unexpected turns in the economy, unreliable suppliers or distributors, or ineffective
strategies, can result in unsatisfactory progress toward meeting objectives. Problems can
result from ineffectiveness (not doing the right things) or inefficiency (doing the right things
poorly).

Determining which objectives are most important in the evaluation of strategies can be
difficult. Strategy evaluation is based on both quantitative and qualitative criteria. Selecting
the exact set of criteria for evaluating strategies depends on a particular organization’s size,
industry, strategies, and management philosophy. An organization pursuing retrenchment
strategy, for example, could have entirely different set-of evaluative criteria from an
organization pursuing a market-development strategy.

Quantitative criteria commonly used to evaluate strategies are financial ratios, which
strategists use to make three critical comparisons:

1. comparing the firm’s performance ever different time periods,

2. comparing the firm’s performance to competitors’ and
3. comparing the firm’s performance to industry averages.
Some key financial ratios that are particularly useful as criteria for strategy evaluation are as
follows:
1. Return on investment (ROl)
2. Return on equity (ROE)

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 3. Profit margin
4. Market share
5. Debt to equity ratio
6. Earnings per share
7. Sales growth
8. Asset growth
But there are some potential problems associated with using quantitative criteria for
evaluating strategies. First, most quantitative criteria are geared to annual objectives rather
than long-term objectives. Also, different accounting methods can provide different results
on many quantitative criteria. Third, intuitive judgments are almost always involved in
deriving quantitative criteria. For these and other reasons, qualitative criteria are also
important in evaluating strategies. Human factors such as high absenteeism and turnover
rates, poor production quality and quantity rates, or low employee satisfaction can be
underlying causes of declining performance. Marketing, finance/accounting, R&D, or
management information systems factors can also cause financial problems.
7.3.3 Taking Corrective Actions
The final strategy-evaluation activity, taking corrective actions, requires making changes to
reposition a firm competitively for the future. Examples of changes that may be needed are
altering an organization’s structure, replacing one or more key individuals, selling a division,
or revising a business mission. Other changes could include establishing or revising
objectives, devising new policies, issuing stock to raise capital, adding additional
salespersons, allocating resources differently, or developing new performance incentives.
Taking corrective actions does not necessarily mean that existing strategies will be
abandoned or even that new strategies must be formulated.

The probabilities and possibilities for incorrect or inappropriate actions increase

geometrically with an arithmetic increase in personnel. Any person directing an overall
undertaking must check on the actions of the participants as well as the results that they have
achieved. If either the actions or results do not comply with preconceived or planned
achievements, then corrective actions are needed.

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 No organization can survive as an island; no organization can escape change. Taking
corrective actions is necessary to keep an organization on track toward achieving stated
objectives. In their thought-provoking ideas, Scholars on Strategic management argued that
business environments are becoming so dynamic and complex that they threaten people and
organizations with future shock, which occurs when the nature, types, and speed of changes
overpower an individual’s or organization’s ability and capacity to adapt. Strategy evaluation
enhances an organization’s ability to adapt successfully to changing circumstances.

Taking corrective actions raises employees’ and managers’ anxieties. Research suggests that
participation in strategy-evaluation activities is one of the best ways to overcome individuals’
resistance to change. According to Scholars on Strategic management, individuals accept
change best when they have a cognitive understanding of the changes, a sense of control over
the situation, and an awareness that necessary actions are going to be taken to implement the
changes.

Strategy evaluation can lead to strategy-formulation changes, strategy- implementation

changes, both formulation and implementation changes, and no changes at all. Strategists
cannot escape having to revise strategies and implementation approaches sooner or later.
Scholars on Strategic management offered the following insight on taking corrective actions:

Resistance to change is often emotionally based and not easily overcome by rational
argument. Resistance may be based on such feelings as loss of status, implied criticism of
present competence, fear of failure in the new situation, annoyance at not being consulted,
lack of understanding of the need for change, or insecurity in changing from well-known and
fixed methods. It is necessary, therefore, to overcome such resistance by creating situations
of participation and (a) full explanation when changes are envisaged.

Corrective actions should place an organization in a better position to capitalize upon internal
strengths; to take advantage of key external opportunities; to avoid, reduce, or mitigate
external threats; and to improve internal weaknesses. Corrective actions should have a proper
time horizon and an appropriate amount of risk. They should be internally consistent and
socially responsible. Perhaps most important corrective actions strengthen an organization’s
competitive position in its basic industry. Continuous strategy evaluation keeps strategists

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 close to the pulse of an organization and provides information needed for an effective
strategic-management system.

Other scholars again described the benefits of strategy evaluation as follows:

Evaluation activities may renew confidence in the current business strategy or point to the
need for actions to correct some weaknesses, such as erosion of product superiority or
technological edge. In many cases, the benefits of strategy evaluation are much more far-
reaching, for the outcome of the process may be a fundamentally new strategy that will lead,
even in a business that is already turning a respectable profit, to substantially increased
earnings. It is this possibility that justifies strategy evaluation, for the payoff can be very
large.

An example company that today is taking major corrective actions is Sun Microsystems. For
nearly two decades, Sun Microsystems dismissed the standard. Chips and software that ran
most computers in favor of its own souped-up custom designs. Although more powerful than
Intel and Microsoft chips and servers, Sun products were also more expensive. However,
today Intel and Microsoft and similar firms produce generic chips and software that are less
expensive than Sun’s and just as powerful, so Sun increasingly is unable to compete on price,
quality, or power. Sun’s revenues and profits are declining rapidly, and the firm is actively
engaged in the strategy-evaluation process. This is an example of a company that basically
began with step two in the process illustrated; today firms must begin with step one due to
intense competition in virtually all industries.

7.4 Characteristics of an Effective Evaluation System

Strategy evaluation must meet several basic requirements to be effective. First, strategy-
evaluation activities must be economical; too much information can be just as bad as too
little information; and too many controls can do more harm than good. Strategy-evaluation
activities also 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. Strategy-evaluation activities should provide timely information; on
occasion and in some areas, managers may need information daily. For example, when a firm
has diversified by acquiring another firm, evaluative information may be needed frequently.

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 However, in an R&D department, daily or even weekly evaluative information could be
dysfunctional. Approximate information that is timely is generally more desirable as a basis
for strategy evaluation than accurate information that does not depict the present. Frequent
measurement and rapid reporting may frustrate control rather than give better control. The
time dimension of control must coincide with the time span of the event being measured.

Strategy evaluation should be designed to provide a true picture of what is happening. For
example, in a severe economic downturn, productivity and profitability ratios may drop
alarmingly, although employees and managers are actually working harder. Strategy
evaluations should portray this type of situation fairly. Information derived from the strategy-
evaluation process should facilitate action and should be directed to those individuals in the
organization who need to take action based on it. Managers commonly ignore evaluative
reports that are provided for informational purposes only; not all managers need to receive all
reports. Controls need to be action-oriented rather than information-oriented.

The strategy-evaluation process should not dominate decisions; it should foster mutual
understanding, trust, and common sense. No department should fail to cooperate with another
in evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not
too restrictive. Complex strategy-evaluation systems often confuse people and accomplish
little. The test of an effective evaluation system is its usefulness, not its complexity.

Large organizations require a more elaborate and detailed strategy-evaluation system because
it is more difficult to coordinate efforts among different divisions and functional areas.
Managers in small companies often communicate with each other and their employees daily
and do not need extensive evaluative reporting systems. Familiarity with local environments
usually makes gathering and evaluating information much easier for small organizations than
for large businesses. But the key to an effective strategy-evaluation system may be the ability
to convince participants that failure to accomplish certain objectives within a prescribed time
is not necessarily a reflection of their performance.

There is no one ideal strategy-evaluation system. The unique characteristics of an

organization, including its size, management style, purpose, problems, and strengths, can
determine a strategy-evaluation and control system’s final design. Scholars on Strategic

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 Management offered the following observation about successful organizations’ strategy-
evaluation and control systems:

Successful companies treat facts as friends and controls as liberating. Companies should not
only survive but thrive in the troubled moments, because their strategy evaluation and
control systems must be sound, their risk must be contained, and they should know
themselves and the competitive situation so well. Successful companies have a voracious
hunger for facts. They see information where others see only data. They love comparisons,
rankings, anything that removes decision making from the realm of mere opinion. Successful
companies maintain tight, accurate financial controls. Their people don’t regard controls as
an imposition of autocracy but as the benign checks and balances that allow them to be
creative and free.

7.5 Contingency Planning

A basic premise of good strategic management is that firms plan ways to deal with
unfavorable and favorable events before they occur. Too many organizations prepare
contingency plans just for unfavorable events; this is a mistake, because both minimizing
threats and capitalizing on opportunities can improve a firm’s competitive position.

Regardless of how carefully strategies are formulated, implemented, and evaluated,

unforeseen events such as strikes, boycotts, natural disasters, arrival of foreign competitors,
and government actions can make a strategy obsolete. To minimize the impact of potential
threats, organizations should develop contingency plans as part of their strategy-evaluation
process. Contingency plans can be defined as alternative plans that can be put into effect if
certain key events do not occur as expected. Only high-priority areas require the insurance
of contingency plans. Strategists cannot and should not try to cover all bases by planning for
all possible contingencies. But in any case, contingency plans should be as simple as
possible.

Some contingency plans commonly established by firms include the following:

1. If a major competitor withdraws from particular markets as intelligence reports

indicate, what actions should our firm take?

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 2. If our sales objectives are not reached, what actions should our firm take to avoid
profit losses?
3. If demand for our new product exceeds plans, what actions should our firm take to
meet the higher demand?
4. If certain disasters occur - such as loss of computer capabilities; a hostile takeover
attempt; loss of patent protection; or destruction of manufacturing facilities because
of earthquakes, tornados, or hurricanes - what actions should our firm take?
5. If a new technological advancement makes our new product obsolete sooner than
expected, what actions should our firm take?
Too many organizations discard alternative strategies not selected for implementation
although the work devoted to analyzing these options would render valuable information.
Alternative strategies not selected for implementation can serve as contingency plans in case
the strategy or strategies selected do not work.

When strategy-evaluation activities reveal the need for a major change quickly, an
appropriate contingency plan can be executed in a timely way. Contingency plans can
promote a strategist’s ability to respond quickly to key changes in the internal and external
bases of an organization’s current strategy. For example, if underlying assumptions about the
economy turn out to be wrong and contingency plans are ready, then managers can make
appropriate changes promptly.

In some cases, external or internal conditions present unexpected opportunities. When such
opportunities occur, contingency plans could allow an organization to capitalize on them
quickly.

Contingency planning gives users three major benefits:

1. It permits quick response to change,

2. It prevents panic in crisis situations, and
3. It makes managers more adaptable by encouraging them to appreciate just how
variable the future can be.
Scholars on Strategic management suggested that effective contingency planning involves a
seven-step process:

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 1) Identify both beneficial and unfavorable events that could possibly derail or disrupt the
strategy or strategies.
2) Specify trigger points. Calculate about when contingent events are likely to occur.
3) Assess the impact of each contingent event. Estimate the potential benefit or harm of
each contingent event.
4) Develop contingency plans. Be sure that contingency plans are compatible with current
strategy and are economically feasible.
5) Assess the counter impact of each contingency plan. That is, estimate how much each
contingency plan will capitalize on or cancel out its associated contingent event. Doing
this will quantify the potential value of each contingency plan.
6) Determine early warning signals for key contingent events. Monitor the early warning
signals.
7) For contingent events with reliable early warning signals, develop advance action plans
to take advantage of the available lead time.
7. 6 Auditing
A frequently used tool in strategy evaluation is the audit. Auditing is defined by the
American Accounting Association (AAA) as “a systematic process of objectively obtaining
and evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between these assertions and established criteria,
and communicating the results to interested users.”

Independent auditors basically are certified public accountants (CPAs) who provide their
services to organizations for a fee; they examine the financial statements of an organization
to determine whether they have been prepared according to generally accepted accounting
principles (GAAP) and whether they fairly represent the activities of the firm. Independent
auditors use a set of standards called generally accepted auditing standards (GAAS). Public
accounting firms often have a consulting arm that provides strategy-evaluation services.

Two government agencies - the General Accounting Office (GAO) and the Internal Revenue
Service (IRS) - employ government auditors responsible for making sure that organizations
comply with federal laws, statutes, and policies. GAO and IRS auditors can audit any public
or private organization. The third group of auditors consists of employees within an

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 organization who are responsible for safeguarding company assets, for assessing the
efficiency of company operations, and for ensuring that generally accepted business
procedures are practiced.

7.6.1 The Environmental Audit

For an increasing number of firms, overseeing environmental affairs is no longer a technical
function performed by specialists; rather, it has become an important strategic-management
concern. Product design, manufacturing, transportation, customer use, packaging, product
disposal, and corporate rewards and sanctions should reflect environmental considerations.
Firms that effectively manage environmental affairs are benefiting from constructive
relations with employees, consumers, suppliers, and distributors.

An environmental audit should be as rigorous as a financial audit and should include training
workshops in which staff can help design and implement the policy. The effort should be
budgeted, and requisite funds should be allocated to ensure that it is not a public relations
facade. A Statement of Environmental Policy should be published periodically to inform
shareholders and the public of environmental actions taken by the firm.

Instituting an environmental audit can include moving environmental affairs from the staff side
of the organization to the line side. Some firms are also introducing environmental criteria and
objectives in their performance appraisal instruments and system.

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