Chapter One

Introduction to Business Policy and Strategic Management

1.1. An Overview of Business Policy
1.1.1. Meaning of Business Policy
Business policy has been defined differently by different scholars. According to Christensen and others
(1992), business policy is defined as “the study of the functions and responsibilities of senior management,
the crucial problems that affect success in the total enterprise, and the decisions that determine the
direction of the organization and shape its future. The problems of policy in business, like those of policy
in public affairs, have to do with the choice of purposes, the molding of organizational identity and
character, the continuous definition of what needs to be done, and the mobilization of resources for the
attainment of goals in the face of competition or adverse circumstances”
This comprehensive definition covers many aspects of business policy.
 It is considered as the study of the functions & responsibilities of the senior management related to
those organizational problems affecting the success of the total organization.
 It deals with the determination of the future course of action that an organization has to adopt.
 It involves choosing the purpose and defining what needs to be done in order to mould the character
and identity of an organization to achieve its goals.
 It is also concerned with the mobilization of resources, which will help the organization to achieve
its goals.
The following are also other definitions of business policy given by different writers:
 Business policy provides a basic framework defining fundamental issues of a company, its mission
and broad business objectives and a set of guidelines governing the company's conduct of business
within its total perspective.
 Business policies are sets of rules that define business processes, industry practices, and the scope
and characteristics of an organization’s offerings.
 Business policy refers the study of the functions and responsibilities of senior management, the
crucial problems that affect success in the total enterprise, and the decisions that determine the
direction of an organization and shape its future.
 Business policy is the study of the roles and responsibilities of top level management, the
significant issues affecting organizational success and the decisions affecting organization in long-
run.
 The business policy is a guide that stipulates rules, regulations and objectives, and may be used in
the managers' decision-making. It must be flexible and easily interpreted and understood by all
employees.
1.1.2. Evolution of Business Policy as a Discipline
The origin of business policy can be faced back to 1911, when the Harvard Business School introduced an
integrate course in management aimed at providing general management capability. However, the real
impetus for introducing business policy in the curriculum of business schools came with the publication of
two reports in 1959 by Gordon and Howell sponsored by the Ford Foundation and Pierson reports
sponsored by the Carnegie Foundation in USA.
The reports had recommended that business policy as a course would give students an opportunity to pull
together what they have learned in the separate business fields and utilize this knowledge in the analysis of
complex business problems.
In 1969 the American Assembly of Collegiate Schools of Business (AACBB), a regulatory body for
business school, made the course of Business Policy a mandatory requirement for the purpose of
recognition. In the last two decades, business policy has become an integral part of management education
curriculum. The practice of including business policy in the management curriculum has spread from the
U.S to other parts of the world.
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The term ‘business policy’ has been used traditionally though new titles such as strategic management,
corporate strategy, and so on are now used extensively for the course. In general, the evolution of business
policy can be viewed in terms of the following four paradigms (Phases).
Phase 1: Paradigm of Ad hoc Policy making (until 1930): The need for policy making arose due to the
nature of the American business firms of that period. The firm’s have originally limited product line,
unique set of customers in limited geographical area. At the time role of policy making become the prime
responsibility of erstwhile entrepreneurs.
Phase 2: Planned Policy Paradigm (1930s & 40s): Due to the increasing environmental changes in USA,
Planned policy formulation replaced ad hoc policy making. The emphasis shifted to the integration of
functional areas in a rapidly changing environment.
Phase 3: Strategy Paradigm (1960s): Increasing complexity and accelerating changes in the environment
made the planned policy paradigm irrelevant since the needs of a business could no longer be served by
policy making and functional integration only. There was a demand for a critical look at the basic concepts
of business and its relationships to the environment. Then, the concept of strategy was emerged in the early
1960s and satisfied this requirement.
Phase 4: Strategic Management Paradigm (1980s): The initial focus of strategic management was on
the intersection of two broad fields of inquiries: the strategic processes of business firms, and the
responsibilities of general management. The approaches & methods of analysis of strategic management
definitely represent a powerful way of thinking to resolve strategic issues.
The resolution of strategic issues that affect the future of a business firm has been a continual endeavor in
the subject of business policy. This endeavor is based on the development of strategic thinking. The
direction in which strategic management is moving can be anticipated from an emerging comprehensive
approach of Management of Discontinues Change which takes account of psychosocial, sociological,
political and systemic characteristics of complex organizations.
With the emergence of futuristic organizations, which are no longer responsible simply for making a
profit or producing goods but for simultaneously contributing to the solution of extremely complex
ecological, moral, political, racial, sexual, and social problems, the demands on business policy are
expected to rise tremendously. The general managers of tomorrow may be called up on to shoulder a set of
entirely new responsibilities necessitating a drastic review of the emerging concepts and techniques in
business policy.
1.1.3. The Purposes and Objectives of Business Policy
The three major purposes of business policy are:
1. To integrate the knowledge gained in various functional areas of management.
2. To adopt generalist approach to problem solving, and
3. To understand the complex linkages operating within an organization through the use of a systems
approach to decision-making.
From the above three purposes, the following objective of business policy could be derived in terms of
knowledge, skills and attitudes:
1. In terms of Knowledge
 The learners of business policy have to understand the various concepts involved such as strategy,
policies, plans, and programs specifically in the context of business policy.
 Through the tools of analysis and diagnosis, a learner can understand the environment in which a
firm operates.
 Information about the environment helps the learner appreciate the manner in which strategy is
formulated.
 Through the knowledge gained from business policy, the learner will be able to visualize how the
implementation of strategic management can take place.
 To learn that the problems on real-life business are unique and so are the solutions is an
enlightening experience for the learner.
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2. In terms of Skills
 The study of business policy enables the development of analytical ability and use it to understand
the situation in a given case or incident.
 The study of business policy, should lead to the skill of identifying the factors relevant in decision-
making.
 As part of business policy study, case analysis leads to the development of oral as wall written
communication skills.
3. In terms of Attitude
 The study of business policy can help in the development of generalist attitude which enables the
learners to assess a situation from all possible angles.
 By acting in a comprehensive manner, a generalist is able to function under conditions of partial
ignorance by using his/her judgment & intuition.
 It is important to have the attitude to go beyond and think when faced with a problematic situation.
Developing a creative and innovative attitude is the hall-mark of a general manager who refuses to
be bound by precedents & stereo-typed decisions.
1.2. An Overview of Business Strategy
Strategic thinking and strategic management are the most important activities undertaken by any business
or public sector organizations. How skillfully these activities are carried out will determine the eventual
long-term success or failure of the organization. In previous section we have seen business policy, as it is
an integrative concept in management which studies the functions and responsibilities of senior
management. In this section we will see the basic concepts of strategy.
1.2.1. Meaning of Business Strategy
You may have heard people talk about a strategy for a business, a strategy for a football match, a strategy
for a military campaign, .etc. But what is strategy?
Enterprises need business strategies for much the same reasons that armies need military strategies—to
give direction and purpose, to deploy resources in the most effective manner, and to coordinate the stream
of decisions being made by different members of the organization.
The concepts and theories of business strategy have their antecedents in military strategy. Indeed the term
strategy derives from the Greek word strategia meaning “generalship,” or “The Art of War” itself formed
from stratos, meaning “army,” and -ag, “to lead.”
Military strategy and business strategy share a number of common concepts and principles, the most basic
being the distinction between strategy and tactics. Strategy is the overall plan for deploying resources to
establish a favorable position. A tactic is a scheme for a specific action. Whereas tactics are concerned with
the maneuvers necessary to win battles, strategy is concerned with winning the war.

Many of the principles of military strategy have been applied to business situations. The differences
between business competition and military conflict must be recognized. The objective of war is (usually) to
defeat the enemy. The purpose of business rivalry is seldom so aggressive: most business enterprises limit
their competitive ambitions, seeking coexistence rather than the destruction of competitors.
The tendency for the principles of military and business strategy to develop as separate bodies of
knowledge reflects the absence of a general theory of strategy. Currently, the concept of strategy is being
used in different organizations as basic instrument to achieve agreed goals and objectives. Despite its wider
use, scholars have agreed on the absence of one specific definition for a strategy. The following are some
of the commonly used definitions of strategy:
Strategy is the determination of the basic long-term goals and objectives of organizations, and the adoption
of courses of action and the allocation of resources necessary for carrying out these goals.
In this definition, there are three aspects or components of a strategy:

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  Determination of basic long-term goals and objectives,
 The adoption of courses of actions to achieve these goals & objectives, and
 Allocation of resources necessary for achieving the goals objectives
Strategy is the pattern or plan that integrates an organization’s major goals, policies, and action sequences
in to a cohesive whole. It helps to allocate an organization’s resources in to a unique and viable posture
based on its internal competencies and short comings, and anticipated changes in the environment and
contingent moves by intelligent opponents.
Strategy is management’s game plan for growing the business, staking out a market position, attracting and
pleasing customers, competing successfully, conducting operations, and achieving targeted objectives.
Most of the above definitions interpret a strategy as some sort of future plan which require a set of policies
adopted by senior management that guides the scope and direction of the organization. It takes in to
account the environment in which the entity operates.
1.2.2. The Levels at Which Strategy Operates
The decision-making hierarchy of an organization usually comprises three levels. These are corporate level,
business level, and functional levels. At these three levels, corporate, business, and functional level
strategies can be formulated respectively.
Corporate strategy: It identifies the business that the organization is taking and should take, and attempts
to determine the roles each business activity is playing and should play in the organization. Corporate level
strategy is primarily concerned with top management, chief executives or board-level decisions for
acquisitions, mergers & major expansions that add or reduce product lines.
Business strategy: In the middle of the decision making hierarchy is the business-level, concerned with a
single strategic business unit and how each business attempts to achieve its mission within its chosen areas
of activity. Successful business-level strategies usually involve building uniquely strong or distinctive
competencies in one or several areas crucial to success and using them to maintain a competitive edge over
rivals. Some examples of distinctive competencies are superior technology and/or product features, better
manufacturing technology and skills, superior sales and distribution capabilities, and better customer
service and convenience.
Functional strategy: At the bottom of the decision making hierarchy is functional level, composed of
managers of a product, geographic, and functional areas. This is the final strategy, which is implemented
by each functional area of the organization to support the business strategy. Functional strategies are
developed and implemented in the value adding activities such as design, procurement, production,
marketing, distribution, finance,…etc.
1.2.3. Difference between Policy and Strategy
The term policy should not be considered as synonymous to the term strategy. The difference between
policy and strategy can be summarized as follows:
 Policy is a blueprint of the organizational activities which are repetitive in nature. While strategy is
concerned with those organizational decisions which have not been dealt/faced before in same
form.
 Policy formulation is the responsibility of top level management. While strategy formulation is
basically done by top, middle and operational level management.
 Policy deals with routine/daily activities essential for effective and efficient running of an
organization. While strategy deals with strategic decisions.
 Policy is concerned with both thought and actions. While strategy is concerned mostly with action.
 A policy is concerned with what is, or what is not done. While a strategy is the methodology used
to achieve a target as prescribed by a policy.

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1.3. Understanding Strategic Management
In the historical evolution of business policy, strategic management is the emerging discipline that forms
the theoretical framework for business policy. Strategic decision making is carried out through the process
of strategic management. So, what is strategic management?
1.3.1. Meaning of Strategic Management
The term strategic management has been defined and interpreted differently by various authors. The
following are some of the commonly used definitions of strategic management.
Strategic management is defined as a long-term, future-oriented process of assessment, goal setting, and
strategy building that maps an explicit path between the present and a vision of the future, that relies on
careful consideration of an organization’s capabilities and environment, and leads to priority-based resource
allocation and other decisions. It is a disciplined effort to produce fundamental decisions and actions that
shape and guide what an agency is, what it does, and why it does it. It includes the process of developing a
strategic plan. A strategic plan is an agency’s comprehensive plan to successfully carry out its
programmatic mission.
Strategic management is defined as a stream of decisions and actions which leads to the development of
an effective strategy or strategies to help achieve corporate objectives. The end result of strategic
management is a strategy or a set of strategies for the organization.
According to Harrison and John (1998), strategic management is defined as the process through which
organizations analyze and learn from their internal and external environments, establish strategic
directions, create strategies that are intended to help achieve established goals, and execute these strategies,
and satisfy key organizational stakeholders. The main end of strategic management, here, is the satisfaction
of the stakeholders of the organization.
Strategic management asks and answers four basic questions.
 Where are we now? Before an organization can develop a plan for a change, it must first
determine where it currently stands and what opportunities for change exist.
 Where do we want to be? Identifying Vision, mission, goals and Objectives
 How do we get there? Developing the Action Plan, a detailed description of the key strategies used
to implement each objective.
 How do we measure our progress? Building Performance Measures, Monitoring and Tracking
Systems and Resource Allocation
1.3.2. A brief look at the Processes of Strategic Management
There are five essential phases in the strategic management process, which are sequential in nature. These
five major phases are:
1. Establishing the hierarchy of strategic intent,
2. Environmental Analysis,
3. Formulation of strategies (Strategic alternatives and choice),
4. Implementation of strategies, and
5. Conducting strategic evaluation and control
In brief the different elements of the process are presented as follows:
1. Establishing the hierarchy of strategic intent The hierarchy of strategic intent lays the foundation for
the strategic management. The element of vision in the hierarchy serves the purpose of stating what an
organization wishes to achieve in long run. The mission relates an organization to society. The business
definition explains the business of an organization interim of customer need and alternative technologies.
The objective of an organization states what is to be achieved in a given time period.
2. Environmental and organizational appraisal helps to find out the opportunities and threats in the
environment and the strengths and weaknesses of the organization in order to create a match between them.
In such a manner opportunities could be availed of and the impact of threats neutralized in order to
capitalize on the organizational strengths and minimize the weakness.
3. Strategic alternatives and choice are required for evolving alternative strategies, out of the many
possible options, and choosing the most appropriate strategy or strategies in the light of environmental
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opportunities and threats and corporate strengths and weaknesses. The procedures (or processes) used for
choosing strategies involve strategic analysis and choice. The end result of this set of elements is a strategic
plan which can be implemented
4. Implementation of strategies. For the implementation of strategy, the strategic plan is put into action.
Implementing Strategy include determining and implementing the most appropriate organizational
structure, developing short- range objectives, and establishing functional strategies.
5. Conducting strategic evaluation and control. Strategic evaluation appraises the implementation of
strategies and measures to organizational performance. The feedback from strategic evaluation is meant to
exercise strategic control over the strategic management process. Strategies may be reformulated, if
necessary.
The process of strategic management is depicted through a model, which consists of different phases; and
these phases are considered as sequentially linked to each other and each successive phase provides a
feedback to the previous phases.

Strategic SWOT Strategic Strategic Strategy Strategy

intent Analysis Alternative Analysis Implementation Evaluatio
s And choice n

Strategic Control
Exhibit 1.1: A working model of the strategic management process
Each phase of the strategic management process consists of a number of discrete and identifiable elements
or activities performed in logical & sequential steps. The detailed discussions will be made in the coming
chapters.
1.3.3. Characteristics of Strategic Decisions
Strategic decision-making leads to the formulation of strategies. The following characteristics help us
understand the nature of strategic decisions:
 Strategic decisions are likely to affect the long-term direction of an organization.
 Strategic decisions are future-oriented. They are based on what managers forecast, rather than what
they know.
 Strategic decisions are likely to be concerned with the scope of an organization’s activities. Should the
organization concentrate on one area of activity, or diversify?
 Strategic decisions are to do with the matching of the activities of an organization to the environment
in which it operates.
 Strategic decisions are about 'stretching' an organization’s resources and competences to create
opportunities or capitalize on them.
 Strategic decisions often have major resource implications for an organization. They involve
substantial allocations of people, physical assets, and money
 The strategy of an organization will be affected not only by environmental forces and resource
availability, but also by the values and expectations of those who have power in and around the
organization.
 Strategic decisions are distinguished by a higher order of complexity than operational tasks. The
complexity arises for at least three reasons.
 Strategic decisions usually involve a high degree of uncertainty:
 Strategic decisions are likely to demand an integrated approach to managing the organization.
 Strategic decisions are likely to involve major change in organizations.
 Strategic decisions are usually have multi-functional or multi-business consequences.

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 Chapter Two
Establishing the Hierarchy of Strategic Intent
2.1. Meaning and Hierarchies of Strategic Intent
Underlying the concept of strategic intent is the notion that strategy formulation should involve setting
ambitious goals, which stretch a company, and then finding ways to build the resources and capabilities
necessary to attain those goals.

Strategic intent refers to an obsession with an organization. Strategic intent envisions a desired leadership
position and establishes the criterion the organization will use to chart its progress. The hierarchy of
strategic intent lays the foundation for strategic management process. In the hierarchy of strategic intent,
the vision, mission, business definition and objectives are established. Formulation of strategies is possible
only when strategic intent is clearly set up. This step is mostly philosophical in nature.
2.2. Creating a Strategic Vision
Creating vision is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to
become. A few definitions are as follows:
Vision is a compelling, conceptual, vivid image of the desired future. A vision focuses and ennobles an
idea about a future state of being in such a way as to excite and compel an agency toward its attainment. It
crystallizes what management wants the organization to be in the future. A vision is not bound by time,
represents global and continuing services, and serves as a foundation for a system of strategic planning.
Vision is defined as the category of intentions that are broad, all inclusive and forward thinking.
As a whole, the organizational vision indicates the direction and values that bring people together in their
attempt to strive towards achieving the organizational goals. Vision articulates the position of an
organization which it may attain in distant future. Vision must be:
 Compelling
 Inspiring, and
 Make people want to join the organization
Advantages of having a Vision
A shared vision provides the following benefits:
 It is an initial force that brings people together
 Inspires stakeholders
 Promotes long term thinking
 Foster risk taking.
 Make organizations competitive, original and unique.
 Represents integrity.
 They are inspiring and motivating to people working in organization.
2.3. Defining Mission Statement and Values
An organization’s mission is the purpose or the reason for the organization’s existence. A well conceived
mission statement defines the fundamental and unique purpose that sets a company apart from other firms
of its type and identifies the scope of the company's operation in terms of the products offered and markets
served.
Mission is the organization’s unique reason for existence, usually contained within a formal statement of
purpose. It identifies what an organization, program or sub-program does (or should do) and why and for
whom it does it. The statutory mission statement is usually found in the legislation creating the agency.
A few additional definitions of mission are as follows:
 Mission is the essential purpose of the organization, concerning particularly why it is in existence, the
nature of the business it is in, and the customers it seeks to serve and satisfy.

7
  A company’s mission is defined by the buyer needs it seeks to satisfy, the customer groups and
market segments it is endeavoring to serve and the resources and technologies it is deploying in
trying to pleasing its customers.
The essential questions for mission statement are:
 What function(s) does the organization perform? (Customer functions, products, or services)
 For whom does the organization perform these functions? (Customer or client groups)
 Where does the organization operate? (Geographic domain)
 How does the organization perform these functions? (Activities, technologies, and driving forces)
Characteristics of a Mission
In order to be effective, a mission statement should posses the following characteristics.
 A mission statement should be realistic and achievable.
 It should neither be too broad (meaningless) not be too narrow (not restrictive). The mission
statement should be precise.
 It must be clear for action. Highly philosophical statements do not give clarity.
 It should have societal linkage. Linking the organization to society will build long term perspective in
a better way.
 It should not be static. To cope up with ever changing environment, dynamic aspects be looked into.
 It should be motivating for members of the organization and of society.
 The mission statement should indicate the process of accomplishing objectives. The clues to achieve
the mission will be guiding force.
Strategic Values/ Principles
Strategic Values/Principles are human factors which drive the conduct of an organization and function as a
guide to the development and implementation of all policies and actions. Strategic Values are beliefs of top
management regarding employees’ welfare, costumer’s interest and shareholder’s wealth. The beliefs may
have economic orientation or social orientation.
Often an organization’s principles are implicitly understood, but it can be helpful to explicitly state them.
Principles summarize the operating philosophies or core values that will be utilized in fulfillment of the
vision and mission. Thus, principles are the bridge between where we are and where we want to be.
An organization’s values identify the key stakeholders and their expectations. The entire organization
structure revolves around the philosophy coming out of core values. Example: Empowerment, commitment
to excellence…etc.
2.4. Defining the Business
Understanding business is vital to define it and answer the question ‘what is our business? ’ Clearly define
the business of an organization in terms of customer needs, customer groups and alternative technologies. It
is suggested to define business along the three dimensions of customer groups, customer functions and
alternative technologies.
 Customer groups are created according to the identity of the customers.
 Customer functions are based on provision of goods/services to customers.
 Alternative technologies describe the manner in which a particular function can be performed for a
customer.
A clear business definition is helpful in identifying several strategic choices. The choices regarding various
customer groups, various customer functions and alternative technologies give the strategists various
strategic alternatives. The diversification, mergers and turnaround depend upon the business definition. If
strategic alternatives are linked through a business definition, it results in considerable amount of synergic
advantage.

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2.5. Setting Goals and Objectives
The vision, mission and business definition determine the business philosophy to be adopted in the long
run. The goals and objectives are set to achieve them.
Goals are the general desired end result, generally after three or more years, toward which organizations
direct their efforts. A goal addresses issues by stating policy intention. They are both qualitative and
quantitative. In a strategic planning system, goals are ranked for priority. Goals stretch and challenge an
organization, but they are realistic and achievable.
Goals denote a broad category of financial and non-financial issues that a firm sets for it self. They are
usually a collection of related programs and a reflection of the major action of the organization.

On the other hand, Objectives are described as being very precise, time-based, and measurable actions that
support the completion of a goal. They are the ends that state specifically how the goals shall be achieved.
It is to be noted that objectives are the manifestation of goals whether specifically stated or not.
Objectives are specific and measurable targets for accomplishment of a goal. They mark interim steps
toward achieving an organization’s long-term mission and goals. Linked directly to organizational goals,
objectives are measurable, time-based statements of intent. They emphasize the results of organization’s
actions at the end of a specific time.
Difference between goals/objectives
The points of difference between the two are as follows:
 The goals are broad while objectives are specific.
 The goals are set for a relatively longer period of time.
 Goals are more influenced by external environment.
Broadly, it is more convenient to use one term rather than both. The difference between the two is simply a
matter of degree and it may vary widely.
Need for Establishing Goals and Objectives
The following points specifically emphasize the need for establishing objectives:
 Objectives provide yardstick to measure performance of a department or organization.
 Objectives serve as a motivating force. All people work to achieve the objectives.
 Objectives help the organization to pursue its vision and mission. Long term perspective is
translated in short-term goals.
 Objectives define the relationship of organization with internal and external environment.
 Objectives provide a basis for decision-making. All decisions taken at all levels of management
are oriented towards accomplishment of objectives.
Objectives can be set in the areas of market standing, innovation productivity, physical and financial
resources, profitability, manager performance and development, worker performance and attitude and
public responsibility.
Characteristics of Goals/Objectives
The following are the characteristic of corporate objectives:
 They form a hierarchy. It begins with broad statement of vision and mission and ends with key
specific goals. These objectives are made achievable at the lower level.
 It is impossible to identify even one major objective that could cover all possible relationships and
needs. Organizational problems and relationship cover a multiplicity of variables and cannot be
integrated into one objective. They may be economic objectives, social objectives, political objectives
etc. Hence, multiplicity of objectives forces the strategists to balance those diverse interests.
 A specific time horizon must be laid for effective objectives. This timeframe helps the strategists to
fix targets.

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 Objectives must be within reach and is also challenging for the employees. If objectives set are
beyond the reach of managers, they will adopt a defeatist attitude. Attainable objectives act as a
motivator in the organization.
 Objectives should be understandable. Clarity and simple language should be the hallmarks Vague
and ambiguous objectives may lead to wrong course of action.
 Objectives must be concrete. For that they need to be quantified. Measurable objectives help the
strategists to monitor the performance in a better way.
 There are many constraints internally as well as externally which have to be considered in objective
setting. As different objectives compete for scarce resources, objectives should be set within
constraints.

Chapter 3
Analysis of the Environment

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3.1. Introduction
An organization, as a productive system, does not operate in a vacuum but in its own environment. It
interacts with its environment, drawing certain inputs from the environment and converting these to outputs
that are offered to the environment. The environment of an organization consists of the totality of all
controllable and uncontrollable conditions, circumstances, and influences that affect the organization's
ability to achieve its objectives. Every organization exists in an environment that has both internal and
external components. Organizations must understand the environment in which business is conducted,
because environmental forces exercise considerable influence on the survival and growth of business.

External Environment

Organization (Internal Environment)

Inputs Processes Outputs

Organization Functions:
Production-Operations
nt
Ext
me
Resources: Marketing Goods ern
iron Physical Financial-Accounting Services
Human Resource Mgt. al
Env Capital Performance
Human Research and Development Env
Measures:
al
Information Information Systems iron
Financial
ern
Managerial Activities: me
Productivity
Ext
Planning nt
Achieve Goal
Organization
Leading
Controlling

Organization (Internal Environment)

External Environment

Fig 3.1: Organizations as Open Systems

3.2. Analysis of Internal Environment
3.2.1. Meaning of Internal Analysis
The internal environment refers to all the controllable elements or factors within an organization which
imparts strengths or cause weaknesses. Internal analysis is concerned with providing management with a
detailed understanding of the business, how effective its current strategies are and how effectively it has
deployed its resources in support of its strategies. It is the process of identifying and understanding an
organization’s strategic capabilities, resources and core competencies. This enables the organization to
know its strengths and weaknesses. In internal analysis, other than strategic capability, an organization will
need to understand its position as compared with its competitors.

3.2.2. Approaches and Components of Internal Analysis

The elements or components of internal analysis vary based on the perspectives or view points of different
authors. There are some three different approaches to identify and analyze the elements of the internal
environment of an organization. These are:
 Comprehensive model
 The 7s model, and
 Resource based approach
A) Comprehensive Model of Internal Analysis
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According to some authors, the internal analysis is a comprehensive evaluation of the internal
environment's potential strengths and weaknesses. It tries to identify and evaluate all of the major
components or factors in the internal environment of an organization. Some of the areas that most
businesses should analyze include the following:
 Financial position. The financial position of a business plays a crucial role in determining what it
can or cannot do in the future.
 Product position. For a business to be successful, it must be acutely aware of its product position
in the marketplace.
 Marketing capability. Closely allied with an organization's product position is its marketing
capabilities (i.e., its ability to deliver the right product at the right time at the right price).
 Research and development capability. Every organization must be concerned about its ability to
develop new products.
 Organizational structure is a firm's formal role configuration, procedures, governance and control
mechanisms, and authority and decision-making processes.
 Human resources. All the activities of an organization are significantly influenced by the quality
and quantity of its human resources.
 Condition of facilities and equipment. The condition of an organization's facilities and equipment
can either enhance or hinder its competitiveness.
 Past objectives and strategies. In assessing its internal environment, every business should attempt
to explicitly describe its past objectives and strategies.
 Organizational culture consists of a complex set of ideologies, symbols, and core values that is
shared throughout the firm and influences the way it conducts business.
 Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others
to create strategic change as necessary.
 Access to natural resources
 Position on the experience curve, operational efficiency, operational capacity…etc
Then, the internal organizational analysis evaluates all these relevant factors in an organization in order to
determine its strengths and weaknesses. The checklists provided above can be helpful in determining
specific strengths and weaknesses in the functional areas of a business.
B) The 7S Model of Internal Analysis
The other approach to analyze the internal environment of an organization is the use of 7S Model. It looks
at the following variables:
 Strategy
 Structure
 Style
 Staff
 Skills
 Systems, and
 Shared values

1. Strategy: Do your strategies take into account the short term, medium term and long term goals?
2. Structure: Do you have a formal organizational structure in place? Are clear lines of reporting or
communicating relationships present?
3. Style of leadership: What is your style of leadership?
 Participative leadership style
 Democratic leadership style
 Autocratic leadership style

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4. Staff: Do you have competent, skilled and experienced staff to work with? How can you manage to
keep staff in the current environment? How do you recruit your staff? How trustworthy are your
employees? Do your staff work long hours? How do you retain quality employees?
5. Skills and competencies: What skills and competencies are present in your business? This may
encompass:
 Leadership skills
 Management skills
 Technical skills
 Interpersonal skills
 Intra personal skills
6. Systems, processes and procedures: What systems, processes and procedures do have in place or
intend to have in place?
 Performance management system
 Financial management system
 Quality control system
 Health and safety
 Stock control system
 Cash control system
 Accounting system …etc
7. Shared values: What qualities or attributes do you base your actions on?  What attributes defines the
culture of your business? What are the core values of your business? Examples of values include:
 Timeliness
 Reliability
 Internal efficiency
 Effectiveness
 Customer satisfaction
 Transparency
 Accountability
 Brand and business reputation
 Quality
 Creativity and innovation
You simply check for the degree to which your business possesses the above 7's. For example, if your
business has the right number of people (Staff) and these people possess the right kind of skills,
competence and expertise (Skills), then these are considered to be the internal strengths of your business.
Where your business lacks shared values and systems, these are considered to be weaknesses.
C) Resource-Based Approach to Internal Analysis
In order to generate a good and sound business strategy and attain competitive advantage, firms need to
initially examine and understand their internal organizational strengths and/or weaknesses. As such, a
different approaches and perspectives are needed to examine and understand the competitiveness of firms
through analyzing the magnitude of the relationship between their internal resources and capabilities. By
focusing on competitive advantage, the resource-based view was developed to analyze the internal
environment of an organization.
The Resource-Based View (RBV) is an economic tool used to determine the strategic resources available
to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies
primarily in the application of the bundle of valuable resources at the firm’s disposal . To transform a short-
run competitive advantage into a sustained competitive advantage requires that these resources are
heterogeneous in nature and not perfectly mobile. Effectively, this translates into valuable resources that
are neither perfectly imitable nor substitutable without great effort. If these conditions hold, the firm ’s
bundle of resources can assist the firm sustaining above average returns.
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The resource-based view emphasizes the internal capabilities of the organization in formulating strategy to
achieve a sustainable competitive advantage in its markets and industries. Organizations are made of a
unique cluster of resources and capabilities that they possess which can be configured and re-configured
to provide them with competitive advantages. The resource-based approach to internal analysis focuses on
the following issues:
 Organizational Resources
 Competencies and Core Competencies
 Organizational capabilities and distinctive capabilities
 Value Chain analysis
 Sustainable competitive advantage

Resources

Distinctive Cost Value Competitive Performance

Competencies Advantage Creation Advantage Results

Capabilities

Fig 3.2: A Model of Competitive Advantage

1. Analysis of Organizational Resources
Organizational Resources are inputs into a firm's production process, such as capital, equipment, skills of
individual employees, patents, finance, and talented managers used to create outputs in the firm of product
or services through a transformation process. Individual resources may not yield to a competitive
advantage. It is through the synergistic combination and integration of sets of resources that competitive
advantages are formed. Resources are either tangible or intangible in nature.
 Tangible, and
 Intangible
a) Tangible resources: Assets that an organization possesses which can be seen and quantified. These
include:
 Financial Resources: Include the firm’s borrowing capacity, the firm’s ability to generate internal
funds
 Physical Resources: Include sophistication and location of a firm’s plant and equipment, access to
raw materials
 Technological Resources: These refer to stock of technology, such as patents, trademarks,
copyrights, and trade secrets
b) Intangible resources: Include assets that are rooted deeply in the firm's history and that have
accumulated over time. These comprise:
 Human Resources (Human Capital): Are the productive services human beings offer the firm in
terms of their skills, knowledge, reasoning, trust, and managerial decision-making abilities.
 Innovation Resources: ideas, scientific capabilities, capacity to innovate
 Reputation or ‘goodwill’: reputation with customers, brand name, perceptions of product quality,
durability, and reliability, reputation with suppliers, efficient, effective, supportive, and mutually
beneficial interactions and relationships.
2. Organizational Capabilities and Distinctive Capabilities

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Organizational capability is the capacity for a set of resources to perform a stretch task or an activity. It is
the product of organizational learning and experience and represents real proficiency in performing an
internal activity. A capability is usually considered as a “bundle” of assets or resources to perform a
business process (which is composed of individual activities).
E.g. Toyota’s efficient distribution systems - Just-in-time (JIT) delivery, strong supplier relationships,
and well-trained inventory specialists
Distinctive capability: A distinctive Capability is a competitively valuable activity that a company
performs better than its rivals. An organization’s capabilities are only distinctive when they emanate from a
characteristic which other firms do not have. Possessing a distinctive characteristic is not sufficient criteria
for success, but also be sustainable (persist over time) and appropriate (it needs to benefit primarily the
organization and its stakeholders).

Distinctive capabilities derive from three areas: An organization’s architecture, innovation, and reputation.
 Architecture: the system of relational contracts which exist inside (with employees and between
employees), and outside (with its customers and suppliers) the organization.
 Innovation: Invention is the act of creating or developing a new product or process. Firms which are
successful in realizing the full returns from their technologies and innovations are able to match their
technological developments with complementary expertise in other areas of their business, such as
manufacturing, distribution, human resources, marketing, and customer relationships
 Reputation: An organization’s reputation is built up through its reliable relationships, which may
have taken a long considerable time to nurture and develop.
Table 3.1: Examples of organizational capabilities:
Functional Areas Capabilities
Distribution Effective use of logistics management techniques
Human resources Motivating, empowering, and retaining employees
Management information Effective and efficient control of inventories through point-of-
systems purchase data collection methods
Marketing Effective promotion of brand-name products; effective
customer service; innovative merchandising
Management Ability to envision the future; effective organizational structure

Manufacturing Design and production skills yielding reliable products; design

quality Product; miniaturization of components of products
Research & development Innovative technology; development of sophisticated control
solutions; rapid transformation of technology into new
products and processes; digital technology

3. Competencies, Core Competencies and Distinctive Competencies

Competencies are attributes that firms require in order to be able to compete in the market place. A
competency is an internal capability that a company performs better than other internal capabilities. They
are deriving from the bundle of resources that a firm possesses. The firm’s most important capabilities are
called competencies.
A core competence is an area of specialized expertise that is the result of harmonizing complex streams of
technology and work activity. Core Competencies are the collective learning in the organization, especially
how to coordinate diverse production skills and integrate multiple streams of technologies (i.e. core

15
competence emphasizes technological and production expertise at specific points along the value chain).
The three tests that can be applied to core competencies of an organization are:
 Core competence should provide a wide variety access to market.
 A core competence should make a significant contribution the perceived customer benefits of the
end products.
 A core competence should be difficult for competitors to imitate.
A core competence is enhanced as it is applied and shared across the organization.
A distinctive competence is a strength possessed by only a small number of competing firms. A
distinctive competence is a competitively valuable capability that a company performs better than its rivals.
Organizations that exploit their distinctive competencies often obtain competitive advantage and attain
above-normal economic performance. Distinctive competencies are competencies that could be found in
the functional areas in the organization. For example in finance, personnel, research and development;
marketing and information management…etc.
Examples of distinctive competencies:
 Toyota, Honda, Nissan
Low-cost, high-quality manufacturing capability and short design-to-market cycles
 Intel
Ability to design and manufacture ever more powerful microprocessors for PCs
 Motorola
Defect-free manufacture of cell phones
4. Sustainable competitive advantage
A competitive advantage is simply an advantage you have over your competitors. The source of
competitive advantage is value creation for customers. Sustained competitive advantage comes from
maintaining higher profits than competitors over long periods of time. Sustainable competitive advantage
occurs when an organization is implementing value-creating strategy that is not being implemented with
the current or potential competitors and when these competitors are unable to duplicate the benefits of this
strategy. A competency will produce competitive advantage when:
 It produces value for the organization, and
 It does this in a way that cannot easily be pursued by competitors.
 Be rare
 Be exploitable by the organization
a) The Question of Value Capabilities are valuable when they enable a firm to conceive of or implement
strategies that improve efficiency and effectiveness. Value is dependent on type of strategy:
 Low cost strategy: lower costs;
 Differentiator: Add enhancing features
To be valuable, the capability must either:
 Increase efficiency (outputs / inputs)
 Increase effectiveness (enable some new capability not previously held)
b) The Question of Rareness Valuable resources or capabilities that are shared by large numbers of firms
in an industry are therefore not rare, and cannot be a source of SCA. None of these are rare. Some
researchers think only organizational assets or resources are rare (such as culture).

c) The Question of Imitability Valuable, rare resources can only be sources of SCA if firms that do not
possess them cannot obtain them. They must be impossible to perfectly imitate them. Ways of imitation
can be avoided:
 Unique Historical Conditions
 Causal ambiguity (why resources create SCA is not understood, even by the firm owning them)

16
  Imitating firms cannot duplicate the strategy since they do not understand why it is successful in the
first place.
 Social Complexity (trust, teamwork, informal relationships, causal ambiguity where cause of
effectiveness is uncertain)
Example: A competitor steals all the scientists in an R&D lab and relocates them to a new facility. But, the
“dynamics”, “culture” and “atmosphere” are not the same.
d) The Question of Substitutability There must be no equivalent resources that can be exploited to
implement the same strategies.
e) The Question of Exploitation Is a firm organized to exploit the full competitive potential of its
resources and capabilities? Are systems in place to enable firms to support the execution of a particular
strategy? Sustainable competitive advantage can be created by:
5. Value Chain Analysis and Outsourcing
Every company’s business consists of a collection of activities undertaken in the course of designing,
producing, marketing, delivering, and supporting its products and services. A company’s value chain
consists of the linked set of value-creating activities the organization performs internally.
Value consists of the performance characteristics and attributes companies provide in the form of goods or
services for which customers are willing to pay.
Value Chain shows how a product moves from the raw-material stage to the final customer.
Value Chain Analysis is the process of identifying resources and capabilities that can add value. It
examines contributions of individual activities to overall level of customer value and ultimately financial
performance. It allows the firm to understand the parts of its operations that create value and those that do
not.
Value Chain consists of two broad categories of activities. These are Primary activities and Support
activities.
1. Primary Activities
Primary activities are involved with a product's physical creation, its sale and distribution to buyers, and its
service after the sale. Primary activities are:
 Inbound Logistics: Activities, such as materials handling, warehousing, and inventory control, used
to receive, store, and disseminate inputs to a product.
 Operations: Activities necessary to convert the inputs provided by inbound logistics into final
product form. Machining, packaging, assembly, and equipment maintenance are examples of
operations activities.
 Outbound Logistics: Activities involved with collecting, storing, and physically distributing the final
product to customers. Examples of these activities include finished goods warehousing, materials
handling, and order processing.
 Marketing and Sales: Activities completed to provide means through which customers can purchase
products and to induce them to do so. To effectively market and sell products, firms develop
advertising and promotional campaigns, select appropriate distribution channels, and select, develop,
and support their sales force.
 Service: Activities designed to enhance or maintain a product’s value. Firms engage in a range of
service-related activities, including installation, repair, training, and adjustment.
Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as
superior, equivalent, or inferior.
Table 3.2: Primary Activities and Factors for Assessment
Inbound Outbound Marketing & Sales Customer Service
Logistics Operations Logistics
 Soundness  Productivity of  Timeliness and  Effectiveness of market  Means to solicit
of material equipment efficiency of research to identify customer customer input for
and compared to that of delivery of segments & needs product
17
 inventory key competitors finished goods  Innovation in sales & improvements
control  Appropriate and services promotion  Promptness of
systems automation of  Efficiency of  Evaluation of alternate attention to
 Efficiency production finished goods distribution channels customer
of raw processes warehousing  Motivation and competence complaints
material  Effectiveness of activities of sales force  Appropriateness of
warehousin production control  Development of image of warranty and
g activities systems to improve quality and a favorable guarantee policies
quality and reduce reputation  Quality of
costs  Extent of brand loyalty customer
 Efficiency of plant among customers education and
layout and work-  Extent of market dominance training
flow design within the market segment or  Ability to provide
overall market replacement parts
and repair service
2. Support Activities
Support activities provide the support necessary for the primary activities to take place.
Table 3.3: Secondary (Support) Activities and Factors for Assessment
Firm Infrastructure Human Resource Technology Development Procurement
 Capability to identify new  Effectiveness of  Success of R&D activities  Development of
product market opportunities and procedures for in leading to product and alternate sources for
potential environmental threats recruiting, process innovations inputs to minimize
 Quality of the strategic planning training, and  Quality of working dependence on a
system to achieve corporate promoting all relationship between R&D single supplier
objectives levels of personnel and other  Procurement of raw
 Coordination and integration of employees departments materials on timely
all value chain activities  Appropriateness  Timeliness of technology basis at lowest
 Ability to obtain relatively low of reward systems development activities in possible cost and at
cost funds for capital  Relations with meeting critical deadlines acceptable levels of
expenditures and working capital trade unions  Qualifications & quality
 Timely & accurate information  Levels of experience of laboratory  Development for
on general and competitive employee technicians and scientists criteria for lease-vs.-
environments motivation and  Ability of work buy decisions
job satisfaction environment to encourage  Good, long-term
creativity and innovation relationships with
suppliers

Support activities include:

 Procurement: Activities completed to purchase the inputs needed to produce a firm’s products.
Purchased inputs include items fully consumed during the manufacture of products.
 Technological Development: Activities completed to improve a firm’s product and the processes
used to manufacture it. Technological development takes many forms, such as process equipment,
basic research and product design, and servicing procedures.
 Human Resource Management: Activities involved with recruiting, hiring, training, developing,
and compensating all personnel.
 Firm’s Infrastructure: Includes activities such as general management, planning, finance,
accounting, legal support, and governmental relations that are required to support the work of the
entire value chain.
Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as
superior, equivalent, or inferior.

18
Outsourcing
Outsourcing is the purchase of a value-creating activity from an external supplier. Few organizations
possess the resources and capabilities required to achieve competitive superiority in all primary and support
activities.
Strategic Rationales for Outsourcing
• Improving business focus: Helps a company focus on broader business issues by having outside
experts handle various operational details.
• Accelerating re-engineering benefits: Achieves re-engineering benefits more quickly by having
outsiders—who have already achieved world-class standards—take over process.
• Sharing risks: Reduces investment requirements and makes firm more flexible, dynamic and better
able to adapt to changing opportunities.
• Freeing resources for other purposes: Redirects efforts from non-core activities toward those that
serve customers more effectively.
3.3. External Analysis
3.3.1. Meaning, Levels and Elements of External Environment
External environment refers to the Variables/factors which are not controlled by an organization and that
may have independent and significant effects on outcomes. The external environment has two levels or
layers: Macro, and Micro-environment.
The macro environment consists of broad environmental factors that impact to a greater or lesser extent
on almost all organizations. It refers to the broad demographic, societal, economic, political, technological,
and natural forces that an organization faces.
Micro-environment, on the other hand, consists of specific factors that affect only the firms in a particular
industry. The micro-environment is also called task environment that operates within the organization's
specific which includes competitive forces and different shareholders.
3.3.2. Analysis of the Macro Environment
Macro (general) environment refers to the broad demographic, societal, economic, political, technological,
and natural forces that an organization faces. It consists of the nonspecific and uncontrollable dimensions
and forces in the surroundings that can affect the activities of all organizations. The general environment of
most organizations has the following dimensions:
1. Economic Environment: Economic forces are changes in the state of the economy. Economic factors
affect the purchasing power of potential customers and the firm's cost of capital. What economic trends
might have an impact on business activity? Economic analysis focuses on the following macro factors:
 Gross national product (GDP) and economic Growth,
 Unemployment rates,
 Investment programs
 International economics
 Inflation rates, interest rates, and money supply
 Monetary exchange rates
 Consumer income and spending
 Workforce productivity
 Energy supply and cost
2. Technological Environment: Technology is a collection of methods a society uses to provide itself with
material needs and wants. Technological environment refers to forces that create new technologies,
creating new products and market opportunities. It is a dynamic force shaping our world. It changes
rapidly. Every new technology replaces an older technology. The companies that do not keep up with
change of technology soon will find their products out-dated, and they will miss the new opportunities. The
following are some of the technological factors affecting purchasing decisions:
 New communication technologies
19
  Government initiatives with technology
 Rate of technological change
 Trends in manufacturing automation and productivity
 Industry and government spending on R&D
 Technology incentives
Technology is vital for competitive advantage, and is a major driver of globalization. The analysis of
technological environment addresses some basic questions such as:
 What is the process by which new technology comes into use in the society?
 Does this make it difficult to acquire the needed technologies?
 Does technology allow for products and services to be made more cheaply and to a better standard
of quality?
 Do the technologies offer consumers and businesses more innovative products and services such
as Internet banking, etc?
 How is distribution changed by new technologies e.g. books via the Internet, flight tickets,
auctions, etc?
 Does technology offer companies a new way to communicate with consumers?
3. Socio-Cultural Environment
The social and cultural influences on business vary from country to country. The social environment is
formed by certain factors like social behavior, social values and beliefs, social customs and traditions, etc.
The business, which neglects these factors will be faced with social boycott and in such a situation, the
business cannot build up its image in the society. This type of social consciousness increases the image and
goodwill of organizations. Factors include:
 Age distribution of population
 Regional shifts in population
 Family demographics
 Lifestyle changes, e.g., diet, exercise, health practices, smoking, drugs
 Culture
 Language
 Communications
 Levels of education
 Ethics
 Local working practices and working hours
 Emphasis on safety
The analysis of social and cultural environment addresses the questions such as:
 What is the dominant religion?
 What are attitudes to foreign products and services?
 Does language impact upon the diffusion of products onto markets?
 How much time do consumers have for leisure?
 What are the roles of men and women within society?
 How long are the population living? Are the older generations wealthy?
 Does the population have a strong/weak opinion on green issues?
4. Political Environment: It consists of laws, government agencies, and pressure groups that influence and
limit various organizations and individuals in a given society. The factors in the political environment
include:
 Public private partnerships
 Government policy and funding
 International politics and policies
 Trade sanctions
20
  Political directives
 Legislation regulating business
 Increasing emphasis on ethics and social responsibility
 Political parties and pressure groups
 Constitution of state, central and local governments
 Central state relations etc.
The analysis of political environment asks the questions such as:
 To what extent are government bureaucrats able to carry out decisions?
 On what basis are resource allocations made?
 Does the bureaucracy facilitate the development of the organization?
5. Natural Environment: The natural environmental factors affecting organizations’ decisions at local,
national and international levels include:
 Environmental policy
 Level of environmental Pollutions
 Issues relating to environmentally friendly practices
 Reducing and disposing of waste in the purchasing function
 Legislation on emissions
 International environmental agreements and their impact upon commercial operations
In the macro-environment, the Political (and legal), Economic, Socio-cultural, and Technological forces are
known as PEST factors. A scan of the external macro-environment in which the firm operates can be
expressed in terms of the following factors:
 Political
 Economic
 Social
 Technological
The acronym PEST is used to describe a framework for the analysis of these macro-environmental factors.

3.3.3. Analysis of the Micro-Environment

The specific (micro) environment of an organization consists of individuals, groups, and organizations that
directly affect a particular organization but are not part of it. The micro environmental forces are close to
an organization and have a direct impact on its ability to serve its customers. The analysis of competitive
forces (industry analysis) and stakeholders are the factors in the specific environment of an organization.
A) Competitive Environment (Industry Analysis)
The boundary for industry analysis is the markets and products that describe the domain of the industry.
Once you understand the business segment that is to be analyzed, identify the capabilities required to
participate in that industry, and those of competitors that are able to effectively target the same business
segments.
The primary model for diagnosing the industry/competitive environment is Michael Porter's 5-Force
Model, which is very useful inPressures
the business world. As Michael Porter has convincingly demonstrated that
from
the state of competition in an industry
Substitute Productsof five competitive forces:
is a composite
 The Rivalry among competing sellers
 The Competitive force of potential entry
 Competitive pressures from substitute products
 The power of suppliers
The power of buyers Rivalry
Suppliersof Key
among
(customers) The Power of
Competing Sellers
Inputs Buyers

21

Potential New
Figure 3.3: The Porter’s Five-Forces Model of Competition
The Five-Force model is a powerful tool for systematically diagnosing the chief competitive pressures in a
market and assessing how strong and important each is. It is also the easiest model to understand and apply.
Let’s look at each force briefly.
1. The Rivalry among Competing Sellers
This involves the direct competition in an industry. This is almost an important force and usually the
strongest of the five forces. It deserves proportionate attention in the competitive analysis. Some of the
major factors that produce more intense rivalry are:
 Slow Market/Industry Growth Rate: A slow growth or declining market, typical of a mature industry,
sets up price wars and other efforts to take business away from competitors.
 Capacity Surpluses: excess capacity pushes both prices and profitability down, especially when there
are substantial fixed costs and/or high exit barriers.
 Number & Size of Competitors: rivalry tends to increase when there are relatively few competitors
who are about equal in size and capabilities; they tend to watch each other carefully and respond
quickly to competitor actions.
 Diverse & Relatively New Competitors: new entrants/rivals with different ideas on how to compete
are likely to unknowingly challenge each other. Further, relatively new competitors haven't tested
each other and the competitive boundaries and are more likely to take more drastic actions, especially
when a strong company outside the industry has acquired a weak company in the industry and wants
to try to transform their new acquisition.
 Product/Service Differentiation is Low: if customers view the products or services as commodities,
competitors are forced to make more extreme competitive moves on pricing, promotion, etc.
 High Exit Barriers: when it is difficult for a firm to leave the industry, the competitors are forced to
stay and compete with "whatever it takes." - e.g., when fixed costs and asset specialization are high,
strategic stakes are high
2. The Competitive Force of Potential Entry
There are two main factors to consider relative to this force: the likelihood of a new entrant and the
seriousness of a potential entry. This is a relatively important force only when both factors are reasonably
high.
 A new entrant is more likely when there are low customer switching costs and low barriers to entry.
Some of the possible barriers to entry are: major or special resources in existing firms (economies of
scale, finances, technology, proprietary knowledge, experience curve advantages, brand
identification, etc), capital requirements, differentiated products or services, limited access to raw
materials and distribution channels, regulatory restrictions, tariffs and international trade restrictions.

22
  The seriousness of a potential entry is high when a potential entrant brings (or could bring) some
special characteristics that are not already present or not easily matched by existing competitors, e.g.,
greater financial resources, special technology, unusual access to distribution channels and/or
government favor, synergy with the entrant's other lines of business.
In addition, the following factors increase the likelihood of new entrants:
 Product differentiation is low
 Brand identification is low
 Incumbents' control of access to raw materials and distribution are low
3. Competitive Pressures from Substitute Products
This competitive force becomes stronger as the probability of an effective substitute becomes higher (not
just a hypothetical threat).The potential threats from substitutes come in two varieties:
 Existing products (or services) from other industries that could satisfy the same need as a product in
our industry under analysis (e.g., tea as a substitute for coffee, email as a substitute for the U.S. Postal
Service and other companies in an industry providing overnight document delivery)
 New products (or services) that did not exist previously, but that offer major improvements over
existing ones. These might originate within or outside the industry.
In addition, the following factors increase the likelihood or threat of substitutes:
 The industry is attractive (e.g., profitable and growing)
 Alternatives are readily available
 Some alternatives have especially attractive characteristics
 Improvements in price-performance of alternatives is high
 Customer switching costs are low
4. The Power of Suppliers
This force becomes stronger when suppliers are more powerful and have more options than the firms in the
industry who purchase from them. Some of the factors that produce such a condition are:
 There are few suppliers and demand is high relative to supply
 The suppliers have many customers and options for selling their products
 Products are unique and suppliers have specialized knowledge, technology, facilities, workers,
government approvals, access to key materials, locations, access)
 The suppliers' products/services are very important in the output of the target industry firms
 Switching costs for industry firms are high
 Suppliers are larger and have greater resources than the industry firms
 The purchasing industry buys only a small portion of the suppliers' goods/services
 Suppliers could integrate forward
5. The Power of Buyers (Customers)
There is more to be considered in analyzing this competitive force, and it is not necessarily a strong force.
Some of the factors that result in significant buyer power are:
 There are few buyers and demand is low relative to supply (e.g., because there are many firms in
the industry competing for limited buyer purchases)
 The buyers have many sources and options for buying products
 Products are not unique (little differentiation) and companies have little of specialized knowledge,
technology, facilities, workers, government approvals, access to key materials, location]
 Switching costs for buyers are low
 Buyers are larger and have greater resources than the industry firms
 The buyers' group buys a major portion of the industry's goods/services
 Some close-substitute products are available
 Buyers' ability to integrate backward is high.
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B) Stakeholders Environment
All organizations are dependent for their survival on various groups of stakeholders. Stakeholders are
groups of individuals that have a vested interest or expect certain levels of performance or compliance from
the organization. Stakeholders do not necessarily use the products or receive the services of a firm.
Sometimes they are referred to as expectation groups.
The stakeholder environment consists of those people and organizations external to the institution who are
directly concerned with the organization and its performance. Examples of stakeholders are clients,
sponsors, donors, potential target groups, and other institutions doing similar or complementary work.
An organizational analysis seeks to learn the identity of these groups in order to assess their potential
impact on the organization. Influences from these environmental contexts can become major facilitating or
constricting forces on the organization as it works to accomplish its mission.

3.3.4. SWOT Analysis (Corporate Appraisal)

After analyzing both the internal and external aspects of an organization, a conclusion of the organization’s
position can be made. By combining our findings on external analysis and internal analysis, we get the
SWOT (strengths, weakness, opportunities and threats) of the organization. We call this as corporate
appraisal.

The PEST factors combined with external micro-environmental factors can be classified as opportunities
and threats in a SWOT analysis. The internal analysis enables us to identify the Strengths and Weaknesses.
SWOT analysis is the most fundamental tool undertaken by organizations to identify organizational
strengths, weaknesses, opportunities and threats. By focusing on the key factors affecting your business,
now and in the future, a SWOT analysis provides a clear basis for examining your business performance
and prospects.

Below is a typical SWOT matrix. A list of strengths, weaknesses, opportunities and threats are put in the
appropriate quadrant so that to easily see what needs to change to gain the competitive advantage.

Strengths Opportunities
 Ab  Changes in demographics
undant resources  New product
 str  Increased demand
ong brand name  Competitor going out of business
Maximize  ene
rgetic staff
Weaknesses Threats Minimize
  Fierce
Po competition
or management  Product
 substitutes
Un  Decease in
motivated e demands
  Trade
Li regulations
mited resources

Litt
le company
direction

24
Fig 3.4: A SWOT Analysis matrix
A) Strengths: Refer to the attributes or core competencies of the organization those are helpful to
achieving its objectives. Strengths are resources that an organization possesses and capabilities that an
organization has developed that can be exploited and developed into a sustainable competitive advantage.
For most organizations, strengths will fall into four distinct categories.
1. Sound finances may give you advantages over your competitors. Important factors might include:
 Positive cash flow
 Growing turnover and profitability.
 Skilled financial management, good credit control and few bad debts.
 A strong balance sheet.
 Access to extensive credit and a good relationship with the bank and other sources of finance.
2. Marketing may be the key to your success. For example, your business may enjoy:
 Market leadership in profitable niches
 A good reputation and a strong brand name.
 An established customer base.
 A strong product range.
 Effective research and development, use of design and innovation.
 A skilled sales force
 Thorough after-sales service.
 Protected intellectual property (e.g. registered designs, patented products).
3. Management and personnel skills and systems may provide equally important underpinnings for
success. These may include factors such as:
 Management strength in depth.
 The ability to make quick decisions.
 Skilled employees, successful recruitment, and effective training and development.
 Good motivation and morale.
 Efficient administration.
4. Strengths in production may include the right premises and plant, and good sources of materials or
sub-assemblies. You may benefit from:
 Modern, low-cost production facilities.
 Spare production capacity.
 A good location.
 Effective purchasing and good relationships with suppliers.
Be aware that strengths are not always what they seem. Strengths may imply weaknesses (for example,
market leaders are often complacent and bureaucratic) and often imply threats (for example, your star
salesman may be a strength — until he resigns).
B) Weaknesses: Refer to the attributes of the organization those are harmful to achieving its objectives.
Weaknesses are resources and capabilities that are lacking or deficient and prevent an organization from
developing a sustainable competitive advantage. They are conditions within the company that can lead to
poor performance. The common weaknesses of most organizations can fall into the following categories:
1. Poor financial management may result in situations where:
 Insufficient funds are available for investment in new plant or product development.
 All available security, including personal assets and guarantees, is already pledged for existing
borrowings.
 Poor credit control leads to unpredictable cash flow.
2. Lack of marketing focus may lead to:
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  Unresponsive attitudes to customer requirements.
 A limited or outdated product range.
 Complacency and a failure to innovate.
 Over-reliance on a few customers.
3. Management and personnel weaknesses are often hard to recognize, except with hindsight. Familiar
examples are:
 Failure to delegate and train successors.
 Expertise and control locked up in a few key personnel.
 Inability to take outside advice.
 High staff turnover.
4. Inefficient production, premises and plant can undermine any business, however hard people work.
Typical problems include:
 Poor location and shabby premises.
 Outdated equipment, high cost production and low productivity.
 Long leases tying the business to unsuitable premises or equipment.
 Inefficient processes.
Company strengths and weaknesses need to be identified in all aspects of the business
1. Relative to the rest of the market (i.e. Compared to competitors)
2. Relative to previous performance or expected performance
3. Relative to customer demand (for example all companies in an industry may fail to satisfy a
particular customer need. This is a weakness - and the first company to match this customer need
will have strength relative to the other companies in the industry.)
Then, highlight key areas of concern or areas that require action and become the focus for future planning.
List key aspects in a table and score them out of 5, where 5 is a major strength and 1 is a major weakness.
Scoring can be based on the following factors:
 Relative to the overall industry
 Relative to major competitors or the next largest competitor
 Relative to expected performance
 Relative to previous performance
C) Opportunities: Opportunities are outside conditions or circumstances that the company could turn to its
advantage. External changes provide opportunities that well managed businesses can turn to their
advantage can include:
1. Changes involving organizations and individuals which directly affect your business may open up
completely new possibilities. For example:
 Deterioration in a competitor’s performance
 Improved access to potential new customers and markets
 Increased sales to existing customers,
 The development of new distribution channels
 Improved supply arrangements, such as just-in-time supply or outsourcing non-core activities.
2. The broader business environment may shift in your favor. This may be caused by:
 Political, legislative or regulatory change. For example, a change in legislation that requires
customers to purchase a product.
 Economic trends. For example, falling interest rates reducing the cost of capital
 Social developments. For example, demographic changes or changing consumer requirements
leading to an increase in demand for your products
 New technology. For example, new materials, processes and information technology

26
D) Threats: External conditions those are harmful to achieving the objectives. Threats are current or future
conditions in the outside environment that may harm the company and can be minor or can have the
potential to destroy the business. Threats might include:
1. Changes involving organizations and individuals that directly affect your business can have far-
reaching effects. For example:
 Improved competitive products or the emergence of new competitors.
 Loss of a significant customer.
 Creeping over-reliance on one distributor or group of distributors.
 Failure of suppliers to meet quality requirements.
 Price rises from suppliers.
 Key personnel leaving, perhaps with trade secrets.
 Lenders reducing credit lines or increasing charges.
 A rent review threatening to increase costs, or the expiry of a lease.
2. The broader business environment may alter to your disadvantage. This may be the result of:
 Political, legislative or regulatory change. For example, new regulation increasing your costs or
requiring product redesign
 Economic trends. For example, lower exchange rates reducing your income from overseas.
 Social developments. For example, consumer demands for ‘environmentally-friendly’ products.
 New technology. For example, technology that makes your products obsolete or gives
competitors an advantage.

The final stage is to combine the analyses and feed the results into the organization’s strategic plan or
formulation of strategy. Based on the results of the analysis and priorities set, the following strategic
courses of actions can be considered in crafting the strategy and developing a strategic plan:
1. Capitalize on opportunities that match your strengths. For example, opportunities that match your
strengths may prompt you to pursue a strategy of aggressive expansion.
2. Address your weaknesses. Decide which weaknesses need to be addressed as a priority. Other
weaknesses must be acknowledged and respected until time and resources allow a solution.
3. Protect yourself against threats. For example, build relationships with suppliers and customers,
foster good employee relations, take out insurance cover against obvious potential disasters, draw up
realistic contingency plans to cope with potential crises...etc

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 Chapter 4
Strategy Alternatives, Analysis and Choice
4.1. Nature of Strategy Alternatives, Analysis and Choice
In this phase, the strategist needs to consider the strategic alternatives and then choose the strategy to adopt.
By now, the strategist should have thoroughly analyzed the environment for opportunities and threats. He/she
should also have assessed the enterprise's strengths and weaknesses re-examined the mission and goals of the
organization and identified any gap that may exist between expected and desired performance. He/she is then
ready to undertake the two activities in this phase which are:
1. The generation of a reasonable number of strategic alternatives, and
2. The choice of a strategy to reduce the gaps.
4.1.1. Levels of Organizational Strategy
There are three aspects or levels of strategy formulation. These are:
Corporate Level Strategy: broad decisions about the total organization's scope and direction.
Competitive Strategy (Business Level Strategy): This involves deciding how the company will compete
within each line of business or strategic business unit (SBU).
Functional Strategy: These are strategies deal with how each functional area and unit will carry out its
functional activities to be effective and maximize resource productivity.

Fig 4.1: Levels of Organizational Strategy

4.1.2. Generating Alternative Strategies Using a TOWS Matrix
The formation of TOWS matrix results in four sets of possible strategic alternatives after matching the
company’s internal strengths and weaknesses with the external opportunities and threats. It can be used to
generate corporate as well as business strategies.
1. Opportunities (O) block: In the Opportunities (O) block, list the external opportunities available in the
company’s or business unit’s current and future environment.

28
2. Threats (T) block: In the Threats (T) block, list the external threats facing the company or unit now and
in the future.
3. Strengths (S) block: In the Strengths (S) block, list the specific areas of current and future strengths for
the company or the unit.
4. Weaknesses (W) block: In the Weaknesses (W) block, list the specific areas of current and future
weakness for the company or the unit.
Generate a series of possible strategies for the company or the business unit under consideration based on
particular combinations of the four sets of strategic factors.
• SO Strategies are generated by thinking of ways in which a company or business unit could use its
strengths to take advantage of opportunities.
• ST Strategies consider company’s or unit’s strengths as a way to avoid threats.
• WO Strategies attempt to take advantage of opportunities by overcoming weaknesses.
• WT Strategies are basically defensive and primarily act to minimize weaknesses.
The degree of the aptness of the strategy formulated decides the extent of the firm’s success.
Internal Factors Strengths (S) Weaknesses (W)
(Strengths List 5 to 10 internal strengths here List 5 to 10 internal
Weaknesses) weaknesses here
External Factors
(Opportunities Threats)

Opportunities (O) SO Strategies WO Strategies

List 5 to 10 external Generate strategies Generate strategies here that
opportunities here here that use strengths take advantage of
to take advantage of opportunities opportunities by overcoming
weaknesses
Threats (T) ST Strategies WT Strategies
List 5 to 10 external Threats here Generate strategies here that use Generate strategies here that
strengths to avoid threats minimize weaknesses and
avoid threats

Fig 4.2: TOWS matrix

4.2. Corporate Level Strategy Alternatives
Corporate level strategy comprises the overall or the grand strategy elements for the corporation as a
whole. It focuses on the kinds of businesses in which the firm wants to engage, ways to acquire or dispose
of businesses, the allocation of resources between businesses and the ways to manage them. In
general, there are four overall (grand) strategy alternates at corporate level. These are:
 Stability
 Growth
 Retrenchment
 Combination
4.2.1. Growth Strategies
Growth strategies are designed to expand an organization's performance, usually as measured by sales,
profits, product mix, market coverage, market share, or other accounting and market-based variables. The
following are the alternative growth strategies:
 Vertical Integration Strategy
 Horizontal Integration
 Diversification Strategy
 Strategic Alliances

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  Acquisitions
 Grow-to-Sell-Out Strategy
 Concentration Strategy
1. Vertical Integration Strategy
This is the strategy where a Company enters one or more businesses that are necessary to the manufacture
and distribution of its own products but that were previously purchased from other companies. It can be
either Backward or Forward integration.
a) Backward integration is where the firm enters into the business of supplying its own raw materials.
b) Forward integration is where the firm enters into the business of distributing its products by entering
market channels closer to the ultimate consumer. This strategy provides more control over final
products/services and distribution.
2. Horizontal Integration
Horizontal integration refers to the acquisition by a corporation of another corporation in the same industry.
This strategy alternative involves expanding the company's existing products into other locations and/or
market segments, or increasing the range of products/services offered to current markets, or a combination
of both. For example, an airline can buy a stake in another airline.
3. Diversification Strategy
This is the strategy of adding different products or divisions to the Corporation. There are two types of
diversifications: concentric and conglomerate.
a) Related (Concentric) Diversification is the addition to a corporation of related products or divisions. In
this alternative, a company expands into a related industry, one having synergy with the company's existing
lines of business, creating a situation in which the existing and new lines of business share and gain special
advantages from commonalities such as technology, customers, distribution, location, product or
manufacturing similarities, and government access. For example, a banking institution may involve in a
variety of financial service business.
b) Unrelated (Conglomerate) Diversification: This corporate strategy alternative involves diversifying
into a line of business unrelated to the current ones. The reasons to consider this alternative are primarily
seeking more attractive opportunities for growth in which to invest available funds, risk reduction, and/or
preparing to exit an existing line of business. For example, MIDROC Company as it is involved in a variety
of unrelated businesses.
4. Strategic Alliances
A strategic alliance is the cooperation between one or two companies to achieve the mutually beneficial
strategic objectives to attain synergy. The various types of strategic alliance are:
a) Mutual service consortium: A mutual service consortium is a partnership of similar companies in
similar industries who pool their resources to gain a benefit that are too expensive to develop alone such as
access to advance technology.
b) Joint venture: A joint venture is a cooperative business activity, formed by two or more separate
organizations for strategic purposes, that creates an independent business entity and allocated ownership,
operational responsibilities, financial risks and rewards to each member while preserving their separate
identity.
c) Licensing Arrangement: A licensing arrangement is the strategic alliance by which the firm in one
country grants license to a firm in other country to produce and/or sell its product. The licensee pays the
compensation to the licensing firm in exchange of the technology. This is more useful where a company
could not enter due the investment restriction in the particular country.
d) Merger is a transaction involving two or more corporations in which shares are exchanged but from
which only one corporation survives.
5. Acquisition Strategy
An acquisition is the purchase of a corporation that is completely absorbed as an operating subsidiary or
division of the acquiring company. The acquisition of Unity University by MIDROC Company is a good
example.
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6. Concentration Strategy
A corporation may choose to grow by concentrating all of its resources in the development of a single
product or product line, single market or single technology, e.g. McDonalds.
7. Grow-to-Sell-Out Strategy
This growth strategy is a way to maximise shareholder investment when the company is sold at an
attractive price.

4.2.2. Stability Strategies

When firms are satisfied with their current rate of growth and profits, they may decide to use a stability
strategy. The firm is often making a comfortable income operating a business that they know, and see no
need to make the psychological and financial investment that would be required to undertake a growth
strategy. Such strategies are typically found in industries having relatively stable environments. The three
types of stability strategies are:
1. No change Strategy: If everything is fine, why change? Alternatively, it may be a comfortable, even
long-term strategy in a mature, rather stable environment.
2. Grab Profits Strategy: Involves the sacrifice of future growth for present profits. This is a non-
recommended strategy to try to mask a deteriorating situation by artificially supporting profits or their
appearance, or otherwise trying to act as though the problems will go away.
3. Pause and then Proceed Strategy: After a period of prolonged fast growth, a corporation may become
inefficient or unmanageable. It is usually temporary, involves reducing the levels of a corporation's objectives
so that it is able to consolidate its resources - to get its house in order. This stability strategy alternative
(essentially a timeout) may be appropriate in either of two situations:
 The need for an opportunity to rest, digest, and consolidate after growth or some turbulent events -
before continuing a growth strategy, or
 An uncertain or hostile environment in which it is prudent to stay in a "holding pattern" until there is
change in or more clarity about the future in the environment.
4.2.3. Retrenchment Strategies
Retrenchment strategies involve a reduction in the scope of a corporation's activities, which also generally
necessitates a reduction in number of employees, sale of assets associated with discontinued product or
service lines, possible restructuring of debt through bankruptcy proceedings, and in the most extreme cases,
liquidation of the firm. There are four retrenchment strategies:
 Turnaround
 Divestment (Sell Out)
 Captive Company
 Liquidation
1. Turnaround Strategy
This strategy, dealing with a company in serious trouble, attempts to revive the company through a
combination of contraction. Firms pursue a turnaround strategy by undertaking a temporary reduction in
operations in an effort to make the business stronger and more viable in the future. These moves are
popularly called downsizing or rightsizing.
2. Divestment (Sell Out) Strategy
Divestment occurs when a business unit or product line is sold to either reduce losses or generate cash flow
from the sale. A divestment decision occurs when a firm chooses to sell one or more of the businesses in its
corporate portfolio. Typically, a poorly performing unit is sold to another company and the money is
reinvested in another business within the portfolio that has greater potential.
3. Captive Company Strategy
This strategy involves giving up independence in exchange for some security by becoming another
company's sole supplier, distributor, or a dependent subsidiary. Here a firm reduces the scope of some of its

31
functional activities and becomes "captive" to another firm. For example, a key customer may agree to
purchase 75% of the products at a favourable price on a long term basis.
4. Liquidation Strategy
Liquidation is the most extreme form of retrenchment. Liquidation involves the selling or closing of the
entire operation. This is a strategy of last resort and one that most managers work hard to avoid.
4.2.4. Combination Strategies
These strategies can be composed of any number of variations of the preceding strategies. A corporation
may pursue growth, stability, and turnaround and retrenchment for its different lines of business or areas of
operations.
4.2.5. Corporate Portfolio Analysis
Corporate Portfolio Analysis is used when corporate strategy involves a number of businesses. One way to
think of corporate-level strategy is to compare it to an individual managing a portfolio of investments.
Boston Consulting Group Matrix (BCG)
The BCG matrix provides a framework for understanding diverse businesses and helps managers establish
priorities for making resource allocation decisions. Businesses are classified in terms of market share and
anticipated market growth. Relative market share is the ratio of a division’s own market share to the market
share of the largest rival firm in that industry.
The BCG matrix is a relatively simple technique for assessing the performance of various segments of the
business. It classifies business-unit performance on the basis of the unit's relative market share and the rate
of market growth. Products and their respective strategies fall into one of four quadrants. According to the
Boston Consulting Group matrix, each SBU in a corporate portfolio can be labeled as a Star, Question
mark, Cash cow, and Dog.

Fig 4.3: Portfolio Analysis: BCG Matrix

1. Stars are products or Strategic Business Units which are growing rapidly, need large amounts of cash to
maintain their position, and are leaders in their business and generate large amounts of cash. Cash flows will
be roughly in balance and represent the best opportunities for growth. The stars provide the basis for long
term growth and profitability. Strategic options for stars include:
 Integration – forward, backward and horizontal
 Market penetration
 Market development
 Product development
 Joint ventures

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2. Question Marks are businesses with little market share but a high growth potential. These businesses
are cash users and can be risky. Question marks are high-growth, low-market-share products or divisions. A
new product launched into a high growth market and with an existing market leader would normally be
considered as a question mark. Because of the high growth environment, they can be a “cash sink ”.
Strategic options for question marks include:
 Market penetration
 Market development
 Product development
 Divestment
3. Cash Cows are businesses that have a high market share in a slow-growth market. Cash cows are
business units that have high market share in a low-growth market. These are often products in the maturity
stage of the product life cycle. They are usually well-established products with wide consumer acceptance,
so sales revenues are usually high. Because of their market share, they have low costs and generate cash.
Cash Cows may be used to fund the businesses in the other three quadrants. It is desirable to maintain the
strong position as long as possible and strategic options include:
 Product development
 Concentric diversification
If the position weakens as a result of loss of market share or market contraction then options would
include:
 Retrenchment (or even divestment)
4. Dogs are businesses with a low market share in a slow-growth market. They are products or divisions
with low growth and a low market share and therefore poor profits. They may need cash to survive. Strategic
options would include:
 Retrenchment (if it is believed that it could be revitalized)
 Liquidation
 Divestment (if you can find someone to buy!)
Successful products may well move from question mark though star to Cash Cow and finally to Dog. Less
successful products that never gain market position will move straight from question mark to Dog.
The BCG is simple and useful technique for strategic analysis. It is convenient for multi-product or multi-
divisional companies. It focuses on cash flow and is useful for investment and marketing decisions.
Companies will frequently search for a balanced portfolio, since..
 Too many stars may lead to a cash crisis
 Too many Cash Cows puts future profitability at risk
 And too many question marks may affect current profitability.
4.3. Alternatives and Analysis of Business Level Strategies
Business-level strategy refers to an integrated and coordinated set of commitments and actions the firm
uses to gain a competitive advantage by exploiting core competencies in specific product markets. These
strategies are intended to create differences between the firm’s positions relative to those of its rivals, and
perform activities differently or to perform different activities as compared to its rivals. The many possible
business-level strategies available can be grouped as either adaptive strategies or competitive strategies.
4.3.1. Analysis of Porter’s Generic Competitive Strategies
One well-known example of formulating strategy was developed by Michael Porter of Havard Business
School. In Porter's views, an organisation's ability to compete in a given market is determined by that
organisation's technical and economic resource, as well as by five environmental "forces", each by which
threatens the organisation's venture into a new market. Porter's five environmental forces are threats of new
entrants, the bargaining power of consumers, the bargaining power of suppliers, the threat of substitute
products, and jockeying for position in crowded markets.

33
More importantly, the strategist should be capable of providing his/her company with the best possible
position in the competitive field - including its defence against current or potential competitors. This
framework has implications for strategy formulation. Porter hypothesizes that the greater the forces in the
industry, the lower the average returns.  Porter has defined three generic strategies to cope up with the five
competitive forces and to outperform other companies in the industry. These are:
 Overall Cost leadership
 Differentiation
 Focus (based either on low costs or on differentiation)
A) Overall Cost Leadership Strategy
Cost Leadership Strategy refers achieving lowest overall activity costs to compete on price (value) of
standardized products offered to the broadest market segment for a typical customer. This can be done
through investment in efficient manufacturing facility, high cost control, elimination of redundant
management levels, etc. The Company's lower costs allow it to continue to earn profits during times of
heavy competition.
Continuous efforts to lower costs relative to competitors are necessary in order to successfully be a cost
leader. This can include:
 Building state of art efficient facilities (may make it costly for competition to imitate)
 Maintain tight control over production and overhead costs
 Minimize cost of sales, R&D, and service.
The implementation of a Cost Leadership Strategy requires:
 The use of a functional structure with highly centralized authority in the corporate staff.
 Jobs to be highly specialized and organized into homogenous subgroups, and highly formalized rules
and procedures are established.
 The operations function is emphasized in this structure to ensure that the firm’s product is being
produced at low costs.
B) Differentiation Strategy
Differentiation Strategy is an action plan to produce goods or services that customers perceive as being
unique in ways that are important (of value) to them. This strategy involves the creating of a product or
service that is perceived throughout its industry as being unique. Value is provided to customers through
unique features and characteristics of an organization's products rather than by the lowest price. Create
Value by:
 Lowering Buyers' Costs – Higher quality means fewer breakdowns, quicker response to problems.
 Raising Buyers' Performance – Buyer may improve performance, have higher level of enjoyment.
 Sustainability – Creating barriers by perceptions of uniqueness and reputation, creating high switching
costs through differentiation and uniqueness.
The implementation of a Differentiation Strategy requires:
 A functional organizational structure in which R&D and marketing functions are emphasized to
support product development and customer awareness of the unique value
 Authority to be decentralized so people closest to the customer can decide how to appropriately
differentiate the firm’s products.
 Jobs in this structure are not specialized; there are few rules and informality in processes promotes
communication and coordination.
C) Focus Strategy
Focused Strategies are aimed at serving the needs of a particular customer segment. Similar to the
corporate strategy of concentration, this business strategy focuses on a particular buyer group, product line
segment or geographic market. The value of the strategy derives from the belief that a company that
focuses its efforts is better able to serve the narrow strategic target more effectively than can its competitor.
Focus Strategy can be:

34
a) Focused Low Cost Strategy is an action plan to produce goods or services for a narrow market segment
at the lowest cost.
b) Focused Differentiation Strategy is an action plan to produce goods or services that a narrow group of
customers perceive as being unique in ways that are important to them.
Companies that use focused strategies may be able serve the smaller segment better than competitors who
have a wider base of customers.
Requirements for Generic Competitive Strategies
Implementing the above said strategies need different resources and skills. The requirements that are
required in various areas are:

Generic Commonly required skills and resources Common organizational requirements

strategy
Overall Cost  Sustained capital investment and  Tight cost control
Leadership access to capital  Frequent, detailed control reports
 Process engineering skills  Structured organization and
 Intense supervisions of labor responsibilities
 Products designed for ease in  Incentives based on meeting strict
manufacture quantitative targets
Differentiation  Low cost distribution system  Strong coordination among functions in
 Strong marketing abilities R&D, product development and
 Product engineering marketing
 Strong R&D  Amenities to attract highly skilled labor.
 Corporate reputation for quality
 Long tradition in the industry
Focus  Strong cooperation from channels  Combination of the above policies
 Combination of the above policies directed at the regular strategic target
directed at the particular strategic
target
Competitive Tactics
Although a choice of one of the generic competitive strategies discussed above provides the foundation for
a business strategy, there are many variations and elaborations in the use of various tactics that may be
useful (in general, tactics are shorter in time horizon and narrower in scope than strategies). Two
categories of competitive tactics are those dealing with timing (when to enter a market) and market
location (where and how to enter and/or defend).
1. Timing Tactics: When to make a strategic move is often as important as what move to make. Timing
tactics include:
a) First-movers: the first to provide a product or service. Being a first-mover can have major strategic
advantages.
b) Second-movers: Being rapid followers. The products of an innovator are somewhat primitive and do not
live up to buyer expectations, thus allowing a clever follower to win buyers away from the leader with
better performing products.
c) Late movers: wait-and-see. Allowing them to catch or pass the first-mover in a relatively short period,
while having the advantage of minimizing risks by waiting until a new market is established.
2. Market Location Tactics: this fall conveniently into offensive and defensive tactics. Offensive tactics
are designed to take market share from a competitor, while defensive tactics attempt to keep a competitor
from taking away some of our present market share, under the onslaught of offensive tactics by the
competitor.
a) Offensive tactics:
 Frontal attack: going head-to-head with the competitor, matching each other in every way.
35
  Flanking attack: attacking a part of the market where the competitor is weak. To be successful, the
attacker must be patient and willing to carefully expand out of the relatively undefended market
niche or else face retaliation by an established competitor.
 Encirclement: involves encircling and pushing over the competitor's position in terms of greater
product variety and/or serving more markets. This requires a wide variety of abilities and resources
necessary to attack multiple market segments.
 Bypass Attack: attempting to cut the market out from under the established defender by offering a
new, superior type of produce that makes the competitor's product unnecessary or undesirable.
 Guerrilla Warfare: using a "hit and run" attack on a competitor, with small, intermittent assaults on
different market segments. This offers the possibility for even a small firm to make some gains
without seriously threatening a large, established competitor and evoking some form of retaliation.
b) Defensive Tactics:
 Raise Structural Barriers: block avenues challengers can take in mounting an offensive
 Increase Expected Retaliation: signal challengers that there is threat of strong retaliation if they
attack
 Reduce Inducement for Attacks: Keeping prices very low gives a new entrant little profit incentive
to enter.
The general experience is that any competitive advantage currently held will eventually be eroded by the
actions of competent, resourceful competitors. Therefore, to sustain its initial advantage, a firm must use
both defensive and offensive strategies, in elaborating on its basic competitive strategy.
4.3.2. Adaptive Strategies
Adaptive business strategies are designed to provide more specific guidance for particular business units
and can be viewed as an attempt to establish a harmony between an organization and its external
environment. These adaptive strategies allow some organizations to be more adaptive or more sensitive to
their environments than others, and the different organization types represent a range of adaptive
companies. Miles and Snow postulated that there are four general adaptive strategies for organizations:
prospector, defender, analyzer, and reactor strategies.
1. Prospector Strategy
Prospector Strategy requires organizations to aggressively offer new products and/or enter new markets.
Prospector organizations thrive in changing business environments that have an element of
unpredictability, and succeed by constantly examining the market in a quest for new opportunities.
Moreover, prospector organizations have broad product or service lines and often promote creativity over
efficiency.
Prospector companies prioritize new product and service development and innovation to meet new and
changing customer needs and demands and to create new demands. Prospector organizations solve this
problem by being decentralized, employing generalists (not specialists), having few levels of management,
and encouraging collaboration among different departments and units.
2. Defender Strategy
This strategy requires organizations to stay with the present product line and markets and maintaining or
increasing customers. Organizations face the entrepreneurial problem of how to maintain a stable share of
the market, and hence they function best in stable environments. A common solution to this problem is cost
leadership, and so these organizations achieve success by specializing in particular areas and using
established and standardized technical processes to maintain low costs.
In addition, defender organizations tend to be vertically integrated in order to achieve cost efficiency.
Defender organizations face the administrative problem of having to ensure efficiency, and thus they
require centralization, formal procedures, and discrete functions. Because their environments change
slowly, defender organizations can rely on long-term planning.
3. Analyzing Strategy

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Analyzer Strategy is a midrange approach between prospecting and defending which requires organizations
to moving cautiously into new markets. Organizations face the entrepreneurial problem of how to maintain
their shares in existing markets and how to find and exploit new markets and product opportunities. These
organizations have the operational problem of maintaining the efficiency of established products or
services, while remaining flexible enough to pursue new business activities. Consequently, they seek
technical efficiency to maintain low costs, but they also emphasize new product and service development
to remain competitive when the market changes.
Like prospector organizations, analyzer organizations cultivate collaboration among different departments
and units. Analyzer organizations are characterized by a balance between defender and prospector
organizations.
4. Reactor Strategy
Reactor strategy requires organizations to follow competitors as a last resort regardless of the environment.
Organizations, as the name suggests, do not have a systematic strategy, design, or structure. They are not
prepared for changes they face in their business environments.

If a reactor organization has a defined strategy and structure, it is no longer appropriate for the
organization's environment. Their new product or service development fluctuates in response to the way
their managers perceive their environment. Reactor organizations do not make long-term plans, because
they see the environment as changing too quickly for them to be of any use, and they possess unclear
chains of command.
As Miles and Snow noted that there is no single best strategic orientation. Each one —with the exception of
the reactor organization—can position a company so that it can respond and adapt to its environment. What
Miles and Snow argue determines the success of a company ultimately is not a particular strategic
orientation, but simply establishing and maintaining a systematic strategy that takes into account a
company's environment, technology, and structure.
4.3.3. Analysis of Business Level Strategies based on Business /Product Life Cycle
Another frequently-used classification of business strategies is built on the concept of a product life cycle.
The life cycle refers to the period from the product’s development until its final withdrawal and it is split up
in phases. The understanding of a product’s life cycle, can help a company to understand and realize when
it is time to introduce and withdraw a product from a market, its position in the market compared to
competitors, and the product’s success or failure.
The product’s life cycle usually consists of five major phases: Product development, Product introduction,
Product growth, Product maturity and finally Product decline.

Figure 4.5: Stages in Business/Product Life Cycle

1. Product Development (Embryonic) Phase

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Product development phase begins when a company finds and develops a new product idea. This involves
translating various pieces of information and incorporating them into a new product. Those products that
survive the test market are then introduced into a real marketplace and the introduction phase of the product
begins. During the product development phase, sales are zero and revenues are negative. It is the time of
spending with absolute no return.
2. Introduction Phase
The introduction phase of a product includes the product launch with its requirements to getting it launch in
such a way so that it will have maximum impact at the moment of sale. This stage is characterized by:
 Products are unfamiliar to consumers
 Market segments not well defined
 Product features not clearly specified
 Competition tends to be limited
Strategies in the Introduction Stage
In launching a new product, marketing management can set a high or a low level for each marketing
variable (price, promotion, distribution, product quality). Considering only price and promotion,
management can pursue one of the four strategies.
Promotion

High Low
High Rapid Skimming Strategy Slow Skimming Strategy

Low Rapid Penetration Strategy Slow Penetration Strategy

a) Rapid Skimming Strategy: A rapid-skimming strategy consists of launching the new product at a high
price and a high promotion level. The firm charges a high price in order to recover as much profit per unit
as possible. It spends heavily on promotion to convince the market of the product’s merits even at the high
price. This strategy works if:
 A large part of the potential market is unaware of the product;
 Those who become aware of the product are eager to have it and can pay; and
 The firm faces potential competition and wants to build brand preferences.
b) Slow–Skimming Strategy: A slow-skimming strategy consists of launching the new product at a high
price and low promotion. The high price helps recover as much profit per unit as possible, and the low
level of promotion keeps marketing expenses down. This combination is expected to skim a lot of profit
from the market. This strategy makes sense when:
 The market is limited in size;
 Most of the market is aware of the product;
 Buyers are willing to pay a high price; and
 Potential competition is not imminent.
c) Rapid–Penetration Strategy: A rapid–penetration strategy consists of launching the product at a low
price and spending heavily on promotion. This strategy promises to bring about the fastest market
penetration and the largest market share. This strategy makes sense when:
 The market is large;
 The market is unaware of the product;
 Most buyers are price-sensitive;
 There is strong potential competition; and
 The company’s unit manufacturing costs fall with the company’s scale of production.
d) Slow-Penetration Strategy: A slow–penetration strategy consists of launching the new product at a low
price and low level of promotion. The low price will encourage rapid product acceptance, and low

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promotion costs bring profits up. The company believes that market demand is highly sensitive to price but
minimally sensitive to promotion. This strategy makes sense when:
 The market is small;
 The market is highly aware of the product;
 The market is price sensitive; and
 There is some potential competition.
3. Growth Phase
If the new product satisfies the market, it will enter a growth stage, in which sales will start climbing
quickly. Product sales grow at an increasing rate because of new purchasers of a product and growing
proportion of repeat purchasers. This stage is characterized by:
 Strong increases in sales
 Attractive to potential competitors
 Primary key to success is to build consumer preferences for specific brands
The company must show all the products offerings and try to differentiate them from the competitors’ ones.
Strategies in the Growth Stage
During the growth stage, the firm uses several strategies to sustain rapid market growth as long as possible:
 Improve product quality and add new product features and improved styling.
 Add new models and flanker products (i.e., products of different sizes, flavors, and so forth that
protect the main product).
 Enter new market segments.
 Increase distribution coverage and enter new distribution channels.
 Shift from product awareness-advertising to product- preference advertising.
 Lower prices to attract the next layer of price sensitive buyers.
 Financial resources to support value-chain activities
The firm that pursues these market expansion strategies will strengthen its competitive position.
4. Maturity Phase
When the market becomes saturated with variations of the basic product, and all competitors are
represented in terms of an alternative product, the maturity phase arrives. This period is the period of the
highest returns from the product. A company that has achieved its market share goal enjoys the most
profitable period, while a company that falls behind its market share goal, must reconsider its marketing
positioning into the marketplace. This stage is characterized by:
 Aggregate industry demand slows
 Market becomes saturated, few new adopters
 Direct competition becomes predominant
 Marginal competitors begin to exit
Pricing and discount policies are often changed in relation to the competition policies. Promotion and
advertising relocates from the scope of getting new customers to the scope of product differentiation in
terms of quality and reliability.
Strategies in the Maturity Stage
In the maturity stage, some companies abandon their weaker products. Marketers should systematically
consider strategies of market, product, and marketing-mix modification.
a) Market Modification: The Company might try to expand the market for its mature brand by expanding
the number of brand users in three ways:
 Convert nonusers: the company can try to attract nonusers to the product.
 Enter new market segments: the company can try to enter new market segments- geographic,
demographic, and so on;
 Win competitors’ customers: the company can attract competitors’ customers to try or adopt the
brand.

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Volume can also be increased by convincing current brand users to increase their usage of the product.
Here are three strategies:
 More frequent use: the company can try to get customers to use the product more frequently.
 More usage per occasion: the company can try to interest users in using more of the product on each
occasion.
 New and more varied uses: the company can try to discover new product uses and convince people
to use the product in more varied ways
b) Product Modification: Managers also try to stimulate sales by modifying the product’s characteristics
through quality improvement, feature improvement, or style improvement.
c) Marketing-Mix Modification: product managers might also try to stimulate sales by modifying other
marketing-mix elements. Price, promotion, place (distribution) and product (goods and services). A major
problem with marketing-mix modifications, especially price reductions and additional services, is that they
are easily imitated by competitors.
5. Decline Phase
The decision for withdrawing a product seems to be a complex task and there a lot of issues to be resolved
before with decide to move it out of the market. This stage is characterized by:
 Industry sales and profits begin to fall
 Strategic options become dependent on the actions of rivals
Usually a product decline is accompanied with a decline of market sales. This is the time to start
withdrawing variations of the product from the market that are weak in their market position. In a study of
company strategies in declining industries, there are five strategies:
 Increasing the firm’s investment (to strengthen its competitive position)
 Maintaining the firm’s investment level until the uncertainties are resolved.
 Decreasing the firm’s investment level selectively by dropping unprofitable customer groups
 Harvesting (“milking”) the firm’s investment to recover cash quickly.
 Divesting the business quickly by disposing of its assets as advantageously as possible.
The appropriate decline strategy depends on the industry’s relative attractiveness and the company ’s
competitive strength in that industry.
4.4. Strategic Choice
Strategic choice is the evaluation of alternative strategies and selection of the best alternative. With firm ’s
consciousness of the realities of a dynamic world, arriving at the strategy through consensus gives way to
strategic choice by extensive and conflicting arguments.
Process of Strategic Choice
Making a Strategic Choice is a decision making process consists of the following five steps:
1. Focusing on alternatives
The aim of focusing on alternatives is to narrow down the choice of alternatives. To narrow down the
choice the process should start from the business definition. With the help of the business definition the
company could generate alternative strategies by working forward from the present to the future position it
wishes to be in. Focusing on alternatives could also be done by visualizing the future state and working
backwards through a gap analysis. By analyzing the difference between the projected and desired
performance, the gap could be found.
2. Considering the selection factors
After narrowing down the alternatives the company has to select the factors based on which it has to
evaluate the alternatives. The criteria on the basis of which evaluation has to be done can be determined
through an objective or subjective approach. The objective approach, which could be termed as rational,
normative or prescriptive is based on analytical techniques that are hard facts or data used to facilitate a
strategic choice. The subjective approach, also termed as intuitive or descriptive is based on one’s personal
judgment, consensus and non-numerical data.
3. Evaluation of strategic alternatives

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There is no set of procedures or prescribed approach for the evaluation for the various alternatives.
Evaluation has to be done by bringing the analysis done by both the subjective and objective factors.
4. Making the strategic choice
After evaluating various alternatives the management could arrive at the best alternative. The company has
to make a strategic choice that will lead the company towards growth in the future, based on its goals and
objectives.
5. Strategic Plan
The final step, before a strategy is implemented, is formulation of a strategic plan. A strategic plan is a
document which provides information regarding the different elements of strategic management and the
manner in which an organization and its strategists propose to put the strategies into action. A
comprehensive strategic plan document could contain the following information.
 A clear statement of vision, mission, business definition, and goals/objectives.
 Results of environmental appraisal, major opportunities and threats, and critical success factors
 Results of corporate appraisal, major strengths and weakness, and distinctive competencies.
 Strategic choice made and assumptions under which strategies would be relevant. Contingent
strategies to be used under different conditions
 Strategic budget for the purpose of resource allocation for implementing strategies and schedule of
implementation.
 Measures to be used to evaluate performances and assess the success of strategy implementation.
The formulation of strategic plan document provides a means not only to formalize the effort that goes in
strategic planning but also for communicating to insiders and outsiders what the company stands for, and
what it plans to do in the given future time period.
A strategic plan should be implemented through procedural implementation, proper resource allocation,
structural implementation, functional implementation and behavioral implementation plans. The
implementation of the strategy should be evaluated and controlled through strategic and operational control
to realize the objectives and mission of the organization.

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 Chapter 5
Strategy Implementation, Control and Evaluations
5.1. Strategy Implementation
5.1.1. Meaning and Aspects (Activities) of Strategy Implementation
After the evaluation of the alternatives, the choice of strategy is made. This choice now needs to be
implemented or put into action. This includes the activation of the strategic alternatives chosen. Strategy
implementation is as good as starting a new business. The stage requires looking at the problems and
eliminating them.
Distinction between Strategy Formulation and Implementation
Strategy making and strategy implementation are two different things. Strategy making requires person
with vision while strategy implementation requires a person with administrative ability. Strategy
implementation is fundamentally different from strategy formulation 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 whereas strategy implementation focuses on
efficiency.
 Strategy formulation is primarily an intellectual process whereas implementation of strategy is
primarily an operational process.
 Strategy formulation requires good intuitive and analytical skills while strategy implementation
requires special motivation and leadership skills.
 Strategy formulation requires coordination among a few individuals while strategy implementation
requires organization wide coordination.
5.1.2. Aspects (Activities) of Strategy Implementation
In general, strategy implementation involves the following major aspects or activities:
 Project implementation
 Procedural implementation
 Resource allocation
 Structural implementation
 Behavioral implementation
 Functional and operational implementation
A) Project Implementation
Strategies lead to plans, programs, and projects. Knowledge related to project formulation and
implementation is covered under the discipline of project management. The concepts of project and project
management are defined by different authors as follows:
In a broad sense, project is a specific activity, with specific starting points and ending point, intended to
accomplish a specific objectives.
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Program is a collection of projects. The projects must be completed in a specified order for a program to
be complete. Because programs comprise multiple projects, they are large in scope than a single project.
Projects may vary considerably in size and duration, involving a small group of people or large numbers in
different parts of the organization, even working in different countries. It is usually unique in content and
unlikely to be repeated again in exactly the same way.
Project management is a dynamic process that utilizes the appropriate resources of the organization in a
controlled and structured manner to achieve some clearly defined objectives identified as strategic needs. It
also refers the application of knowledge, skills, tools, and techniques to project activities to meet project
requirements.
Project management is always conducted within a defined set of constraints. It typically consists of
balancing the four different factors or constraints:
 Time: Projects must be delivered on time
 Cost: Projects must be within cost
 Scope: Projects must be within scope
 Quality: Projects must meet customer quality requirements
Project Cycle
Projects usually go through a series of identifiable stages. Project cycle refers to the various stages through
which a project passes from the time of its inception up to its implementation. The main features of this
process are information gathering, analysis and decision-making. According to the first model developed
for the World Bank (1970) known as Baum Cycle, there are five stages in a project cycle. These are:
identification, preparation, appraisal, selection, and implementation.
Phase 1: Project Identification: This phase involves identifying the problems or project ideas which need
to be addressed and analyzing the ways in which they can be addressed.
Phase 2: Project Preparation (feasibility study): This stage (also called project formulation) involves the
detailed planning of the project idea. The project will have to be designed, alternatives considered and
technical, economic and financial feasibility will have to be established. The result of the preparation stage
is a set of tangible proposals with an associated set of costs and benefits. A feasibility study can usually be
undertaken by external consultants.
Phase 3: Project Appraisal: This stage involves a systematic and critical review of all aspects of the
project objectively in order that decision can be made as to whether to proceed. In this stage project
managers set criteria and select the project(s) that fulfill the criteria set. This could involve discarding the
project or alteration of some of the plans.
Phase 4: Project Implementation: This phase is one of actually performing the project and ensuring that
the objectives are met and the outputs are produced. A major priority is to implement the project on
schedule, but problems frequently occur and for this reason it is important for feedback to be obtained
through monitoring progress. This should allow for modification of the project in the light of experience.
Phase 5: Project Evaluation: This is the process of reviewing the completed project to see whether the
intended benefits are achieved. This process may lead to lessons for the design of future projects and
sometimes it may lead to the identification of an associated project or an extension to the existing project.
B) Procedural Implementation
Procedural implementation takes place by following the “Law of the Land” i.e. the rules and regulation in
terms of wastage cost, utility etc. It involves completing all those procedural formalities that have been
prescribed by the governments both central and state. A procedure is a series of related tasks that make up
the chronological sequence and the established way of performing the work to be accomplished. Procedural
implementation involves different steps. These steps vary from industry to industry. Also these may change
as per the changes in the government policies.
C) Resource Allocation
The organization has to allocate resources according to priorities established by annual objectives. It has to
make decisions regarding short term and long term allocation. The problem associated with resource
allocation is the problem involved in to process. The problems emerge because resources are limited; and
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there are competing organizational units with each trying to have the major portion. The following are
some of the factors inhibit effective resource allocation:
 Overprotection of resources,
 Too emphasis on short-term financial criteria,
 Organizational politics,
 Vague strategy targets,
 A reluctance to take risks, and
 A lack of sufficient knowledge
D) Structural Implementation
The structural implementation of strategy involves designing of the organization structure and interlinking
various units and sub units of the organization. It involves issues like:
 How the work of the organization will be divided
 How will the work be assigned among various positions, groups, department, divisions… etc
 The coordination among these for achievement of organizational objectives.
The organization has to emphasize on both aspects and therefore, it must design organization structure and
provide systems for integration and coordination among organization’s parts and members.
Matching Organization Structure to Strategy
The following five-sequence procedure serves as a useful guide for fitting structure to strategy:
1. Pinpoint the key functions and tasks requisite for successful strategy execution
In any organization, some activities and skills are always more critical to strategic success than others
are. The strategy-critical activities vary according to the particulars of a firm's strategy and competitive
requirements. To help identify what an organization's strategy-critical activities are, two questions can
usefully be posed:

What functions have to be performed for the strategy to succeed?

In what areas would mal-performance seriously endanger strategic success ?
The answers to these two questions should point squarely at what activities and skills are crucial and
where to concentrate organization-building efforts
2. Understanding the Relationships among Activities
Activities can be related by the flow of material through the production process, the type of customer
served, the distribution channels used, the technical skills and know-how needed to perform them, a strong
need to centralize authority over them, the sequence in which tasks must be performed, and geographic
location.
3. Grouping Activities into Organization Units
If activities crucial to strategic success are to get the attention and visibility they merit, then they have to
be a prominent part of the organizational scheme. Senior managers can seldom give a stronger signal
as to what is strategically important than by making key function and critical skills the most prominent
organizational building blocks and, further, assigning them a high position in the organizational
pecking order.
4. Determine the degree of authority needed to manage each organizational unit
Activities and organizational units with a key role in strategy execution should not made subordinate to
routine and non-key activities. Revenue-producing and results-producing activities should not made
subordinate to internal support or staff functions. The crucial administrative skill is selecting strong
managers to head up each unit and delegating them enough authority to formulate and execute an
appropriate strategy for their unit.
5. Providing for Coordination among the Units
Providing for coordination of the activities of organizational units is accomplished mainly through
positioning them in the hierarchy of authority. Positioning organizational units along the vertical scale of
managerial authority, coordination of strategic efforts can also achieved through informal meetings,
project teams, special task fortes, standing committees, formal strategy reviews, and annual strategic
planning and budgeting cycles. The whole process of negotiating and deciding on the objectives and
44
strategies of each organizational unit and making sure that related activities mesh suitably help
coordinate operations, across organizational units.
The Strategy-Related Approaches to Organization Structure
There are essentially five strategy-related approaches to organization: functional specialization, geographic
organization, decentralized business divisions, strategic business units, and matrix structures featuring
dual lines of authority and strategic priority.
1. The Functional Organization Structure
Generally speaking, organizing by functional specialties promotes full utilization of the most up-to-date
technical skills and helps a business capitalize on the efficiency gains resulting from use of those technical
skills. These are strategically important considerations for single-business organizations, dominant-
product enterprises, and vertically integrated firms, and account for why they usually have some kind of
centralized, functionally specialized structure.

2. Geographic Forms of Organization

This is used by large-scale enterprises whose strategies need to be tailored to fit the particular needs and
features of different geographical areas.
3. Decentralized Business Units
Grouping activities along business and product lines has been a clear-cut trend among diversified
enterprises. Separate business/product divisions emerged because diversification made a functionally
specialized manager's job incredibly complex. Strategy implementation is facilitated by grouping key
activities belonging to the same business under one organizational roof, thereby creating line-of-business
units (which then can be subdivided into whatever functional subunits suit the key activities/ critical tasks
makeup of the business).
4. Strategic Business Units
A strategic business unit (SBU) is a grouping of business units based on some important strategic elements
common to each. The possible elements of relatedness include an overlapping set of competitors, a closely
related strategic mission, a common need to compete globally, an ability to accomplish integrated
strategic planning, common key success factors, and technologically related growth opportunities.

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5. Matrix Forms of Organization
A matrix organization is a structure with two or more channels of command, two lines of budget
authority, and two sources of performance and reward. The key feature of the matrix is that product (or
business) and functional lines of authority are overlaid to form a matrix or grid, and managerial authority
over the activities in each unit/cell of the matrix is shared between the product manager and
functional manager.

E) Behavioral Implementation: Leadership, Corporate Culture, and Business Ethics.

Behavioral implementation deals with those aspects of strategy implementation that have impact on
behavior of people in the organizations. Since human resources form an integral part of the organization
their activities and behavior need to be directed in a certain way. Any departure may lead to the failure of
strategy. The five issues in this context relevant to strategy implementation are:
 Leadership
 Corporate Culture
 Values and Ethics
1. Leadership: Leadership is the capacity to frame plans which will succeed and the faculty to persuade
others to carry them out in the face of all difficulties. In practical terms, a leader has to achieve the task
(mission, objective or goal). For doing so, s/he has to build his team as a cohesive group and develop every
individual in the team to give his very best. Consequently, s/he has to harmonize and integrate the needs
related to the accomplishment of the task with those of the group he leads and individuals in the group.
In actual practice, functions related to leadership are integrated in the following steps:
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  Planning to achieve the task by using the available resources and people
 Initiating work by allocating tasks and resources
 Controlling by monitoring the work; modifying plan
 Supporting by encouragement and by motivating and training
 Evaluating
2. Corporate Culture
Each organization has its own way of dealing with corporate problems and do have their own
organizational culture. The culture of the organization very much depends on the behavior of the
employees. If the employees have a strong commitment towards their organizations, the organization is
said to have a strong culture and vice versa.
3. Values and Ethics
A strong culture in any organization is based on strong ethics and values. This is very important for the
success of the organization in the long-run. Ethics and values ensure that the organization does not adopt
short-cut methods to achieve success; instead it stresses on the concept of sustained success. Every
organization has its own code of ethics and standards in a written form. The code of ethics normally
contains the following points:
 Honesty
 Fairness in practices of the company—Disclosing the inside information;
 Acquiring and using outside information—Disclosure of outside activities by the employer to the
employee;
 Using company assets; etc.
The value statements normally include:
 value of customers
 Commitment towards the business practices like quality etc.
 Duty towards shareholders, suppliers etc.
 Following the environmental protection norms etc.
There can be more such points, which can be discussed under the head value statements and code of ethics.
Each organization has its own set of value statements and code of ethics. For the strategy to be
implemented effectively, it is important to have a set of formal value statements and code of ethics. These
should not be merely in a written form but must be followed by each employee of the organization so as to
create a strong corporate culture, which in turn would result in the success of the organization.
F) Functional Implementation and Functional Strategies
Functional Implementation
Functional implementation deals with the development of policies and plans in different areas of functions
which an organization undertakes. The major functions of the organization include
 Production function involve decisions relating to size and location of plants, technology to be used,
cost factor, production capacity, quality of the product, R&D etc.
 Marketing function include the decisions relating to type of products, price of products, product
distribution and product promotion.
 Finance function deals with decisions like sources of funds, usage of funds and management of
earnings.
 Personnel function includes recruitment of right personnel, development of personnel, motivation
system, retaining personnel, personnel mobility, industrial relations etc.
Each and every function makes its own policies and plans in tune with the whole organization’s strategy
and then implements to fulfill the objectives.
Functional Strategies
Functional Strategy is the approach a functional area takes to achieve corporate and business unit
objectives and strategies by maximizing resource productivity. This involves coordinating the various

47
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:
1. Purchasing strategy – determines:
 Outsourcing decision refers purchasing from someone else a product or service that had been
previously provided internally.
 Purchasing Choices in obtaining raw materials, parts and supplies such as multiple sourcing, sole
sourcing, parallel sourcing
2. Marketing strategy involves with
 Strategy on product choices, pricing, distribution, promotion, and customer service
 Market development strategy i.e. capture a larger share of existing market through market saturation
and market penetration; develop new markets for current products
 Product development strategies – develop new products for existing markets; develop new products
for new markets
 Advertising or Promotion strategy – Push marketing strategy (investing in trade promotion to gain
or hold share); pull marketing strategy (investing in consumer advertising to build brand awareness)
3. Financial strategy –examines the financial implications of corporate and business-level strategic
options and identifies the best financial course of action. Deal with capital acquisition, capital allocation,
dividend policy, investment, and cash flow management. And also maximizes financial value of the firm
4. R&D Strategy –Deals with product and process innovation and improvement choices such as:
 Technological leader (Pioneer the lowest cost product design; be the first firm down the learning
curve; create low-cost ways of performing value activities; pioneer a unique product that increases
buyer value; innovate in other activities to increase buyer value…etc.)
 Technological follower (Lower the cost of the product or value activities by learning from the
leader’s experience; avoid R&D costs through imitation; adapt the product or delivery system more
closely to buyer needs by learning from the leader’s experience…etc.)
 Process development and product development
5. Production /Operations strategy: Address choices about where and how product will be manufactured,
technology to be used, and management of resources, purchasing, quality control, inventory control, and
relations with suppliers.
 How and where product is manufactured
 Level of vertical integration in process
 Deployment of physical resources
 Relationships with suppliers
 Flexible manufacturing system
 Continuous product improvement
6. Logistics strategy – flow of products into and out of the process. The three current trends:
centralization, outsourcing, and use of the internet.
7. HRM strategy – addresses issues of:
 Deal with work flow control, pay and incentives, recruiting, orientation, training, staffing, and labor
relations
 Low-skilled employees with low pay, repetitive tasks, high turnover
 Skilled employees with high pay, cross trained, self-managing teams
8. Information systems strategy –technology to provide business units with competitive advantage. Deal
with office automation, decision support, and operational support.

5.2. Strategic Control and Evaluations

The final stage in strategic management is strategy evaluation and control. All strategies are subject to
future modification because internal and external factors are constantly changing. In the strategy evaluation

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and control process managers determine whether the chosen strategy is achieving the organization's
objectives.

5.2.1. An Overview of Strategic Evaluation and Control

Evaluation and control mechanisms are set in place to inform every stage of the strategic management
process. They are a means of collecting whatever information we may need to compare plans against actual
events, to ensure that things are working well, and to anticipate, or correct, any faults or weaknesses in the
system. Effective evaluation and control can tell us what we are doing well and what we are not. The terms
‘evaluation’ and ‘control’ are not necessarily the same thing.
Strategic control is a tool that allows managers to evaluate whether or not their selected strategies are
working as intended. It enables managers to find ways to improve the strategies and seek changes if
strategies are not working. Strategic control is the process by which an organization tracks the strategy as
it is being implemented, detecting any problem areas or potential problem areas that might suggest that the
strategy is incorrect, and making any necessary adjustments. Strategic controls allow you to step back and
look at the big picture and make sure all the pieces of the picture are correctly aligned.
Strategy evaluation is essential to ensure that stated objectives are being achieved. It measures the
effectiveness and efficiency of organizational strategy in achieving organizational objectives. We evaluate
to know how good our strategic plans are and how well they are implemented. The information we get
from evaluation enables us to exercise better control over the strategic management process.
The success of an organization is gauged by its effectiveness and efficiency. Effectiveness is measured by
the degree to which the organization has achieved its objectives while efficiency refers to the manner of
resource utilization for achieving the output. It is easy to evaluate efficiency by comparing output/input of
an organizations or organizational units. Inputs are always quantifiable. An organization is more efficient
than the other is if it uses less resource (inputs) than another or if for the same input it gives more output. In
many organizations, evaluation is an appraisal of performance by addressing questions like:
 Have assets increased?
 Profitability increased?
 Sales increased?
 Productivity increase?
 ROI ratios increased?
5.2.2. Levels of Control: Strategic Control and Operational Control
Organizational controls can be at Strategic and operational levels. Imagine that you are the captain of a
ship. The strategic controls make sure that your ship is going in the right direction; management and
operating controls make sure that the ship is in good condition before, during, and after the voyage.
1. Strategic control is the process by which an organization tracks the strategy as it is being implemented,
detecting any problem areas or potential problem areas that might suggest that the strategy is incorrect, and
making any necessary adjustments. Strategic controls allow you to step back and look at the big picture and
make sure all the pieces of the picture are correctly aligned.
Strategic controls are necessary to steer the firm through these events. They must provide some means of
correcting direction on the basis of intermediate performance and new information. Questions involved in
Strategic controls are:
 Are we moving in the proper direction?
 Are our assumptions about major trends and changes correct?
 Should we adjust or abort the strategy?
Four Types of Strategic Control
 Premise Control - Designed to check systematically and continuously whether premises on which the
strategy is based are still valid

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  Implementation Control - Designed to assess whether the overall strategy should be changed in light
of the results associated with the incremental actions that implement the overall strategy
 Strategic Surveillance - Designed to monitor a broad range of events inside and outside the firm that
are likely to affect the course its strategy
 Special Alert Control - Thorough, and often rapid, reconsideration of the firm’s strategy because of a
sudden, unexpected event
2. Operational control, in contrast to strategic control, is a process concerned with executing the strategy.
Operational controls are systems that guide, monitor, & evaluate progress in meeting short-term objectives,
providing post-action evaluation and control over short periods. Where operational controls are imposed, they
function within the framework established by the strategy. Normally these goals, objectives, and standards
are established for major subsystems within the organization, such as business units, projects, products,
functions, and responsibility centers.

Typical operational control measures include return on investment, net profit, cost, and product quality.
These control measures are essentially summations of finer-grained control measures. Corrective action
based on operating controls may have implications for strategic controls when they involve changes in the
strategy.
5.2.3. Types of Control
It is also valuable to understand that, within the strategic and operational levels of control, there are several
types of controls. Controls can be classified on the basis of:
 Level of pro-activity
 Outcome versus behavioral, and
 Financial and Nonfinancial Controls
1. Pro-activity: Proactive means the firm tries to initiate and influence. Based on the pro-activity, we have
three types of control: feed forward control, concurrent control, and feedback control.
a) Feed forward control. This refers active monitoring of problems in a way that provides their timely
prevention, rather than after-the-fact reaction. It addresses what we can do ahead of time to help our plan
succeed. The essence of feed forward control is to see the problems coming in time to do something about
them. For instance, feed forward controls include preventive maintenance on machinery and equipment and
due diligence on investments.
b) Concurrent Controls: The process of monitoring and adjusting ongoing activities and processes is
known as concurrent control. Such controls are not necessarily proactive, but they can prevent problems
from becoming worse. For this reason, we often describe concurrent control as real-time control because it
deals with the present.
c) Feedback Controls: Finally, feedback controls are processes that involve the gathering of
information about a completed activity, evaluating that information, and taking steps to improve the
similar activities in the future. Involve gathering information about a completed activity, evaluating that
information, and taking steps to improve the similar activities in the future. This is the least proactive of
controls and is generally a basis for reactions. Feedback controls permit managers to use information on
past performance to bring future performance in line with planned objectives.
2. Outcome and Behavioral Controls: Controls also differ depending on what is monitored, outcomes or
behaviors.
a) Outcome controls are processes that are generally preferable when just one or two performance
measures (say, return on investment) are good gauges of a business ’s health. Outcome controls are
effective when there’s little external interference between managerial decision making on the one hand and
business performance on the other.
b) Behavioral controls involve the direct evaluation of managerial and employee decision making, not of
the results of managerial decisions. They tie rewards to a broader range of criteria. Behavioral controls and
commensurate rewards are typically more appropriate when there are many external and internal factors
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that can affect the relationship between a manager’s decisions and organizational performance. They’re also
appropriate when managers must coordinate resources and capabilities across different business units.
3. Financial and Nonfinancial Controls: Across the different types of controls, it is important to
recognize that controls can take on one of two predominant forms: financial and nonfinancial controls.
a) Financial control involves the management of a firm’s costs and expenses to control them in relation to
budgeted amounts. Thus, management determines which aspects of its financial condition, such as assets,
sales, or profitability, are most important, tries to forecast them through budgets, and then compares actual
performance to budgeted performance. At a strategic level, total sales and indicators of profitability would
be relevant strategic controls. Without effective financial controls, the firm’s performance can deteriorate.
While we often think of financial controls as a form of outcome control, they can also be used as a
behavioral control. For instance, if managers must request approval for expenditures over a budgeted
amount, then the financial control also provides a behavioral control mechanism as well.
b) Nonfinancial control: Increasing numbers of organizations have been measuring customer loyalty,
referrals, employee satisfaction, and other such performance areas that are not financial. In contrast to
financial controls, nonfinancial controls involve processes that track aspects of the organization that are not
immediately financial in nature but are expected to lead to positive financial performance outcomes. The
theory behind such nonfinancial controls is that they should provide managers with a glimpse of the
organization’s progress well before financial outcomes can be measured. And this theory does have some
practical support. For instance, highly satisfied customers are the best predictor of future sales in many of
its businesses, so it regularly tracks customer satisfaction.

5.2.4. Process of Strategic Evaluation and Control

Although control systems must be tailored to specific situations, such systems generally follow the same
basic process. The controlling process has five major steps:
 Determine Areas to Control
 Establishing Standards
 Measuring Actual Performance
 Comparing Performance against Standards
 Taking Corrective Action

1. Determine Areas to Control

The first major step in the control process is determining the major areas to control, i.e. identify critical
control points, because it is expensive and virtually impossible to control every aspect of an organization’s
activities. Critical control points include all the areas of an organization's operations that directly affect the
success of its key operations, areas where failures can not be tolerated, and costs in time and money are
greatest. Critical control points can include:
 Budgetary control – planning levels control
 Cost control – detailed expenses control
 Inventory control – control for supply, work in process and finished goods
 Quality control – control for maintaining quality standards for products / services
 Production control – operation schedule, work flow
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2. Establishing Standards
Standards are units of measurements established by management to serve as benchmarks for comparing
performance levels. They spell out specific criteria for evaluating performance and related employee
behaviors. The exact nature of the standards to be used depends on what is being monitored. Standards, if
possible, must be:
 Specific and quantitative as much as possible
 Flexible to adopt the changes that may occur over the future
 Challenging and should aim for improvement over past performance
The standards of performance could be any of the following three types
a) Historical Standards: In this type of standards, comparison of present performance is made with the
past performance. Though simplest, this type does not take into account the challenges in environmental
conditions between the two periods.
b) Industry Standards: In this type of standards, the comparison of a firm's performance is made against
similar other firms in the industry. The difficulty here is that all the firms may not be exactly the same for
purposes of comparison.
c) Present Standards: The goals/targets are decided by the firm’s management to be achieved in a
particular period. Present standards convey the aspiration levels and take into account environmental
conditions, if properly derived. These are more realistic and also consider the organizations' capacity& to
achieve them.
3. Measuring Actual Performance
Once standards are determined, the next step is measuring performance. For a given standard, a manager
must decide both how to measure actual performance and how often to do so.
4. Comparing Performance against Standards
This is a step where comparison is made between the “what is” and the “what should be. ” The purpose of
comparing actual performance against intended performance is, of course, to determine if corrective action
is needed. Quantitative criteria commonly used to evaluate strategies, which are used to make three critical
comparisons:
 Comparing the firm’s performance over different time periods,
 Comparing the firm’s performance to competitors, and
 Comparing the firm’s performance to industry averages
Consequently, the comparison result may show that the actual performance exceeds (positive deviation),
meets (zero deviation), or falls below (negative deviation) expectations (standards). In comparing
performance with standards, managers need to direct attention to the exception to save time and effort. The
managerial principle of exception states that control is enhanced by concentrating on exceptions, or
significant deviations from the expected result or standard.

5. Taking Corrective Action

The corrective action to be taken depends up on the type of deviation that exists. When performance
exactly meets (deviation of zero) or exceeds (positive deviation) the standards set, usually no corrective
action is necessary. Taking corrective action 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. Having determined that there
has been a deviation from objectives you have two options:
 Correct the actual performance (of equipment or human resources).If the source of the deviation is
inadequate performance you have a number of options. For example, you may change your section’s
strategy or how you structure your section; you may alter your compensation or remuneration
practices; you may introduce training programs or new technologies; or you may redesign jobs.

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  Revise the criteria of performance or the objectives set. You may determine that one or more of the
original objectives were unrealistic or inappropriate. In this case it is the objectives, and not the
performance, that need to be altered.

5.2.5. Benefits of strategic evaluation and control

What are the main benefits of strategic evaluation and control? There are three:
• They provide direction. They enable management to make sure that the organization is heading in the
right direction and that corrective action is taken where needed.
• They provide guidance to everybody. Everyone within the organization, both managers and workers
alike, learn what is happening, how their performance compares with what is expected, and what
needs to be done to keep up the good work or improve performance.
• They inspire confidence. Information about good performance inspires confidence in everybody.
Those within the organization are likely to be more motivated to maintain and achieve better performance
in order to keep up their track record. Those outside – customers, government authorities, shareholders
–are likely to be impressed with the good performance.

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