Unit 1

STRATEGIC MANAGEMENT

Concept, Meaning, Definition:

Strategy is the determination of the long-term goals and objectives of an enterprise and the
adoption of the courses of action and the allocation of resources necessary for carrying out
these goals. Strategy is management’s game plan for strengthening the organization’s position,
pleasing customers, and achieving performance targets.

Types of strategy

Strategy can be formulated on three different levels:

• corporate level
• business unit level
• functional or departmental level.

CORPORATE STRATEGY

BUSINESS STRATEGY

FUNCTIONAL STRATEGY

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses in which
the company should compete and with the development and coordination of that portfolio of
businesses.
Corporate level strategy is concerned with:
• Reach - defining the issues that are corporate responsibilities; these might include
identifying the overall goals of the corporation, the types of businesses in which the
 corporation should be involved, and the way in which businesses will be integrated and
managed.
• Competitive Contact - defining where in the corporation competition is to be localized.
Take the case of insurance: In the mid-1990's, Aetna as a corporation was clearly
identified with its commercial and property casualty insurance products. The
conglomerate Textron was not. For Textron, competition in the insurance markets took
place specifically at the business unit level, through its subsidiary, Paul Revere.
(Textron divested itself of The Paul Revere Corporation in 1997.)
• Managing Activities and Business Interrelationships - Corporate strategy seeks to
develop synergies by sharing and coordinating staff and other resources across business
units, investing financial resources across business units, and using business units to
complement other corporate business activities. Igor Ansoff introduced the concept of
synergy to corporate strategy.
• Management Practices - Corporations decide how business units are to be governed:
through direct corporate intervention (centralization) or through more or less
autonomous government (decentralization) that relies on persuasion and rewards.
Corporations are responsible for creating value through their businesses. They do so by
managing their portfolio of businesses, ensuring that the businesses are successful over the
long-term, developing business units, and sometimes ensuring that each business is compatible
with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that can be
planned independently from the other business units of the firm.
At the business unit level, the strategic issues are less about the coordination of operating units
and more about developing and sustaining a competitive advantage for the goods and services
that are produced. At the business level, the strategy formulation phase deals with:
• positioning the business against rivals
• anticipating changes in demand and technologies and adjusting the strategy to
accommodate them
• influencing the nature of competition through strategic actions such as vertical
integration and through political actions such as lobbying.
Michael Porter identified three generic strategies (cost leadership, differentiation, and focus)
that can be implemented at the business unit level to create a competitive advantage and defend
against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and departments.
The strategic issues at the functional level are related to business processes and the value chain.
Functional level strategies in marketing, finance, operations, human resources, and R&D
involve the development and coordination of resources through which business unit level
strategies can be executed efficiently and effectively.
Functional units of an organization are involved in higher level strategies by providing input
into the business unit level and corporate level strategy, such as providing information on
resources and capabilities on which the higher level strategies can be based. Once the higher-
level strategy is developed, the functional units translate it into discrete action-plans that each
department or division must accomplish for the strategy to succeed.

STRATEGIC MANAGEMENT

Strategic management is defined as the art and science of formulating, implementing, and
evaluating cross-functional decisions that enable the organization to achieve its objectives."
Generally, strategic management is not only related to a single specialization but covers cross-
functional or overall organization.
• Strategic management is a comprehensive area that covers almost all the functional
areas of the organization. It is an umbrella concept of management that comprises all
such functional areas as marketing, finance & account, human resource, and production
& operation into a top level management discipline. Therefore, strategic management
has an importance in the organizational success and failure than any specific functional
areas.
• Strategic management deals with organizational level and top level issues whereas
functional or operational level management deals with the specific areas of the business.
• Top-level managers such as Chairman, Managing Director, and corporate level
planners involve more in strategic management process.
• Strategic management relates to setting vision, mission, objectives, and strategies that
can be the guideline to design functional strategies in other functional areas
• Therefore, it is top-level management that paves the way for other functional or
operational management in an organization

Definition:

“The determination of the basic long-term goals & objectives of an enterprise and the adoption
of the course of action and the allocation of resources necessary for carrying out these goals”.

-Chandler

STRATEGIC MANAGEMENT MODEL / STRATEGIC PLANNING PROCESS

 In today's highly competitive business environment, budget-oriented planning or
forecast-based planning methods are insufficient for a large corporation to survive and prosper.
The firm must engage in strategic planning that clearly defines objectives and assesses both
the internal and external situation to formulate strategy, implement the strategy, evaluate the
progress, and make adjustments as necessary to stay on track.
A simplified view of the strategic planning process is shown by the following diagram:

STRATEGIC INDENT

ENVIRONMENTAL SCANNING

STRATEGY FORMULATION

STRATEGY IMPLEMENTATION

EVALUATION & CONTROL

a) STRATEGIC INTENT
Strategic intent takes the form of a number of corporate challenges and opportunities, specified
as short term projects. The strategic intent must convey a significant stretch for the company,
a sense of direction, which can be communicated to all employees. It should not focus so much
on today's problems, but rather on tomorrow's opportunities. Strategic intent should specify the
competitive factors, the factors critical to success in the future.
Strategic intent gives a picture about what an organization must get into immediately in order
to use the opportunity. Strategic intent helps management to emphasize and concentrate on the
priorities. Strategic intent is, nothing but, the influencing of an organization’s resource potential
and core competencies to achieve what at first may seem to be unachievable goals in the
competitive environment.

b) Environmental Scan
The environmental scan includes the following components:
• Analysis of the firm (Internal environment)
• Analysis of the firm's industry (micro or task environment)
• Analysis of the External macro environment (PEST analysis)
The internal analysis can identify the firm's strengths and weaknesses and the external analysis
reveals opportunities and threats. A profile of the strengths, weaknesses, opportunities, and
threats is generated by means of a SWOT analysis
An industry analysis can be performed using a framework developed by Michael Porter known
as Porter's five forces. This framework evaluates entry barriers, suppliers, customers, substitute
products, and industry rivalry.

c) Strategy Formulation
Strategy Formulation is the development of long-range plans for the effective management of
environmental opportunities and threats, in light of corporate strengths & weakness. It includes
defining the corporate mission, specifying achievable objectives, developing strategy & setting
policy guidelines.

i) Mission
Mission is the purpose or reason for the organization’s existence. It tells what the
company is providing to society, either a service like housekeeping or a product like
automobiles.

ii) Objectives
Objectives are the end results of planned activity. They state what is to be accomplished
by when and should be quantified, if possible. The achievement of corporate objectives
should result in the fulfillment of a corporation’s mission.

iii) Strategies
Strategy is the complex plan for bringing the organization from a given posture to a
desired position in a future period of time.

d) Policies
A policy is a broad guide line for decision-making that links the formulation of strategy
with its implementation. Companies use policies to make sure that employees throughout the
firm make decisions & take actions that support the corporation’s mission, objectives &
strategy.

d) Strategy Implementation
It is the process by which strategy & policies are put into actions through the development of
programs, budgets & procedures. This process might involve changes within the overall
culture, structure and/or management system of the entire organization.

i) Programs:
It is a statement of the activities or steps needed to accomplish a single-use plan. It makes
the strategy action oriented. It may involve restructuring the corporation, changing the
company’s internal culture or beginning a new research effort.

ii) Budgets:
A budget is a statement of a corporations program in terms of dollars. Used in planning &
control, a budget lists the detailed cost of each program. The budget thus not only serves
as a detailed plan of the new strategy in action, but also specifies through proforma financial
statements the expected impact on the firm’s financial future

iii) Procedures:
Procedures, sometimes termed Standard Operating Procedures (SOP) are a system of
sequential steps or techniques that describe in detail how a particular task or job is to be
done. They typically detail the various activities that must be carried out in order to
complete.

e) Evaluation & Control

After the strategy is implemented it is vital to continually measure and evaluate progress so
that changes can be made if needed to keep the overall plan on track. This is known as the
control phase of the strategic planning process. While it may be necessary to develop systems
to allow for monitoring progress, it is well worth the effort. This is also where performance
standards should be set so that performance may be measured and leadership can make
adjustments as needed to ensure success.

Evaluation and control consists of the following steps:

i) Define parameters to be measured
ii) Define target values for those parameters
iii) Perform measurements
iv) Compare measured results to the pre-defined standard
 v) Make necessary changes

STAKEHOLDERS IN BUSINESS

A corporate stakeholder is a party that can affect or be affected by the actions of the business
as a whole. Stakeholder groups vary both in terms of their interest in the business activities and
also their power to influence business decisions. Here is the summary:

The stake holders of a company are as follows

• Shareholders
• Creditors
• Directors and managers
• Employees
• Suppliers
• Customers
• Community
• Government

Stakeholder Main Interests Power and influence

 Profit growth, Share price
Shareholders Election of directors
growth, dividends
Can enforce loan covenants
Interest and principal to be
Creditors and Can withdraw banking
repaid, maintain credit rating
facilities
Salary ,share options, job Make decisions, have
Directors and managers
satisfaction, status detailed information
Salaries & wages, job
Staff turnover, industrial
Employees security, job satisfaction &
action, service quality
motivation
Long term contracts, prompt
Pricing, quality, product
Suppliers payment, growth of
availability
purchasing
Reliable quality, value for Revenue / repeat business,
Customers money, product availability, Word of mouth
customer service recommendation
Environment, local jobs, Indirect via local planning
Community
local impact and opinion leaders
Operate legally, tax receipts, Regulation, subsidies,
Government
jobs taxation, planning
VISION, MISSION AND PURPOSE

VISION STATEMENT
Vision statement provides direction and inspiration for organizational goal setting.
Vision is where you see your self at the end of the horizon OR milestone therein. It is a single
statement dream OR aspiration. Typically a vision has the flavors of 'Being Most admired',
'Among the top league', 'Being known for innovation', 'being largest and greatest' and so on.
Typically 'most profitable', 'Cheapest' etc. don’t figure in vision statement. Unlike goals, vision
is not SMART. It does not have mathematics OR timelines attached to it.

Vision is a symbol, and a cause to which we want to bond the stakeholders, (mostly employees
and sometime share-holders). As they say, the people work best, when they are working for a
cause, than for a goal. Vision provides them that cause.
Vision is long-term statement and typically generic & grand. Therefore a vision statement
does not change unless the company is getting into a totally different kind of business.

Vision should never carry the 'how' part . For example ' To be the most admired brand in
Aviation Industry' is a fine vision statement, which can be spoiled by extending it to' To be the
most admired brand in the Aviation Industry by providing world-class in-flight services'. The
reason for not including 'how' is that 'how' may keep on changing with time.
Challenges related to Vision Statement:
Putting-up a vision is not a challenge. The problem is to make employees engaged with it.
Many a time, terms like vision, mission and strategy become more a subject of scorn than being
looked up-to. This is primarily because leaders may not be able to make a connect between the
vision/mission and people’s every day work. Too often, employees see a gap between the
vision, mission and their goals & priorities. Even if there is a valid/tactical reason for this mis-
match, it is not explained.

Horizon of Vision:
Vision should be the horizon of 5-10 years. If it is less than that, it becomes tactical. If it is of
a horizon of 20+ years (say), it becomes difficult for the strategy to relate to the vision.

Features of a good vision statement:

• Easy to read and understand.
• Compact and Crisp to leave something to people’s imagination.
• Gives the destination and not the road-map.
• Is meaningful and not too open ended and far-fetched.
• Excite people and make them get goose-bumps.
• Provides a motivating force, even in hard times.
• Is perceived as achievable and at the same time is challenging and compelling,
stretching us beyond what is comfortable.

Vision is a dream/aspiration, fine-tuned to reality:

The Entire process starting from Vision down to the business objectives, is highly iterative.
The question is from where should we start. We strongly recommend that vision and mission
statement should be made first without being colored by constraints, capabilities and
environment. This can said akin to the vision of armed forces, that’s 'Safe and Secure country
from external threats'. This vision is a non-negotiable and it drives the organization to find
ways and means to achieve their vision, by overcoming constraints on capabilities and
resources. Vision should be a stake in the ground, a position, a dream, which should be prudent,
but should be non-negotiable barring few rare circumstances.

Mission Statement
Mission of an organization is the purpose for which the organization is. Mission is again a
single statement, and carries the statement in verb. Mission in one way is the road to achieve
the vision. For example, for a luxury products company, the vision could be 'To be among
most admired luxury brands in the world' and mission could be 'To add style to the lives'
A good mission statement will be :
• Clear and Crisp: While there are different views, We strongly recommend that
mission should only provide what, and not 'how and when'. We would prefer the
mission of 'Making People meet their career' to 'Making people meet their career
through effective career counseling and education'. A mission statement without 'how
& when' element leaves a creative space with the organization to enable them take-up
wider strategic choices.
• Have to have a very visible linkage to the business goals and strategy:
For example you cannot have a mission (for a home furnishing company) of 'Bringing
Style to People’s lives' while your strategy asks for mass product and selling. Its better
that either you start selling high-end products to high value customers, OR change your
mission statement to 'Help people build homes'.
• Should not be same as the mission of a competing organization. It should touch upon
how its purpose it unique.

Mission follows the Vision:

The Entire process starting from Vision down to the business objectives, is highly iterative.
The question is from where should be start. I strongly recommend that mission should follow
the vision. This is because the purpose of the organization could change to achieve their vision.
For example, to achieve the vision of an Insurance company 'To be the most trusted Insurance
Company', the mission could be first 'making people financially secure' as their emphasis is on
Traditional Insurance product. At a later stage the company can make its mission as 'Making
money work for the people' when they also include the non-traditional unit linked investment
products.

TOYOTA
Vision
-Toyota aims to achieve long-term, stable growth economy, the local communities it serves,
and its stakeholders.

Mission
-Toyota seeks to create a more prosperous society through automotive manufacturing.

IBM
Vision
Solutions for a small planet

Mission
At IBM, we strive to lead in the invention, development and manufacture of the industry's most
advanced information technologies, including computer systems, software, storage systems
and microelectronics.

We translate these advanced technologies into value for our customers through our professional
solutions, services and consulting businesses worldwide.

BUSINESS, OBJECTIVES AND GOALS

A business (also known as enterprise or firm) is an organization engaged in the trade

of goods, services, or both to consumers. Businesses are predominant in capitalist economies,
in which most of them are privately owned and administered to earn profit to increase
the wealth of their owners. Businesses may also be not-for-profit or state-owned. A business
owned by multiple individuals may be referred to as a company, although that term also has a
more precise meaning.

Goals : It is where the business wants to go in the future, its aim. It is a statement of purpose,
e.g. we want to grow the business into Europe.
Objectives: Objectives give the business a clearly defined target. Plans can then be made to
achieve these targets. This can motivate the employees. It also enables the business to measure
the progress towards to its stated aims.
The Difference between goals and objectives

• Goals are broad; objectives are narrow.

• Goals are general intentions; objectives are precise.
• Goals are intangible; objectives are tangible.
• Goals are abstract; objectives are concrete.
• Goals can't be validated as is; objectives can be validated.

CORPORATE GOVERNANCE
Corporate governance generally refers to the set of mechanisms that influence the decisions
made by managers when there is a separation of ownership and control.
The evolution of public ownership has created a separation between ownership and
management. Before the 20th century, many companies were small, family owned and family
run. Today, many are large international conglomerates that trade publicly on one or many
global exchanges.

In an attempt to create a corporation where stockholders' interests are looked after, many firms
have implemented a two-tier corporate hierarchy. On the first tier is the board of directors:
these individuals are elected by the shareholders of the corporation. On the second tier is the
upper management: these individuals are hired by the board of directors.

Share holders

A shareholder or stockholder is an individual or institution (including a corporation) that legally

owns one or more shares of stock in a public or private corporation. Shareholders own the
stock, but not the corporation itself.
Stockholders are granted special privileges depending on the class of stock. These rights may
include:
• The right to sell their shares,
• The right to vote on the directors nominated by the board,
• The right to nominate directors (although this is very difficult in practice because of
minority protections) and propose shareholder resolutions,
• The right to dividends if they are declared,
• The right to purchase new shares issued by the company, and

Board of Directors

Elected by the shareholders, the board of directors is made up of two types of representatives.
The first type involves individuals chosen from within the company. This can be a CEO, CFO,
manager or any other person who works for the company on a daily basis. The other type of
representative is chosen externally and is considered to be independent from the company. The
role of the board is to monitor the managers of a corporation, acting as an advocate for
stockholders. In essence, the board of directors tries to make sure that shareholders' interests
are well served.

Board members can be divided into three categories:

• Chairman – Technically the leader of the corporation, the chairman of the board is
responsible for running the board smoothly and effectively. His or her duties typically
include maintaining strong communication with the chief executive officer and high-
level executives, formulating the company's business strategy, representing
 management and the board to the general public and shareholders, and maintaining
corporate integrity. A chairman is elected from the board of directors.
• Inside Directors – These directors are responsible for approving high-level budgets
prepared by upper management, implementing and monitoring business strategy, and
approving core corporate initiatives and projects. Inside directors are either
shareholders or high-level management from within the company. Inside directors help
provide internal perspectives for other board members. These individuals are also
referred to as executive directors if they are part of company's management team. s
• Outside Directors – While having the same responsibilities as the inside directors in
determining strategic direction and corporate policy, outside directors are different in
that they are not directly part of the management team. The purpose of having outside
directors is to provide unbiased and impartial perspectives on issues brought to the
board.

Management Team
As the other tier of the company, the management team is directly responsible for the day-to-
day operations (and profitability) of the company.
• Chief Executive Officer (CEO) – As the top manager, the CEO is typically responsible
for the entire operations of the corporation and reports directly to the chairman and
board of directors. It is the CEO's responsibility to implement board decisions and
initiatives and to maintain the smooth operation of the firm, with the assistance of senior
management. Often, the CEO will also be designated as the company's president and
therefore also be one of the inside directors on the board (if not the chairman).
• Chief Operations Officer (COO) – Responsible for the corporation's operations,
the COO looks after issues related to marketing, sales, production and personnel. More
hands-on than the CEO, the COO looks after day-to-day activities while providing
feedback to the CEO. The COO is often referred to as a senior vice president.
• Chief Finance Officer (CFO) – Also reporting directly to the CEO, the CFO is
responsible for analyzing and reviewing financial data, reporting financial
performance, preparing budgets and monitoring expenditures and costs. The CFO is
required to present this information to the board of directors at regular intervals and
provide this information to shareholders and regulatory bodies such as the Securities
and Exchange Commission (SEC). Also usually referred to as a senior vice president,
the CFO routinely checks the corporation's financial health and integrity.

Need & Significance

1) Changing ownership Structure:
 The profile of corporate ownership has changed significantly. Public financial
institutions are the single largest shareholder is the most of the large corporations in the private
sector. Institutional investors and mutual funds have now become singly or jointly direct
challenges to management of companies.

2) Social Responsibility:
A company is a legal entity without physical existence. Therefore, it is managed
by board of directors which is accountable and responsible to share holders who provide the
funds. Directors are also required to act in the interests of customers, lenders, suppliers and the
local community for enhancing shareholders value.
3) Scams
In recent years several corporate frauds have shaken the public confidence. A
large number of companies have been transferred to Z group by the Bombay stock exchange.
4) Corporate Oligarchy:
Shareholder activism and share holder democracy continue to remain myths in
India. Postal ballot system is still absent. Proxies are not allowed to speak at the meetings.
Shareholders’ association, inventor’s education and awareness have not emerged as a
countervailing force.
5) Globalization
As Indian companies went to overseas markets for capital, corporate
governance become a buzz world.

Fundamental Principles of Corporate Governance.

1) Transparency
It means accurate, adequate & timely disclosure of relevant information to the
stakeholders. Without transparency, it is impossible to make any progress towards good
governance. Business heads should realize that transparency also creates immense shareholder
value.
2) Accountability
Corporate Governance has to be a top down approach. Chairman, Board of
Directors & Chief Executives must fulfill their responsibilities to make corporate governance
a reality in Indian industry. Accountability also favours the objective of creating shareholders
value
3) Merit Based Management
A strong Board of Directors is necessary to lead and support merit based
management. The board has to be an independent, strong and non- partisan body where the
sole motive should be decision-making through business prudence.

Trends in Corporate Governance:

 • Boards are getting more involved not only in reviewing & evaluating company
strategic but also in shaping.
• Institutional investors such as pension’s funds, mutual funds, & insurance
companies are becoming active on boards, and are putting increase pressure on
top management to improve corporate performances.
• None affiliated outside directors are increasing their numbers and power in
publicly held corporation’s as CEO’s loosen their grips on boards. Outside
members are taking charge of annual CEO evaluation.
• Boards are getting smaller, partially because of the reduction in the number of
insiders but also because boards desire new directors to have specialized
knowledge & expertise instead of general experience.
• Boards continue to take more control of board functions by either splitting the
combined chair/CEO position into two separate positions or establishing a lead
outside director position.
• As corporations become more global, they are increasingly looking for
international experience in their board members.

CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility is the interaction between business and the social environment
in which it exists. Bowen argued that corporate social responsibility rests on two premises:
social contract, which is an implied set of rights and obligations that are inherent to social
policy and assumed by business, and moral agent, which suggests that businesses have an
obligation to act honorably and to reflect and enforce values that are consistent with those of
society.

The Three Perspectives of Social Responsibility

The three perspectives of corporate social responsibility are economic responsibility,
public responsibility, and social responsiveness. The three perspectives represent a continuum
of commitment to social responsibility issues, ranging from economic responsibility at the low
end and social responsiveness at the high end. The economic responsibility perspective argues
that the only social responsibility of business is to maximize profits within the “rules of the
game.” Moreover, the proponents of this viewpoint argue that organizations cannot be moral
agents. Only individuals can be moral agents. In contrast, the public responsibility perspective
argues that businesses should act in a way that is consistent with society’s view of responsible
behavior, as well as with established laws and policy. Finally, the proponents of the social
responsiveness perspective argue that businesses should proactively seek to contribute to
society in a positive way. According to this view, organizations should develop an internal
environment that encourages and supports ethical behavior at an individual level.

Different approaches of CSR

The stockholder view is much narrower, and only views the stockholders (i.e., owners)
of a firm. The stockholder view of the organization would tend to be aligned closer to the
economic responsibility view of social responsibility. The stakeholder view of the organization
argues that anyone who is affected by or can affect the activities of a firm has a legitimate
“stake” in the firm. This could include a broad range of population. The stakeholder view can
easily include actions that might be labeled public responsibility and social responsiveness.

Stakeholders: All those who are affected by or can affect the activities of an organization.

1. Primary Stakeholders: The primary stakeholders of a firm are those who have a formal,
official, or contractual relationship with the organization. They include owners
(stockholders), employees, customers, and suppliers.

2. Secondary Stakeholders: The secondary stakeholders of a firm are other societal groups
that are affected by the activities of the firm. They include consumer groups, special
interest groups, environmental groups, and society at large.

The globalization of the business environment has had a remarkable impact on issues of social
responsibility. As organizations become involved in the international field, they often find that
their stakeholder base becomes wider and more diverse. As a result, they must cope with social
responsibility related issues across a broad range of cultural and geographic orientations.

The four strategies for social responsibility represent a range, with the reaction strategy on
one end (i.e., do nothing) and the proaction strategy on the other end (do much). The
defense and accommodation strategies are in the middle. (reaction, defense,
accommodation, and proaction). Examples of firms that have pursued these strategies are
as follows:

• Reaction: Over 40 years ago, the medical department of the Manville Corporation
discovered evidence to suggest that asbestos inhalation causes a debilitating and often fatal
lung disease. Rather than looking for ways to provide safer working conditions for company
employees, the firm chose to conceal the evidence. It appears that tobacco companies have
done the same thing.
• Defense: Over the years, rather than demonstrating social responsiveness in terms of air
pollution reductions, vehicle safety, and gas shortages, the automobile companies did little
to confront the problems head on. Currently, the high demand for pickup trucks and SUVs
encourages the problem to continue.
• Accommodation: Many financial service companies, along with meeting the minimum
requirements of disclosure regulations, maintain a more proactive code for voluntary, on-
demand disclosure of bank information requested by customers or by any other member of
the public.
• Proaction: Becton Dickinson & Company is a medical-supply firm that has targeted its
charitable contributions to projects it believes “will help eliminate unnecessary suffering
and death from disease around the world.” Similarly, Starbucks makes contributions to
literacy programs and was one of the first companies to give health benefits to partners.