Yashwantrao MBA 301

Chavan
Maharashtra
Open University

MBA : SECOND YEAR

SEMESTER III
COMPULSORY COURSE

STRATEGIC MANAGEMENT

Unit 1 : Introduction to Strategic Management 1

Unit 2 : Strategy Formulation and Defining Vision 17

Unit 3 : Defining Mission, Goals and Objectives 31

Unit 4 : External Assessment 47

Unit 5 : Organisational Appraisal : The Internal Assessment - 1 79

Unit 6 : Organisational Appraisal: Internal Assessment - 2 93

Unit 7 : Corporate Level Strategies 119

Unit 8 : Business Level Strategies 151

Unit 9 : Strategic Analysis and Choice 169

Unit 10 : Strategy Implementation 195

Unit 11 : Structural Implementation 217

Unit 12 : Behavioural Implementation 237

Unit 13 : Functional and Operational Implementation 263

Unit 14 : Strategic Evaluation and Control 283

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
VICE-CHANCELLOR : Prof. E. Vayunandan
DIRECTOR, SCHOOL OF COMMERCE & MANAGEMENT : Dr. Pandit Palande
NATIONAL ADVISORY BOARD
Dr. Pandit Palande Prof. Devanath Tirupati, Dr. Surendra Patole
Former Vice Chancellor Dean Academics, Assistant Professor,
Director, School of Commerce Indian Institute of Management (IIM) School of Commerce &
& Management, Bangalore. Management,
Yashwantrao Chavan Maharashtra Yashwantrao Chavan Maharashtra
Open University, Nashik Open University, Nashik

Prof. Sudhir. K. Jain Prof. Karuna Jain, Dr. Latika Ajitkumar Ajbani
Former Vice Chancellor Director, Assistant Professor,
Professor & Former Head N I T I E, Vihar Lake, School of Commerce &
Dept. of Management Studies Mumbai Management,
Indian Institute of Technology (IIT) Yashwantrao Chavan Maharashtra
Delhi Open University, Nashik

Prof. Vinay. K. Nangia

Professor & Former Head
Department of Business Studies,
Indian Institute of Technology (IIT)
Roorkee

Authors Editor
Dr. Sheetal Sharma Dr. Latika Ajitkumar Ajbani Dr. Vinay Sharma
Dean Academics & Professor Assistant Professor, YCMOU Associate Professor
IILM Lucknow Department of Management Studies
Uttar Pradesh, India Dr. Surendra Patole Indian Institute of Technology (IIT)
Assistant Professor, YCMOU Roorkee, Uttarakhand, India
Visiting Professor, IIM, Lucknow

Instructional Technology Editing & Programme Co-ordinator

Dr. Latika Ajitkumar Ajbani
Assistant Professor
School of Commerce & Management
Yashwantrao Chavan Maharashtra
Open University, Nashik

Production
Shri. Anand Yadav
Manager, Print Production Centre, Y. C. M. Open University, Nashik- 422 222

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEB development grant)
q First Publication : October 2017 q Publication No. : 2234
q Cover Design : Shri. Avinash Bharne
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ISBN : 978-81-8055-418-6 MBA 301

Introduction

In recent years, the development of ICT and digitization has increased the need
to develop new products and services and build business models that transcend in-
dustries and merge different technologies. Technology innovation in the past closely
pursued and developed specialist knowledge, but with the development of unprec-
edented new products and services based on new concepts, innovations increasingly
arise from merging one technology field with another. Amid continuous environmental
change, dynamic strategic management to deliberately and constantly create new
positioning (including new products, services, and business models) and values is an
important theme for practitioners on a day-to-day basis. How should companies
exploit and implement strategy under a dynamically fluctuating environment? What is
the essence of dynamic strategic management? These issues are common points of
deliberation for strategy researchers and numerous corporate leaders alike. The re-
search question I would like to pose as a specialist in the fields of innovation and
strategic management is that of how to achieve this corporate strategy for dynamic
strategic management. This book suggests a framework and case studies for dy-
namic strategic management theory for strengthening existing business and taking
new positions to target new business (products, services, and business models) un-
der a rapidly changing environment. The essence of strategic management goes be-
yond companies simply adapting to environmental change while creating appropriate
strategies for the future. It also involves companies optimizing the individual manage-
ment elements that comprise the corporate system (including organization, strategy,
operation, and leadership) in alignment with these factors, and achieving continuance
and growth through integrative and dynamic development. How companies consider
congruence with the environment and dynamically transform corporate boundaries to
adapt to the environment (or create new environments) has become a key theme in
the implementation of corporate strategy. In this book the optimal design of a corpo-
rate system comprising the management elements of strategy, organization, opera-
tion, and leadership aimed at designing corporate boundaries compatible with the
environment.

- Dr. Vinay Sharma

Dr. Sheetal Sharma
Dr. Latika Ajitkumar Ajbani
Dr. Surendra Patole
Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.
All rights reserved. No part of this publication which is material protected by this copyright
notice may be reproduced or transmitted or utilized or stored in any form or by any means
now known or hereinafter invented, electronic, digital or mechanical, including photocopy-
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The information contained in this book has been obtained by authors from sources believed
to be reliable and are correct to the best of their knowledge. However, the publisher and its
authors shall in no event be liable for any errors, omissions or damage arising out of use of
this information and specially disclaim any implied warranties or merchantability or fitness
for any particular use.
Message from the Vice-Chancellor

Dear Students,
Greetings!!!
I offer cordial welcome to all of you for the Master’s degree programme of
Yashwantrao Chavan Maharashtra Open University.
As a post graduate student, you must have autonomy to learn, have information
and knowledge regarding different dimensions in the field of Commerce & Management
and at the same time intellectual development is necessary for application of knowledge
wisely. The process of learning includes appropriate thinking, understanding important
points, describing these points on the basis of experience and observation, explaining
them to others by speaking or writing about them. The science of education today
accepts the principle that it is possible to achieve excellence and knowledge in this
regard.
The syllabus of this course has been structured in this book in such a way, to
give you autonomy to study easily without stirring from home. During the counseling
sessions, scheduled at your respective study centre, all your doubts will be clarified
about the course and you will get guidance from some experienced and expert
professors. This guidance will not only be based on lectures, but it will also include
various techniques such as question-answers, doubt clarification. We expect your
active participation in the contact sessions at the study centre. Our emphasis is on
‘self study’. If a student learns how to study, he will become independent in learning
throughout life. This course book has been written with the objective of helping in
self-study and giving you autonomy to learn at your convenience.
During this academic year, you have to give assignments and complete the Project
work wherever required. You have to opt for specialization as per programme structure.
You will get experience and joy in personally doing above activities. This will enable
you to assess your own progress and thereby achieve a larger educational objective.
We wish that you will enjoy the courses of Yashwantrao Chavan Maharashtra
Open University, emerge successful and very soon become a knowledgeable and
honorable Master’s degree holder of this university.
Best Wishes!

- Vice-Chancellor
 Syllabus
STRATEGIC MANAGEMENT MBA-301

UNIT 1 : INTRODUCTION TO STRATEGIC MANAGEMENT

Definition of Strategic Management—Nature of Strategic Management—
Dimensions of Strategic Management—Need for Strategic Management—
Benefits of Strategic Management—Risks involved in Strategic
Management—Strategic Management Process.

UNIT 2 : STRATEGY FORMULATION AND DEFINING VISION

Aspects of Strategy Formulation—Business Vision—Defining Vision—
Nature of Vision—Characteristics of Vision Statements—Importance of
Vision—Advantages of Vision.

UNIT 3 : DEFINING MISSION, GOALS AND OBJECTIVES

Defining Mission—Importance of Mission Statement—Characteristics of
a Mission Statement—Components of a Mission Statement—Formulation
of Mission Statement—Evaluating Mission Statements—Concept of Goals
and Objectives.

UNIT 4 : EXTERNAL ASSESSMENT

Concept of Environment—Porter’s Five Force Analysis—The Five
Forces—Forces that Shape Competition—Industry Analysis—Framework
for Industry Analysis —Competitive Analysis—Environmental Scanning—
Features of EnvironmentalAnalysis—Techniques of Environmental Scanning.

UNIT 5 : ORGANISATIONAL APPRAISAL: THE INTERNAL

ASSESSMENT 1
Importance of Internal Analysis—SWOT Analysis—Carrying out SWOT
Analysis—Steps in SWOT Analysis—Critical Assessment of SWOT
Analysis—Advantages and Limitations.

UNIT 6 : ORGANISATIONAL APPRAISAL: INTERNAL ASSESSMENT 2

Strategy and Culture—Value Chain Analysis—Analysis—Conducting a
Value Chain Analysis—Usefulness of the Value Chain Analysis—
Organisational Capability Factors—Resources—Strategic Importance of
Resources—Critical Success Factors—Benchmarking.
UNIT 7 : CORPORATE LEVEL STRATEGIES
Expansion Strategies—Retrenchment Strategies—Turnaround Strategy—
Divestment—Bankruptcy—Liquidation—Combination Strategies—
Internationalization—Cooperation Strategies—Joint Ventures—
Strategic—Alliances—Consortia—Restructuring.

UNIT 8 : BUSINESS LEVEL STRATEGIES

Industry Structure—Positioning of the Firm—Generic Strategies Risks
in Competitive Strategies—Critical Assessment of Generic Strategies—
Comment on Porter’s Generic Strategies—Business Tactics.

UNIT 9 : STRATEGIC ANALYSIS AND CHOICE

Process for Strategic Choice—Focusing on a few Alternatives—
Considering Selection Factors—Evaluating the Alternatives—Making the
Actual Choice—Industry Analysis—Corporate Portfolio Analysis—
Display Matrices—Balancing the Portfolio—Portfolio and other Analytical
Models—Contingency Strategies.

UNIT 10 : STRATEGY IMPLEMENTATION

Activating Strategies—Nature of Strategy Implementation—Barriers and
Issues in Strategy Implementation—Model for Strategy Implementation—
Resource Allocation—Importance of Resource Allocation—Managing
Resource Conflict—Criteria for Resource Allocation Process—Factors
affecting Resource Allocation—Difficulties in Resource Allocation.

UNIT 11 : STRUCTURAL IMPLEMENTATION

Basic Principles of Organisational Structure—Relation between Strategy
and Structure—Improving Effectiveness of Traditional Organisational
Structures—Types of Organisational Structures—Modular
Organisation—Towards Boundary less Structures—Structures for
Strategies.

UNIT 12 : BEHAVIOURAL IMPLEMENTATION

Stakeholders and Strategy—Strategic Leadership—Leadership
Approaches—Corporate Culture and Strategic Management—Influence
of Culture on Behaviour—Creating Strategy Supportive Culture—
Personal Values and Ethics—Importance of Ethics—Approaches to
Ethics—Building an Ethical Organisation—Social Responsibility and
Strategic Management—Responsibilities of Business—Need for CSR:
The Strategy.
UNIT 13 : FUNCTIONAL AND OPERATIONAL IMPLEMENTATION
Functional Strategies—Nature of Functional Strategies—Need for
Functional Strategies—Functional Plans and Policies—Operational Plans
and Policies—Importance of Operational Strategy—Components of
Operational Plan and Policies—Personnel (HR) Plans and Strategies—
HR Planning—Staffing—Training and Development—Performance
Management—Compensation and Rewards—Industrial Relations.

UNIT 14 : STRATEGIC EVALUATION AND CONTROL

Nature of Strategic Evaluation and Control—Types of General Control
Systems—Basic Characteristics of Effective Evaluation and Control
System—Strategic Control—Types of Strategic Control—Approaches
to Strategic Control—Operational Control—Setting of Standards—
Measurement of Performance—Identifying Deviations—Taking
Corrective Action—Techniques of Strategic Control.

nnnn
 Introduction to
UNIT 1 : INTRODUCTION TO Strategic Management

STRATEGIC MANAGEMENT
NOTES
1.0 Unit Objectives

1.1 Introduction

1.2 Definition of Strategic Management

1.3 Nature of Strategic Management

1.4 Dimensions of Strategic Management

1.5 Need for Strategic Management

1.6 Benefits of Strategic Management

1.7 Risks involved in Strategic Management

1.8 Strategic Management Process

1.9 Summary

1.10 Key Terms

1.11 Questions and Exercises

1.12 Further Reading and References

1.0 Unit Objectives

After reading this unit, you should be able to:

• State the meaning, nature and importance of strategic

management
• Explain the dimensions and benefits of strategic management
• Identify the risks involved in strategic management
Strategic Management : 1
Introduction to • Discuss the strategic management process
Strategic Management

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

1.2 Definition of Strategic Management

We have so far discussed the concepts of strategic thinking,
strategic decision-making and strategic approach which, it is hoped, will
serve as an a background understand the nature of strategic management.
However, to get an understanding of what goes on in strategic
management, it is useful to begin with definitions of strategic management.
Strategic Management : 2
Later in the unit, weintroduce the elements and the process of strategic Introduction to
Strategic Management
management and the importance, benefitsand limitations of strategic
management.

As already mentioned, the concepts in strategic management have

NOTES

been developed by a numberof authors like Alfred Chandler, Kenneth

Andrews, Igor Ansoff, William Glueck, Henry Mintzberg, Michael E.
Porter, Peter Drucker and a host of others. There are therefore
severaldefinitions of strategic management. Some of the important
definitions are:

1. “Strategic management is concerned with the determination of the

basic long-term goals and theobjectives of an enterprise, and the adoption
of courses of action and allocation of resources necessaryfor carrying
out these goals”.

– Alfred Chandler, 1962

2. “Strategic management is a stream of decisions and actions which

lead to the development of aneffective strategy or strategies to help
achieve corporate objectives”.
Check Your Progress
– Glueck and Jauch, 1984 Discuss the various
elements of strategic
3. “Strategic management is a process of formulating, implementing management?

and evaluating cross-functionaldecisions that enable an organisation to

achieve its objective”.

– Fed R David, 1997

4. “Strategic management is the set of decisions and actions resulting in

the formulation and implementation of plans designed to achieve a
company’s objectives.”

– Pearce and Robinson, 1988 Strategic Management : 3

Introduction to 5. “Strategic management includes understanding the strategic position
Strategic Management
of an organisation, makingstrategic choices for the future and turning
strategy into action.”

NOTES – Johnson and Sholes, 2002

6. “Strategic management consists of the analysis, decisions, and actions

an organisation undertakes inorder to create and sustain competitive
advantages.”

– Dess, Lumpkin & Taylor, 2005

We observe from the above definitions that different authors have

defined strategic managementin different ways. Note that the definition of
Chandler that we have quoted above is from theearly 1960s, the period
when strategic management was being recognized as a separate discipline.

This definition consists of three basic elements:

l. Determination of long-term goals

2. Adoption of courses of action

3. Allocation of resources to achieve those goals

Though this definition is simple, it does not consist of all the elements
and does not capture theessence of strategic management.The definitions
of Fred R. David, Pearce and Robinson, Johnson and Sholes and Dell,
Lumpkinand Taylor are some of the definitions of recent origin. Taken
together, these definitions capturethree main elements that go to the heart
of strategic management. The three on-going processesare strategic analysis,
strategic formulation and strategic implementation. These threecomponents
parallel the processes of analysis, decisions and actions. That is,
strategicmanagement is basically concerned with:
Strategic Management : 4
l. Analysis of strategic goals (vision, mission and objectives) along Introduction to
Strategic Management
with the analysis of theexternal and internal environment of the
organisation.

2. Decisions about two basic questions: NOTES

(a) What businesses should we compete in?

(b) How should we compete in those businesses to implement

strategies?

3. Actions to implement strategies. This requires leaders to allocate the

necessary resourcesand to design the organisation to bring the
intended strategies to reality. This also involvesevaluation and
control to ensure that the strategies are effectively implemented.The
real strategic challenge to managers is to decide on strategies that
provide competitive advantage which can be sustained over time.
This is the essence of strategic management, and Dess, Lumpkin
and Taylor have rightly captured this element in their definition.

1.3 Nature of Strategic Management

Strategic Management can be defined as the art & science of

formulating, implementing, and evaluating, cross-functional decisions

that enable an organisation to achieve its objectives.

Strategic management is different in nature from other aspects

of management. An individual manager is most often required to deal

with problems of operational nature. He generally focuses on day-to-

day problems such as the efficient production of goods, the management

of a sales force, the monitoring of financial performance or the design

of some new system that will improve the level of customer service.!
Strategic Management : 5
Introduction to
Strategic Management 1.4 Dimensions of Strategic Management
The characteristics of strategic management are as follows:

1. Top management involvement: Strategic management relates

NOTES
to several areas of a firm’soperations. So, it requires top
management’s involvement. Generally, only the top management
has the perspective needed to understand the broad implications
of its decisions and the power to authorize the necessary resource
allocations.

2. Requirement of large amounts of resources: Strategic

management requires commitment of the firm to actions over an
extended period of time. So they require substantial resources,
such as, physical assets, money, manpower etc.

3. Affect the firm’s long-term prosperity: Once a firm has

committed itself to a particular strategy, its image and competitive
advantage are tied to that strategy; its prosperity is dependent
upon such a strategy for a long time.

4. Future-oriented: Strategic management encompasses

forecasts, what is anticipated by the managers. In such decisions,
emphasis is placed on the development of projections thatwill
enable the firm to select the most promising strategic options. In
the turbulent environment, a firm will succeed only if it takes a
proactive stance towards change.

5. Multi-functional or multi-business consequences: Strategic

management has complex implications for most areas of the firm.
They impact various strategic business units especially in areas
relating to customer-mix, competitive focus, organisational
structure etc. All these areas will be affected by allocations or
reallocations of responsibilities and resources that result from these
decisions.
Strategic Management : 6
 6. Non-self-generative decisions: While strategic management may Introduction to
Strategic Management
involve making decisions relatively infrequently, the organisation
must have the preparedness to make strategic decisions at any
point of time. That is why Ansoffcalls them “non-self-generative NOTES
decisions.”

1.5 Need for Strategic Management

No business firm can afford to travel in a haphazard manner. It has
to travel with the support of some route map. Strategic management
provides the route map for the firm. It makes it possible for the firm to
take decisions concerning the future with a greater awareness of their
implications. It provides direction to the company; it indicates how growth
could be achieved. The external environment influences the management
practices within any organisation. Strategy links the organisation to this
external world. Changes in these external forces create both opportunities
and threats to an organisation’s position – but above all, they create
uncertainty. Strategic planning offers a systematic means of coping with
uncertainty and adapting to change.

It enables managers to consider how to grasp opportunities and

avoid problems, to establishand coordinate appropriate courses of action
and to set targets for achievement.

Thirdly, strategic management helps to formulate better strategies

through the use of a moresystematic, logical and rational approach. Through
involvement in the process, managers andemployees become committed
to supporting the organisation. The process is a learning, helping,educating
and supporting activity. An increasing number of firms are using strategic
management for the following reasons:

1. It helps the firm to be more proactive than reactive in shaping its

own future.
Strategic Management : 7
Introduction to 2. It provides the roadmap for the firm. It helps the firm utilize its
Strategic Management
resources in the best possible manner.

3. It allows the firm to anticipate change and be prepared to manage it.

NOTES
4. It helps the firm to respond to environmental changes in a better way.

5. It minimizes the chances of mistakes and unpleasant surprises.

6. It provides clear objectives and direction for employees.

1.6 Benefits of Strategic Management

“We are tackling 20-year problems with five-year plans staffed with two-
year personnel funded by one–year appropriations”.

– Harlan Cleveland

The above quotation sums up why today’s decision-makers must

plan and manage strategically. In developing as well as in industrialized
countries, the increasingly rapid nature of change as well as a greater
openness in the political and economic environments, requires a different
set of perspective from that needed during more stable times. When a certain
degree of equilibrium existed in the environment, as during the 1950s, with
constant positive economic growth, low debt, manageable budgets and
relative environmental stability, managers could concentrate almost
exclusively on the internal dimensions of themorganisations and assume
constancy in the external environment. Forward calculations weresimple,
inputs were predictable, and planning was mostly an arithmetic exercise.

Now, systems are much more open, environment is characterized

by increasingly unstable economic growth, budgets are constantly revised,
inputs are thoroughly unpredictable, and planning in the traditional sense is
no longer tenable.

Therefore, today’s enterprises need strategic management to reap

Strategic Management : 8 the benefits of business opportunities, overcome the threats and stay ahead
in the race. The purpose of strategicmanagement is to exploit and create Introduction to
Strategic Management
new and different opportunities for tomorrow; while long term planning,
in contrast, tries to optimize for tomorrow the trends of today.

Today, all top companies are involved in strategic management. NOTES

They are finding ways torespond to competitors, cope with difficult

environmental changes, meet changing customerneeds and effectively
use available resources.

It is important to note that strategic planning goes far beyond

the planning process. Unlike traditional planning, strategic planning
involves a long-range planning underconditions of uncertainty and
complexity Such a planning involves:

l. Strategic thinking

2. Strategic decision-making

3. Strategic approach

A structured approach to strategy planning brings several benefits

(Smith, 1995; Robbins, 2000)

1. It reduces uncertainty: Planning forces managers to look

ahead, anticipate change anddevelop appropriate responses. It
also encourages managers to consider the risks associated with
alternative responses or options.

2. It provides a link between long and short terms: Planning

establishes a means of coordination between strategic objectives
and the operational activities that support the objectives.

3. It facilitates control: By setting out the organisation’s overall

strategic objectives and ensuring that these are replicated at
operational level, planning helps departments to move in the same
direction towards the same set of goals. Strategic Management : 9
Introduction to 4. It facilitates measurement: By setting out objectives and
Strategic Management
standards, planning provides a basis for measuring actual
performance.

NOTES

Strategic management has thus both financial and non-financial benefits:

1. Financial Benefits: Research indicates that organisations that

engage in strategicmanagement are more profitable and successful
than those that do not. Businesses thatfollowed strategic
management concepts have shown significant improvements in
sales,profitability and productivity compared to firms without
systematic planning activities.

2. Non-financial benefits: Besides financial benefits, strategic

management offers otherintangible benefits to a firm. They are;

(a) Enhanced awareness of external threats

(b) Improved understanding of competitors’ strategies

(c) Reduced resistance to change

(d) Clearer understanding of performance-reward relationship

Check Your Progress (e) Enhanced problem-prevention capabilities of organisation

Depict the model of
strategic management (f) Increased interaction among managers at all divisional and
and explain its
components? functional levels

(g) Increased order and discipline.

According to Gordon Greenley, strategic management offers the following

benefits:

1. It allows for identification, prioritization and exploitation of

opportunities.

2. It provides objective view of management problems.

Strategic Management : 10
 Introduction to
1.7 Risks involved in Strategic Management Strategic Management
Strategic management is an intricate and complex process that
takes an organisation intounchartered territory. It does not provide a
NOTES
ready-to-use prescription for success. Instead, ittakes the organisation
through a journey and offers a framework for addressing questions and
solving problems. Strategic management is not, therefore, a guarantee
for success; it can be dysfunctional if conducted haphazardly. The
following are its limitations:

1. It is a costly exercise in terms of the time that needs to be devoted to

it by managers. Thenegative effect of managers spending time away
from their normal tasks may be quite serious.

2. A negative effect may arise due to the non-fulfilment of the

expectations of the participating managers, leading to frustration
and disappointment.

3. Another negative effect of strategic management may arise if those

associated with the formulation of strategy are not intimately
involved in the implementation of strategies.

1.8 Strategic Management Process

Developing an organisational strategy involves four main
elements – strategic analysis, strategic choice, strategy implementation
and strategy evaluation and control. Each of these contains further steps,
corresponding to a series of decisions and actions, that form the basis
of strategic management process.

1. Strategic Analysis: The foundation of strategy is a definition

of organisational purpose.This defines the business of an
organisation and what type of organisation it wants to be. Many
organisations develop broad statements of purpose, in the form
of vision and mission statements. These form the spring – boards Strategic Management : 11
Introduction to for the development of more specificobjectives and the choice
Strategic Management
of strategies to achieve them

2. Strategic Choice: The analysis stage provides the basis for

NOTES strategic choice. It allows managers to consider what the
organisation could do given the mission, environment and
capabilities – a choice which also reflects the values of managers
and other stakeholders.

3. Strategy Implementation: Implementation depends on

ensuring that the organisation has a suitable structure, the right
resources and competencies (skills, finance, technology etc.),
right leadership and culture. Strategy implementation depends
on operational factors being put into place.

4. Strategy Evaluation and Control: Organisations set up

appropriate monitoring and control systems, develop standards
and targets to judge performance.

1.9 Summary
Strategic or institutional management is the conduct of drafting,
implementing andevaluating cross-functional decisions that will enable
an organisation to achieve its longtermobjectives. It is a level of
managerial activity under setting goals and over tactics.It is the process
of specifying the organisation’s mission, vision and objectives,
developingpolicies and plans, often in terms of projects and programs,
which are designed to achievethese objectives, and then allocating
resources to implement the policies and plans, projectsand programs.
Strategic management provides overall direction to the enterprise and
is closely related to the field of Organisation Studies.

Although a sense of direction is important, it can also stifle

Strategic Management : 12 creativity, especially if it isrigidly enforced. In an uncertain and ambiguous
world, fluidity can be more importantthan a finely tuned strategic Introduction to
Strategic Management
compass.

When a strategy becomes internalized into a corporate culture,

it can lead to group think.It can also cause an organisation to define NOTES
itself too narrowly.Even the most talented manager would no doubt
agree that “comprehensive analysis isimpossible” for complex problems.

Formulation and implementation of strategy must thus occur

side-by-side rather thansequentially, because strategies are built on
assumptions which, in the absence of perfectknowledge, will never be
perfectly correct. The essence of being “strategic” thus lies in a capacity
for “intelligent trial-and error” rather than linear adherence to finally
honed and detailed strategic plans. Strategic management is a question
of interpreting, and continuously reinterpreting, the possibilities presented
by shifting circumstances for advancing an organisation’s objectives.

1.10 Key Terms

Environmental Analysis: Evaluation of the possible or probable effects
of external as well as internal forces and conditions on an organisation’s
survival and growth strategies.

Financial Benefits: profits associated with strategic management

Multifunctional Consequences: having complex implications on most

of the functions of the organisation

Non-financial Benefits: intangible benefits associated with strategic

management

Non-Self Generative Decisions: decisions that are taken infrequently

but promptly when neededat any point of time

Plan: A set of intended actions, through which one expects to achieve a

goal. Strategic Management : 13
Introduction to Strategic Choice: choice of course of action given the environment,
Strategic Management
mission and capabilities

Strategic Management: stream of decisions and actions that lead to

NOTES development of effective strategy

Strategy: A plan of action designed to achieve a particular goal.

Tactic: A conceptual action taken under a well-defined strategy to achieve

a specific objective

1.11 Questions and Exercises

1. Discuss the various elements of strategic management.

2. Examine the significance of strategic management.

3. “Strategic management process is the way in which strategists

determine objectives and strategic decisions”. Discuss.

4. Bring out the distinguishing features of strategic management.

5. Can the process of strategic management really be depicted in a

given model or it is a prompt and dynamic process? Give reasons.

6. Depict the model of strategic management and explain its components.

7. Suppose you are the Managing Director of an organisation. Your

organisation is runninginto losses due to poor management and

decision making. How will you analyse the situation and move your

organisation out of the situation?

8. Have you ever challenged, shaken old work methods? What problems

did you encounter? Did you overcome them? How? If no, what

were the reasons for their beinginsurmountable?

9. With reference to a day’s work, what steps do you take to organise

and prioritize your tasks?

Strategic Management : 14
10. Describe a specific instance, in a group situation, where you made Introduction to
Strategic Management
your views known about an issue important to yourself. What was
the issue, and why was it crucial?
11. Outline in very broad terms how you would create a strategy for NOTES
say, a public interest campaign.

Check your progress

Fill in the blanks:
1. Strategic management provides overall ......................... to the
enterprise.
2. Strategic management is a question of interpreting, and continuously
........................., the possibilities presented by .........................
circumstances for advancing an organisation’s objectives.
3. The foundation of strategy is a definition of organisational
..........................
4. Organisations set up appropriate monitoring and control systems,
develop standards and targets to judge .....................
5. ......................... and ......................... of strategy rarely proceed
according to plan.
6. The first step in the strategic management process is to develop the
corporate ......................... and .........................
7. Once a firm has committed itself to a particular strategy, its
......................... and ......................... are tied to it.
8. A ......................... can be defined as the overall goal of an
organisation that all business activities and processes should
contribute toward achieving.
9. Formulation and implementation of strategy must occur side-by-
side rather than .........................
10. When a strategy becomes internalized into a corporate culture, it
can lead to .........................
11. Strategic planning goes far beyond the ......................... process. Strategic Management : 15
Introduction to 12. Generally, only the ......................... has the perspective needed
Strategic Management
to understand the broad implications behind the strategic plans.
13. The real strategic goals are realized only along with the analysis

NOTES of the ......................... and ......................... environment of the

organisation.
14. Developing an organisational strategy involves .........................
main elements.
15. Strategic planning is a ......................... exercise in terms of the
time that needs to be devoted to it by managers.

Answers:
1. direction 2. reinterpreting, shifting 3. purpose 4. Performance
5. Formulation, implementation 6. vision, mission 7. image, competitive
advantage 8. Vision 9. sequentially 10. group think 11. planning
12. top management 13. external, internal 14. Four 15. Costly.

1.12 Further Reading and References

Books
• Pearce JA and Robinson RB, Strategic Management, McGraw
Hill,NY, 2000.
• Richard Lynch, Corporate Strategy, Essex, Pearson Education
Ltd., 2006.
• Hugh MacMillan and Mahen Tampoe, Strategic Management,
Oxford University Press, 2000.
• Rao VSP and Hari Krishna V, Strategic Management – Text and
Cases, New Delhi,Excel Books, 2003
• Fed R David, Strategic Management, New Jersey, Prentice Hall,
1997.
• Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy,
6th Edition, PearsonEducation Ltd., 2002.
Strategic Management : 16
 Strategy Formulation
UNIT 2: STRATEGY FORMULATION and Defining Vision

AND DEFINING VISION

NOTES
2.0 Unit Objectives

2.1 Introduction

2.2 Aspects of Strategy Formulation

2.3 Business Vision

2.3.1 Defining Vision

2.3.2 Nature of Vision

2.3.3 Characteristics of Vision Statements

2.3.4 Importance of Vision

2.3.5 Advantages of Vision

2.4 Summary

2.5 Key Terms

2.6 Questions and Exercises

2.7 Further Reading and References

2.0 Unit Objectives

After studying this unit, you should be able to:

• Discuss various aspects of strategy formulation

• Explain the relevance business vision Strategic Management : 17

Strategy Formulation
and Defining Vision 2.1 Introduction
Strategy formulation is the process of determining appropriate
courses of action for achieving organisational objectives and thereby
NOTES
accomplishing organisational purpose.

Strategy formulation is vital to the well-being of a company or

organisation. It produces a clearset of recommendations, with supporting
justification, that revise as necessary the mission andobjectives of the
organisation, and supply the strategies for accomplishing them. In
formulation,we are trying to modify the current objectives and strategies
in ways to make the organisationmore successful. This includes trying to
create “sustainable” competitive advantages – althoughmost competitive
advantages are eroded steadily by the efforts of competitors.A good
recommendation should be: effective in solving the stated problem(s),
practical (can be Notesimplemented in this situation, with the resources
available), feasible within a reasonable time frame, cost-effective, not
overly disruptive, and acceptable to key “stakeholders” in theorganisation.
It is important to consider “fits” between resources plus competencies
withopportunities, and also fits between risks and expectations.

There are four primary steps in this phase:

1. Reviewing the current key objectives and strategies of the

organisation, which usuallywould have been identified and
evaluated as part of the diagnosis
2. Identifying a rich range of strategic alternatives to address the
three levels of strategy formulation outlined below, including but
not limited to dealing with the critical issues.
3. Doing a balanced evaluation of advantages and disadvantages of
the alternatives relativeto their feasibility plus expected effects
on the issues and contributions to the success of theorganisation
Strategic Management : 18
 4. Deciding on the alternatives that should be implemented or Strategy Formulation
and Defining Vision
recommended.In organisations, and in the practice of strategic
management, strategies must be implementedto achieve the
intended results. Here it has to be remembered that the most NOTES
wonderful strategyin the history of the world is useless if not
implemented successfully.

2.2 Aspects of Strategy Formulation

The following three aspects or levels of strategy formulation, each
with a different focus, needto be dealt with in the formulation phase of
strategic management. The three sets ofrecommendations must be
internally consistent and fit together in a mutually supportive mannerthat
forms an integrated hierarchy of strategy, in the order given.

1. Corporate Level Strategy

2. Competitive Strategy

3. Functional Strategy

Let us understand each of them one by one.

1. Corporate Level Strategy : In this aspect of strategy, we are concerned

with broad decisions about total organisation’s scope and direction.
Check Your Progress
Basically, we consider what changes should be made in our growth
Given the vision, as the
objective and strategy for achieving it, the lines of business we are in, and new Director, what ideas
would you want to
how these lines of business fit together. It is useful to think of three
implement to achievethe
components of corporate level strategy: vision?

(a) Growth or directional strategy (what should be our growth

objective, ranging from retrenchment through stability to varying
degrees of growth - and how do we accomplish this).

(b) Portfolio strategy (what should be our portfolio of lines of

business, which implicitlyrequires reconsidering how much
concentration or diversification we should have),and Strategic Management :19
Strategy Formulation (c) Parenting strategy (how we allocate resources and manage
and Defining Vision
capabilities and activitiesacross the portfolio – where do we put
special emphasis, and how much do we integrate our various lines

NOTES of business).

2. Competitive Strategy:It is quite often called as Business Level Strategy.

This involves deciding how the company will compete within each Line of
Business (LOB) or Strategic Business Unit (SBU). In this second aspect
of a company’s strategy, the focus is on how to compete successfully in
each of the lines of business the company has chosen to engage in. The
central thrust is how to build and improve the company’s competitive
position for each of its lines of business. A company has competitive
advantage whenever it can attract customers and defend against competitive
forces better than its rivals. Companies want to develop competitive
advantages that have some sustainability (although the typical term
“sustainable competitive advantage” is usually only true dynamically, as a
firm works to continue it).

3. Functional Strategy:These more localized and shorter-horizon strategies

deal with how each functional area and unit will carry out its functional
activities to be effective and maximize resource productivity. Functional
strategies are relatively short-term activities that each functional area within
a company will carry out to implement the broader, longer-term corporate
level and business level strategies. Each functional area has a number of
strategy choices, that interact with and must be consistent with the overall
company strategies.

2.3 Business Vision

The first task in the process of strategic management is to formulate

the organisation’s visionand mission statements. These statements define

Strategic Management : 20
the organisational purpose of a firm. Togetherwith objectives, they form Strategy Formulation
and Defining Vision
a “hierarchy of goals.”

• Plans
NOTES
• Objectives

• Goals

• Mission

• Vision

A clear vision helps in developing a mission statement, which in

turn facilitates setting of objectives of the firm after analysing external
and internal environment. Though vision, missionand objectives together
reflect the “strategic intent” of the firm, they have their
distinctivecharacteristics and play important roles in strategic
management.

Vision can be defined as “a mental image of a possible and

desirable future state of the organisation” (Bennis and Nanus). It is “a
vividly descriptive image of what a company wants tobecome in future”.
Vision represents top management’s aspirations about the
company’sdirection and focus. Every organisation needs to develop a
vision of the future. A clearlyarticulated vision moulds organisational
identity, stimulates managers in a positive way andprepares the company
for the future.

“The critical point is that a vision articulates a view of a realistic,

credible, attractive future forthe organisation, a condition that is better
in some important ways than what now exists.”

Vision, therefore, not only serves as a backdrop for the

development of the purpose and strategyof a firm, but also motivates
the firm’s employees to achieve it. Strategic Management :21
Strategy Formulation
According to Collins and Porras, a well-conceived vision consists of
and Defining Vision
two major components:

1. Core ideology
NOTES
2. Envisioned future

Core ideology is based on the enduring values of the organisation

(“what we stand for and whywe exist”), which remain unaffected by
environmental changes. Envisioned future consists of along-term goal
(what we aspire to become, to achieve, to create”) which demands
significantchange and progress.

2.3.1 Defining Vision

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

2.3.2 Nature of Vision

A vision represents an animating dream about the future of the
firm. By its nature, it is hazy andvague. That is why Collins describes it
as a “Big hairy audacious goal” (BHAG). Yet it is apowerful motivator
to action. It captures both the minds and hearts of people. It articulates
aview of a realistic, credible, attractive future for the organisation, which

Strategic Management :22 is better than what nowexists. Developing and implementing a vision is
 Strategy Formulation
one of the leader’s central roles. He should notonly have a “strong sense
and Defining Vision
of vision”, but also a “plan” to implement it.

NOTES
Example: Henry Ford’s vision of a “car in every garage” had power.

It capturedthe imagination of others and aided internal efforts to mobilize

resourcesand make it a reality. A good vision always needs to be a bit

beyond acompany’s reach, but progress towards the vision is what unifies

theefforts of company personnel.

2.3.3 Characteristics of Vision Statements

As may be seen from the above definitions, many of the

characteristics of vision given by theseauthors are common such as being

clear, desirable, challenging, feasible and easy to communicate.Nutt and

Back off have identified four generic features of visions that are likely to

enhanceorganisational performance:

1. Possibilitymeans the vision should entail innovative possibilities

for dramatic organisational improvements.

2. Desirabilitymeans the extent to which it draws upon shared Check Your Progress
“Employees have a
organisational norms andvalues about the way things should greater role to play in
formulating strategy”.
be done.
Comment?

3. Action abilitymeans the ability of people to see in the vision,

actions that they can takethat are relevant to them.

4. Articulationmeans that the vision has imagery that is powerful

enough to communicateclearly a picture of where the

organisation is headed.
Strategic Management : 23
Strategy Formulation
and Defining Vision
2.3.4 Importance of Vision
Having a strategic vision is linked to competitive advantage,
enhancing organisational performance, and achieving sustained
NOTES
organisational growth. Clear vision enables firms to determine how well
organisational leaders are performing and to identify gaps between the
vision and current practices. Organisations preparing for transformational
change regularly undertake “envisioning” exercises to help guide them
into the future. The visioning process itself can enhance the self-esteem of
the people who participate in it because they can see the potential fruits of
their labours.Conversely, a “lack of vision” is associated with organisational
decline and failure. As Beaverargues “Unless companies have clear vision
about how they are going to be distinctly differentand unique in adding
and satisfying their customers, they are likely to be the corporate
failurestatistics of tomorrow”. Lacking vision is used to explain why
companies fail to build their corecompetencies despite having access to
adequate resources to do so. Business strategies that lackvisionary content
may fail to identify when change is needed. Lack of an adequate process
fortranslating shared vision into collective action is associated with the
failure to produce transformational organisational change.

2.3.5 Advantages of Vision

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

1. Good vision fosters long-term thinking.

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

3. It is inspiring and exhilarating.

4. It represents a discontinuity, a step function and a jump ahead so

Strategic Management : 24 that the company knowswhat it is to be.

 Strategy Formulation
5. It fosters risk-taking and experimentation.
and Defining Vision
6. A good vision is competitive, original and unique. It makes sense

in the market place.

NOTES
7. A good vision represents integrity. It is truly genuine and can be

used for the benefit of people

Nutt and Backoff identify three different processes for

crafting a vision:

1. Leader-dominated Approach: The CEO provides the strategic

vision for the organisation This approach is criticized because it
is against the philosophy of empowerment, which maintains that
people across the organisation should be involved in processes
and decisions that affect them.
2. Pump-priming Approach: The CEO provides visionary ideas
and selects people and groups within the organisation to further
develop those ideas within the broad parameters set out by the
CEO.
3. Facilitation Approach: It is a “co-creating approach” in which a
wide range of people participate in the process of developing
and articulating a vision. The CEO acts as a facilitator,
orchestrating the crafting process. According to Nutt and Backoff,
it is this approach that is likely to produce better visions and
more successful organisational change and performance as more
people have contributed to its development and will therefore be
more willing to act in accordance with it.

2.4 Summary
Strategic management is the set of managerial decisions and action

that determines theway for the long-range performance of the company.It

Strategic Management : 25
Strategy Formulation includes environmental scanning, strategy formulation, strategy
and Defining Vision
implementation,evaluation and control.Strategy formulation is the
development of long range plans for the effective managementof
environmental opportunities and threats in light of corporate strengths
NOTES
and weaknesses.It includes defining the corporate mission, specifying
achievable objectives, developingstrategies and setting policy
guidelines.Corporate strategy is one, which decides what business the
organisation should be in, andhow the overall group of activities should
be structured and managed.Competitive Strategy is concerned with
creating and maintaining a competitive advantagein each and every
area of business.Strategy that is related to each functional area of
business such as production, marketingand personnel is called functional
strategy.Corporate vision is a short, succinct, and inspiring statement
of what the organisation intends to become and to achieve at some
point in the future, often stated in competitiveterms.

2.5 Key Terms

Core Ideology: based on the enduring values of the organisation

Corporate Level Strategy:Involves broad decisions about organisation’s

scope and direction.

Facilitation Approach: A wide range of people participate in the

process of developing and articulating a vision.

Functional Strategy: Involves decisions about each unit of the

organisation.

Leader Dominated Approach: The CEO provides the strategic vision

for the organisation.

Pump-priming Approach: The CEO provides visionary ideas and

selects people and groups within the organisation to further develop

Strategic Management : 26 those ideas.

Strategic Business Area (SBA):SBA is a distinctive segment of the Strategy Formulation
and Defining Vision
environment in which the firm wants to do business.
Sustainable Competitive Advantage:getting a substantial edge over
the competitors. NOTES
Vision: The overall goal of an organisation that all business activities
and processes should contribute toward achieving.

2.6 Questions and Exercises

1. Suppose you are the CEO of an organisation that has just
launched an I-pod to give competition to Apple and Sony.
What will be the key considerations while developing your
vision statement?
2. Given the vision, as the new Director, what ideas would you
want to implement to achievethe vision?
3. Has there ever been a time on your life when your vision of
the future was so inspiring that you converted initial nay-sayers
into followers later on? If yes discuss. If no, analysea situation
when it could have happened. Why do you think you failed?
4. Discuss a time when you established a vision for your team.
What process was used? Wereothers involved in setting the
vision? How did the vision contribute to the functioning ofthe
unit?
5. “Employees have a greater role to play in formulating strategy”.
Comment.
6. “Small business’ success solely depends upon its strategy
formulation approach”. To whatextent does this statement hold
good?
7. Do non-profit organisations benefit from strategy formulation?
Why/why not?
8. When is a good time to formulate strategy? Explain with
reasons according to your understanding. Strategic Management : 27
Strategy Formulation 9. Critically analyse the leader dominated approach. Is there a better
and Defining Vision
approach?
10. Do you think business vision should be reviewed and upgraded

NOTES after every few years?Justify your answer by giving suitable

arguments.

Check your progress

Fill in the blanks:

1. Strategy formulation is the process of determining appropriate

courses of action for achieving organisational .....................
2. The most wonderful strategy in the history of the world is useless
if not ..................... successfully.
3. Corporate strategy involves ..................... kinds of initiatives.
4. Strategy formulation includes defining the .....................,
specifying achievable ....................., developing ..................... and
setting policy guidelines.
5. Corporate vision is a short, succinct, and inspiring statement of
what the organization intends to ................. and to .................
6. ................ basic characteristics distinguish functional strategies
from corporate level and business level strategies.
7. Competitive Strategy is concerned with creating and maintaining
a competitive ................. in each and every area of business.
8. Lack of vision is associated with organisational ................. and
.................

9. ..................... of business vision means that it should include

innovative possibilities for dramatic organizational improvement.

10. A business vision should be .....................; it should be able to

paint a picture of the kind of company the management is trying

Strategic Management : 28 to create.

Answers: Strategy Formulation
and Defining Vision
1. objectives 2. Implemented 3. four 4. corporate mission, objectives,
strategies 5. become, achieve 6. Three 7. advantage 8. decline,
failure 9. Possibility 10. Graphic NOTES

2.7 Further Reading and References

Books
• Thompson and AJ. Strickland, Strategic Management, Business
Publications, Texas, 1984.

• Fred R. David, Strategic Management – Concepts and Cases,

Pearson Education Inc., 2005.

• Ian Palmer, Richard Dunford and Gib Akin, Managing

Organisational Change, Tata McGraw-Hill, New Delhi, 1957.

Strategic Management : 29
Strategic Management : 30
 Defining Mission,
UNIT 3 : DEFINING MISSION, GOALS Goals and Objectives

AND OBJECTIVES
NOTES
3.0 Unit Objectives

3.1 Introduction

3.2 Defining Mission

3.3 Importance of Mission Statement

3.4 Characteristics of a Mission Statement

3.5 Components of a Mission Statement

3.6 Formulation of Mission Statements

3.7 Evaluating Mission Statements

3.8 Concept of Goals and Objectives

3.8.1 Goals

3.8.2 Objectives

3.9 Summary

3.10 Key Terms

3.11 Questions and Exercises

3.12 Further Reading and References

3.0 Unit Objectives

After studying this unit, you should be able to:

• Define mission
• State the importance, characteristics and components of
mission Strategic Management : 31
Defining Mission, • Evaluate mission statements
Goals and Objectives
• Explain the concept of goals and objectives

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

3.2 Defining Mission

Thompson defines mission as “The essential purpose of the
organisation, concerning particularly why it is in existence, the nature of
the business it is in, and the customers it seeks to serve and satisfy”. Hunger
and Wheelen simply call the mission as the “purpose or reason for the
organisation’s existence”. A mission can be defined as a sentence describing
Strategic Management : 32 a company’s function, markets and competitive advantages. It is a short
written statement of your business goals and philosophies. It defines Defining Mission,
Goals and Objectives
what an organisation is, why it exists and its reason for being. At a
minimum, a mission statement should define who are the primary
customers of the company, identify the products and services it produces, NOTES
and describe the geographical location in which it operates.

Example:

1. l. Ranboxy Petrochemicals: To become a research based global

company.
2. Reliance Industries: To become a major player in the global
chemicals business and simultaneously grow in other growth
industries like infrastructure.
3. ONGC: To stimulate, continue and accelerate efforts to develop
and maximize the contribution of the energy sector to the
economy of the country.
4. Cadbury India: To attain leadership position in the confectionery
market and achieve a strong national presence in the food drinks
sector.
5. Hindustan Lever: Our purpose is to meet everyday needs of
people everywhere – to anticipate the aspirations of our
Check Your Progress
consumers and customers, and to respond creatively and
“Mission describes the
competitively with branded products and services which raise present and vision the
the quality of life. future”. With this
statement in mind
6. McDonald: To offer the customer fast food prepared in the compare mission and
same high quality worldwide, tasty and reasonably priced, vision statements?

delivered in a consistent low key décor and friendly manner.

Most of the above mission statements set the direction of the

business organisation by identifying the key markets which they plan to
serve. Strategic Management : 33
Defining Mission,
Goals and Objectives 3.3 Importance of Mission Statement
The purpose of the mission statement is to communicate to all the
stakeholders inside and outside the organisation what the company stands
NOTES
for and where it is headed. It is important to develop a mission statement
for the following reasons:

1. It helps to ensure unanimity of purpose within the organisation.

2. It provides a basis or standard for allocating organisational
resources.
3. It establishes a general tone or organisational climate.
4. It serves as a focal point for individuals to identify with the
organisation’s purpose and direction.
5. It facilitates the translation of objectives into tasks assigned to
responsible people within the organisation.
6. It specifies organisational purpose and then helps to translate this
purpose into objectives in such a way that cost, time and
performance parameters can be assessed and controlled.

3.4 Characteristics of a Mission Statement

A good mission statement should be short, clear and easy to
understand. It should therefore possess the following characteristics:

1. Not lengthy: A mission statement should be brief.

2. Clearly articulated: It should be easy to understand so that the
values, purposes, and goals of the organisation are clear to
everybody in the organisation and will be a guide to them.
3. Broad, but not too general: A mission statement should achieve a
fine balance between specificity and generality.
4. Inspiring: A mission statement should motivate readers to action.
Employees should find it worthwhile working for such an
Strategic Management : 34 organisation.
5. It should arouse positive feelings and emotions of both Defining Mission,
Goals and Objectives
employees and outsiders about the organisation.
6. Reflect the firm’s worth: A mission statement should generate
the impression that the firm is successful, has direction and is NOTES
worthy of support and investment.
7. Relevant: A mission statement should be appropriate to the
organisation in terms of its history, culture and shared values.
8. Current: A mission statement may become obsolete after some
time. As Peter Druckerpoints out, “Very few mission statements
have anything like a life expectancy of thirty, let alone, fifty years.
To be good enough for ten years is probably all one can normally
expect”. Changes in environmental factors and organisational
factors may necessitate modification of the mission statement.
9. Unique: An organisation’s mission statement should establish
the individuality and uniqueness of the company.
10. Enduring: A mission statement should continually guide and
inspire the pursuit of organisational goals. It may not be fully
achieved, but it should be challenging for managers and
employees of the organisation.
11. Dynamic: A mission statement should be dynamic in orientation
allowing judgments about the most promising growth directions
and the less promising ones.
12. Basis for guidance: Mission statement should provide useful
criteria for selecting a basis for generating and screening strategic
options.
13. Customer orientation: A good mission statement identifies the
utility of a firm’s products or services to its customers, and
attracts customers to the firm.
14. A declaration of social policy: A mission statement should
contain its philosophy about social responsibility including its
obligations to the stakeholders and the society at large. Strategic Management : 35
Defining Mission, 15. Values, beliefs and philosophy: The mission statement should
Goals and Objectives
lay emphasis on the values the firm stands for; company
philosophy, known as “company creed”, generally accompanies

NOTES or appears within the mission statement.

3.5 Components of a Mission Statement

Mission statements may vary in length, content, format and
specificity. But most agree that an effective mission statement must be
comprehensive enough to include all the key components. Because a
mission statement is often the most visible and public part of the strategic
management process, it is important that it includes all the following
essential components:

1. Basic product or service: What are the firm’s major products or

services?
2. Primary markets: Where does the firm compete?
3. Principal technology: Is the firm technologically current?
4. Customers: Who are the firm’s customers?
5. Concern for survival, growth and profitability: Is the firm
committed to growth and financial soundness?
6. Company philosophy: What are the basic beliefs, values,
aspirations and ethical priorities of the firm?
7. Company self-concept: What is the firm’s distinctive competence
or major competitive advantage?
8. Concern for public image: Is the firm responsive to social,
community and environmental concerns?
9. Concern for employees: Are employers considered a valuable
asset of the firm?

Strategic Management : 36 10. Concern for quality: Is the firm committed to highest quality?
 Defining Mission,
3.6 Formulation of Mission Statements Goals and Objectives

There is no standard method for formulating mission statements.

Different firms follow different approaches. As indicated in the strategic NOTES
management model, a clear mission statement is needed before alternative
strategies can be formulated and implemented. It is important to involve
as many managers as possible in the process of developing a mission
statement, because through involvement, people become committed to
the mission of the organisation. Mission statements are generally
formulated as follows:

1. In many cases, the mission is inherited i.e. the founder establishes

the mission which may remain unchanged down the years or may
be modified as the conditions change.
2. In some cases, the mission statement is drawn up by the CEO and
board of directors or a committee of strategists constituted for
the purpose.
3. Engaging consultants for drawing up the mission statement is also
common.
4. Many companies hold brainstorming sessions of senior executives
to develop a mission statement. Soliciting employee’s views is
also common.
5. According to Fred R. David, an ideal approach for developing a
mission statement would be to select several articles about mission
statements and ask all managers to read these as background
information. Then ask managers to prepare a draft mission
statement for the organisation. A facilitator or a committee of top
managers, merge these statements into a single document and
distribute this draft mission statement to all managers. Then the
mission statement is finalized after taking inputs from all the
managers in a meeting. Strategic Management : 37
Defining Mission, 6. Decision on how best to communicate the mission to all managers,
Goals and Objectives
employees and external constituencies of an organisation are needed
when the document is in its final form. Some organisations even
develop a videotape to explain the mission statement and how it
NOTES
was developed.
7. The practice in Indian companies appears to be a consultative-
participative route. For Example, at Mahindra and Mahindra,
workshops were conducted at two levels within the organisation
with corporate planning group acting as facilitators. The State Bank
of India went one step ahead by inviting labour unions to partake in
the exercise. Satyam Computers went one more step ahead by
involving their joint venture companies and overseas clients in the
process.

Mission of two Global Companies

Mission Statement of IBM

At IBM, we strive to lead in the invention, development and

manufacture of the industry’s most advanced information technologies,
including computer systems, software, and storage systems and

microelectronics. We translate these advanced technologies into value for

our customers through our professional solutions, services and consulting
businesses worldwide.

Mission Statement of FedEx

“FedEx is committed to our People-Service-Profit Philosophy. We

will produce outstanding financial returns by providing totally reliable,
competitively superior, global, air-ground transportation of high-priority
goods and documents that require rapid, time-certain delivery.”

Source: ibm.com and fedex.com

Strategic Management : 38
 Defining Mission,
3.7 Evaluating Mission Statements Goals and Objectives

For a mission statement to be effective, it should meet the following ten

conditions: NOTES
1. The mission statement is clear and understandable to all parties
involved. The organisation can articulate and relate to it.
2. The mission statement is brief enough for most people to
remember.
3. The mission statement clearly specifies the purpose of the
organisation. This includes a clear statement about:
A. What needs the organisation is attempting to fill (not what products
or services are offered)?
B. Who the organisation’s target populations are?
C. How the organisation plans to go about its business; that is, what
it’s primary technologies are?
4. The mission statement should have a primary focus on a single
strategic thrust.
5. The mission statement should reflect the distinctive competence
of the organisation (e.g., what can it do best? What is its unique
advantage?)
6. The mission statement should be broad enough to allow flexibility Check Your Progress
Are goals and objectives
in implementation, but not so broad as to permit lack of focus.
the same thing? Justify
7. The mission statement should serve as a template and be the same your answer. Discuss the
unique characteristics of
means by which the organisation can make decisions. goals and objectives?
8. The mission statement must reflect the values, beliefs and
philosophy of operations of the organisation.
9. The mission statement should reflect attainable goals.
10. The mission statement should be worked so as to serve as an
energy source and rallying point for the organisation (i.e., it should
reflect commitment to the vision). Strategic Management : 39
Defining Mission,
Goals and Objectives 3.8 Concept of Goals and Objectives

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

Stated vs. Operational Goals

Operational goals are the real goals of an organisation. Stated

goals are the official goals of an organisation. Operational goals tell us
what the organisation is trying to do, irrespective of what the official
goals say the aims are. Official goals generally reflect the basic philosophy
of the company and are expressed in abstract terminology, for example,
‘sufficient profit’, ‘market leadership’ etc. According to Charles Perrow,
Strategic Management : 40 the following are the important operational goals:
 1. Environmental Goals: An organisation should be responsive to Defining Mission,
Goals and Objectives
the broader concerns of the communities in which it operates,
and should have goals that satisfy people in the external
environment. For example, goals like customer satisfaction and NOTES
social responsibility may be important environmental goals.
2. Output Goals: Output goals are related to the identification of
customer needs. Issues like what markets should we serve, which
product lines should be followed, etc. are examples of output
goals.
3. System Goals: These goals relate to the maintenance of the
organisation itself. Goals like growth, profitability, stability etc.
are examples.
4. Product Goals: These goals relate to the nature of products
delivered to customers. They define quantity, quality, variety,
innovativeness of products.
5. Derived Goals: These goals relate to derived or secondary areas
like contribution to political activities, promoting social service
institutions etc.

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

Characteristics of Objectives
Well – stated objectives should be:
1. Specific
2. Quantifiable Strategic Management : 41
Defining Mission, 3. Measurable
Goals and Objectives
4. Clear
5. Consistent
6. Reasonable
NOTES
7. Challenging
8. Contain a deadline for achievement
9. Communicated, throughout the organisation.

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

Nature of Objectives

The following are the characteristics of objectives:

Hierarchy of Objectives : In a multi – divisional firm, objectives

should be established for the overall company as well as for each

division. Objectives are generally established at the corporate,

divisional and functional levels, and as such, they form a hierarchy.

The zenith of the hierarchy is the mission of the organisation.
The objectives at each level contribute to the objectives at the

Strategic Management : 42
next higher level.
 Long-range and Short-range Objectives : Organisations need Defining Mission,
Goals and Objectives
to establish both long-range and short-range objectives (Long–
range means more than one year, and short–range means one
year and less.) Short-range objectives spell out the near – term NOTES
results to be achieved. By doing so, they indicate the speed and
the level of performance aimed at each succeeding period.

Multiplicity of Objectives : Organisations pursue a number of

objectives. At every level in the hierarchy, objectives are likely
to be multiple. Example: The marketing division may have the
objective of sales and distribution of products. This objective
can be broken down into a group of objectives for the product,
distribution, research and promotion activities. To describe a
single, specific goal of an organisation is to say very little about
it. It turns out that there are several goals involved.

Network of Objectives : Objectives form an interlocking network.

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

3.9 Summary

• A mission can be defined as a sentence describing a company’s

function, markets and competitive advantages.

• Developing your mission statement is the step which moves your Strategie Management : 43
Defining Mission, strategic planning process from the present to the future.
Goals and Objectives
• The mission should be broad enough to allow for the diversity
(new products, new services, new markets) one requires for
NOTES one’s business.
• The mission statement should also be specific enough to provide
the focus necessary to the success of your business.
• Once a mission statement has been set, every organisation needs
to periodically reviewand possibly revise it to make sure it
accurately reflects its goals and the business and economic
climates evolve.

3.10 Key Terms

Company philosophy: It is a set of beliefs, principles, or aims, underlying

a company’s practice or conduct.

Company self-concept: how much does the company knows itself

Goals: It is an open ended statement of what one wants to achieve

with no quantification of outcomes or time limit.

Mission: A statement that declares what business a company is in and

who its customers are.

Objectives: The results an organisation wants to achieve in pursuing its

basic mission.

3.11 Questions and Exercises

1. “Mission describes the present and vision the future”. With this
statement in mind compare mission and vision statements.
2. Are goals and objectives the same thing? Justify your answer.

Strategie Management : 44
Discuss the unique characteristics of goals and objectives.
 3. Suppose you are going to open a new mobile device Defining Mission,
Goals and Objectives
manufacturing company. Prepare a mission statement for your
company. (Try and include as many elements mentioned in the
unit as possible) NOTES
4. “It is necessary to review the mission statement periodically”.
Justify the statement
5. How can a mission statement set the tone of the organisation?
6. Analyse the characteristics of a good mission statement.
7. “Like an individual should know him/herself inside out, an
organisation should also know itself”. Substantiate
8. “Goals are general in nature while objectives are specific”.
Explain using suitable examples.
9. Explain the concept of stated and operational goals with the
help of appropriate examples.

Check your progress

Fill in the blanks:
1. The mission statement should have a primary focus on a
..................... strategic thrust.
2. The mission statement should reflect ..................... goals.
3. A mission can be defined as a sentence describing a company’s
................., ................. and .................
4. It is more important to communicate the mission statement to
.................than to .................
5. A mission statement should be appropriate to the organisation in
terms of its ................., ................. and .................
6. Every firm has to secure its survival through ................. and
.................
7. A focus on customer satisfaction causes managers to realize the
importance of providing excellent .................
8. The company ...................... provides a distinctive and accurate
picture of the company’s managerial outlook. Strategie Management : 45
Defining Mission, 9. .………………can’t be quantified, whereas ……………….can
Goals and Objectives
be quantified.
10. Objectives are inter-…………………......…and inter-

NOTES ……………… .

Answers:
1. single 2. Attainable 3. function, markets, competitive advantages
4. employees, customers 5. history, culture, shared values 6. growth,
profitability 7. customer service 8. Philosophy 9. Goals, Objectives
10. Related, dependent.

3.12 Further Reading and References

Books
• A A. Thompson and A J. Strickland, Strategic Management,
Business Publications, Texas, 1984.
• Adapted from Pearce JA and Robinson RB, Strategic Management,
McGraw Hill, NY, 2000.
• Fred R. David, Strategic Management – Concepts and
Cases, Pearson Education Inc., Notes 2005.
• Ian Palmer, Richard Dunford and Gib Akin, Managing
Organisational Change, Tata McGraw-Hill, New Delhi, 1957.

Strategie Management : 46
 External Assessment

UNIT 4: EXTERNAL ASSESSMENT

NOTES
4.0 Unit Objectives

4.1 Introduction

4.2 Concept of Environment

4.3 Porter’s Five Force Analysis

4.3.1 The Five Forces

4.3.2 Forces that Shape Competition

4.4 Industry Analysis

4.4.1 Framework for Industry Analysis

4.4.2 Industry Analysis

4.5 Competitive Analysis

4.6 Environmental Scanning

4.6.1 Features of Environmental Analysis

4.6.2 Techniques of Environmental Scanning

4.7 Summary

4.8 Key Terms

4.9 Questions and Exercises

4.10 Further Reading and References

4.0 Unit Objectives

After studying this unit, you should be able to:

• Realise the concept of environment

• Discuss porter’s five forces theory Strategic Management : 47
External Assessment • Explain the concept of industry analysis
• Discuss environment scanning

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

4.2 Concept of Environment

Environment literally means the surroundings, external objects,
influences or circumstances under which someone or something exists.
The environment of any organisation is “the aggregateof all conditions,
events and influences that surround and affect it.” Davis, K, The Challenge
of Business, (New York: McGraw Hill, 1975), p. 43.Environment refers
to all external forces which have a bearing on the functioning of business.
Jauch and Gluecke has defined environment as “The environment includes
factors outside the firm which can lead to opportunities or a threat to the
firm. Although there are many factors themost important of the sectors
are socio-economic, technological, supplier, competitor and govt.”The
recent changes in tariff rates have changed the toy industry of India with
Strategic Management : 48 the market nowbeing dominated by Chinese products. A slight change in
the Reserve Bank of India’s monetarypolicy can increase or decrease External Assessment

interest rates in the market. A slight shift in the government’sfiscal policy

can shift the whole demand curve towards the right or the left.

NOTES

Importance of Business Environment

1. Environment is Complex: The environment consists of a number

of factors, events, conditions and influences arising from different
sources. All these interact with each otherto create new sets of
influences.

2. It is Dynamic: The environment by its very nature is a constantly

changing one. The varied influences operating upon it impart
dynamism to it and cause it to continually change its shape and
character.

3. Environment is multi -faceted: The same environmental trend

can have different effectson different industries. For instance,
GATS is an opportunity for some companies but athreat for
others.

4. It has a far-reaching impact: The environment has a far-reaching

impact on organisationsin that the growth and profitability of an
organisation depends critically on theenvironment in which it
exists.

5. Its impact on different firms with in the same industry differs:

A change in environmentmay have different bearings on various
firms operating in the same industry. In thepharmaceutical industry
in India, for instance, the impact of the new IPR
(IntellectualProperty Rights) law will different for research-based
pharmacy companies such as Ranbaxy and Dr. Reddy’s Lab and
will be different for smaller pharmacy companies. Strategic Management : 49
External Assessment 6. It may be an opportunity as well as a threat to expansion:
Developments in the generalenvironment often provide
opportunities for expansion in terms of both products andmarkets.

NOTES 7. Changes in the environment can change the competitive scenario:

General environmentalchanges may alter the boundaries of an
industry and change the nature of its competition.This has been
the case with deregulation in the telecom sector in India. Since
deregulation,every second year new competitors emerge, old foes
become friends and M&As followevery new regulation.

8. Sometimes developments are difficult to predict with any degree

of accuracy: Macroeconomic developments such as interest rate
fluctuations, the rate of inflation, andexchange rate variations are
extremely difficult to predict on a medium or a long termbasis. On
the other hand, some trends such as demographic and income levels
can be easyto forecast.

4.3 Porter’s Five Force Analysis

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

4.3.1 The Five Forces

In essence, the job of the strategist is to understand and cope with
competition. However, managers define competition too narrowly, as if it
Strategic Management : 50 occurs only among today’s direct competitors.Yet competition for profits
goes beyond established industry rivals. It includes four other competitive External Assessment

forces as well: customers, suppliers, potential entrants and substitutes.

The Five Forces model developed by Michnal E. Porter has been

the most commonly used analytical tool for examining competitive NOTES
environment. According to this model, the intensity of competition in
an industry depends on five basic forces. These five forces are:

1. Threat of new entrants

2. Intensity of rivalry among industry competitors

3. Bargaining power of buyers

4. Bargaining power of suppliers

5. Threat of substitute products and services.

Each of these forces affects a firm’s ability to compete in a given market.

Together, they determine the profit potential for a particular industry.

4.3.2 Forces that Shape Competition

The configuration of the five forces differ from industry to
industry. For example in the market for commercial aircraft, fierce rivalry Check Your Progress
among existing competitors (i.e. Airbus and Boeing) and the bargaining “The five forces model
provides the rationale for
power of buyers of aircrafts are strong, while the threat of entry, the
increasing or decreasing
threat of substitutes, and the power of suppliers are more benign. Thus, resources commitment”.
Comment?
the strongest competitive force or forces determine the profitability of
an industry and becomes the most important to strategy formulation.

1. The Threat of New Entrants: The first of Porter’s Five Forces

model is the threat of new entrants. New entrants bring new
capacity and often substantial resources to an industry with a
desire to gain market share. Established companies already Strategic Management : 51
External Assessment operating in an industry often attempt to discourage new entrants
from entering the industry to protect their share of the market
and profits. Particularly when big new entrants are diversifying

NOTES from other markets into the industry, they can leverage existing
capabilities and cash flows to shake up competition. Pepsi did
this when it entered the bottled water industry, Microsoft did
when it began to offer internet browsers, and Apple did when it
entered the music distribution business.

2. Barriers to entry: Entry barriers depend on the advantages that

existing companies have relative to new entrants. There are seven
major sources:

(a) Economies of scale: These are relative cost advantages

associated with large volumes of production, that lower a
company’s cost structure. The cost of product per unit
declines as the volume of production increases. This
discourages new entrants to enter on a large scale. If the new
entrant decides to enter on a large-scale to obtain economies
of scale, it has to bear high risks associated with a large
investment.

(b) Product differentiation:Brand loyalty is buyer’s preference

for the differentiated products of any established company.
Strong brand loyalty makes it difficult fornew entrants to take
market share away from established companies. It reduces
threat of entry because the task of breaking down well-
established customer preferences is too costly for them.

(c) Capital requirements: The need to invest large financial

resources in order to compete can deter new entrants. Capital
may be necessary not only for fixed assets, but also to extend
Strategic Management : 52 customer credit, build inventories and fund start-up losses.
 The barrier is particularly great if the capital is required for External Assessment

unrecoverable expenditure, such as up-front advertising or

research and development. While major corporations have the
financial resources to invade almost any industry, the capital NOTES
requirements in certain fields limit the pool of likely entrants.
It is important not to overstate the degree to which capital
requirements alone deter entry; if industry returns are attractive
and are expected to remain so, and if capital markets are
efficient, investors will provide new entrants with the funds
they need.
(d) Switching costs : Switching costs are the one-time costs that
a customer has to bear to switch from one product to another.
When switching costs are high, customers can be locked up in
the existing product, even if new entrants offer a better product.
Thus, the higher the switching costs are, the higher is the barrier
to entry. Enterprise Resource Planning (ERP) software is an
example of a product with very high switching costs. Once a
company has installed SAP’s ERP system, the cost of moving
to a new vendor are astronomical.
(e) Access to distribution channels: The new entrant’s need to
secure distribution channel for the product can create a barrier
to entry. The established companies have already tied up with
distribution channels. For example, a new food item may have
to displace others from the supermarket shelf via price breaks,
promotions, intense selling efforts or some other means. The
more limited the wholesale or retail channels are, tougher will
be the entry into an industry. Sometimes, if the barrier is so
high, a new entrant must create its own distribution channels
as Timex did in the watch industry in the 1950s.
(f) Cost disadvantages independent of size:Some existing
companies may have advantages other than size or economies
of scale. These are derived from: Strategic Management : 53
External Assessment (i) Proprietary technology
(ii) Preferential access to raw material sources
(iii) Government subsidies
(iv) Favorable geographical locations
NOTES

3. Expected Retaliation : How new entrants believe that the existing

companies may react will also influence their decision to enter or
stay out of an industry. If reaction is vigorous and protracted enough,
the profit potential in the industry can fall below the cost of capital
for all participants. Existing companies often use public statements
to send massages to new entrants about their commitment to
defending market share. New entrants are likely to fear expected
retaliation if:
(a) Existing companies have previously responded vigorously
to new entrants
(b) Existing companies possess substantial resources to fight
back
(c) Existing companies seem likely to cut prices to protect their
market share
(d) Industry growth is slow, so newcomers can gain volume
only by taking the market share from existing companies.
An analysis of entry barriers and expected retaliation is obviously
crucial for any company contemplating entry into a new industry.
The challenge is to find ways to surmount the entry barriers without
nullifying the profitability of the industry.

4. Intensity of Rivalry among Competitors: The second of Porter’s

Five-Forces model is the intensity of rivalry among established
companies within an industry. Rivalry means the competitive
struggle between companies in an industry to gain market share

Strategic Management : 54 from each other. Firms use tactics like price discounting, advertising
campaigns, new product introductions and increased customer External Assessment

service or warranties. Intense rivalry lowers prices and raises costs.

It squeezes profits out of an industry. Thus, intense rivalry among
established companies constitutes a strong threat to profitability. NOTES
Alternatively, if rivalry is less intense, companies may have the
opportunity to raise prices or reduce spending on advertising
etc. which leads to higher level of industry profits.

The intensity of rivalry is greatest under the following conditions:

(a) Numerous competitors or equally powerful competitors :
When there are many competitors in an industry or if the
competitors are roughly of equal size and power, the intensity
of rivalry will be more. Any move by one firm is matched by
an equal countermove. In such situations rivals find it hard to
avoid poaching business.
(b) Slow industry growth : Slow industry growth turns
competition into fight because the only path to growth is to
take sales away from a competitor.
(c) High fixed but low marginal costs : This creates intense
pressure for competitors to cut prices below their average
costs even close to their marginal costs, to steal customers.
(d) Lack of differentiation or switching costs : If products or
services of rivals are nearly identical and there are few
switching costs, this encourages competitors to cut prices to
win new customers. Years of airline price wars reflect these
circumstances in that industry.
(e) Capacity augmentation in large increments : If the only
way a manufacturer can increase capacity is in a large
increment, such as building a new plant, it will run that new
plant at full capacity to keep its unit costs low. Such capacity
additions can be very disruptive to the supply/demand balance Strategic Management : 55
External Assessment and cause the selling prices to fall throughout the industry.
(f) High exit barriers : Exit barriers keep a company from leaving
the industry. Exit barriers can be economic, strategic or

NOTES emotional factors that keep firms competing even though they
may be earning low or negative returns on their investments.
If exit barriers are high, companies become locked up in a
non-profitable industry where overall demand is static or
declining. Excess capacity remains in use, and the profitability
of healthy competitors suffers as the sick ones hang on.

5. Bargaining power of buyers : The third of Porter’s five

competitive forces is the bargaining power of buyers. Bargaining
power of buyers refers to the ability of buyers to bargain down
prices charged by firms in the industry or driving up the costs of
the firm by demanding better product quality and service. By
forcing lower prices and raising costs, powerful buyers can squeeze
profits out of an industry. Thus, powerful buyers should beviewed
as a threat. According to Porter, buyers are most powerful under
the following conditions:
(a) There are few buyers : If there are few buyers or each one
does bulk purchases, then they have more bargaining power.
Large buyers are particularly powerful in industries like
telecommunication equipment, off-shore drilling, and bulk
chemicals. High fixed costs and low marginal costs increase
the pressure on rivals to keep capacity filling through
discounts.
(b) The products are standard or undifferentiated : If the
products purchased from the firm are standard or
undifferentiated, the buyers can easily find alternative sources
of supplies. Then buyers can play one company against the

Strategic Management : 56 other, as in commodity grain markets.

 (c) The buyer faces low switching costs : Switching costs External Assessment

lock the buyer to a particular firm. If switching costs are

low, buyers can easily switch from one firm’s product to
another. NOTES

(d) The buyer earns low profits : If the buyer is under pressure
to trim its purchasing costs, the buyer is price sensitive and
bargains more.

(e) The quality of buyer’s products : If the quality of buyer’s

product is little affected by industry’s products, buyers are
more price sensitive. Most of the above sources of buyer
power can be attributed to consumers as a group as well as
to industrial and commercial buyers. The buying power of
retailers is determined by the same factors, with one
important addition. Retailers can gain significant bargaining
power over manufacturers when they can influence
consumers. Purchasing decisions as they do in audio
components, jewellery, appliances, sporting goods etc., are
examples.

6. Bargaining power of suppliers : The fourth of Porter’s Five

Forces model is the bargaining power of suppliers. Suppliers
are companies that supply raw materials,
components,equipment, machinery and associated products.
Powerful suppliers make more profits by charging higher prices,
limiting quality or services or shifting the costs to industry
participants. Powerful suppliers squeeze profits out of an
industry and thus, they are a threat. A supplier’s bargaining power
will be high under the following conditions:

(a) Few suppliers : When the supplier group is dominated by

few companies and is more concentrated than the firms to
whom it sells, an industry is called concentrated. The Strategic Management : 57
External Assessment suppliers can then dictate prices, quality and terms.
(b) Product is differentiated : When suppliers offer products
that are unique or differentiated or built-up switching costs,
it cuts off the firm’s options to play one supplier against the
NOTES
other. For example, pharmaceutical companies that offer
patented drugs with distinctive medical benefits have more
power over hospitals, drug buyers etc.
(c) Dependence of supplier group on the firm : When suppliers
sell to several firms and the firm does not represent a
significant fraction of its sales, suppliers are prone to exert
power. In other words, the supplier group does not depend
heavily on the industry for revenues. Suppliers serving many
industries will not hesitate to extract maximum profits from
each one. If a particular industry accounts for a large portion
of a supplier group’s volume or profit, however, suppliers
will want to protect the industry through reasonable pricing.
(d) Importance of the product of the firm : When the product
is an important input to the firm’s business or when such inputs
are important to the success of a firm’s manufacturing process
or product quality, the bargaining power of suppliers is high.
(e) Threat of forward integration : When the supplier poses a
credible threat of integrating forward, this provides a check
against the firm’s ability to improve the terms by which it
purchases.
(f) Lack of substitutes : The power of even large, powerful
suppliers can be checked if they compete with substitutes.
But, if they are not obliged to compete with substitutes as
they are not readily available, the suppliers can exert power.

7. Threat of substitute products : The fifth of Porter’s Five Forces

model is the threat of substitute products. A substitute performs
Strategic Management : 58 the same or a similar function as an industry’s product. Video
 conferences are a substitute for travel. Plastic is a substitute for External Assessment
aluminium. E-mail is a substitute for a mail. All firms within an
industry compete with industries producing substitute products.
For example, companies in the coffee industry compete indirectly
NOTES
with those in the tea and soft drink industries because all these
serve the same need of the customer for refreshment. The
existence of close substitutes is a strong competitive threat
because this limits theprice that companies in one industry can
charge for their product. In other words, when the threat of
substitutes is high, industry profitability suffers. If an industry
does not ward off the substitutes through product performance,
marketing, price or other means, it will suffer in terms of
profitability and growth potential in the following circumstances:

(a) It offers an attractive price and performance : The better

the relative value of the substitute, the worse is the profit
potential of the industry. For example, long distance
telephone service providers suffered with the advent of
Internet-based phone services.
(b) The buyer’s switching costs to the substitutes is low : For
example, switching from a proprietary, branded drug to a
generic drug usually involves minimum switching costs.
Strategists should be particularly alert to changes in other
industries that may make attractive substitutes. For example,
improvements in plastic materials prompted the automobile
manufactures to substitute plastic for steel in many
automobile components. Task Compare FMCG and
Automobile sectors based on Porter’s five forces model.

4.4 Industry Analysis

Each business operates among a group of firms that produce
competing products or services known as an “industry”. An industry is Strategic Management : 59
External Assessment thus a group of firms producing similar products or services. By similar
products we mean products that customers perceive to be substitutes
for one another.

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

4.4.1 Framework for Industry Analysis

Industry analysis covers two important components:
Strategic Management : 60
 1. Industry environment External Assessment

2. Competitive environment

The following are the aspects to be covered in the above analysis: NOTES
Industry Analysis
1. Industry features
2. Industry boundaries
3. Industry environment
4. Industry structure
5. Industry performance
6. Industry practices
7. Industry attractiveness
8. Industry prospects for future

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

4.4.2 Industry Analysis

1. Industry Features : Industries differ significantly. So, analyzing
a company’s industry begins with identifying the industry’s
dominant economic features and forming a picture of the industry
landscape. An industry’s dominant economic features include such
factors as:
(a) Overall size
(b) Market growth rate
(c) Geographic boundaries of the market
(d) Number and sizes of competitors
(e) Pace of technological change
(f) Product innovations etc. Strategic Management : 61
External Assessment Getting a handle on an industry features promotes understanding
of the kinds of strategic moves that managers should employ.
For example, in industries characterized by one product advance
NOTES after another, a strategy of continuous product innovation
becomes a condition for survival.
Example: Video games, computers and pharmaceuticals.

2. Industry Boundaries : All the firms in the industry are not similar
to one another. Firms within the same industry could differ across
various parameters, such as:
(a) Breadth of market
(b) Product/service quality
(c) Geographic distribution
(d) Level of vertical integration
(e) Profit motives

3. Industry Environment : Based on their environment, industries

are basically of two types:

(a) Fragmented Industries : A fragmented industry consists of

a large number of small or medium-sized companies, none of
which is in a position to determine industry price. Many
fragmented industries are characterized by low entry barriers
and commodity type products that are hard to differentiate.
(b) Consolidated Industries : A consolidated industry is
dominated by a small number of large companies (an
oligopoly) or in extreme cases, by just one company (a
monopoly). These companies are in a position to determine
industry prices. In consolidated industries, one company’s
competitive actions or moves directly affect the market share
of its rivals, and thus their profitability. When one company
Strategic Management : 62 cuts prices, the competitors also cut prices. Rivalry increases
 as companies attempt to undercut each other’s prices or offer External Assessment

customers more value in their products, pushing industry

profits down in the process. The consequence is a dangerous
competitive spiral. NOTES
According to Michael Porter, industries can be
categorized into:

• Emerging industries : Are those in the introductory and

growth phases of their life cycle.
• Mature industries : Are those who reached the maturity
stage of their life cycle.
• Declining industries : Are those in the transition stage
from maturity to decline.
• Global industries : Are those with manufacturing bases
and marketing operations in several countries.
Competition varies during each stage of industry life
cycle.

4. Industry Structure : Defining an industry’s boundaries is

incomplete without an understanding of its structural attributes.

Structural attributes are the enduringcharacteristics that give an

industry its distinctive character.

Industry structure consists of four elements:

(a) Concentration : It means the extent to which industry sales

are dominated by only a few firms. In a highly concentrated

industry (i.e. an industry whose sales are dominated by a

handful of firms), the intensity of competition declines over

time. High concentration serves as a barrier to entry into an

industry, because it enables the firms to hold large market

shares to achieve significant economies of scale. Strategic Management : 63

External Assessment (b) Economies of scale : This is an important determinant of
competition in an industry. Firms that enjoy economies of
scale can charge lower prices than their competitors, because
of their savings in per unit cost of production. They also can
NOTES
create barriers to entry by reducing their prices temporarily
or permanently to deter new firms from entering the industry.
(c) Product differentiation : Real perceived differentiation often
intensifies competition among existing firms.

(d) Barriers to entry : Barriers to entry are the obstacles that a

firm must overcome to enter an industry, and the competition
from new entrants depends mostly on entry barriers.

5. Industry attractiveness : Industry attractiveness is dependent on

the following factors:
(a) Profit potential
(b) Growth prospects
(c) Competition
(d) Industry barriers etc.
As a general proposition, if an industry’s profit prospects
are above average, the industry can be considered attractive; if
its profit prospects are below average, it is considered
unattractive. If the industry and competitive situation is assessed
as attractive, firms employ strategies to expand sales and invest
in additional facilities as needed to strengthen their long-term
competitive position in business. If the industry is judged as
unattractive, firms may choose to invest cautiously, look for ways
to protect their profitability. Strong companies may consider
diversification into more attractive businesses. Weak companies
may consider merging with a rival to bolster market share and

Strategic Management : 64 profitability.

 6. Industry performance : This requires an examination of data External Assessment

relating to:
(a) Production
(b) Sales NOTES
(c) Profitability
(d) Technological advancements etc.

7. Industry practices : Industry practices refer to what a majority

of players in the industry do with respect to products, pricing,
promotion, distribution etc. This aspect involves issues relating
to:
(a) Product policy
(b) Pricing policy
(c) Promotion policy
(d) Distribution policy
(e) R&D policy
(f) Competitive tactics.

8. Industry’s future prospects : The future outlook of an industry

can be anticipated based on such factors as:
(a) Innovation in products and services
(b) Trends in consumer preferences
(c) Emerging changes in regulatory mechanisms
(d) Product life cycle of the industry
(e) Rate of growth etc.

4.5 Competitive Analysis

The degree of competition in an industry is influenced by a number
of forces. To establish a strategic agenda for dealing with these forces
and grow despite them, a firm must understand: Strategic Management : 65
External Assessment 1. How these forces work in an industry?
2. How they affect the firm in its particular situation?

NOTES The essence of strategy formulation is coping with competition.

Intense competition in an industry is neither a coincidence nor a bad
luck. It is rooted in its underlying economics. There are two theories of
economics – theory of monopoly and theory of perfect competition.
These represent two extremes of industry competition. In a monopoly
context, a single firm is protected by barriers to entry, and has an
opportunity to appropriate all the profits generated in the industry. In a
“perfectly competitive” industry, competition is unbridled and entry to
the industry is easy. This kind of industry structure, of course, offers the
worst prospects for long-run profitability. The weaker the forces
collectively, however, the greater the opportunity for superior
performance in terms of profit.

4.6 Environmental Scanning

Environmental analysis or scanning is the process of monitoring
the events and evaluating trends in the external environment, to identify

Check Your Progress both present and future opportunities and threats that may influence the

Discuss Industry firm’s ability to reach its goals. Strategists need to analyse a variety of
analysis using Porter’s different components of the external environment, identify “Key Players”
five forces theory?
within those domains, and be very cognizant of both threats and
opportunities within the environment. It is from such an analysis that
managers can make decisions on whether to react to, ignore, or try to
influence or anticipate future opportunities and threats discovered. The
main purpose of environmental scanning is therefore to find out the
correct “fit” between the firm and its environment, so that managers
can formulate strategies to take advantage of the opportunities and

Strategic Management : 66 avoid or reduce the impact of threats.

 External Assessment
4.6.1 Features of Environmental Analysis
In the context of a changing environment, the process of
environmental analysis is very well comparable to the functions of radar.
From this analogy, it is possible to derive three important features of NOTES

the process of environmental analysis (Ian Wilson).

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

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

Exploratory Process
Environmental analysis is an exploratory process. A large part
of the process seeks to explore the unknown terrain and the dimensions
of possible future. The emphasis must be on speculating systematically
about alternative outcomes, assessing probabilities, questioning
assumptions and drawing rational conclusions.

4.6.2 Techniques of Environmental Scanning

So far, we have discussed the constituents of macro and
operating environment and how these can become a threat or
opportunity. As a corporate strategist, one has to identify the impact of
these environmental forces on firm’s choice of direction and action.
Environmental analysis involves two phases, viz; information gathering
and evaluation. Strategic Management : 67
External Assessment Glueck and Jauch mention the following sources for environmental
analysis:
1. Verbal and written information : Verbal information is
generally obtained by direct talk with people, by attending
NOTES
meetings, seminars etc, or through media. Written or
documentary information includes both published and
unpublished material.
2. Search and scanning : This involves research for obtaining
the required information.
3. Spying : Although it may not be considered ethical, spying
to get information about competitor’s business is not
uncommon.
4. Forecasting : This involves estimating the future trends and
changes in the environment. There are many techniques of
forecasting. It can be done by the corporate planners or
consultants. For the above purpose, firms use a number of
tools and techniques depending on their specific
requirements in terms of quality, relevance, cost etc.

Some of the techniques which are generally used for carrying

out environmental analysis are:
1. PESTEL analysis
2. SWOT analysis
3. ETOP
4. QUEST
5. EFE Matrix
6. CPM
7. Forecasting techniques
(a) Time series analysis
(b) Judgmental forecasting
(c) Expert opinion
Strategic Management : 68 (d) Delphi’s technique
 (e) Multiple scenario External Assessment

(f) Statistical modelling

(g) Cross-impact analysis
(h) Brainstorming NOTES
(i) Demand/hazard forecasting

The above techniques are briefly discussed below:

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

SWOT Analysis : SWOT analysis is discussed in more detail in

Unit 5.

ETOP : Environmental Threats and Opportunities Profile (ETOP)

gives a summarized picture of environmental factors and their likely
impact on the organisation. ETOP is generally prepared as follows.

1. List environmental factors : The different aspects of the

general as well as relevant environmental factors are listed. Strategic Management : 69
External Assessment For example, economic environment can be divided into rate
of economic growth, rate of inflation, fiscal policy etc.
2. Assess impact of each factor : At this stage, the impact of
NOTES each factor is assessed closely and expressed in qualitative
(high, medium or low) or quantitative factors (1, 2, 3). It is
to be noted that not all identified environmental factors will
have the same degree of impact. The impact is assessed as
positive or negative.
3. Get a big picture : In the final stage, the impact of each
factor and its importance is combined to produce a summary
of the overall picture.

EFE Matrix : Just like ETOP, the External Factor Evaluation Matrix
(EFE Matrix) helps to summarize and evaluate the various
components of external environment. The EFE Matrix can be
developed in five steps:

1. List 10 to 20 important opportunities and threats.

2. Assign a weight to each factor from 0.0 (not important) to
1.0 (most important). The higher the weight, the more
important is the factor to the current and future success of
the company.
3. Assign a rating to each factor 1(poor), 2 (average), 3 (above
average), 4 (superior). The rating indicates how effectively
the firm’s current strategies respond to that particular factor.
4. Multiply each factor’s weight by its rating to determine a
weighted score.
5. Finally, add the individual weighted scores for all the external
factors to determine the total weighted score for the
organisation.
Strategic Management : 70
QUEST : QUEST (Quick Environment Scanning Technique) is a External Assessment

four step process, which uses scenario buildingfor environmental

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

Competitive Profile Matrix (CPM) : This is a competitor analysis,

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

Forecasting Techniques : Macro environmental and industry

scanning and analysis are only marginally useful if what they do is
to reveal current conditions. To be truly useful, such analysis must
forecast future trends and changes. Forecasting is a way of estimating
the future events that are likely to have a major impact on the
enterprise. It is a technique whereby managers try to predict the Strategic Management : 71
External Assessment future characteristics of the environment to help managers take
strategic decisions. Various techniques are used to forecast future
situations. Important among these are:

NOTES
1. Time series analysis : Extrapolation is the most widely
practiced form of forecasting. Simply stated, extrapolation
is the extension of present trends into the future. It rests on
the assumption that the world is reasonably consistent and
changes slowly in the short run. They attempt to carry a series
of historical events forward into the future. Because time
series analysis projects historical trends into the future, its
validity depends on the similarity between past trends and
future conditions.
2. Judgemental forecasting : This is a forecasting technique
in which employees, customers, suppliers etc., serve as a
source of information regarding future trends. For example,
sales representatives may be asked to forecast sales growth
in various product categories based on their interaction with
customers. Survey instruments may be mailed to customers,
suppliers or trade associations to obtain their judgments on
specific trends.
3. Expert opinion : This is a non-quantitative technique in
which experts in a particular area attempt to forecast likely
developments. Knowledgeable people are selected and asked
to assign importance and probability rating to various future
developments. This type of forecast is based on the ability of
a knowledgeable person to construct probable future
developments on the interaction of key variables. The delphi
technique is one such technique.
4. Delphi Technique : This is a forecasting technique in which

Strategic Management : 72 the opinion of experts in the appropriate field are obtained
 about the probability of the occurrence of specified events. External Assessment

The responses of the experts are compiled and a summary is

sent to each expert. This process is repeated until consensus
is arrived at regarding the forecast of a particular event. NOTES

5. Statistical modelling : It is a quantitative technique that

attempts to discover causal factors that link two or more-
time series together. They use different sets of equations.
Regression analysis and other econometric methods are
examples. Although very useful for grasping historical trends,
statistical modelling is based on historical data. As the
patterns of relationships change, the accuracy of the forecast
deteriorates.
6. Cross-impact Analysis : By this analysis, researchers analyze
and identify key trends that will impact all other trends. The
question is then put: “If event A occurs, what will be the
impact on all other trends”. The results are used to build
“domino chains”, with one event triggering others.
7. Brainstorming : Brainstorming is a technique to generate a
number of alternatives by a group of 6 to 10 persons. The
basic ground rule is to propose ideas without first mentally
evaluating them. No criticism is allowed. Ideas tend to build
on previous ideas until a consensus is reached. This is a good
technique to create ideas.
8. Demand/Hazard forecasting : Researchers identify major
events that would greatly affect the firm. Each event is rated
for its convergence with several major trends taking place in
society and its appeal to a group of the public; the higher the
event’s convergence and appeal, the higher its probability of
occurring. Strategic Management : 73
External Assessment
4.7 Summary
• External assessment is a step where a firm identifies
opportunities that could benefit it andthreats that it should avoid.
NOTES
• It involves monitoring, evaluating, and disseminating of
information from the external and internal environments to key
people within the corporation.
• The nature and degree of competition in an industry hinge on
five forces, viz. the threat ofnew entrants, the bargaining power
of customers, the bargaining power of suppliers, thethreat of
substitute products or services and the jockeying among current
contestants.
• To establish a strategic agenda for dealing with these contending
currents and to grow despite them, a company must understand
how they work in its industry and how they affect the company
in its particular situation.
• The process of conducting external environment assessment
starts with collating information and intelligence on factors
affecting the external environment.
• Industry analysis is a tool that facilitates a company’s
understanding of its position relativeto other companies that
produce similar products or services.
• Environmental analysis or scanning is the process of monitoring
the events and evaluatingtrends in the external environment, to
identify both present and future opportunities andthreats that
may influence the firm’s ability to reach its goals.

4.8 Key Terms

Competition: Rivalry between two or more parties to achieve a similar
goal.

Strategic Management : 74 Environment: The totality of surrounding conditions.

Environmental Scanning: Process of gathering, analyzing, and External Assessment

dispensing information for tactical or strategic purposes.

Fragmented Industries: Consists of a large number of small or
medium-sized companies, none of which is in a position to determine NOTES
industry price.
Porters Five Forces: Named after Michael E. Porter, this model
identifies and analyzes competitive forces that shape every industry,
and helps determine an industry’s weaknesses and strengths.
Switching Costs: One-time costs that a customer has to bear to switch
from one product to another.

4.9 Questions and Exercises

1. “The five forces model provides the rationale for increasing or
decreasing resources commitment”. Comment.
2. Are there any disadvantages in using Porter’s five forces model?
Elucidate the pros and cons of using the model.
3. “The five forces theory is a short-sighted theory”. Why/why
not?
4. Discuss Industry analysis using Porter’s five forces theory.
5. Present at least 7 points to highlight the importance of industry
analysis.
6. Do you think it is important to define an industry’s boundaries?
Why/why not?
7. Suppose a firm competes in the microcomputer industry. Where
in your opinion, the boundaries of this industry begin and end?
8. Analyse the features that determine the strength of the
competitive forces operating in the industry.
9. “Each industry’s attractiveness or profitability potential is a
direct function of the interactions of various environmental Strategic Management : 75
External Assessment forces that determine the nature of competition.” Discuss.
10. Is it feasible to create strategic group in any industry? Explain
the rationale behind creating these groups.

NOTES 11. Present a critical assessment of industry life cycle analysis.

12. These days, the industry uses a very popular term- hyper-
competition. Find out what it means and elucidate through
examples.

Check your progress

Fill in the blanks:
1. At the level of marketing strategy, a competitor has four
variables: ................, ................, ................ and ................
2. Competitors’ reactions can be studied at ................ levels.
3. The five forces and strategic group models present a ................
picture of competition while emphasizing the role of ................
4. The shakeout stage ends when the industry enters its ................
stage.
5. Under the shakeout stage, ................ are forced out, and a
small number of industry leaders emerge.
6. The ................ represents all the players in the game and
analyses how their interactions affect the firm’s ability to
generate and appropriate value.
7. Buyers, suppliers, new entrants and substitute products are all
................ forces.
8. A primary industry may be considered as a group of ................,
whereas a secondary industry includes ................
9. ................, ................ and ................ are essential for
conducting an environmental survey.
10. Analyzing a company’s industry begins with identifying the
industry’s dominant ................ features.
Strategic Management : 76
 11. A ................ industry is dominated by a small number of large External Assessment

companies.
12. Defining an industry’s boundaries is incomplete without an
understanding of its ................ attributes. NOTES
13. Firms that enjoy ................ can charge lower prices than their
competitors.
14. With Porter’s framework, a strong competitive force can be
regarded as a ................
15. ................ are the one-time costs that a customer has to bear
to switch from one product to another.
16. The new entrant’s need to secure ................ for the product
can create a barrier to entry.

Answers:
1. product, distribution, price, promotion 2. Two 3. static, innovation
4. Mature 5. marginal competitors 6. value net 7. competitive 8.
close competitors, less direct competitors 9. Industry structure, industry
boundaries,industry attractiveness 10. economic 11. Consoli-dated 12.
structural 13. economies of scale 14. threat 15. Switching costs 16.
distribution channel.

4.10 Further Reading and References

Books
• Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic
Management–Creating Competitive Advantage, McGraw-Hill,
Irwin, NY, 2003.
• Michael Porter, How Competitive Forces Shape Strategy,
Harvard Business Review, 1979. John Parnell, Strategic
Management – Theory and Practice, Atomic Dog Publishing.
USA, 2003. Strategic Management : 77
External Assessment • Pearce JA and Robinson RB, Strategic Management, Mc
Graw Hill, NY, 2000.

• VS Ramaswamy and S.Namakumari, Strategic Planning,

NOTES Macmillan, New Delhi, 1999.

Strategic Management : 78
 Organisational Appraisal :
UNIT 5: ORGANISATIONAL Internal Assessment 1

APPRAISAL : THE
INTERNAL ASSESSMENT 1 NOTES

5.0 Unit Objectives

5.1 Introduction

5.2 Importance of Internal Analysis

5.3 SWOT Analysis

5.3.1 Carrying out SWOT Analysis

5.3.2 Steps in SWOT Analysis

5.3.3 Critical Assessment of SWOT Analysis

5.3.4 Advantages and Limitations

5.4 Summary

5.5 Key Terms

5.6 Questions and Exercises

5.7 Further Reading and References

5.0 Unit Objectives

After studying this unit, you should be able to:

• State the importance of internal analysis

• Discuss SWOT analysis
Strategic Management : 79
Organisational Appraisal :
Internal Assessment 1 5.1 Introduction
Internal analysis is also referred to as “internal appraisal”,

NOTES “organisational audit”, “internal corporate assessment” etc. Over the

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

5.2 Importance of Internal Analysis

Strategic management is ultimately a “matching game” between
environmental opportunities and organisational strengths. But, before a
firm actually starts tapping the opportunities, it is important to know its
own strengths and weaknesses. Without this knowledge, it cannot decide
which opportunities to choose and which ones to reject. One of the
ingredients critical to the success of a strategy is that the strategy must
place “realistic” requirements on the firm’s resources. The firm therefore
cannot afford to go by some untested assumptions or gut feelings. Only
systematic analysis of its strengths and weaknesses can be of help. This
is accomplished in internal analysis by using analytical techniques like
RBV, SWOT analysis, Value chain analysis, Benchmarking, IFE Matrix
etc. Thus, systematic internal analysis helps the firm:
Strategic Management : 80
 Organisational Appraisal :
1. To find where it stands in terms of its strengths and weaknesses
Internal Assessment 1
2. To exploit the opportunities that are in line with its capabilities

3. To correct important weaknesses

NOTES
4. To defend against threats

5. To assess capability gaps and take steps to enhance its capabilities.

This exercise is also the starting point for developing the competitive
advantage required for the survival and growth of the firm.

5.3 SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities and threats.
SWOT analysis is a widely used framework to summaries a company’s
situation or current position. Any company undertaking strategic planning
will have to carry out SWOT analysis: establishing its current position in the
light of its strengths, weaknesses, opportunities and threats. Environmental
and industry analyses provide information needed to identify opportunities
and threats, while internal analysis provides information needed to identify
strengths and weaknesses. These are the fundamental areas of focus in SWOT Check Your Progress

analysis. SWOT analysis stands at the core of strategic management. It is Analyses the role of
internal analysis in
important to note that strengths and weaknesses are intrinsic (potential) value strategy formulation?
creating skills or assets or the lack thereof, relative to competitive forces.
Opportunities and threats, however, are external factors that are not created
by the company, but emerge as a result of the competitive dynamics caused
by ‘gaps’ or ‘crunches’ in the market. We had briefly mentioned about the
meaning of the terms opportunities, threats, strengths and weaknesses. We
revisit the same for purposes of SWOT analysis.

Strategic Management : 81
1. Opportunities: An opportunity is a major favourable situation in a
firm’s environment. Examples include market growth, favourable
Organisational Appraisal : changes in competitive or regulatory framework, technological
Internal Assessment 1
developments or demographic changes, increase in demand, opportunity
to introduce products in new markets, turning R&D into cash by

NOTES licensing or selling patents etc. The level of detail and perceived degree
of realism determine the extent of opportunity analysis.

2. Threats: A threat is a major unfavourable situation in a firm’s

environment. Examples include increase in competition; slow market
growth, increased power of buyers or suppliers, changes in
regulations etc. These forces pose serious threats to a company
because they may cause lower sales, higher cost of operations, higher
cost of capital, inability to make break-even, shrinking margins or
profitability etc. Your competitor’s opportunity may well be a threat
to you.

3. Strengths: Strength is something a company possesses or is good

at doing. Examples include a skill, valuable assets, alliances or
cooperative ventures, experienced sales force, easy access to raw
materials, brand reputation etc. Strengths are not a growing market,
new products, etc.

4. Weaknesses: A weakness is something a company lacks or does

poorly. Examples include lack of skills or expertise, deficiencies in
assets, inferior capabilities in functional areas etc. Though
weaknesses are often seen as the logical ‘inverse’ of the company’s
threats, the company’s lack of strength in a particular area or market
is not necessarily a relative weakness because competitors may also
lack this particular strength.

5.3.1 Carrying out SWOT Analysis

Strategic Management : 82
 The first thing that a SWOT analysis does is to evaluate the strengths Organisational Appraisal :
Internal Assessment 1
and weaknesses in terms of skills, resources and competencies. The analyst
then should see whether the internal capabilities match with the demands of
the key success factors. The job of a strategist is to capitalize on the
NOTES
organisation’s strengths while minimizing the effects of its weaknesses in
order to take advantage of opportunities and overcome threats in the
environment. SWOT analysis for a typical firm isgiven below

5.3.2 Steps in SWOT Analysis

The three important steps in SWOT analysis are:
1. Identification
2. Conclusion
3. Translation

1. Identification:
(a) Identify company resource strengths and competitive
capabilities
(b) Identify company resource weaknesses and competitive
deficiencies
(c) Identify company’s opportunities
(d) Identify external threats

2. Conclusion:
(a) Draw conclusions about the company’s overall situation.

3. Translation: Translate the conclusions into strategic actions by acting

on them:
(a) Match the company’s strategy to its strengths and
opportunities
Strategic Management : 83
Organisational Appraisal : (b) Correct important weaknesses
Internal Assessment 1
(c) Defend against external threats

NOTES In devising a SWOT analysis, there are several factors that will
enhance the quality of the material:
1. Keep it brief, pages of analysis are usually not required.
2. Relate strengths and weaknesses, wherever possible, to
industry key factors for success.
3. Strengths and weaknesses should also be stated in
competitive terms, that is, in comparison with
competitors.
4. Statements should be specific and avoid blandness.
5. Analysis should reflect the gap, that is, where the
company wishes to be and where it is now.
6. It is important to be realistic about the strengths and
weaknesses of one’s own and competitive organisations.

Probably the biggest mistake that is commonly made in SWOT

analysis is to provide a long list of points but little logic, argument and
evidence. A short list with each point well argued is more likely to be
convincing.

TOWS Matrix?
TOWS matrix is just an extension of SWOT matrix. TOWS
stand for threats, opportunities, weaknesses and strengths. This matrix
was proposed by Heinz Weihrich as a strategy formulation – matching
tool. TOWS matrix illustrates how internal strengths and weaknesses
can be matched with external opportunities and threats to generate four
sets of possible alternative strategies. This matrix can be used to generate
corporate as well as business strategies. To generate a TOWS matrix,
the following steps are to be followed:
Strategic Management : 84
 Organisational Appraisal :
Internal Assessment 1
1. List external opportunities available in the company’s
current and future environment, inthe ‘opportunities
block’ on the left side of the matrix. NOTES
2. List external threats facing the company now and in future
in the “threats block” on the left side of the matrix.
3. List the specific areas of current and future strengths for
the company, in the “strengths block” across the top of
the matrix.
4. List the specific areas of current and future weaknesses
for the company in the “weaknesses box” across the top
of the matrix.
5. Generate a series of possible alternative strategies for the
company based on particular combinations of the four
sets of factors.

The four sets of strategies that emerge are:

SO Strategies : SO strategies are generated by thinking of ways in

which a company can use its strengths to take advantage of
opportunities. This is the most desirable and advantageous strategy Check Your Progress
What points would you
as it seeks to mass up the firm’s strengths to exploit opportunities.
keep in mind to enhance
For example, Hindustan Lever has been augmenting its strengths by the quality of the material
while devisinga SWOT
taking over businesses in the food industry, to exploit the growing Analysis?
potential of the food business.

ST Strategies : ST strategies use a company’s strengths as a way to

avoid threats. A company may use its technological, financial and
marketing strengths to combat a new competition. For example,
Hindustan Lever has been employing this strategy to fight the increasing
Strategic Management : 85
Organisational Appraisal : competition from companies like Nirma, Procter & Gamble etc.
Internal Assessment 1

WO Strategies : WO Strategies attempt to take advantage of

NOTES opportunities by overcoming its weaknesses. For example, for textile

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

WT Strategies : WT Strategies are basically defensive strategies and

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

Strategic Management : 86
 Organisational Appraisal :
5.3.3 Critical Assessment of SWOT Analysis Internal Assessment 1

SWOT analysis is one of the most basic techniques for analysing

firm and industry conditions. It provides the “raw material” for analysing NOTES
internal conditions as well as external conditions of a firm. SWOT analysis

can be used in many ways to aid strategic analysis. For example, it can

be used for a systematic discussion of a firm’s resources and basic

alternatives that emerge from such an analysis. Such a discussion is

necessary because a strength to one firm may be a weakness for another

firm, and vice-versa. For example, increased health consciousness of

people is a threat to some firms (e.g. tobacco) while it is an opportunity

to others (e.g. health clubs). According to Johnson and Sholes (2002),

a SWOT analysis summarises the key issues from the business

environment and the strategic capability of an organisation that impacts

strategy development. This can also be useful as a basis for judging

future courses of action. The aim is to identify the extent to which the

current strengths and weaknesses are relevant to, and capable of, dealing

with the changes taking place in the business environment. It can also

be used to assess whether there are opportunities to exploit further the

unique resources or core competencies of the organisation. Overall,

SWOT analysis helps focus discussion on future choices and the extent

to which the company is capable of supporting its strategies.

5.3.4 Advantages and Limitations

Advantages
1. It is simple.
2. It portrays the essence of strategy formulation: matching
a firm’s internal strengths and weaknesses with its Strategic Management : 87
Organisational Appraisal :
external opportunities and threats.
Internal Assessment 1
3. Together with other techniques like Value Chain Analysis

and RBV, SWOT analysis improves the quality of internal

NOTES analysis.

Limitations

1. It gives a static perspective, and does not reveal the

dynamics of competitive environment.

2. SWOT emphasizes a single dimension of strategy (i.e.

strength or weakness) and ignores other factors needed

for competitive success.

3. A firm’s strengths do not necessarily help the firm create

value or competitive advantage.

4. SWOT’s focus on the external environment is too narrow.

In spite of the above criticism and its limitations, SWOT analysis

is still a popular analytical tool used by most organisations. It is definitely

a useful aid in generating alternative strategies, through what is called

TOWS matrix.

5.4 Summary
• The internal environment of an organisation contains the internal

resources and possessesinternal capabilities and core competencies.

• SWOT Analysis is a strategic planning method used to evaluate the

Strengths, Weaknesses,

• Opportunities, and Threats involved in a project or in a business

venture.
Strategic Management : 88
 Organisational Appraisal :
5.5 Key Terms Internal Assessment 1

Opportunities : A time or place favourable for executing a policy/

strategy. NOTES
Resource : an asset, skill, process or knowledge controlled by an
organisation.
SWOT Analysis : Strengths, Weakness, Opportunities and Threat
Analysis.
Threat : A major unfavourable situation in a firm’s environment.

5.6 Questions and Exercises

1. Suppose you are newly appointed CEO of a retail major. How

would you perform the internal analysis to identify the resources
and capabilities of the firm?
2. Analyses the role of internal analysis in strategy formulation.
3. What points would you keep in mind to enhance the quality of
the material while devisinga SWOT Analysis?
4. “SWOT Analysis portrays the essence of strategy formulation”.
Comment.
5. How would you carry out SWOT analysis for a software and
electronic media company?
6. Critically assess the significance of SWOT Analysis in Strategic
Management.
7. You are the CEO of a footwear manufacturing company. Your
company manufactures shoes and sandals for both the sexes.
The designs of the shoes and sandals have notchanged over
the years. Your shoes sold like hot cakes in early 2000s but
now the sales have declined heavily. Analyse the situation and
suggest appropriate solutions to get the company back on track.
8. Is it not enough for a company to analyse its own strengths
and weaknesses? Justify your Answer. Strategic Management : 89
Organisational Appraisal : 9. “SWOT analysis stands at the core of strategic management”.
Internal Assessment 1
Substantiate
10. Conduct a SWOT analysis for any two major companies in the

NOTES FMCG market.

Check your progress

Fill in the blanks:
1. SWOT stands for ....................., ....................., .....................
and .....................
2. An ..................... is a major favourable situation in a firm’s
environment.
3. ..................... is something a company possesses or is good at
doing.
4. SWOT Analysis provides the “raw material” for analyzing
..................... and ..................... conditions of a firm.
5. ..................... portrays the essence of strategy formulation.
6. SWOT’s focus on the external environment is too .....................
7. …………………is the starting point of developing competitive
advantage.
8. Increase in competition and high inflation rate are
potential……………………for a company.
9. At the……………….stage of SWOT analysis, companies try to
correct their major weaknesses.
10. ……………………matrix is just an extension of the SWOT
matrix.

Answers:
1. strengths, weaknesses, opportunities, threats 2. opportunity
3. Strength 4. internal, external 5. SWOT 6. narrow 7. Internal analysis
8. Threats 9. Translation 10. TOWS
Strategic Management : 90
 Organisational Appraisal :
5.7 Further Reading and References Internal Assessment 1

Books
• AA. Thompson and AJ. Strickland, Strategic Management,
NOTES
Business Publications, Texas, 1984.
• Francis Cherunilam, Strategic Management, Himalaya
Publishing Home, Mumbai, 1998.
• Johnson Gerry and Sholes Kevan, Exploring Corporate
Strategy, 6th Edition, Pearson Education Ltd., 2002.
• Michael Porter, Competitive Advantage, Free Press, New
York.

Strategic Management : 91
Strategic Management : 92
 Organisational Appraisal :
UNIT 6: ORGANISATIONAL Internal Assessment 2

APPRAISAL: INTERNAL
ASSESSMENT 2 NOTES

6.0 Unit Objectives

6.1 Introduction

6.2 Strategy and Culture

6.3 Value Chain Analysis

6.3.1 Analysis

6.3.2 Conducting a Value Chain Analysis

6.3.3 Usefulness of the Value Chain Analysis

6.4 Organisational Capability Factors

6.4.1 Resources

6.4.2 Strategic Importance of Resources

6.4.3 Critical Success Factors

6.5 Benchmarking

6.6 Summary

6.7 Key Terms

6.8 Questions and Exercises

6.9 Further Reading and References

6.0 Unit Objectives

After studying this unit, you Should be able to:

• Realise the concept between strategy and culture Strategic Management : 93

Organisational Appraisal :
• Discuss value chain analysis
Internal Assessment 2
• Identify organisational capability factors
• Describe the concept of benchmarking

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

6.2 Strategy and Culture

An organisation’s culture can exert a powerful influence on the
behaviour of all employees. It can, therefore, strongly affect a company’s
ability to adopt new strategies. A problem for a strong culture is that a
change in mission, objectives, strategies or policies is not likely to be
successful if it is in opposition to the culture of the company. Corporate
culture has a strong tendency to resist change because its very existence
often rests on preserving stable relationships and patterns of behaviour.
For example, the male-dominated Japanese centered corporate culture
of the giant Mitsubishi Corporation created problems for the company
when it implemented its growth strategy in North America. The alleged
sexual harassment of its female employees by male supervisors resulted
in lawsuits and a boycott of the company’s automobiles by women
activists. There is no one best corporate culture. An optimal culture is
Strategic Management : 94
one that best supports the mission and strategy of the company. This Organisational Appraisal :
Internal Assessment 2
means that, like structure and leadership, corporate culture should support
the strategy. Unless strategy is in complete agreement with the culture,
any significant change in strategy should be followed by a change in the NOTES
organisation’s culture.

Although corporate cultures can be changed, it may often take

long time and requires much effort. A key job of management therefore
involves “managing corporate culture”. In doing so, management must
evaluate what a particular change in strategy means to the corporate
culture, assess if a change in culture is needed and decide if an attempt
to change culture is worth the likely costs.

‘FIT’ between Strategy and Culture

A culture grounded in values, practices and behavioural norms

that match what is needed for good strategy implementation, helps
energize people throughout the company to do their jobs in a strategy
supportive manner. But when the culture is in conflict with some aspects
of the company’s direction, performance targets, or strategy, the culture
becomes a stumbling block. Thus, an important part of managing the Check Your Progress
strategy implementation process is establishing and nurturing a good “Organisation does not
have a ‘best’ or a ‘worst’
‘fit’ between culture and strategy.
culture”, Substa- ntiate?

6.3 Value Chain Analysis

Every organisation consists of a chain of activities that link
together to develop the value of the business. They are basically
purchasing of raw materials, manufacturing, distribution, and marketing
of goods and services. These activities taken together form its value
Strategic Management : 95
Organisational Appraisal :
chain. The value chain identifies where the value is added in the process
Internal Assessment 2
and links it with the main functional parts of the organisation. It is used for
developing competitive advantage because such chains tend to be unique

NOTES to an organisation. It then attempts to make an assessment of the

contribution that each part makes to the overall added value of the business.
Essentially, Porter linked two areas together:

1. The added value that each part of the organisation

contributes to the whole organisation;and
2. The contribution that each part makes to the competitive
advantage of the whole organisation.

In a company with more than one product area, the analysis should
be conducted at the level of product groups, not at corporate strategy
level. Value Chain thus views the organisation as a chain of value-creating
activities. Value is the amount that buyers are willing to pay for what a
product provides them. A firm is profitable to the extent the value it receives
exceeds the total cost involved in creating its products. Creating value for
buyers that exceeds the cost of production (i.e. margin) is a key concept
used in analysing a firm’s competitive position. Porter has applied this idea
to the activities of an organisation as a whole, arguing that it is necessary
to examine activities separately in order to identify sources of competitive
advantage.

According to Porter, customer value is derived from three basic sources.

1. Activities that differentiate the product

2. Activities that lower its costs

3. Activities that meet the customer’s need quickly.

Competitive advantage, argues Michael Porter (1985), can be

Strategic Management :96 understood only by looking at a firm as a whole, and cost advantages and
successful differentiation are found in the chain of activities that a firm Organisational Appraisal :
Internal Assessment 2
performs to deliver value to its customers.

NOTES
6.3.1 Analysis
According to Porter, value chain activities are divided into two
broad categories, as shown in the figure.

1. Primary activities

2. Support activities

Primary activities contribute to the physical creation of the product or

service, its sale and transfer to the buyer and its service after the sale.

Support activities include such activities as procurement, HR etc. which

either add value by themselves or add value through primary activities
and other support activities. Advantage or disadvantage can occur at
any one of the five primary and four secondary activities, which together
form the value chain for every firm.

Primary Activities

Inbound Logistics : These activities focus on inputs. They

include material handling, warehousing, inventory control,
vehicle scheduling, and returns to suppliers of inputs and raw
materials.

Operations : These include all activities associated with

transforming inputs into the final product, such as production,
machining, packaging, assembly, testing, equipment maintenance
etc. These activities are associated with collecting, storing,
physically distributing the finished products to the customers.
They include finished goods warehousing, material handling and
delivery, vehicle operation, order processing and scheduling.
Strategic Management : 97
Organisational Appraisal : Marketing and Sales : These activities are associated with
Internal Assessment 2
purchase of finished goods by the customers and the inducement
used to get them buy the products of the company. They include

NOTES advertising, promotion, sales force, channel selection, channel

relations and pricing.

Support Activities

Procurement :Activities associated with purchasing and

providing raw materials, supplies and other consumable items
as well as machinery, laboratory equipment, office equipment
etc.

Porter refers to procurement as a secondary activity, although

many purchasing gurus would argue that it is (at least partly) a
primary activity. Included are such activities as purchasing raw
materials, servicing, supplies, negotiating contracts with
suppliers, securing building leases and so on.

Technology Development : Activities relating to product R&D,

process R&D, process design improvements, equipment design,
computer software development etc.

Human Resource Management : Activities associated with

recruiting, hiring, training, development, compensation, labour
relations, development of knowledge-based skills etc.

Firm Infrastructure : Activities relating to general management,

organisational structure, strategic planning, financial and quality
control systems, management information systems etc.

Johnson and Sholes (2002) observe that few organisations

undertake all activities from production of raw materials to the
point–of–sale of finished products themselves. But, the value
Strategic Management : 98 chain exercise must incorporate the whole process, that is, the
 entire value system. This means, for example, that even if an Organisational Appraisal :
Internal Assessment 2
organisation does not produce its own raw materials, it must
nevertheless seek to identify the role and impact of its supply
sources on the final product. Similarly, even if it is not responsible NOTES
for after-sales service, it must consider how the performance of
those who deliver the service contribute to overall product/service
cost and quality.

6.3.2 Conducting a Value Chain Analysis

Value chain analysis involves the following steps.

Identify Activities

The first step in value chain analysis is to divide a company’s

operations into specific activities and group them into primary and
secondary activities. Within each category, a firm typically performs a
number of discrete activities that may reflect its key strengths and
weaknesses.

Allocate Costs

The next step is to allocate costs to each activity. Each activity in

the value chain incurs costs and ties up time and assets. Value chain analysis
requires managers to assign costs and assets to each activity. It views
costs in a way different from traditional cost accounting methods. The
different method is called activity-based costing.

Identify the Activities that Differentiate the Firm

Scrutinizing the firm’s value chain not only reveals cost advantages
or disadvantages, but also identifies the sources of differentiation
advantages relative to competitors.

Examine the Value Chain

Once the value chain has been determined, managers need to Strategic Management : 99
Organisational Appraisal : identify the activities that are critical to buyer satisfaction and market success.
Internal Assessment 2
This is essential at this stage of the value chain analysis for the following
reasons:
1. If the company focuses on low-cost leadership, then
NOTES
managers should keep a strict vigil oncosts in each activity.
If the company focuses on differentiation, advantage given
by each activity must be carefully evaluated.
2. The nature of value chain and the relative importance of
each activity within it, vary from industry to industry.
3. The relative importance of value chain can also vary by a
company’s position in a broader value system that includes
value chains of upstream suppliers and downstream
distributors and retailers.
4. The interrelationships among value-creating activities also
need to be evaluated.

The final basic consideration in applying value chain analysis is the

need to use a comparison when evaluating a value activity as a strength or
weakness. In this connection, RBV and SWOT analysis will supplement
the value chain analysis. To get the most out of the value-chain analysis, as
already noted, one needs to view the concept in a broader context. The
value chain must also include the firm’s suppliers, customers and alliance
partners. Thus, in addition to thoroughly understanding how value is created
within the organisation, one must also know how value is created for other
organisations involved in the overall supply chain or distribution channel in
which the firm participates. Therefore, in assessing the value chains there
are two levels that must be addressed.

1. Interrelationships among the activities within the firm.

2. Relationships among the activities within the firm and with
other organisations that are a part of the firm’s expanded

Strategic Management : 100 value chain.

 Organisational Appraisal :
6.3.3 Usefulness of the Value Chain Analysis Internal Assessment 2

The value chain analysis is useful to recognize that individual

activities in the overall production process play an important role in
NOTES
determining the cost, quality and image of the end-product or service.
That is, each activity in the value chain can contribute to a firm’s relative
cost position and create a basis for differentiation, which are the two
main sources of competitive advantage. While a basic level of competence
is necessary in all value chain activities, management needs to identify
the core competences that the organisation has or needs to have to compete
effectively.

Analyzing the separate activities in the value chain helps

management to address the following issues:

1. Which activities are the most critical in reducing cost or

adding value? If quality is a keyconsumer value, then
ensuring quality of supplies would be a critical success
factor.
2. What are the key cost or value drivers in the value chain?
3. What linkages help to reduce cost, enhance value or
discourage imitation?
4. How do these linkages relate to the cost and value drivers?

Porter identified the following as the most important cost and

value drivers:
Cost Drivers

1. Economies of scale
2. Pattern of capacity utilization (including the efficiency of
production processes and labour productivity)
3. Linkages between activities (for example, timing of
deliveries affect storage costs, just-in time system
minimizes inventory costs) Strategic Management : 101
Organisational Appraisal : 4. Interrelationships (for example, joint purchasing by two
Internal Assessment 2
units reduces input costs)
5. Geographical location (for example, proximity to supplies

NOTES reduces input costs)

6. Policy choices (such as the choices on the product mix,
the number of suppliers used, wage costs, skills
requirements and other human resource policies affect
costs)
7. Institutional factors (which include political and legal
factors, each of which can have a significant impact on
costs).

Value Drivers

Value drivers are similar to cost drivers, but they relate to other
features (other than low price) valued by buyers. Identifying value derivers
comes from understanding customer requirements, which may include:

1. Policy choices (choices such as product features, quality

of input materials, provision ofcustomer services and skills
and experience of staff).
2. Linkages between activities (for example, between
suppliers and buyers; sales and aftersales staff).

The cost and value drivers vary between industries. The value
chain concept shows that companies can gain competitive advantage by
controlling cost or value drivers and/or reconfiguring the value chain,
that is, a better way of designing, producing, distributing or marketing a
product or service. For example, Ryanair has become one of the most
profitable airlines in Europe through concentrating on the parts of its
value chain, such as ticket transaction costs, no frills etc.
Strategic Management : 102
 Organisational Appraisal :
6.4 Organisational Capability Factors Internal Assessment 2

Organisations capabilities lies in its resources. The resources

are the means by which an organisation generates value. It is this value
NOTES
that is then distributed for various purposes. Resources and capabilities
of a firm can be best explained with the help of Resource Based
View(RBV) of a firm which is popularized by Barney. RBV considers
the firm as a bundle of resources – tangible resources, intangible
resources, and organisational capabilities. Competitive advantage,
according to this view, generally arises from the creation of bundles of
distinctive resources and capabilities.

6.4.1 Resources
A ‘resource’ can be an asset, skill, process or knowledge
controlled by an organisation. From a strategic perspective, an
organisation’s resources include both those that are owned by the
organisation and those that can be accessed by the organisation to support
its strategies. Some strategically important resources may be outside
the organisation’s ownership, such as its network of contacts or
customers. Typically, resources can be grouped into four categories:

1. Physical resources include plant and machinery, land

and buildings, productioncapacity etc.
2. Financial resources include capital, cash, debtors,
creditors etc.
3. Human resources include knowledge, skills and
adaptability of human resources.
4. Intellectual capital is an intangible resource of an
organisation. This includes theknowledge that has been
captured in patents, brands, business systems, customer
databases and relationships with partners. In a Strategic Management : 103
Organisational Appraisal :
knowledge-based economy, intellectual capital is likely
Internal Assessment 2
to be the major asset of many organisations.

NOTES Capabilities

Resources are not very productive on their own. They need

organisational capabilities. Organisational capabilities are the skills that
a firm employs to transform inputs into outputs. They reflect the ability
of the firm in combining assets, people and processes to bring about the
desired results. Prahalad and Hamel describe an organisational
competence as a “bundle of skills and technologies”, which are integrated
in people skills and business processes. Capabilities are, therefore a
function of the firm’s resources, their application and organisation,
internal systems and processes, and firm specific skill sets. Capabilities
are rarely unique, and can be acquired by other firms as well in that
industry. Some of these capabilities may become “distinctive
competencies”, when a firm performs them better than its rivals.

Core Competence

Superior performance does not merely come from resources alone

because they can be imitated or traded. Superior performance comes by
the way in which the resources are deployed to create competences in
the organisation’s activities. For example, the knowledge of an individual
willnot improve an organisation’s performance unless he or she is allowed
to work on particular tasks which exploit that knowledge. Although an
organisation will need to achieve a threshold level of competence in all
of the activities and processes, only some will become core competences.
Core competence refers to that set of distinctive competencies that
provide a firm with a sustainable source of competitive advantage. Core
competencies emerge over time, and reflect the firm’s ability to deploy
different resources and capabilities in a variety of contexts to gain and
Strategic Management : 104 sustain competitive advantage.
 Core competences are activities or processes that are critically Organisational Appraisal :
Internal Assessment 2
required by an organisation to achieve competitive advantage. They
create and sustain the ability to meet the critical success factors of
particular customer groups better than their competitors in ways that NOTES
are difficult to imitate. In order to achieve this advantage, core
competences must fulfill the following criteria. It must be:

1. an activity or process that provides customer value in

the product or service features.
2. an activity or process that is significantly better than
competitors.
3. an activity or process that is difficult for competitors to
imitate.

Task Enlist at least five types of resources that all organisations

have. An organisation uses different types of resources and exhibits a
certain type of organisational capabilities to leverage those resources
to bring about a competitive advantage, as shown in It is important to
emphasize that resources by themselves do not yield a competitive
advantage. Those resources need to be integrated into value creating
activities. Thus the central theme of RBV is that competitive advantage
is created and sustained through the bundling of several resources in
unique combinations. Thus,

1. Competence is something an organisation is good at

doing.

2. Core competence is a proficiently performed internal

activity.

3. Distinctive competence is an activity that a company

performs better than its rivals.

4. Distinctive competencies become the basis for

competitive advantage. Strategic Management : 105
Organisational Appraisal :
Barney, in his VRIO framework of analysis, suggests four questions to
Internal Assessment 2
evaluate a firm’s key resources.

NOTES 1. Value: Does it provide competitive advantage?

2. Rareness: Do other competitors possess it?
3. Imitability: Is it costly for others to imitate?
4. Organisation: Is the firm organised to exploit the resource?

If the answer to these questions is “yes” for a particular resource, that

resource is considered a strength and a distinctive competence.

Using Resources to Gain Competitive Advantage: Grant proposes a

five-step resource based approach to strategy analysis.

1. Identify and classify the firm’s resources in terms of

strengths and weaknesses.
2. Combine the firm’s strengths into specific capabilities.
3. Appraise the profit potential of these resources and
capabilities.
4. Select the strategy that best exploits the firm’s resources
and capabilities relative to external opportunities.
5. Identify resource gaps and invest in overcoming
weaknesses.

6.4.2 Strategic Importance of Resources

Johnson and Sholes (2002 ) explain the strategic importance of

resources with the concept of ‘strategic capability’. According to them,

strategic capability is the ability of an organisation to put its resources

and capabilities to the best advantage so as to enable it to gain

competitive advantage. There are three type of resources:

Strategic Management : 106
Available Resources Organisational Appraisal :
Internal Assessment 2
Strategic capability depends on the resources available to an
organisation because it is the resources used in the activities of the
organisation that create competences. As already explained
NOTES

Threshold Resources

A set of basic resources are needed by a firm for its existence

and survival in the marketplace. These resources are called ‘threshold
resources’. But this threshold tends to increase with time. So, a firm
needs to continuously improve this threshold resource base just to stay
in business.

Unique Resources

Unique resources are those resources that are critically required

to achieve competitive advantage. They are better than competitors’
resources and are difficult to imitate. The ability of an organisation to
meet the critical success factors in a particular market segment depends
on these unique resources. To illustrate unique resources, Johnson and
Sholes quote the example of some libraries having unique collection of
books, which contain knowledge not available elsewhere, and the
example of retail stores located in prime locations, which can charge
higher than average prices. Similarly, some organisations have patented Check Your Progress
“Integration of culture
products or services that are unique, which give them advantage. remains atop challenge
in majority of mergers
and acquisitions”.Why?

6.4.3 Critical Success Factors

Critical Success Factors (CSFs) are defined as the resources,
skills and attributes of an organisation that are essential to deliver success
in the market place. CSFs are also called “Key Success Factors” (KSFs)
or “Strategic Factors”. They are the key factors which are critical for
organisational success and survival.
Strategic Management : 107
Organisational Appraisal :
Internal Assessment 2 Critical success factors will vary from one industry to another.
For example, in the perfume and cosmetics industry, the critical success
factors include branding, product distribution and product performance,
NOTES but are unlikely to include low labour costs, which is a very important
CSF for steel companies. CSFs can be used to identify elements of the
environment that are particularly worth exploring.

Rockart (1979) has applied the CSFs approach to several

organisations through a three step process for determining CSFs. These
steps are:

1. Generate CSFs (asking, what does it take to be

successful in business?)
2. Convert CSFs into objectives (asking, “What should
the organisation’s goals and objectives be with respect
to CSFs)
3. Set Performance standards (asking “How will we know
whether the organisation has been successful in this
factor?”)

Rockart has also identified four major sources of CSFs:

1. Structure of the industry: Some CSFs are specific to

the structure of the industry. Forexample, the extent of
service support expected by the customers. Automobile
companies have to invest in building a national network
of authorized service stations to ensure service delivery
to their customers.
2. Competitive strategy, industry position and geographic
location: CSFs also arise from the above factors. For
example, the large pool of English-speaking manpower
Strategic Management : 108
 makes India an attractive location for outsourcing the Organisational Appraisal :
Internal Assessment 2
BPO needs of American and British firms.
3. Environmental factors: CSFs may also arise out of the
general/business environment of a firm, like the NOTES
deregulation of Indian Industry. With the deregulation of
telecommunications industry, many private companies
had opportunities of growth.
4. Temporal factors: Certain short-term organisational
developments like sudden loss of critical manpower (like
the charismatic CEO) or break-up of the family owned
business, may necessitate CSFs like “appointment of a
new CEO” or “rebuilding the company image”.
Temporarily such CSFs would remain CSFs till the time
they are achieved.

6.5 Benchmarking
Benchmarking is the process of comparing the business processes
and performance metrics including cost, cycle time, productivity, or
quality to another that is widely considered to be an industry standard
benchmark or best practice. Essentially, benchmarking provides a
snapshot of the performance of a business and helps one understand
where one is in relation to a particular standard. The result is often a
business case and “Burning Platform” for making changes in order to
make improvements. Also referred to as “best practice benchmarking”
or “process benchmarking”, it is a process used in management and
particularly strategic management, in which organisations evaluate
various aspects of their processes in relation to best practice companies’
processes, usually within a peer group defined for the purposes of
comparison. This then allows organisations to develop plans on how to
make improvements or adapt specific best practices, usually with the Strategic Management : 109
Organisational Appraisal : aim of increasing some aspect of performance. Benchmarking may be a
Internal Assessment 2
one-off event, but is often treated as a continuous process in which
organisations continually seek to improve their practices.

NOTES
Types of Benchmarking

Benchmarking can be of following types:

1. Process benchmarking: the initiating firm focuses its

observation and investigation ofbusiness processes with
a goal of identifying and observing the best practices from
one or more benchmark firms. Activity analysis will be
required where the objective is to benchmark cost and
efficiency; increasingly applied to back-office processes
where outsourcing may be a consideration.
2. Financial benchmarking: performing a financial analysis
and comparing the results in an effort to assess your
overall competitiveness and productivity.
3. Benchmarking from an investor perspective: extending
the benchmarking universe to also compare to peer
companies that can be considered alternative investment
opportunities from the perspective of an investor.
4. Performance benchmarking: allows the initiator firm
to assess their competitive position by comparing
products and services with those of target firms.
5. Product benchmarking: the process of designing new
products or upgrades to currentones. This process can
sometimes involve reverse engineering which is taking
apart competitors’ products to find strengths and
weaknesses.
6. Strategic benchmarking: involves observing how others
compete. This type is usually notindustry specific,
Strategic Management : 110 meaning it is best to look at other industries.
 7. Functional benchmarking: a company will focus its Organisational Appraisal :
Internal Assessment 2
benchmarking on a single function in order to improve
the operation of that particular function. Complex
functions such as Human Resources, Finance and NOTES
Accounting and Information and Communication
Technology are unlikely to be directly comparable in cost
and efficiency terms and may need to be disaggregated
into processes to make valid comparison.
8. Best-in-class benchmarking: involves studying the
leading competitor or the company that best carries out
a specific function.
9. Operational benchmarking: embraces everything from
staffing and productivity to office flow and analysis of
procedures performed.

There is no single benchmarking process that has been universally

adopted. The wide appeal and acceptance of benchmarking has led to
various benchmarking methodologies emerging The first book on
benchmarking, written by Kaiser Associates, offered a 7-step approach.
RoberCamp (who wrote one of the earliest books on benchmarking in
1989) developed a 12-stage approach to benchmarking.

The 12 stage methodology consisted of:

1. Select subject ahead

2. Define the process

3. Identify potential partners

4. Identify data sources

5. Collect data and select partners

6. Determine the gap Strategic Management : 111

Organisational Appraisal : 7. Establish process differences
Internal Assessment 2
8. Target future performance

9. Communicate
NOTES
10. Adjust goal

11. Implement

12. Review/recalibrate.

The following is an example of a typical benchmarking methodology:

1. Identify your problem areas: Because benchmarking can

be applied to any business processor function, a range of
research techniques may be required. They include:
informal conversations with customers, employees, or
suppliers; exploratory research techniques such as focus
groups; or in-depth marketing research, quantitative
research, surveys, questionnaires, re-engineering analysis,
process mapping, quality control variance reports, or
financial ratio analysis. Before embarking on comparison
with other organisations it is essential that one knows
one’s own organisation’s function, processes; base lining
performance provides a point against which improvement
effort can be measured.
2. Identify other industries that have similar processes:
For instance if one were interested in improving hand
offs in addiction treatment he/she would try to identify
other fields that also have hand off challenges. These
could include air traffic control, cell phone switching
between towers, transfer of patients from surgery to

Strategic Management : 112 recovery rooms.

 Organisational Appraisal :
3. Identify organisations that are leaders in these areas: Internal Assessment 2
Look for the very best in any industry and in any country.
Consult customers, suppliers, financial analysts, trade
associations, and magazines to determine which NOTES
companies are worthy of study.
4. Survey companies for measures and practices:
Companies target specific business processes using
detailed surveys of measures and practices used to
identify business process alternatives and leading
companies. Surveys are typically masked to protect
confidential data by neutral associations and consultants.
5. Visit the “best practice” companies to identify leading
edge practices: Companies typically agree to mutually
exchange information beneficial to all parties in a
benchmarking group and share the results within the
group.
6. Implement new and improved business practices: Take
the leading edge practices and develop implementation
plans which include identification of specific
opportunities, funding the project and selling the ideas
to the organisation for the purpose of gaining
demonstrated value from the process

6.6 Summary
• Culture is a powerful component of an organisation’s success,

laying the tracks for strategyto roll out on.It is the foundation

for profit, productivity and progress. While it can accelerate

getting tothe next level of performance, it can just as easily act

as drag.
Strategic Management : 113
Organisational Appraisal : • Culture-strategy Fit is a leading organisational culture consulting
Internal Assessment 2
firm conducting groundbreaking culture diagnosis and change
projects to help organisations leverage their cultureto drive
strategy and performance.
NOTES
• It involves specifying the objective of the business venture or
project and identifying theinternal and external factors that are
favorable and unfavorable to achieving that objective.
• A value chain is a chain of activities.Products pass through all
activities of the chain in order and at each activity the
productgains some value.
• The chain of activities gives the products more added value than
the sum of added valuesof all activities.
• It is important not to mix the concept of the value chain with the
costs occurring throughout the activities.
• Benchmarking is an improvement tool whereby a company
measures its performance orprocess against other companies’
best practices, determines how those companies achieved their
performance levels.Benchmarking uses the information to
improve its own performance.

6.7 Key Terms

Assimilation: The acquired firm willingly surrenders its culture and
adopts the culture of the acquiring company.

Benchmarking: The concept of discovering what is the best performance

being achieved, whether in your company, by a competitor, or by an
entirely different industry.

Cultural Fit: Compatibility of culture with other arenas.

Deculturation involves imposition of the acquiring firm’s culture

Strategic Management : 114 forcefully on the acquired firm.

 Organisational Appraisal :
Integration involves merging the two cultures in such a way that separate
Internal Assessment 2
cultures of both firms are preserved in the resulting culture.

Value Chain: Value chain is ‘a string of companies working together to

satisfy market demands.’ NOTES

6.8 Questions and Exercises

1. As a strategy manager, what would you do if you find that the
culture of your organisationis in conflict with company’s direction
and performance targets?
2. “Organisation does not have a “best” or a “worst” culture”.
Substantiate.
3. To be a good manager, one must expertly use symbols, role
models, and ceremonial occasions to achieve the strategy culture
fit. Why/why not?
4. “Integration of culture remains atop challenge in majority of
mergers and acquisitions”.Why?
5. Explain the rationale behind benchmarking with the help of
suitable examples.
6. Do you think that each activity in the value chain can contribute
to a firm’s relative cost position and create a basis for
differentiation? Why/why not?
7. Explain the concept of value chain with the help of figure and
suitable examples.
8. Conduct a value chain analysis for a computer system
manufacturing company.
9. “Resources alone can’t do any good for a company. “ Elucidate
10. Discuss the organizational resources from a strategic point of
view. Strategic Management : 115
Organisational Appraisal :
Check your progress
Internal Assessment 2
Fill in the blanks:

NOTES 1. An organisation’s ..................... can exert a powerful influence

on the behaviour of all employees.
2. An optimal culture is one that best supports the .....................
and ..................... of the company.
3. A culture grounded in ....................., ..................... and
..................... norms that match what is needed for good
strategy implementation.
4. An important part of managing the strategy implementation
process is establishing and nurturing a good ‘fit’ between
..................... and .....................
5. When implementing a new strategy, a company should take
time to assess .....................
6. Once a strategy is established, it is difficult to .....................
7. Changing a company’s culture to align it with ..................... is
one of the toughest management tasks.
8. Changing culture requires both ..................... actions and
..................... actions.
9. Leaders must emphasize ..................... values through internal
company communications.
10. The greater the gap between the cultures of the two firms, the
..................... the executives in the acquired firm quit their jobs.

Answers:
1. culture 2. mission, strategy 3. values, practices, behavioural
4. culture,strategy 5.strategy-culture compatibility 6.Change 7. strategy
8. symbolic, substantive 9. dominant 10. faster
Strategic Management : 116
 Organisational Appraisal :
6.9 Further Reading and References Internal Assessment 2

Books

• AA. Thompson and AJ. Strickland, Strategic Management, NOTES

Business Publications, Texas, 1984.

• Francis Cherunilam, Strategic Management, Himalaya Publishing

Home, Mumbai, 1998.

• Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy,

6th Edition, Pearson Education Ltd., 2002.

• Michael Porter, Competitive Advantage, Free Press, New York.

Strategic Management : 117

Strategic Management : 118
 Corporate Level
UNIT 7: CORPORATE LEVEL Strategies

STRATEGIES
NOTES
7.0 Unit Objectives

7.1 Introduction

7.2 Expansion Strategies

7.3 Retrenchment Strategies

7.3.1 Turnaround Strategy

7.3.2 Divestment

7.3.3 Bankruptcy

7.3.4 Liquidation

7.4 Combination Strategies

7.5 Internationalisation

7.6 Cooperation Strategies

7.6.1 Joint Ventures

7.6.2 Strategic Alliances

7.6.3 Consortia

7.7 Restructuring

7.8 Summary

7.9 Key Terms

7.10 Questions and Exercises

7.11 Further Reading and References

Strategic Management : 119
Corporate Level
Strategies 7.0 Unit Objectives
After studying this unit, you should be able to:

NOTES • Discuss the expansion strategies: concentration, integration and

diversification
• Explain the retrenchment and combination strategies
• State the concept of internationalisation
• Describe the concept of cooperation and restructuring

7.1 Introduction
Corporate strategy is primarily about the choice of direction for
the corporation as a whole. Thebasic purpose of a corporate strategy is
to add value to the individual businesses in it. A corporatestrategy involves
decisions relating to the choice of businesses, allocation of resources
amongdifferent businesses, transferring skills and capabilities from one
set of businesses to others, andmanaging and nurturing a portfolio of
businesses in such a way as to obtain synergies amongproduct lines and
business units, so that the corporate whole is greater than the sum of
itsindividual business units. Managers at the corporate level act on behalf
of shareholders and provide strategic guidance tobusiness units. In these
circumstances, a key question that arises is to what extent and how
mightthe corporate level add value to what the businesses do; or at least
how it might avoid destroyingvalue.

Corporate strategy is thus concerned with two basic issues:

1. What businesses should a firm compete in?

2. How can these businesses be coordinated and managed so

Strategic Management : 120 that they create “Synergy.”
 Synergy means that the whole is greater than the sum of its parts. Corporate Level
Strategies
In organisationalterms, synergy means that as separate departments within
an organisation co-operate andinteract, they become more productive
than if each were to act in isolation. In strategicmanagement, the corporate NOTES
parent has to create synergy among the separate businessunits by
effectively coordinating their activities, so that the corporate whole is
greaterthan the sum of the independent units. Synergy is said to exist for
a multi-divisionalcorporation if the return on investment (ROI) of each
division is greater than what thereturn would be if each division were an
independent business.

7.2 Expansion Strategies

Growth strategies are the most widely pursued corporate
strategies. Companies that do business in expanding industries must grow
to survive. A company can grow internally by expanding itsoperations
or it can grow externally through mergers, acquisitions, joint ventures
or strategic alliances.

Reasons for Pursuing Growth Strategies

Firms generally pursue growth strategies for the following reasons:

1. To obtain economies of scale: Growth helps firms to

achieve large-scale operations, whereby fixed costs can
be spread over a large volume of production.
2. To attract merit: Talented people prefer to work in firms
with growth.
3. To increase profits: In the long run, growth is necessary
for increasing profits of the organisation, especially in
the turbulent and hyper–competitive environment.
4. To become a market leader: Growth allows firms to reach
leadership positions in themarket. Companies such as Strategic Management : 121
Corporate Level Reliance Industries, TISCO etc. reached commanding
Strategies
heightsdue to growth strategies.
5. To fulfill natural urge: A healthy firm normally has a natural
urge for growth. Growthopportunities provide great
NOTES
stimulus to such urge. Further, in a dynamic world
characterizedby the growth of many firms around it, a firm
would have a natural urge for growth.
6. To ensure survival: Sometimes, growth is essential for
survival. In some cases, a firm maynot be able to survive
unless it has critical minimum level of business. Further, if a
firmdoes not grow when competitors are growing, it may
undermine its competitiveness.

Categories of Growth Strategies

Growth strategies can be divided into three broad categories:

1. Intensive Strategies

2. Integration Strategies

3. Diversification Strategies

Concentration Strategies

Without moving outside the organisation’s current range of products

or services, it may be possible to attract customers by intensive advertising,
and by realigning the product and market options available to the
organisation. These strategies are generally referred to as intensification or
concentration strategies. By intensifying its efforts, the firm will be able to
increase its sales and market share of the current product-line faster. This
is probably the most successful internal growth strategy for firms whose
products or services are in the final stages of the product life cycle. Most
of the approaches of intensive strategies deal with product-market
realignments.
Strategic Management : 122
Thus, there are three important intensive strategies: Corporate Level
Strategies
1. Market penetration

2. Market development
NOTES
3. Product development

1. Market penetration: Market penetration seeks to increase

market share for existing products in the existing markets through
greater marketing efforts. This includes activities like increasing
the sales force, increasing promotional effort, giving incentives
etc.

2. Market Development: Market development seeks to increase

market share by selling the present products in new markets.
This can be achieved through the following approaches:

(a) By entering new geographic markets:A company,

which has been confined to some part of a country, may
expand to other parts and foreign markets. Thus, market
development can be achieved through:

(i) Regional expansion

(ii) National expansion

Check Your Progress
(iii) International expansion
Explain the concept of
Example: Nirma, which was confined to local markets product development. Under
what conditions, do you think
or some parts of the country in the beginning, later it is feasible?
expanded to the regional market and then to the national
market.

(b) By entering new market segments:This can be

achieved through:

(i) Developing product versions to appeal to

other segments
Strategic Management : 123
Corporate Level (ii) Entering other channels of distribution
Strategies
(iii) Advertising in other media

Example: Hindustan Lever entered the low price

NOTES
detergent segment by introducing a low-priced detergent
called “Wheel” to compete with “Nirma”. This strategy
will be effective when:

(i) New untapped or unsaturated markets exist

(ii) New channels of distribution are available
(iii) The firm has excess production capacity

(iv) The firm’s industry is becoming rapidly global

(v) The firm has resources for expanded operations

3. Product Development: Product development seeks to increase

the market share by developing new or improved products for
present markets.This can be achieved through:

(a) Developing new product features

(b) Developing quality variations

(c) Developing additional models and sizes

(product proliferation)

Example: Hindustan Lever keeps on adding new brands

or improved versions of consumer products from time
to time to maintain its market share. This strategy will be
effectivewhen:

(a) The firm’s products are in maturity stage

(b) The firm witnesses one of the rapid
technological developments in the industry
(c) The firm is in a high growth industry
(d) Competitors bring out improved quality
Strategic Management : 124 products from time to time
 (e) The firm has strong R&D capabilities. Corporate Level
Strategies
Integrative Strategies

Integration basically means combining activities relating to the

present activity of a firm. Such a combination can be done on the basis of NOTES
the industry value chain. A company performs a number of activities to
transform an input to output. These activities include right from the
procurement of raw materials to the production of finished goods and
their marketing and distribution to the ultimate consumers. These activities
are also called value chain activities. Vertical integration can be:

Full integration: participating in all stages of the industry value

chain.

Partial integration: participating in selected stages of the industry

value chain.

A firm can pursue vertical integration by starting its own operations

or by acquiring a company already performing the activities, it wants to
bring in house. Thus, integration is basically of tw0 types:

1. Vertical integration and

2. Horizontal integration

Vertical Integration

As already explained above, vertical integration involves gaining

ownership or increased controlover suppliers or distributors. Vertical
integration is of two types:

1. Backward Integration: Backward integration involves gaining

ownership or increasedcontrol of a firm’s suppliers. For example,
a manufacturer of finished products may takeover the business of
a supplier who manufactures raw materials, component parts and
other inputs. Brooke Bond’s acquisition of tea plantations is an
example of backwardintegration.
Strategic Management : 125
Corporate Level 2. Forward Integration: Forward integration involves gaining
Strategies
ownership or increased control over distributors or retailers. For
example, textile firms like Reliance, Bombay Dyeing, JK Mills

NOTES (Raymond’s) etc. have resorted to forward integration by opening

their own showrooms.

Advantages of Vertical Integration: The following are the advantages of

vertical integration:

1. A secure supply of raw materials or distribution channels.

2. Control over raw materials and other inputs required for
production or distribution channels.
3. Access to new business opportunities and technologies.
4. Elimination of need to deal with a wide variety of suppliers
and distributors.
Risks

1. Increased costs, expenses and capital requirements.

2. Loss of flexibility in investments.
3. Problems associated with unbalanced facilities or unfulfilled
demand.
4. Additional administrative costs associated with managing a
more complex set of activities.

Disadvantages of Vertical Integration: The following are the disadvantages

of vertical integration

1. It boosts the firm’s capital investment.

2. It increases business risk.
3. It denies financial resources to more worthwhile pursuits.
4. It locks a firm into relying on its own in-house sources of
supply.
5. It poses all kinds of capacity-matching problems.
Strategic Management : 126
 6. It calls for radically different skills and capabilities, which Corporate Level
Strategies
may be lacked by the manufacturer.
7. Outsourcing of component parts may be cheaper and less
complicated than in-house manufacturing. NOTES
Most of the world’s automakers, despite their expertise in
automobile technology and manufacturing, strongly feel that purchasing
many of their key parts and components from manufacturing specialists
result in:

1. Higher quality

2. Lower costs

3. Greater design flexibility

So, they feel that vertical integration option is not preferable.

Weighing the Pros and Cons of Vertical Integration: All in all, vertical
integration strategy canhave both strengths and weaknesses. The choice
depends on:

1. Whether vertical integration can enhance the performance

of the organisation in ways that lower costs, build expertise
or increase differentiation.
2. Whether vertical integrations impact on costs, flexibility,
response times and administrative costs of coordinating
more activities, are more justified.
3. Whether vertical integration substantially enhances a
company’s competitiveness.

If there are no solid benefits, vertical integration will not be an

attractive strategic option. In many cases, companies prefer to focus on
a narrow scope of activities and rely on outsiders to perform the remaining
activities. Strategic Management : 127
Corporate Level Horizontal Integration
Strategies
Horizontal integration is a strategy of seeking ownership or
increased control over a firm’s competitors. Some authors prefer to call
NOTES this as horizontal diversification. By whichever name it is called, this
strategy generally involves the acquisition, merger or takeover of one or
more similar firms operating at the same stage of the industry value chain.

Recent acquisition of Arcelor by Mittal Steels and the acquisition of Corus

by Tata Steel are goodexamples of horizontal integration. The most
important advantage of horizontal integration is that it generally eliminates
or reduces competition. Other advantages are:

1. It yields access to new markets.

2. It provides economies of scale.
3. It allows transfer of resources and capabilities.
When horizontal integration is appropriate Horizontal integration is an
appropriate strategy when:

1. A firm competes in a growing industry.

2. Increased economies of scale provide a major competitive
advantage.
3. A firm has both the capital and human talent needed to
successfully manage an expanded organisation.
4. Competitors are faltering due to lack of managerial
expertise or resources, which the firm has.
Diversification Strategies

Diversification is the process of adding new businesses to the

existing businesses of the company.In other words, diversification adds
new products or markets to the existing ones. A diversifiedcompany is
one that has two or more distinct businesses. The diversification strategy
is concernedwith achieving a greater market from a greater range of
products in order to maximize profits.From the risk point of view,
companies attempt to spread their risk by diversifying into severalproducts
Strategic Management : 128 or industries.
Example: An air-conditioning company may add room-heaters in its Corporate Level
Strategies
present product lines, or a company producing cameras may branch off
into the manufacturing of copying machines.
NOTES
Types of Diversification: Broadly, there are two types of diversification:

1. Concentric Diversification: Adding a new, but related

business is called concentric diversification. It involves
acquisition of businesses that are related to the acquiring
firm in terms of technology, markets or products. The
selected new business has compatibility with the firm’s
current business.

2. Conglomerate diversification: Adding a new, but

unrelated business is called conglomerate diversification.
The new business will have no relationship to the
company’s technology, products or markets. For
example, ITC which is basically a cigarette manufacturer,
has diversified into hotels, edible oils, financial services
etc. Similarly, Reliance Industries, which is basically a
textile manufacturer, has diversified into petro chemicals,
telecommunications, retailing etc. Unlike concentric
diversification, conglomerate diversification does not
result in much of synergy. The main objective is profit
motive. But it has important advantages.

Advantages

(a) Business risk is scattered over diverse industries.

(b) Financial resources are invested in industries that

offer the best profit prospects.

(c) Buying distressed businesses at a low price can

enhance shareholder wealth.
Strategic Management : 129
Corporate Level (d) Company profitability can be more stable in
Strategies
economic upswings and downswings.

Disadvantages
NOTES
(a) It is difficult to manage different businesses
effectively.

(b) The new business may not provide any competitive

advantage if it has no strategic fits.

Diversification into both Related and Unrelated Businesses: Some

companies may diversify into both related and unrelated businesses. The
actual practice varies from company to company.There are three types
of enterprises in this respect:

1. Dominant business enterprises: In such enterprises, one major

“core” business accounts for 50 to 80 per cent of total revenues
and the remaining comes from small related and unrelated
businesses, e.g. TISCO.

2. Narrowly diversified enterprise: These are enterprises that

are diversified around a few (two to five) related or unrelated
businesses e.g. BPL.

3. Broadly diversified enterprises: These enterprises are

diversified around a wide-ranging collection of related and
unrelated businesses e.g. ITC, Reliance Industries.

7.3 Retrenchment Strategies

They are the last resort strategies. A company may pursue
retrenchment strategies when it has a weak competitive position in some

Strategic Management : 130 or all of its product lines resulting in poor performance – sales are down
and profits are dwindling. In an attempt to eliminate the weaknesses Corporate Level
Strategies
that aredragging the company down, management may follow one or
more of the followingretrenchment strategies.

1. Turnaround NOTES

2. Divestment

3. Bankruptcy

4. Liquidation

7.3.1 Turnaround Strategy

A firm is said to be sick when it faces a severe cash crunch or a
consistent downtrend in its operating profits. Such firms become
insolvent unless appropriate internal and external actions are taken to
change the financial picture of the firm. This process of recovery is
called “turnaroundstrategy”.

When Turnaround becomes Necessary

Do companies turn sick overnight and qualify as potential

candidates for turnaround or do they become sick slowly which can be
stopped by timely corrective action? Obviously, the latter is true in most
of the cases. But the reality is also that companies becoming sick often
do not themselves recognize this fact, and fail to take timely action to
remedy the situation. Despite the fact that factors that lead to sickness
may vary from company to company, there aresome common signals
which herald the onset of sickness. John M Harris has listed a dozen
danger signals of impending sickness.

1. Decreasing market share : This is the most significant symptom

of a major sickness. A company which is losing its market share
to competition needs to sit up and take careful note. Regular
monitoring of market share helps companies to keep a tag on Strategic Management : 131
Corporate Level themperformance in the market vis-à-vis their competitors. Any
Strategies
indication of declining market share should trigger off immediate
corrective action.

NOTES 2. Decreasing constant rupee sales : Sales figures, to be meaningful,

should be adjusted for inflation. If constant rupee sales figures
are showing a declining trend, then this is a danger signal to
watch out.

3. Decreasing profitability : Profit figures are a good indication of

a company’s health. Care must be taken to interpret the profit
figures correctly, so as to avoid any misjudgements. Decreasing
profitability can show up as smaller profits in absolute terms or
lower profits per rupee of sales or decreasing return on investment
or smaller profit margins.

4. Increasing dependence on debt : A company overly reliant on

debt soon gets into a tight corner with very few options left. A
substantial rise in the amount of debt, a lopsided debtto- equity
ratio and a lowered corporate credit rating may cause banks and
other financial institutions to impose restrictions and become
reluctant to lend money. Once financial institutions are hesitant
to lend money, the company’s rating on the stock market
alsoslides down and it becomes very difficult for the company to
raise funds from the public too.

5. Restricted dividend policies : Dividends frequently missed or

restricted dividends signal danger. Often, such companies may
have earlier paid substantially higher proportion of earnings as
dividends when in fact they should have been reinvesting in the
business. Current inability to pay dividends is an indication of
the gravity of the situation.

6. Failure to reinvest sufficiently in the business : For a company

Strategic Management : 132 to stay competitive and keep on the fast growth track, it is
 essential to reinvest adequate amounts in plant, equipment and Corporate Level
Strategies
maintenance. When a business is growing, the combination of
new investments and reinvestments often warrants borrowing.
Companies which fail to recognize this fact and try to finance NOTES
growth with only their internal funds are applying brakes in the
path of growth.

7. Diversification at the expense of the core business : It is a well-

observed fact that once companies reach a particular level of
maturity in the existing business, they start looking for
diversification. Often this is done at the cost of the core business,
which then starts to deteriorate and decline. Diversification in
new ventures should be sought as a supplement and not as a
substitute for the primary core business.

8. Lack of planning : In many companies, particularly those built

by individual entrepreneurs, the concept of planning is generally
lacking. This can often result in major setbacks as limited thought
or planning go into the actions and their consequences.

9. Inflexible chief executives : A chief executive who is unwilling

to listen to fresh ideas from others is a signal of impending bad
news. Even if the CEO recognises the danger signals, his
unwillingness to accept any proposal from his subordinates further
blocks the path towards recovery.

10. Management succession problems : When nearly all the top

managers are in their modifies, there may be a serious vacuum at
the second line of command. As these older managers retire or
leave because of perception of decreasing opportunities, there is
bound to be serious management crisis.

11. Unquestioning boards of directors : Directors, who have family,

social or business ties with the chief executive or have served
very long on the board, may no longer be objective in their Strategic Management : 133
Corporate Level judgment. Thus, these directors serve limited purpose in terms
Strategies
of questioning or cautioning the CEO about his actions.

12. A management team unwilling to learn from its competitors:

NOTES Companies in decline often adopt a closed attitude and are not
willing to learn anything from their competitors. Companies
which have survived tough competitive times continuously
analyse theircompetitors’ moves.

Types of Turnaround Strategies

Slater has classified the turnaround strategies into two broad

categories. These are strategic turnaround and operating turnaround.
Whether a sick business needs strategic or operating turn-around can be
ascertained by analysing the current strategic and operating health of
the business. The operating turnarounds are easier to carry out and can
be applied only when there are average to strong strategic strengths
(product-market relationship) in the business. The strategic turnaround
choices may involve either a new way to compete existing business or
entering an altogether new business. Entering a new business as a
turnaround strategy can be approached through the process of product
portfolio management. The strategic turnaround focuses either on
increasing the market share in a given product-market framework or by
shifting the product-market relationship in a new direction by re-
positioning.

The operating turnaround strategies are of four types. These are:

1. Revenue-increasing strategies

2. Cost-cutting strategies

3. Asset-reduction strategies

4. Combination strategies
Strategic Management : 134
 The focus of all these choices is on short-term profit. Thus, if a Corporate Level
Strategies
sick firm is operating much belowits break-even, it must take steps to
reduce the levels of fixed cost and help in reducing the totalcosts of the
firm. In real life, it is always a difficult choice to identify the assets NOTES
which can be sold without affecting the productivity of the business. To
identify saleable assets, the firm may have to keep in mind its strategic
move in the next two to three years. The turnaround strategies
appropriate under different circumstances are:

If the sick firm is operating substantially but not extremely below

its break-even point, then the most appropriate turnaround strategy is
the one which generates extra revenues. These may be in the form of
price reduction to increase sales, stimulating product demand through
promotional efforts or sometimes by introducing scaled down versions
of the main products of the firm. The increased quantities of product
sales not only result in higher sales but also reduce the per unit cost,
thus leading to higher operating profits. If the firm is operating closer
but below break-even point then the turnaround strategy calls for
application of combination strategies. Under combination strategies cost-
reducing, revenue generating and asset-reduction actions are pursued
simultaneously in an integrated and balanced manner. The combination
strategies have a direct favourable impact on cash flows as well as on
profits.

Turnaround Process

The process of turning a sick company into a profitable one is

rather complex and difficult. It is complex because a successful
turnaround strategy demands corrective actions in many deficient areas
of the firm. It is necessary that all these actions are integrated and do
not contradict each other. Strategic Management : 135
Corporate Level
Strategies 7.3.2 Divestment
Selling a division or part of an organisation is called divestiture.
This strategy is often used to raise capital for further strategic acquisitions
NOTES
or investments. Divestiture is generally used as a part of turnaround
strategy to get rid of businesses that are unprofitable, that require too
much capital or that do not fit well with the firm’s other activities.
Divestiture is an appropriate strategy to be pursued under the following
circumstances:

1. When a business cannot be turned around

2. When a business needs more resources than the company

can provide

3. When a business is responsible for a firm’s overall poor

performance

4. When a business is a misfit with the rest of the organisation

5. When a large amount of cash is required quickly

6. When government’s legal actions threaten the existence

of a business.

Reasons for Divestitures

1. Poor fit of a division : When the parent company feels that a

particular division within the company cannot be managed
profitably; it may think of selling the division to another company.
This does not mean the division itself is unprofitable. The other
firm with greater expertise in the line of business could manage
the division more profitably. This means the division can be
managed better by someone else than the selling company.

2. Reverse synergy : Synergy refers to additional gains that can be

Strategic Management : 136

derived when two firms combine. When synergy exists, the
 Corporate Level
combined entity is worth more than the sum of the parts valued
Strategies
separately. In other words, 2 + 2 = 5. Reverse synergy exists
when the parts are worth more separately than they are within
the parent company’s corporate structure. In other words, 2 + 2 NOTES

= 3. In such a case, an outside bidder might be able to pay more

for a division than what the division is worth to the parent
company.

3. Poor performance : Companies may want to divest divisions

when they are not sufficiently profitable. The division may earn
a rate of return, which is less than the cost of capital of the
parent company. A division may turn out to be unprofitable due
to various reasons such as increase in the material and labour
cost, decline in the demand etc.

4. Capital market factors : A divestiture may also take place

because the post divestiture firm, as well as the divested division,
has greater access to capital markets. The combined capital
structure may not help the company to attract the capital from
the investors. Some investors are looking at steel companies
and others may be looking for cement companies. These two
groups of investors are not interested in investing in combined Check Your Progress

company, with cement and steel businesses due to the cyclical “Horizontal integration
eliminates or reduces
nature of businesses. So each group of investors are interested competition”. Comment?
in stand-alone cement or steel companies. So divestitures may
provide greater access to capital markets for the two firms as
separate companies rather than the combined corporation.

5. Cash flow factors : Selling a division results in immediate cash

inflows. The companies that are under financial distress or in
insolvency may be forced to sell profitable and valuable divisions
to tide over the crisis. Strategic Management : 137
Corporate Level 6. To release the managerial talent : Sometime the management
Strategies
may be overburdened with the management of the conglomerate
leading to inefficiency. So they sell one or more divisions of the

NOTES company. After the divestiture, the existing management can

concentrate on the remaining businesses and can conduct the
business more efficiently.

7. To correct the mistakes committed in investment decisions:

Many companies in India diversified into unrelated areas during
the pre-liberalization period. Afterwards they realised that such
a diversification into unrelated areas was a big mistake. To correct
the mistake committed earlier, they had to go for divestiture.
This is because they moved into product market areas with which
they had less familiarity than their existing activities.

8. To realise profit from the sale of profitable divisions : This

type of divestiture occurs when a firm acquires under-performing
businesses, makes it profitable and then sells it to other
companies. The parent company may repeat this process to make
profit out of it.

9. To reduce the debt burden : Many companies sell their assets or

divisions to reduce their debt and bring the balance in the capital
structure of the firm.

10. To help to finance new acquisitions : Companies may sell less

profitable divisions and buy more profitable divisions in order
to increase the profitability of the company as a whole.

Types of Divestitures

1. Spin-off : It is a kind of demerger when an existing parent

company distributes on a prorate basis the shares of the new

Strategic Management : 138 company to the shareholders of the parent company free of cost.
 There is no money transaction, subsidiary’s assets are not Corporate Level
Strategies
revalued, and transaction is treated as stock dividend. Both the
companies exist and carry on their businesses independently after
spin-off. During spin-off, a new company comes into existence. NOTES

2. Sell-off : It is a form of restructuring, where a firm sells a

division to another company. When the business unit is sold,
payment is received generally in the form of cash or securities.
When the firm decides to sell a poorly performing division, this
asset goes to another owner, who presumably values it more
highly because he can use the asset more advantageously than
the seller. The seller receives cash in the place of asset. So the
firm can use this cash more efficiently than it was utilising the
asset that was sold. The firm can also get premium for the assets
because the buyer can more advantageously use such assets.
Sell-off generally have positive impact on the market price of
shares of both the buyer and seller companies. So sell-offs are
beneficial for the shareholders of both the companies.

3. Voluntary corporate liquidation or bust-ups : It is also known

as complete sell-off. The companies normally go for voluntary
liquidation because they create value to the shareholders. The
firm may have a higher value in liquidation than the current
market value. Here the firm sells its assets/divisions to multiple
parties which may result in a higher value being realised than if
they had to be sold as a whole. Through a series of spinoffs or
sell-offs a company may go ultimately for liquidation.

4. Equity carve outs : It is a different type of divestiture and different

form of spin-off and sell off. It resembles Initial Public Offering
(IPO) of some portion of equity stock of a wholly owned
subsidiary by the parent company. The parent company may sell
a 100% interest in subsidiary company or it may choose to remain Strategic Management : 139
Corporate Level in the subsidiary’s line of business by selling only a partial interest
Strategies
(shares) and keeping the remaining percentage of ownership.
After the sale of shares to the public, the subsidiary company’s

NOTES shares will be listed and traded separately in the capital market.

5. Leveraged buyouts (LBO’s) : A leveraged buyout is an

acquisition of a company in which the acquisition is substantially
financed through debt. Debt typically forms 70-90% of the
purchase price. Much of the debt may be secured by the assets
of the company (asset based lending). Firms with assets that
have a high collateral value can more easily obtain such loans.
So LBOs are generally found in capital intensive industries. Debt
is obtained on the basis of company’s future earnings potential.

7.3.3 Bankruptcy
This is a form of defensive strategy. It allows organisations to
file a petition in the court for legal protection to the firm, in case the
firm is not in a position to pay its debts. The court decides the claims on
the company and settles the corporation’s obligations.

7.3.4 Liquidation
Liquidation occurs when an entire company is dissolved and its
assets are sold. It is a strategy of the last resort. When there are no
buyers for a business which wants to be sold, the company may be wound
up and its assets may be sold to satisfy debt obligations. Liquidation
becomes the inevitable strategy under the following circumstances:

1. When an organisation has pursued both turnaround

strategy and divestiture strategy, butfailed.
Strategic Management : 140
 2. When an organisation’s only alternative is bankruptcy. Corporate Level
Strategies
A company can legally declare bankruptcy first and then
wind up the company to raise needed funds to pay debts.
3. When the shareholders of a company can minimize their NOTES
losses by selling the assets of a business.

7.4 Combination Strategies

A company can pursue a combination of two or more corporate
strategies simultaneously. But a combination strategy can be
exceptionally risky if carried too far. No organisation can afford to pursue
all the strategies that might benefit the firm. Difficult decisions must be
made. Priorities must be established. Organisations like individuals have
limited resources, so organisations must choose among alternative
strategies. In large diversified companies, a combination strategy is
commonly employed when different divisions pursue different strategies.
Also, organisations struggling to survive may employ a combination of
several defensive strategies.

7.5 Internationalisation
When the focus of a business is its domestic operations, but a
portion of its activities are outside the home country, it is called an
“International Company”. In other words, an international company is
one that is primarily based in a single country but that acquires some
meaningful share of its resources or revenues from other countries. For
example, a small company engaged in exporting some of its products
beyond its home country, is called “international” in its operations.
Internationalisation involves creating an international division and
exporting the products through that division. The firm really focuses on
the domestic market, and exports what is demanded abroad. All control Strategic Management : 141
Corporate Level is retained at home office regarding product and marketing strategies.
Strategies
As a firm becomes more successful abroad, it might set up manufacturing
and marketing facilities in the foreign country, and allow a certain degree

NOTES of customization. Country units are allowed to make some minor

adaptations to products to suit local needs. But they have far less
independence and autonomy compared to multi-domestic companies.
All sources of core competencies are centralized. The majority of large
US multinationals pursued the international strategy in the decades
following World War II. These companies centralized R&D and product
development but established manufacturing facilities as well as
marketing divisions abroad. Companies such as Mc Donald’s and
Kellogg’s are examples of firms that followed such a strategy in the
beginning. Although these companies do make some local adaptations,
they are of a very limited nature. With increasing pressure to reduce
costs due to global competition, especially from low-cost countries,
the use of this strategy has become limited.

The disadvantages of this strategy are:

1. By concentrating most of its activities in one location,

it fails to take advantage of thebenefit of an optimally
distributed value chain.
2. It is susceptible to higher levels of currency risks,
because the company is too closely associated with a
single country and increase in the value of currency may
suddenly make the product unattractive abroad.

Exporting

This means selling the products in other countries through an

agent or a distributor. This choice offers avenues for larger firms to
begin their international expansion with a minimum investment.

Strategic Management : 142 There are merits and demerits.

Merits Corporate Level
Strategies
1. Less expensive

2. No need to set up manufacturing facilities abroad

NOTES
Demerits

1. Not suitable for bulky, perishable or fragile goods

2. Import duties make the product expensive

3. High transportation costs

4. Cannot avail lower production costs in host country

7.6 Cooperation Strategies

Cooperative strategies such as strategic alliance and joint
ventures are a logical and timely response to intense and rapid changes
in economic activity, technology and globalisation. Apart from alliances
between the firms operating within the same country, cross border
alliances have also become increasingly popular these days. Alliances
generally come in three basic types joint ventures, strategic alliance,
and consortia.

7.6.1 Joint Ventures

In a joint venture, two firms contribute equity to form a new
venture, typically in the host country to develop new products or build
a manufacturing facility or set up a sales and distribution network (Eg.
Maruti Suzuki). The commonly cited advantages are:

1. Improvement of efficiency

2. Access to knowledge Strategic Management : 143

Corporate Level 3. Dealing with political risk factors
Strategies
4. Collusions may restrict competition

Merits
NOTES
1. Two partners bring complementary expertise to the new
venture

2. Both parties share capital and risks.

3. Helps to meet host country regulations

Demerits

1. Two partners may fail to get along

2. The firm has to share profits with the partner

3. Host country culture may pose problems

7.6.2 Strategic Alliances

This is a collaborative partnership between two or more firms
to pursue a common goal. Each partner in an alliance brings knowledge
or resources to the partnership. Such an alliance is generally formed to
access a critical capability not possessed in-house.

7.6.3 Consortia Notes

Consortia are defined as large interlocking relationships, cross
holdings and equity stakes between businesses of an industry. There
could be two forms of consortia:

1. Multipartner Consortia : These are multi-partner alliances

intended to share an underlying technology. One of the most
important European based consortiums to date is Air Bus
Strategic Management : 144
 Industries. Airbus brings together four European aerospace firms Corporate Level
Strategies
from Britain, France, Germany and Spain

2. Cross - holding Consortia : These include large Japanese

Keiretsus (Sumitomo, Mitsubishi, and Mitsui) and Korean NOTES

Chaebols (Daewoo, LG, Hyundai, and Samsung). Two important

features of cross-holding consortia are building long-term focus
and gaining technological critical mass among affiliated member
companies.

7.7 Restructuring
Restructuring is another means by which the corporate office
can add substantial value to a business. Here, the corporate office tries
to find either poorly performing business units with unrealized potential
or businesses on the threshold of significant, positive change. The parent
intervenes, often selling off the whole or part of the businesses, changing
the management, reducing payroll and unnecessary expenses, changing
strategies, and infusing the business with new technologies, processes,
reward systems, and so forth. When the restructuring is complete, the
company can either “sell high” and capture the added value or keep the
business in the corporate family and enjoy the financial and competitive
benefits of the enhanced performance. For the restructuring strategy to
work, the corporate office must have insights to detect businesses
competing in industries with a high potential for transformation.
Additionally, of course, they must have the requisite skills and resources
to turn the businesses around, even if they may be in new and unfamiliar
industries.

Restructuring can involve changes in assets, capital structure

or management.
Strategic Management : 145
Corporate Level 1. Assets restructuring involves the sale of unproductive assets, or
Strategies
even whole lines of businesses, that are peripheral. In some cases,
it may even involve acquisitions that strengthen the core

NOTES businesses.

2. Capital restructuring involves changing the debt-equity mix or

the mix between different classes of debt or equity.

3. Management restructuring involves changes in the composition

of top management team, organisational structure, and reporting
relationships. Tight financial control, rewards based strictly on
meeting performance goals, reduction in the number of middle-
level managers are common steps in management restructuring.
In some cases, parental restructuring may even result in changes
in strategy as well as infusion of new technologiesand processes.

7.8 Summary
• Strategy is the direction and scope of an organisation over the
long-term. Strategies achieve advantages for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder expectations.
• Strategies exist at several levels in any organisation – ranging
from the overall business through to individuals working in it.
• Growth strategies are the most widely pursued corporate
strategies.Without moving outside the organisation’s current
range of products or services, it maybe possible to attract
customers by intensive advertising, and by realigning the
productand market options available to the organisation. These
strategies are generally referredto as intensification or
concentration strategies.
Strategic Management : 146
 • There are three important intensive strategies, viz. Market Corporate Level
Strategies
penetration, Marketdevelopment and Product development.
Integration basically means combining activities relating to the
present activity of a firm.Integration is basically of two types, NOTES
viz. vertical integration and horizontal integration.
• Diversification is the process of adding new businesses to the
existing businesses of the company.
• A company may pursue defense strategies when it has a weak
competitive position insome or all of its product lines resulting
in poor performance.
• Retrenchment strategies are last resort strategies. Companies
can use any of the fourretrenchment strategies- turnaround,
divestment, bankruptcy and liquidation.
• Firms can take the international route by exporting a part of
their produce to other nationsor by outsourcing a small chunk
of their work outside.
• Cooperative strategies such as strategic alliance and joint
ventures are a logical and timelyresponse to intense and rapid
changes in economic activity, technology and globalisation.
• Restructuring is another means by which the corporate office
can add substantial value toa business. Restructuring can involve
changes in assets, capital structure or management.

7.9 Key Terms

Backward Integration: Gaining ownership or increased control of a
firm’s suppliers.
Corporate Strategy: primarily about the choice of direction for the
corporation as a whole
Diversification: process of adding new businesses to the existing
businesses of the company Strategic Management : 147
Corporate Level Horizontal Integration: The strategy of seeking ownership or increased
Strategies
control over a firm’s competitors.
Integration: Integration basically means combining activities relating
to the present activity of a firm.
NOTES
Intensive Strategy: firms intensify their efforts to boost sales and grow
market share
Market Development: seeks to increase market share by selling the
present products in new markets
Market Penetration: seeks to increase market share for existing
products in the existing markets through greater marketing efforts.
Vertical Integration: Expanding the firm’s range of activities backward
into the sources of supply and/or forward into the distribution channels.

7.10 Questions and Exercises

1. If a firm succeeds in making the customers to switch from the
competitor’s brands to the firm’s brands, while maintaining its
existing customers intact, there will be an increase in the firm’s
sales. Why/why not?
2. Explain the concept of product development. Under what
conditions, do you think it is feasible?
3. As a manager, in which situations would you apply vertical
integration and why?
4. “Horizontal integration eliminates or reduces competition”.
Comment
5. Discuss the concept of last resort strategies. Under what
conditions should they be applied?
6. “A firm is sick!” What do you mean by this statement? How
can you prevent this sickness?
7. Do you think that the turnaround process is difficult? Why/

Strategic Management : 148

why not?
 8. Suppose you are the business head of a firm which is in deep Corporate Level
Strategies
financial trouble and is losing customers because of lack of
proper services. In such a situation, what will you do and how
would you justify your actions? NOTES

Check your progress

Fill in the blanks:
1. The customer ................... defines the value proposition that
the organisation will apply to satisfy customers.
2. The ................... focuses on all the activities and key processes
required in order for the company to excel at providing the
value expected by the customers.
3. The ................... and ................... is the foundation of any
strategy and focuses on the intangible assets of an organisation.
4. ................... strategy implies continuing the current activities
of the firm without any significant change in direction.
5. A ................... strategy is a decision to do nothing new.
6. ................... strategies are the most widely pursued corporate
strategies.
7. ................... seeks to increase market share for existing products
in the existing markets.
8. Market ................... seeks to increase market share by selling
the present products in new markets.
9. ................... seeks to increase the market share by developing
new or improved products for present markets.
10. ................... increases the dependability of the supply and quality
of raw materials.
11. ................... involves gaining ownership or increased control
over distributors or retailers.
12. ................... is the process of adding new businesses to the
existing businesses of the company.
Strategic Management : 149
Corporate Level 13. By expanding into ..................., the company can obtain new
Strategies
technologies and products, which can complement its present
businesses.
14. Competition as a reason of corporate ................... occurs in the
NOTES
form of product and/or price competition.

Answers:
1. perspective 2. internal process 3. innovation, learning perspective
4. Stability 5. no change 6. Growth 7. Market penetration 8. Development
9. Product development 10. Backward integration 11. Forward
integration 12. Diversification 13. industries 14. Decline.

7.11 Further Reading and References

Books

• Adapted from Pearce JA and Robinson RB, Strategic Management,

McGraw Hill, NY, 2000.

• W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy, Harvard

Business School Press, 2005.

• Wheelen Thomas L, David Hunger J, KrishRangarajan, Concepts in

Strategic Management and Business Policy, New Delhi, Pearson
Education, 2006.

Strategic Management : 150

 Business Level
Strategies
UNIT 8: BUSINESS LEVEL
STRATEGIES
NOTES
8.0 Unit Objectives

8.1 Introduction

8.2 Industry Structure

8.3 Positioning of the Firm

8.4 Generic Strategies

8.4.1 Risks in Competitive Strategies

8.4.2 Critical Assessment of Generic Strategies

8.4.3 Comment on Porter’s Generic Strategies

8.5 Business Tactics

8.6 Summary

8.7 Key Terms

8.8 Questions and Exercises

8.9 Further Reading and References

8.0 Unit Objectives

After studying this unit, you should be able to:

• Define industry structure

• Describe the positioning of firm
• Discuss the generic strategies
• Identify the business tactics
Strategic Management : 151
Business Level
Strategies 8.1 Introduction
Each business should have its own business strategy. A business
strategy is basically a competitivestrategy and is concerned more with
NOTES
how a business competes successfully in the chosen market.The strategic
decisions at business-level revolve around choice of products and
markets, meetingthe needs of customers, protecting market share, gaining
advantage over competitors, exploitingor creating new opportunities
and earning profit at the business unit level. In short, a businessstrategy
outlines the competitive posture of its operations in the industry.Business
strategy is guided by the direction set by the corporate strategy. It takes
the cue fromthe priorities set by the corporate strategy. It translates the
direction and intent generated at thecorporate level into objectives and
strategies for individual business units.

8.2 Industry Structure

An industry is a collection of firms offering goods or services
that are close substitutes of each other. Alternatively, an industry consists
of firms that directly compete. For industry analysis, an industry can be
defined rather broadly (the beverage industry)or more precisely (the
carbonated soft drink industry). How one defines and circumscribes
anindustry depends on the kinds of analysis to be performed. In “industry
analysis”, it is generallybetter to define an industry as precisely as
possible.Example: In discussing companies like Coca-Cola and Pepsi,
one would want to definethe boundaries of the “carbonated soft drink
industry” rather than that of the “beverage industry”.The term “industry
structure” refers to the number and size distribution of firms in an
industry.The number of firms in an industry may run into hundreds or
thousands. The existence of a largenumber of firms in an industry reduces
opportunities for coordination among firms in theindustry. Hence,
Strategic Management :152 generallyspeaking, the level of competition in an industry rises with
thenumber of firms in the industry. The size distribution of firms in an Business Level
Strategies
industry is important fromthe perspective of both business policy and
public policy.

NOTES
Industry structure consists of four elements:
(a) Concentration
(b) Economies of scale
(c) Product differentiation
(d) Barriers to entry.

(a) Concentration: It means the extent to which industry sales

are dominated by only a fewfirms. In a highly concentrated
industry, i.e. an industry whose sales are dominated by ahandful
of firms, the intensity of competition declines over time. High
concentrationserves as a barrier to entry into an industry, because
it enables the firms to hold largemarket shares to achieve
significant economies of scale.
(b) Economies of Scale: This is an important determinant of
competition in an industry. Firms that enjoy economies of scale
can charge lower prices than their competitors, because oftheir
savings in per unit cost of production. They also can create
barriers to entry byreducing their prices temporarily or Check Your Progress
permanently to deter new firms from entering theindustry. Which industry is
(c) Product differentiation: Real perceived differentiation often Vodafone a part of?
Identify the features of
intensifies competition among existing firms. that industry and
(d) Barriers to entry: Barriers to entry are the obstacles that a comment on its status in
India?
firm must overcome to enter an industry, and the competition
from new entrants depends mostly on entry barriers.

These features determine the strength of the competitive forces

operating in the industry. Trendsaffecting industry structure are important
considerations in strategy formulation. Strategic Management : 153
Business Level
Strategies 8.3 Positioning of the Firm
When starting a new firm or launching new product, a prime
strategic decision is to identify thetarget audience. But even though a
NOTES
useful segment has been identified, this does not in itself resolve the
organisation’s strategy. The competitive position within the segment then
needs to be explored, because only this will show how the organisation
will compete within the segment. Competitive positioning is thus the
choice of differential advantage that the product or services will possess
against its competitors. Competitive positioning allows an organisation
to compete and survive in a market place or in a segment of a market
place. To develop positioning, it is useful to follow a two-stage process-
first identify the segment gaps, second identify positioning within
segments.

Identification of Segment Gaps and their Competitive Positioning

Implications
From a strategy viewpoint, the most useful strategy analysis often
emerges by exploring where there are gaps in the segments of an industry.
The starting point for such work is to map out thecurrent segmentation
position and then place companies and their products into the segments;it
should then become clear where segments exist that are not served or are
poorly served bycurrent products.

Identifying the Positioning within the Segment

From a strategy perspective, some gaps may be more attractive
than others. For example, they may have limited competition or poorly
supported products. In addition, some gaps may possessa clear advantage
in terms of competitive positioning. Others may not.

Strategic Management : 154 The process of developing positioning runs as follows:

 1. Perceptual mapping: In-depth qualitative research on actual Business Level
Strategies
and prospective customerson the way they make their decisions
in the market place, e.g. strong versus weak, cheapversus
expensive, modern versus traditional.
NOTES
2. Positioning: Brands or products are then placed on the map
using the research dimensions.
3. Options development: Take existing and new products and
use their existing strengthsand weaknesses to devise possible
new positions on the map.
4. Testing: First with simple statements with customers, then
at a later stage in the marketplace.

It will be evident that this is essentially a process, involving

experimentation with actual and potential customers.

8.4 Generic Strategies

Generic strategies were first outlined in two books from Michael
Porter of Harvard Business School. These were “Competitive Strategy”
in 1980 and “Competitive Advantage’’ in 1985. The second book
contained a small modification of the concept. The original version is
explored here. Michael Porter made the bold claim that there are only
three fundamental strategies that any business can undertake. During
the 1980s, they were regarded as being at the forefront of strategic
thinking. Arguably, they still have a contribution to make in the new
century in the development of strategic options.
Professor Porter argued that the three basic strategies open to any
business are:
1. Cost leadership
2. Differentiation
3. Focus.
Strategic Management : 155
Business Level Each of these generic strategies has the potential to overcome
Strategies
the five forces of competition and allow the firm to outperform rivals
within the same industry. These are called ‘generic’ because they can

NOTES be used in a variety of situations, across diverse industries at various

stages of development.

Cost Leadership
Cost leadership is a strategy whereby a firm aims to deliver its
product or service at a pricelower than that of its competitors. Overall
cost leadership is achieved by the firm by maintaining the lowest costs
of production and distribution within an industry and offering “no-
frills” products. This strategy requires economies of scale in production
and close attention to efficiency and operating costs. The firm places
a lot of emphasis on minimizing direct input and overhead costs, by
offering no-frills products.
Example: Deccan Airways, Timex, Nirma.
A cost leadership strategy is likely to work better where the
product is standardized, competition is based mainly on price and
consumers can switch easily between different suppliers. However, a
low cost base will not in itself bring competitive advantage. The product
must be perceived as comparable or acceptable by consumers. Firms
pursuing this strategy must be effective in engineering, purchasing,
manufacturing, and physical distribution. Marketing can be
consideredas less important, as the consumer is familiar with the
product attributes.

Differentiation Strategy
Differentiation consists of offering a product or service that is
perceived as unique or distinctive by the customer. This allows firms
to command a premium price or to retain buyer loyalty because
customers will pay more for what they regard as a better product. A

Strategic Management : 156 differentiation strategy can be more profitable than a cost leadership
strategy because of the premium price. Products can be differentiated in Business Level
Strategies
a number of ways so that they stand apart from standardized products:

1. Superior quality NOTES

2. Special or unique features
3. More responsive customer service
4. New technologies
5. Dealer network.

Example: Hero Honda, Nike athletic shoes, Sony, Asian Paints,

Mercedes-Benz, BMW etc. Nokia achieves differentiation through the
individual design of its product, while Sony achieves it by offering superior
reliability, service and technology. Mercedes-Benz differentiates by
stressing a distinctive product service image, while Coca Cola
differentiates by building a widely recognized brand. This strategy is
often supported by high spending on advertising and promotion to sustain
the brand identity. McDonald’s is differentiated by its brand name and
its ‘Big Mac’ and ‘Ronald McDonald’ products and imagery. In order to
differentiate a product, Porter argued that it is necessary for the producer
to incur extra costs, for example, to advertise a brand and thus
differentiate it.The form of differentiation varies from industry to industry.
In construction industry, equipment durability, spare parts availability
and service will feature, while in cosmetics, differentiation is based on
sophistication and exclusivity. Differentiation is aimed at the broad mass
market. It is a viable strategy for earning above average profits because
the resulting brand loyalty lowers customers’ sensitivity to price. Buyer
loyalty also serves as an entry barrier because new entrants must develop
their own distinctive competence to differentiate their products in some
way to achieve buyer loyalty. It is essential for the success of this strategy
that the premium price for the differentiated product must exceed the
cost of differentiation. For successfully carrying out the differentiation Strategic Management : 157
Business Level strategy, the following are required :
Strategies

1. Creative flair
2. Engineering skills
NOTES
3. R&D capabilities
4. Innovative marketing capabilities
5. Motivation for innovation
6. Corporate reputation for quality or technological capabilities.

Focus Strategy
A focus strategy occurs when a firm focuses on a specific niche in
the market place and develops its competitive advantage by offering
products especially developed for that niche. It targets a specific consumer
group (e.g. teenagers, babies, old people etc.) or a specific geographic
market (urban areas, rural areas etc.).
Hence, the focus strategy selects a segment or group of segments
in the industry and tailors its strategy to serve them to the exclusion of
others. By optimizing its strategy, for the targets, the focuser seeks to
achieve competitive advantage in its target segments, even though it does
not possess a competitive advantage overall. As Porter observes, while
the low cost and differentiation strategies are aimed at achieving
theirobjectives industry-wide, the entire focus strategy is built around
serving a particular target very well. Sometimes, according to Porter, neither
a low-cost leadership strategy nor a differentiation strategy is possible for
an organisation across the broad range of the market.
Example: The costs of achieving low-cost leadership may require
substantial funds which are not available. Equally, the costs of
differentiation, while serving the mass market of customers, may be too
high. If the differentiation involves quality, it may not be credible to offer
high quality and cheap products under the same brand name. So a new
brand name has to be developed and supported. For these and related

Strategic Management : 158 reasons, it may be better to adopt a focus strategy.

 The focus strategy has two variants: Business Level
Strategies
1. Cost focus: A firm seeks to achieve low cost position in
its target segment only.
2. Differentiation focus: A firm seeks to differentiate its NOTES
products in its target segment only.

8.4.1 Risks in Competitive Strategies

No one competitive strategy is guaranteed for success. Some
companies that have successfully implemented one of Porters’
competitive strategies have found that they could not sustain the strategy.
Each of these generic strategies has its own risks.

1. Risks of cost leadership:

(a) Cost leadership may not be sustained
# If competitors imitate
# If technology changes
# If other bases for cost leadership erode.
(b) Proximity in differentiation is lost.
(c) Cost focusers achieve even lower costs in segments.

Proximity in differentiation means that companies that choose

cost leadership strategy must offer relatively standardized products with
features or characteristics that are acceptable to customers. In other
words, the company must offer a minimum level of differentiation–at
the lowest competitive price. If this minimum level of differentiation is
lost, then the strategy of cost leadership will fail.

2. Risks of differentiation:
(a) Differentiation may not be sustained
# If competitors imitate.
# If features of differentiation become less important to
buyers. Strategic Management : 159
Business Level (b) Cost proximity is lost.
Strategies
(c) Firms that follow focus strategy may achieve even greater
differentiation in segments.

NOTES (d) Dilution of brand identification through product-line.

A company following a differentiation strategy must ensure that

the higher price it charges for its higher quality is not priced too far
above the competition, otherwise customers will not see the extra quality
as worth the extra cost.
In other words, if the price differential between the standardized
and differentiated product is too high, the risk is that the company
provides a greater level of uniqueness than the customers are willing to
pay for.

3. Risks of Focus: The competitive risks of focus strategy are similar to

those previously noted for cost leadership and differentiation strategies,
with the following additions:
(a) Focus strategy is not sustained if competitors imitate it.
(b) The target segment may become structurally unattractive.
# if structure erodes.
# if demand disappears.

Check Your Progress (c) Competitors may successfully focus on an even smaller

Illustrate how a firm can segment of the market, out focusing the focuser, or focus
pursue both low-cost only on the most profitable slice of the focuser’schosen
and differentiation stra-
tegies? segment.
(d) An industry-wide competitor may recognize the attractiveness
of the segment served by the focuser and mobilize its superior
resources to better serve the segment’s need.
(e) Preferences and needs of the narrow segment may become
more similar to the broad market, reducing or eliminating

Strategic Management : 160 the advantage of focusing.

8.4.2 Critical Assessment of Generic Business Level
Strategies
Strategies
The generic business-level strategies discussed above are useful
NOTES
when we view an industry as stable. However, in practice, business
environment is dynamic and successful firms need toadapt their
strategies to the environmental conditions. More (2001) notes that
each generic strategy gives a company some kind of defence against
each of the five competitive forces.

Example: Cost leadership can raise barriers to cope with cost increases
form suppliers.

8.4.3 Comment on Porter’s Generic

Strategies
Hendry ll and others have set out the problems of the logic
and the empirical evidence associated with generic strategies that limit
its absolute value. We can summarize them as follows:

Low-cost Leadership
1. If the option is to seek low-cost leadership, then how can more
than one company be thelow-cost leader? It may be a
contradiction in terms to have an option of low-cost leadership.
2. Competitors also have the option to reduce their costs in the
long-term, so how can one company hope to maintain its
competitive advantage without risk?
3. Low-cost leadership should be associated with cutting costs
per unit of production. However, there are limitations to the
usefulness of this concept.
4. Low-cost leadership assumes that technology is relatively
predictable, if changing. Radical change can so alter the cost
positions of actual and potential competitors. Strategic Management : 161
Business Level 5. Cost reductions only lead to competitive advantage when
Strategies
customers are able to make comparisons. This means that the
low-cost leader must also lead price reductions or competitors
will be able to catch up, even if this takes some years and is at
NOTES
lower profit margins. But permanent price reductions by the cost
leader may have a damaging impact on the market positioning of
its product or service that will limit its usefulness.

Differentiation
1. Differentiated products are assumed to be higher priced. This is
probably too simplistic. The form of differentiation may not lend
itself to higher prices.
2. The company may have the objective of increasing its market
share, in which case it mayuse differentiation for this purpose
and match the lower prices of competitors.
3. Porter discusses differentiation as if the form this will take in any
market will be immediately obvious. The real problem for strategy
options is not to identify the need fordifferentiation but to work
out what form this should take that will be attractive to
thecustomer. Generic strategy options throw no light on this issue
whatsoever. They simplymake the dubious assumption that once
differentiation has been decided on, it is obvioushow the product
should be differentiated.

Focus
1. The distinction between broad and narrow targets is sometimes
unclear. Are they distinguished by size of market? Or by customer
type? If the distinction between them isunclear then what benefit
is served by focus?
2. For many companies, it is certainly useful to recognise that it
would be more productiveto pursue a niche strategy, away from
Strategic Management : 162 the broad markets of the market leaders. That is theeasy part of
 the logic. The difficult part is to identify which niche is likely to Business Level
Strategies
proveworthwhile. Generic strategies provide no useful guidance
on this at all.
3. As markets fragment and product life cycles become shorter, NOTES
the concept of broad targetsmay become increasingly redundant.

Fast-moving Markets
In dynamic markets such as those driven by new internet
technology, the application of generic strategies will almost
certainly miss major new market opportunities. They cannot
be identified by the generic strategies approach. Faced with
this veritable onslaught on generic strategies, it might be thought
that Professor Porter would gracefully concede that there might
be some weaknesses in the concept. However, Porter hit back
in 1996 by drawing a distinction between basic strategy and
what hecalled ‘operational effectiveness’ – the former is
concerned with the key strategic decisionsfacing any
organisation while the latter are more concerned with such
issues as TQM, outsourcing,re-engineering and the like. He
did not concede any ground but rather extended his approach
toexplore how companies might use market positioning within
the concept of generic strategies. Given these criticisms, it
should not be concluded that the concept of generic strategies
has no merit. As part of a broader analysis, it can be a useful
tool for generating basic options in strategic analysis. It forces
exploration of two important aspects of business strategy: the
role ofcost reduction and the use of differentiated products in
relation to customers and competitors.
But it is only a starting point in the development of such
options. When the market is growing fast, it may provide no
useful routes at all. More generally, the whole approach takes
a highly prescriptive view of strategic action. Strategic Management : 163
Business Level
Strategies 8.5 Business Tactics
Tactics should work with a firm’s strategy and they are the set
of requirements need for the planto take place. A tactic is a device
NOTES
used by the firm for meeting your goals set by your strategy. Strategy
and tactics should always be relative to one another because the tactics
are the set of actions needed to fulfil your strategy.

1. Tactics are the tools used to achieve goals.

2. Tactics include things like advertising and marketing.
3. Tactics are the steps taken to achieve goals.

Brand Management
One tactic that almost every firm employs is strategic brand
management. Firms must find a way to communicate their products
and corporate philosophy to potential customers. Over time, a business
can establish a reputation that gives its brand name an advantage over
the lesserknown competitors. Brand management includes good
advertising and public relations to present an image of that is consistent
with the mission and vision of the company. A company may also
conduct researchor poll the general public to learn about how it is
perceived and what changes are necessary.

Diversification and Specialisation

Two different business strategies that deal with the scope of a
company are diversification and specialisation. A business can diversify
by simply expanding its products and services, such as adding a new
division, or through merging or acquiring another
business.Specialisation is the opposite of diversification. It refers to
narrowing a business’s products tofocus on a more specific type of
product. By focusing limited resources on a smaller product line,a
Strategic Management : 164 business may hope to improve the quality of its remaining products, or
simply divest itself ofan unprofitable product. Business Level
Strategies

Research and Development

Some firms use investments into research and development as NOTES
a major tactic to get ahead of competitors. This is particularly true in
the manufacturing field, where new product technologiescan save money
and produce products that will excite consumers. Smaller businesses
may lackthe money or in-house talent to invest directly in research and
development, but for largercompanies the ability to innovate can be
the difference between success and failure.

Risk Management Notes

Managing risk is a tactic that every firm employs in its own
way. The simple act of founding a business is itself a risk, since market
trends and customer behaviour can be difficult to predict. For an
established business, managing risk means making good decisions about
where to invest funds and what types of products to focus on.

8.6 Summary
• Business conditions are always changing, so it’s a good practice
to periodically step backand take a hard look at the business
strategy and analyse its implementation.
• Business Strategy can be defined as a long-term approach to
implementing a firm’s businessplans to achieve its business
objectives.
• A business strategy addresses how the firm competes in a market
and how it attains and sustains competitive advantage.
• The term “industry structure” refers to the number and size
distribution of firms in an industry.
Strategic Management : 165
• The competitive position within the segment then needs to be
Business Level explored, because only thiswill show how the organisation will
Strategies
compete within the segment.
• Cost Leadership Strategy emphasises efficiency. By producing

NOTES high volumes of standardisedproducts, the firm hopes to take

advantage of economies of scale and experience curveeffects.
• The product is often a basic no-frills product that is produced
at a relatively low cost andmade available to a very large
customer base.
• Differentiation is aimed at the broad market that involves the
creation of a product or services that is perceived throughout
its industry as unique.
• Focus Strategy concentrates on a select few target markets and
is also called a segmentationstrategy or niche strategy.

8.7 Key Terms

Cost Leadership: A strategy whereby a firm aims to deliver its product
or service at a price lowerthan that of its competitors.
Differentiation: Offering a product or service that is perceived as unique
or distinctive by the customer.
Focus Strategy: The strategy in which a firm focuses on a specific
niche in the market place anddevelops its competitive advantage by
offering products especially developed for that niche.
Industry: A collection of firms offering goods or services that are close
substitutes of each other.
Positioning: Occupying a distinct position in the minds of consumers.

8.8 Questions and Exercises

1. Which industry is Vodafone a part of? Identify the features of
that industry and comment on its status in India.

Strategic Management : 166 2. Critically analyse the benefits of positioning for a firm.
 3. Suppose you are the CEO of a cosmetic firm. Under what Business Level
Strategies
situations would you choose a low-cost, differentiation, or speed-
based strategy?
4. Illustrate how a firm can pursue both low-cost and differentiation NOTES
strategies.
5. Identify requirements for business success at different stages of
industry evolution.
6. Discuss the good business strategies in fragmented and global
industries.
7. “Diversification is a double edged sword”. Comment
8. There are many risks in cost leadership strategy. What are they
and how would it affect you as a manager?
9. Under what condition(s) do you think would the cost leadership
strategy work better?
10. In which situations do you think that the neither a low cost nor
a differentiation strategy would be possible for an organisation?
11. Are tactics different from business strategies? Give reasons for
your answer.
12. “Business strategy and tactics go hand in hand”. Discuss

Check your progress

Fill in the blanks:
1. ....................means the extent to which industry sales are
dominated by only a few firms.
2. Competitive positioning gives.............................advantage to the
firms.
3. .............................are the tools used for meeting the goals and
objectives as designed by the strategy.
4. A company focuses only the production of ladies shoes. This is
an example of............................
5. Each of these generic strategies has the potential to overcome
the .................. of competition. Strategic Management : 167
Business Level 6. A cost leadership strategy is likely to work better where the
Strategies
product is ..................
7. Compared with the low-cost leader, competitors will have
.................. costs.
NOTES
8. The .................. strategy selects a segment or group of segments
in the industry and tailors its strategy to serve them to the
exclusion of others.
9. If the differentiation involves quality, it may not be credible to
offer .................. quality and.................. products under the
same brand name.
10. Hybrid strategies include a combination of ..................
strategies.

Answers:
1. Concentration 2. Differential 3. Tactics 4. Specialisation 5. Five
forces 6. Standardised 7. Higher 8. Focus 9. High, cheap 10. Generic

8.9 Further Reading and References

Books
• Azhar Kazmi, Strategic Management and Business Policy - 3rd
edition, Tata McGrawHill
• C Appa Rao, B Parvathiswara Rao and K Sivarama krishna,
Strategic Management and Business Policy-Text and Cases, Excel
Books
• David Fred, Strategic Management: Concepts and Cases-12th
edition, Prentice Hall ofIndia
• Online links www.1000ventures.com/business_guide/sbu
• www.economicexpert.com/.../Flanking :marketing :warfare:
strategiec

Strategic Management : 168

 Strategic Analysis
and Choice
UNIT 9: STRATEGIC ANALYSIS
AND CHOICE NOTES
9.0 Unit Objectives

9.1 Introduction

9.2 Process for Strategic Choice

9.2.1 Focusing on a few Alternatives

9.2.2 Considering Selection Factors

9.2.3 Evaluating the Alternatives

9.2.4 Making the Actual Choice

9.3 Industry Analysis

9.4 Corporate Portfolio Analysis

9.4.1 Display Matrices

9.4.2 Balancing the Portfolio

9.4.3 Portfolio and other Analytical Models

9.5 Contingency Strategies

9.6 Summary

9.7 Key Terms

9.8 Questions and Exercises

9.9 Further Reading and References

Strategic Management : 169

Strategic Analysis
and Choice 9.0 Unit Objectives
After studying this unit, you should be able to:

NOTES • Describe the process for strategic choice

• Explain the concept of strategic and industry analysis
• State the concept of corporate portfolio analysis
• Discuss the contingency strategies

9.1 Introduction
Strategic analysis and choice is essentially a decision-making
process. This involves generating feasible alternatives, evaluating those
alternatives and choosing a specific course of action that could best
enable the firm to achieve its mission and objectives. Alternative
strategies do not come from a vacuum. They are derived from the firm’s
present strategies keeping in view the vision, mission, objectives andalso
the information gathered from external and internal analysis. They are
consistent with or built on past strategies that have worked well.

9.2 Process for Strategic Choice

According to Glueck and Jauch, “strategic choice is the decision

to select from among the alternatives considered the strategy which

will best meet the enterprise objectives. This decision-making process

consists of four distinct steps:

1. Focusing on a few alternatives.

2. Considering the selection factors.

3. Evaluating the alternatives.

4. Making the actual choice.

Strategic Management :170
 Strategic Analysis
9.2.1 Focusing on a few Alternatives and Choice
Strategists never consider all feasible options that could benefit
the firm because there are innumerable options. So strategists should
narrow down the choice to a reasonable number of alternatives. But it NOTES
is still difficult to tell what that reasonable number is. For deciding on a
reasonable number of alternatives, we can make use of the following
concepts:

Gap Analysis
In gap analysis, a company sets objectives for a future period
of time, say three to five years of time, and then works backward to
find out where it can reach at the present level of efforts.

Business Definition
In deciding on what would be a manageable number of
alternatives, it is advisable to start with the business definition. Business
definition, as discussed earlier, determines the scope of activities that
can be undertaken by a firm. It tries to answer three basic questions
clearly: (i) who is being satisfied? (ii) what is being satisfied? and (iii)
how the need is being satisfied?

Check Your Progress

9.2.2 Considering Selection Factors Conduct an industry
analysis for the Indian
The concepts of Gap Analysis and Business definition would
automobile industry?
help the strategist to identify a few workable alternatives. These must
be analysed further against a set of selection criteria. Selection factors
are the criteria against which the alternative strategies are evaluated.
These selection factors consist of:

1. Objective factors : are based on analytical techniques such as

BCG matrix, GE matrix etc. and are hard facts or data used to
facilitate a strategic choice. They are also called rational, Strategic Management : 171
Strategic Analysis normative or prescriptive factors.
and Choice
2. Subjective factors : on the other hand, are based on one’s personal

judgment or descriptive factors such as consistency, feasibility,

NOTES etc. which are discussed in the previous unit.

9.2.3 Evaluating the Alternatives

After narrowing down the alternative strategies to a few

alternatives, each alternative has to be evaluated for its suitability to

achieve the organisational objectives. Evaluation of strategic alternatives

basically involve bringing together the results of the analysis carried out
on the basis of objective and subjective criteria.

9.2.4 Making the Actual Choice

An evaluation of alternative strategies leads to a clear assessment

of which alternative is most suitable to achieve the organisational goals.

The final step, therefore, is to make the actual choice. One or more

strategies have to be chosen for implementation. Besides the chosen

strategies, some contingency strategies should also be worked out to

meet any eventualities. In both the above two steps, a number of portfolio

analyses like BCG, nine–cell matrix etc., can be useful.

9.3 Industry Analysis

The basic purpose of industry analysis is to assess the strengths
and weaknesses of a firm relative to its competitors in the industry. It
tries to highlight the structural realities of particular industry and the
extent of competition within that industry. Through industry analysis, an
organisation can find whether the chosen field is attractive or not and
assess its own position within the industry.
Strategic Management : 172
Importance of Industry Analysis Strategic Analysis
and Choice
Macro environment is common to all industries. It remotely
affects the industry. It is the structural realities of the specific industry
and the nature and intensity of competition unique to thatindustry that
NOTES
are of special relevance to the firm in formulating strategy.

The importance of industry analysis can thus be summarised

as follows.
1. Industry – related factors have a more direct impact on the
firm than the general environment.
2. An industry’s dominant economic characteristics are important
because of their implication for crafting strategy.
3. Industry analysis reveals industry attractiveness and its
prospects for growth.
4. It helps the firm to identify such aspects as:
(a) Current size of the industry
(b) Product offerings
(c) Relative volumes
(d) Performance of the industry in recent years
(e) Forces that determine competition in the industry.
5. It focuses attention on the firm’s competitors.
6. It helps to determine key success factors.
7. A thorough understanding of the industry provides a basis for
thinking about appropriate strategies that are open to the firm.

9.4 Corporate Portfolio Analysis

Many companies offer more than one product, and serve more
than one customer. They have a portfolio (i.e. a basket) of products.
This is a good strategy because a firm which is dependent on one
product or customer runs immense risk. Decisions on strategy,
therefore, generally involve a range of products in a range of markets. Strategic Management : 173
Strategic Analysis Portfolio analysis is an analytical tool which views a corporation as a
and Choice
basket or portfolio of products or business units to be managed for
the best possible returns, and help a corporate to build a multi-business

NOTES strategy. When an organisation has several products in its portfolio, it

is quite likely that they will be in different stages of development.
Some will be relatively new and some much older. Many organisations
will not wish to risk having all their products at the same stage of
development. It is useful to have some products with limited growth
but producing profits steadily, and some products with real growth
potential but may still be in the introductory stage. Indeed, the products
that are earning steadily may be used to fund the development of those
that will provide the growth and profits in the future.

So, the key strategy is to produce a balanced portfolio of

products, some with low risk but dull growth and some with high-risk
but great potential for growth and profits. This is what we call portfolio
analysis.

The aim of portfolio analysis is:

1. To analyse its current business portfolio and decide which
business should receive moreor less investment.
2. To develop growth strategies for adding new businesses to
the portfolio.
3. To decide which business should no longer be retained.

9.4.1 Display Matrices

“Display matrices” are simple frameworks in which products
or business units are displayed as a series of investments from which
top management expects a profitable return. It charts and characterises
different products or businesses in the organisation’s portfolio of
investments in such a way that top management constantly juggles to
Strategic Management : 174
ensure the best returns from them. As already stated, key purpose of Strategic Analysis
and Choice
portfolio models is to assist in achieving a balanced portfolio of
businesses. This means that portfolio should consist of those businesses
whose profitability, growth, cash flow and risk elements would NOTES
complement each other, and add up to a satisfactory overall corporate
performance. Imbalance in portfolio, for example, could be caused either
by excessive cash generation with too few growth opportunities or by
insufficient cash generation to fund the growth requirements of other
businesses in the portfolio.

9.4.2 Balancing the Portfolio

Balancing the portfolio means that the different products or
businesses in the portfolio have to be balanced with respect to four
basic aspects:

1. Profitability: The main aim of the portfolio analysis is to

maintain the overall profitabilityof the corporation, even though
some of the businesses are loss making. This is ensured through
balancing investments.
2. Cash flow: A growing firm may be profitable, but it will also
require additional cash outflows for investment requirements.
Mature businesses, though less profitable, do not require much
of investments though they may not be net cash generators.
Thus, portfolio analysis must balance different businesses, which
together must give a comfortable overallcash flow position in
harmony with the desired strategy of the company.
3. Growth: All businesses or products go through the life cycle
of introduction, growth, maturity and decline stages. If a
company depends on one product alone, it would face problems
in the declining stage of the product. It may be too late to start
a new product at this stage because of the time lag involved in
Strategic Management : 175
Strategic Analysis waiting till it achieves its growth rate. It is therefore better to
and Choice
match different businesses at different stages in their life cycles, to
achieve stability which is sometimes called “extended corporate
immortality”. Thus the balancing of the portfolio implies that
NOTES
though individual businesses grow, mature and decline, yet the
company continues to grow.
4. Risk: Another major objective of portfolio analysis is to reduce
the risk due to economic trends and market forces in a country.
The aim is to put together diverse businesses with different or
even opposite market forces to ensure a stable and smoother
financial performance of the overall corporation.

9.4.3 Portfolio and other Analytical Models

Innumerable analytical models have been developed by several
leading consulting firms. Some of the best-known models are:
1. BCG matrix
2. GE Nine-cell Matrix
3. Hofer’s Product/Market Evolution Matrix
4. Directional Policy Matrix
5. Arthur D Little’s Portfolio Matrix
6. Profit Impact of Market Strategy (PIMS) Matrix
7. SPACE Matrix
8. Quantitative Strategic Planning Matrix (QSPM)

BCG Matrix
The BCG matrix was developed by the Boston Consultancy group
in 1970s. It is also called the “Growth share matrix”. This is the
most popular and the simplest matrix to describe a corporation’s
portfolio of businesses or products. BCG matrix is based on the
premise that majority of the companies carry out multiple business
activities in a number of different product-market segments.
Strategic Management : 176
Together, these different businesses form the business portfolio Strategic Analysis
and Choice
of the company, which need to be balanced for overall
profitability of the company. To ensure long-term success, a
company’s business portfolio should consist of both high-growth NOTES
products in need of cash inputs and low-growth products that
generate excess cash. The BCG matrix helps to determine
priorities in a product portfolio. Its basic purpose is to invest
where there is growth from which the firm can benefit, and
divest those businesses that havelow market share and low
growth prospects. Each of the products or business units is
plotted on a two-dimensional matrix consisting of :
1. Relative market share
2. Market growth rate.

Relative Market Share: Relative market share is defined as the

ratio of the market share of the concerned product or business
unit in the industry divided by the share of the market leader.
Bythis calculation, a relative market share of 1.0 belongs to the
market leader.
For example, if market share of 3 businesses A, B, C are
Business Market share
A - 10%
B - 20%
C - 60%
A’s relative market share=10/60=1/6
B’s relative market share=20 /60=1/3
C’s relative market share=60/20=3

The relative market share reflects the firm’s capacity to generate

cash. It is assumed that if a business unit enjoys high market
share; its cash earnings would be correspondingly higher and
vice versa. Strategic Management : 177
Strategic Analysis Market Growth Rate: It is the percentage of market growth, that
and Choice
is, the percentage by which sales of a product or business unit
have increased. A high growth rate enables the company to expand

NOTES its operations. It makes it easier for the company to increase its
market share and provide the opportunities of profitable
investment. The company may plough back its earnings into the
business and further increase the rate of return on the investment.
Additional cash will necessarily be required to avail of the
investment opportunities for growth. On the other hand, low
market growth rate indicates stagnation with little scope for
expansion and profitable investments may be risky to undertake.
Increase in market share in such a situation can be possible only
by cutting into the competitor’s market price.

Building the BCG Matrix

The stepwise procedure for building the BCG matrix is given
below:
1. The various activities of the company are classified into
different business units or SBUs.
2. The growth rate of the market is determined and plotted on
the Y-axis.
3. The assets employed by the company in each of the business
units are compiled to determine the relative size of the business
unit in relation to the company.
4. The relative market share for different business units is
estimated and plotted on the X-axis
5. The position of each business unit or product is plotted on
a matrix of market growth raterelative market share. The size
of the business is represented by a circle with a diameter
corresponding to the assets invested in the business. The radius

Strategic Management : 178 of the circle is given by r = p .R2 where R represents total
 sales, P represents sales of the business unit as a percentage Strategic Analysis
and Choice
of the total sales of the company.
6. Depending on its location in the 2 × 2 matrix, a
separate strategy has to be developed for each of the units. NOTES
It is important not to change the criteria around in order
to shift pet projects and products into more favourable
groups, thereby defeating the very purpose of the exercise.

Analysis of BCG Matrix

The BCG matrix reflects the contribution of the products or
business units to its cash flow. Based on this analysis, the
products or business units are classified as:
1. Stars
2. Cash cows
3. Question marks
4. Dogs

Stars (High Growth, High Market Share)

Stars are products that enjoy a relatively high market share in
a strongly growing market. They are (potentially) profitable
and may grow further to become an important product or
category for the company. The firm should focus on and invest
Check Your Progress
in these products or business units. The general features of
Analyse the main
stars are: advantages of portfolio
1. High growth rate means they need heavy investment analysis? Why it is a
good option for
2. High market share means they have economies of scale multiproduct or ganisa-
and generate large Amounts .............. of cash tions?

3. But they need more cash than they generate.

The high growth rate will mean that they will need heavy
investment and will therefore be cash users. Overall, the general
strategy is to take cash from the cash cows to fund stars. Cash Strategic Management : 179
Strategic Analysis may also be invested selectively in some problem children
and Choice
(question marks) to turn them into stars. The other problem
children may be milked or even sold to provide funds elsewhere.

NOTES
Cash Cows (Low Growth, High Market Share)
These are the product areas that have high relative market shares
but exist in low-growth markets. The business is mature and it is
assumed that lower levels of investment will be required. On this
basis, it is therefore likely that they will be able to generate both
cash and profits. Such profits could then be transferred to support
the stars. The general features of cash cows are:
1. They generate both cash and profits
2. The business is mature and needs lower levels of
investment
3. Profits are transferred to support stars/question marks
4. The danger is that cash cows may become under-
supported and begin to lose their market.

Although the market is no longer growing, the cash cows may

have a relatively high market share and bring in healthy profits.
No efforts or investments are necessary to maintain the status
quo. Cash cows may however ultimately become dogs if they
lose the market share.

Question Marks (High Growth, Low Market Share)

Question marks are also called problem children or wild cats.
These are products with low relative market shares in high-growth
markets. The high market growth means that considerable
investment may still be required and the low market share will
mean that such products will have difficulty in generating
substantial cash. These businesses are called’ question marks
Strategic Management : 180 because the organisation must decide whether to strengthen them
or to sell them. Strategic Analysis
and Choice
The general features of question marks are:
1. Their cash needs are high
2. But their cash generation is low NOTES
3. Organisation must decide whether to strengthen them
or sell them.

Dogs (Low Growth, Low Market Share)

These are products that have low market shares in low-growth
businesses. These products will need low investment but they
are unlikely to be major profit earners. In practice, they may
absorb cash required to hold their position. They are often
regarded as unattractive for the long term and recommended
for disposal. The general features of dogs are:
1. They are not profit earners
2. They absorb cash
3. They are unattractive and often recommended for
disposal.

Turnaround can be one of the strategies to pursue because

many dogs have bounced back and become viable and profitable
after asset and cost reduction. The suggested strategy is to
drop or divest the dogs when they are not profitable. If
profitable, do not invest, but make the best out of its current
value. This may even mean selling the division’s operations.

Ge Nine Cell Matrix

This matrix was developed in 1970s by the General Electric
Company with the assistance of the consulting firm, McKinsey
& Co., USA. This is also called GE Multifactor Portfolio matrix.
The GE matrix has been developed to overcome the obvious
limitations of BCG matrix. This matrix consists of nine cells Strategic Management : 181
Strategic Analysis (3×3) based on two key variables:
and Choice
1. Business strength; and
2. Industry attractiveness.

NOTES The horizontal axis represents “business strength” and the

“vertical axis represents”, “industry attractiveness”.
The business strength is measured by considering such
factors as:
1. Relative market share
2. Profit margins
3. Ability to compete on price and quality
4. Knowledge of customer and market
5. Competitive strengths and weaknesses
6. Technological capacity
7. Calibre of management
Industry attractiveness is measured considering such
factors as:
1. Market size and growth rate
2. Industry profit margin
3. Competitive intensity
4. Economies of scale
5. Technology
6. Social, environmental, legal and human aspects

The individual product-lines or business units are plotted as

circles. The area of each circle is proportionate to industry sales.
The pie within the circles represents the market share of the
product line or business unit. The nine cells of the GE matrix
represent various degrees of industry attractiveness (high,
medium or low) and business strength (strong, average and
weak). After plotting each product line or business unit on the
nine cell matrix, strategic choices are made depending on their
Strategic Management : 182 position in the matrix.
Directional Policy Matrix (DPM) Strategic Analysis
and Choice
This matrix was developed by Shell Chemicals, UK. It uses
two dimensions- viz. “business sector prospects and the
“company’s competitive capabilities”. Business sectors NOTES
prospects are divided into attractive, average and unattractive;
and company’s competitive capabilities into strong, average
and weak, as shown in the following Figure 9.7. This gives a
9-cell matrix. Based on the two dimensions, businesses fall
into Nine quadrants. The strategy to be followed for businesses
in each quadrant are explained below.

Divestment
Both competitive capabilities and business prospects of the
business units are weak. Loss making units with uncertain cash
flows fall in this quadrant. Since the situation is not likely to
improve in the near future, these businesses should be divested.
The resources released could be put to an alternative use.

Phased Withdrawal
Here the SBU is in an average to weak competitive position in
the low growth unattractive business, with very little chance
of generating enough cash flows. Gradual withdrawal from
such SBUs is the strategy to be followed. The cash released
can be invested in more profitable ventures.

Double or Quit
Though business prospects look attractive here the company’s
competitive capabilities are weak. Either invest more to exploit
the prospects or, if not possible, better “exit” from the SBU.

Phased Withdrawal
Already covered in previous page. Strategic Management : 183
Strategic Analysis Custodial
and Choice
Here both competitive capabilities and business prospects are
unattractive or average. Bear with the situation with a little bit

NOTES of help from the other product divisions or get out of the SBU
so as to focus more on other attractive businesses.

Try Harder
Here business prospects are attractive, but competitive
capabilities are average; strengthen their capabilities with
infusion of additional resources.

Cash Generation
Here the SBU has strong competitive capabilities, but its
business prospects are unattractive. Its operations can be
continued at least for generating cash flows and profits.
However, further investments cannot be made in view of
unattractive business prospects.

Growth
Here the SBU has strong competitive capabilities, but its
business prospects are average. This SBU requires additional
infusion of funds. This would help the SBU to grow.

Market Leadership
Here the SBU has strong capabilities, and its business prospects
are also attractive. It must receive top priority so that the SBU
can retain its market leadership.

Arthur D Little Portfolio Matrix (ADL)

Arthur D Little Company’s matrix links the stages of the product
life cycle with the business strength. On the vertical axis,

Strategic Management : 184 businesses are classified with respect to their business strength
as weak, tenable, favoured, strong or dominant. Along the Strategic Analysis
and Choice
horizontal axis, four steps in the product life cycle, i.e.
embryonic, growth, mature and decline are marked.
NOTES
Profit Impact of Market Strategy (PIMS)
PIMS was invented by General Electric in the 1960s to examine
which strategic factors most influence cash flows and the
investment needs and success. PIMS model is based on analysis
of data presented by companies to derive general laws. Actually,
the model uses statistical relationships derived from the past
experience of companies. Typically, the Strategic Planning
Institute develops an industry characteristic, using
multidimensional cross sectional regression studies of the
profitability of more than 2000 companies. The industry
characteristic is compared with performance in the concerned
company so as tofind the clue to appropriate strategic
approaches. The model is characterized by scientific objectivity
but it involves analysis of relationship that is based on
heterogeneity of business and time periods. PIMS, of course,
has certain inherent drawbacks. It assumes that short-term
profitability is the primary goal of the firm. The analysis is
based on the historical data and the model does not take note
of further changes in the company’s external environment. The
model cannot take account of internal-dependencies and
potential synergy within organisations. Each firm is examined
in isolation.

SPACE Matrix
The Strategic Position and Action Evaluation (SPACE) matrix
is another important technique. It reveals which of the following
strategies is most appropriate for an organisation: Strategic Management : 185
Strategic Analysis 1. Aggressive strategies
and Choice
2. Conservative strategies
3. Defensive strategies

NOTES 4. Competitive strategies

Aggressive Quadrant
When a firm’s directional vector falls in the “aggressive
quadrant” of the matrix. It is in an excellent position to use its
internal strength to:
1. take advantage of external opportunities
2. overcome internal weaknesses
3. avoid or minimize external threats

The firm can adopt any of the aggressive growth strategies

like market penetration, market development, product
development, backward and forward integration, horizontal
integration, concentric and conglomerate diversification or a
combination strategy.

Conservative Quadrant
When a firm’s directional vector falls in the “conservative
quadrant”, it means the firm should stay close to its core
competencies and not take excessive risks. Conservative
strategies include market penetration, market development,
product development and concentric diversification.

Defensive Quadrant
When the directional vector falls in the “defensive quadrant”,
it suggests that the firm should focus on rectifying internal
weaknesses and external threats, through defensive strategies.
Defensive strategies or retrenchment strategies include
Strategic Management : 186
turnaround, divestiture, bankruptcy or liquidation. Strategic Analysis
and Choice
Competitive Quadrant
When a directional vector falls in the “competitive quadrant”,
the firm should follow competitive strategies, which include NOTES
backward, forward, and horizontal integration, market
penetration; market development, product development, joint
ventures and strategic alliances.

Quantitative Strategic Planning Matrix (QSPM)

The basic format of QSPM is as follows:
• Key external factors
• Economic
• Political, legal and governmental
• Social, cultural and demographic
• Technological
• Competitive
• Key internal factors
• Management
• Marketing
• Finance
• Production
• HR
• R&D

The QSPM is a tool that allows strategists to evaluate

alternative strategies objectively, based on key internal and
external success factors. Like other analytical tools, QSPM
requires good intuitive judgment.

The six steps required to develop a QSPM are:

Step 1: Make a list of the firm’s external opportunities/threats Strategic Management : 187
Strategic Analysis and internal strengths/ weaknesses.
and Choice
Step 2: Assign weights to each key factor.
Step 3: Identify alternative strategies that the organisation

NOTES wants to pursue.

Step 4: Determine the attractiveness scores. They are numerical
values that indicate the relative attractiveness of each
strategy in a given set of strategies.
Step 5: Compute the total attractiveness scores, which are
obtained by multiplying the weights by the
attractiveness scores in each row.
Step 6: Compute the sum total attractiveness scores in each
strategy column of QPSM.
The sum attractiveness scores reveal which strategy is most
attractive.

9.5 Contingency Strategies

Strategic choice is made on the basis of certain assumptions
and conditions. If the conditions change drastically, the chosen
strategies may have to be discarded altogether. If they are not too
radical, the strategies may have to be modified suitably. But changes
do not occur in a sequential order, nor do they give any impending
warnings. They surface suddenly leaving deep scars on the faces of
managers—if they are unprepared. To be on the safe side, strategists
always keep contingency strategies ready. Such contingency strategies
are formulated in advance to take care of unknown events and
unexpected challengers. As rightly summarised by Peter Drucker,
successful managers do not wait for future. They make the future
through their proactive planning and advanced preparation. They
introduce original action by removing present difficulties, anticipate
Strategic Management : 188 future problems, change the goals to suit internal and external changes,
experiment with creative ideas and take initiative, attempt to shape Strategic Analysis
and Choice
the future and create a more desirable environment.

The contingencies could come in the form of a labour strike, a NOTES

downturn in the economy or an overnight change in government policy.
Once such scenarios are identified managers could come out with
alternative strategies for the firm. Firms using this kind of strategy
identify certain trigger points to alert management that a contingency
strategy should be pressed into service. When alternative plans are
put in place, mid-course corrections could be carried out in a smooth
way.

9.6 Summary
• Strategic choice is the decision to select from among the

alternatives considered, the strategy which will best meet the

enterprise objectives.

• This decision-making processconsists of four distinct steps:

Focusing on a few alternatives. Considering the selection

factors. Evaluating the alternatives. Making the actual choice.

• Strategic analysis framework consists of three stages: Input

stage, Matching stage and Decision stage

• The basic purpose of industry analysis is to assess the strengths

and weaknesses of a firm relative to its competitors in the

industry.

• Portfolio analysis is an analytical tool which views a corporation

as a basket or portfolio of products or business units to be

managed for the best possible returns, and help a corporate to

build a multi-business strategy.

• Various matrices are used under this approach. Strategic Management : 189
Strategic Analysis • Though the portfolio approaches have limitations, but all these
and Choice
limitations can be overcomethrough effective strategy
development and meticulous planning.
NOTES • While the core competence concept appealed powerfully to
companies disillusioned withdiversification, it did not offer any
practical guidelines for developing corporate-levelstrategy.
• Contingency plans are organised and coordinated set of steps
to be taken if an emergencyor disaster (fire, hurricane, injury,
robbery, etc.) strikes.

9.7 Key Terms

BCG Matrix: Most popular and the simplest matrix to describe a
corporation’s portfolio of businesses or products.

Display Matrices: Frameworks in which products or business units

are displayed as a series of investments from which top management
expects a profitable return.

Market Growth Rate: The percentage of market growth, that is, the
percentage by which sales of a particular product or business unit
have increased.

Portfolio strategy approach: A method of analysing an organisation’s

mix of business in terms of both individual and collective contributions
to strategic goals.

Relative Market Share: The ratio of the market share of the concerned
product or business unit in the industry divided by the share of the
market leader.

Strategic Choice: Selection of a strategy that will best meet the firm’s
objectives.
Strategic Management : 190
 Strategic Analysis
9.8 Questions and Exercises and Choice

1. Suppose you are the head of a garments making firm that has

just started its operations in India. Discuss the process of NOTES

strategic choice that you are most likely to follow.

2. Conduct an industry analysis for the Indian automobile industry.

3. Analyse the main advantages of portfolio analysis? Why it is a
good option for multiproduct organisations?
4. Through examples, prove that some of the underlying
assumptions of the BCG matrix may not hold good for some
businesses.
5. Compare and contrast the General Electric Grid and the BCG
Matrix?
6. Do you think, BCG Matrix has limited application? Justify your
answer.
7. Though BCG matrix can be very helpful in forcing decisions in
managing a portfolio of products, it cannot be employed as
the sole means of determining strategies for a portfolio of
products. Do you agree with this statement or not? Why?
8. On the basis of GE Matrix, make an analysis of banking
company of your choice.
9. Analyse the main issues which have to be taken care of while
formulating a multi business strategy.
10. Do you think it is possible to sustain over a long run without
formulating multi business strategy? Why/ why not?

Check your progress

Fill in the blanks:
1. The balancing of the portfolio implies that though individual
businesses grow, mature and decline, yet the company continues
to .................. . Strategic Management : 191
Strategic Analysis
2. The GE matrix has been developed to overcome the obvious
and Choice
limitations of .................
3. In GE Matrix, the horizontal axis represents ................. and
NOTES the vertical axis represents .................
4. GE matrix is also called ................. strategy matrix.
5. Directional Policy Matrix (DPM) was developed by .................
6. Arthur D Little Company’s matrix links the stages of the product
life cycle with the .................
7. On the vertical axis in Arthur D Little Company’s matrix,
businesses are classified with respect to their business strength
as ................., ................., ................., ................. or
.................
8. The axes of the space matrix represent two internal dimensions,
namely, ................. and .................
9. The axes of the space matrix represent two external dimensions,
namely, ................. and .................
10. BCG matrix is also called the .................
11. The BCG matrix helps to determine ................. in a product
portfolio.
12. A high growth rate enables the company to ................. its
operations.

Answers:
1. grow 2. BCG matrix 3. business strength, industry attractiveness
4. Stoplight 5. Shell Chemicals, UK 6. business strength 7. weak,
tenable, favoured, strong, dominant 8. financial strength, competitive
advantage 9. environmental stability, industry strengths 10. Growth
share matrix 11. Priorities 12. Expand
Strategic Management : 192
 Strategic Analysis
9.9 Further Reading and References and Choice

Books
• Richard Lynch, Corporate Strategy, Prentice Hall, Pearson NOTES
Education Ltd., UK, 2006.

• R.Srinivasan, Strategic Management, Prentice Hall of India, New

Delhi, 2005.

• Online links www.marketingteacher.com/Lessons/lesson_a_d_little

• www.netmba.com/strategy/matrix/bcg

• www.valuebasedmanagement.net/methods_ge_mckinsey

Strategic Management : 193

Strategic Management : 194
 Strategy
Implementation
UNIT 10: STRATEGY
IMPLEMENTATION NOTES

10.0 Unit Objectives

10.1 Introduction

10.2 Activating Strategies

10.3 Nature of Strategy Implementation

10.4 Barriers and Issues in Strategy Implementation

10.5 Model for Strategy Implementation

10.6 Resource Allocation

10.6.1 Importance of Resource Allocation

10.6.2 Managing Resource Conflict

10.6.3 Criteria for Resource Allocation Process

10.6.4 Factors affecting Resource Allocation

10.6.5 Difficulties in Resource Allocation

10.7 Summary

10.8 Key Terms

10.9 Questions and Exercises

10.10 Further Reading and References

Strategic Management : 195

Strategy
Implementation 10.0 Unit Objectives
After studying this unit, you should be able to:
• Explain how strategies are activated
NOTES
• State the nature and barriers in strategy implementation
• Discuss the model of strategy implementation
• Describe the concept of resource allocation

10.1 Introduction
Strategy implementation is the process of putting organisation’s
various strategies into action by setting annual or short-term objectives,
allocating resources, developing programmes, policies, structures,
functional strategies etc. Even the best strategic plan will be useless
unless it is implemented properly. The strategy implementation is,
therefore, the most difficult element of the strategic management process.
This is so because there has to be a “fit” between the strategy and the
organisation.

10.2 Activating Strategies

There is no guarantee that a well designed strategy is likely to be
approved and implemented automatically. The strategic leader must,
therefore, defend the strategy from every angle, communicate how the
strategy when implemented would benefit the whole organisation and
secure the wholehearted support of employees working at various levels.
To keep things on track, he can list out priorities, programme
implementation process, budgets, etc. on paper so that nothing is left to
chance. While giving a concrete shape to the strategy, he should also
take note of regulatory mechanisms that govern business activity and
see that everything is in order. Some of the important things to be kept
Strategic Management : 196 in mind are listed below:
1. Formation of a company: This must be in line with provisions Strategy
Implementation
of the Companies Act, 1956, covering issues such as formation
of a company, its registration, obtaining suitable licenses before
commencing operations, raising funds from various sources in NOTES
accordance with the provisions of SEBI Act, 1992.
2. Operations of a company: The company must compete in a
fair way and earn the profits through legally blessed routes only
observing the (a) provisions of competition law; (b)Import/
export restrictions, (c) FERA regulations (FEMA regulations,
2000); (d) Patent, trademark, copyright (Indian Patents Act
1995, The Trade and Merchandise Marks Act 1958, The
Copyrights Act 1957 etc.) stipulations; (e) Labour Laws
(regarding employment of women, children, payment of wages,
providing welfare amenities, keeping healthy industrial relations
etc.); (f) environmental protection (The Environment Protection
Act 1986), (g) pollution control requirements; (h) consumer
protection measures etc.
3. Winding up operations: Even when the company decides to
get out of a venture/business, the rules of the game need to be
followed scrupulously (whether in offering golden handshake
to employees or asking all the employees to quit in one go).
Check Your Progress
After the institutionalisation of strategy in the above manner,
“Strategic decisions to be
action plans could be formulated. These are basically functional
communicated and
level strategies undertaken at the departmental level and usually understood throughout
the organisation”.
deal with operational aspects of a strategy. The action plans,
Elucidate?
however, must try to translate the overall strategic plan in letter
and spirit without any deviations. Issues like who will do what,
what kind of support is required at various stages, what kind of
privities have to be fixed while implementing active plans, how
does a particular active plan contribute to the broad objectives
of the strategy etc. must also be carefully looked into. Once the Strategic Management : 197
Strategy action plans are ready, the strategist must resolve issues relating
Implementation
to allocation of scarce resources over the entire organisation.

NOTES 10.3 Nature of Strategy Implementation

A successful strategy formulation does not guarantee successful
strategy implementation. It affects an organisation from top to bottom; it
affects all divisional and functional areas of business. It requires the right
alignment between the strategy and various activities, processes within
the organisation. The complexities in the task of implementation arise
from a number of organisational adjustments that are required over an
extended period of time and the need to match them all to the strategy.
Key people need to be added or reassigned, resources have to be mobilised
and allocated, functional strategies and policies are to be designed,
organisational structure may have to be changed, a strategy- supportive
culture may have to be developed, reward and incentive plans are to be
revised and if necessary, restructuring, re-engineering and redesigning
becomes imperative. In short, the difficulties in affecting the organisational
adjustments arise from the tasks associated with change. The success of
strategy implementation, to a large extent, therefore, depends on the way
the task of change management is carried out.

10.4 Barriers and Issues in Strategy Implem-

entation
Management must keep in mind the following key issues that
arise in implementing strategy and how empowering systems might relate
to such issues.

1. Time Horizon: Such systems have both long-term and short-

term dimensions. For example, rewards like productivity bonus
should be based on quantitative measures of performance related
Strategic Management : 198
to the short-term. On the other hand, it is appropriate to link Strategy
Implementation
long-term rewards with qualitative measures and a few relevant
quantitative measures.
2. Risk Considerations: When risk-prone behaviour is desired,
NOTES
qualitative measures of performance may be more beneficial,
for example, rewards like bonus or stock options. This is
because quantitative measures may lead to risk-averse
behaviour to avoid failure rather than risk prone behaviour to
achieve results.
3. Bases of Individual Rewards: Reward systems should be
linked to an individual’s capability,effort and job satisfaction.
If rewards are geared to only one aspect, it may have a
negativeeffect on performance in other aspects.
4. Bases of Group Rewards: An important issue in reward
systems is whether to haveindividual rewards or group rewards.
Rewarding individuals for effort and performance may be
difficult unless the organisational structure permits individual
performance to be isolated from that of others. Thus, for
example, with respect to managerial contribution to corporate
performance, individual rewards may be beneficial and
appropriate because individual’s contribution is relatively
independent of others. On the other hand, if individual’s
contributions are relatively interdependent, it would be
appropriate to adopt schemes based on group performance.
Again, rewarding individuals may be necessary where
entrepreneurial or creative behaviours are sought to be
encouraged. On the contrary, if greater co-operation and team
work is sought to be rewarded, group reward schemes would
be more desirable.
5. Corporate and SBU Perspectives: In multi-divisional
organisations, reward systems with a balanced approach
towards corporate interests and the interests of the Strategic Strategic Management : 199
Strategy Business Units (SBUs) should be designed, where business
Implementation
units have greater autonomy and independence. Likewise, if
the SBUs are not likely to influence corporate performance,

NOTES unit-based reward schemes would be more beneficial. But in

the case of directors andgeneral managers, placed in the units,
who have dual responsibility of achieving unit aswell as
corporate objectives, due care must be taken to design balanced
empoweringenvironment.

10.5 Model for Strategy Implementation

According to Steiner and Miner, “the implementation of policies
and strategies is concerned with the design and management of systems
to achieve the best integration of people, structures, processes and
resources in reaching organisational purposes”. Implementation of
strategy therefore involves a number of interrelated decisions, choices,
and a broad range of activities. It requires an integration of people,
structures, processes etc. Mc Kinsey’s 7-S model is good at capturing
the importance of all these elements in the implementation of strategy.
The 7-S framework was developed in 1970s by the well-known
consultancy firm, the Mc Kinsey Company of the United States. The
7-S framework is illustrated :
• Strategy
• Shared
• Values
• Structure
• Systems
• Staff
• Skills Style
The purpose of the model is to show the interrelationship
between different elements of an organisation, and the need to bring
Strategic Management : 200 them together.
7-S Framework Strategy
Implementation
This framework basically deals with organisational change. The
main thrust of change is not connected only with the organisation’s
strategy. It has to be understood by the complex relationships that exist NOTES
between strategy, structure, systems, style, staff, skills and super-
ordinategoals. These are called the 7-S of the organisation.

The 7-S framework suggests that there are several factors that
influence an organisation’s ability to change. The variables involved are
interconnected so that altering one element may wellimpact other
connected elements. Hence, significant changes cannot be achieved in
any variablewithout making changes in all the variables. There is no
starting point or implied hierarchy inthe shape of the diagram, so it is
not obvious which of the 7 factors would be the driving forcein changing
a particular organisation at a particular point of time. All the elements
are equallyimportant. The critical variables of change could be different
across organisations. They couldalso be different in the same
organisation. Fundamentally, the framework makes the point that
effective strategy implementation is more than an individual subject,
but is coupled with skills, styles, structures, systems, staff and super-
ordinate goals.

Super-ordinate Goals: “Super-ordinate goals” mean the “goals

of a higher order which express the values, vision and mission
that senior management brings to the organisation”. These can
be considered as the fundamental ideas around which a business
is built. Hence, theyrepresent the main values and aspirations of
an organisation. They are the broad notions offuture direction.
They can be considered to be equivalent to “organisational
purposes”.

Structure: “Structure” means the organisational structure of the Strategic Management : 201
Strategy company. The design of organisational structure is a critical task
Implementation
of top management. Organisational structure refers tothe relatively
more durable organisational arrangements and relationships. It
prescribes the formal relationships among various positions and
NOTES
activities, communication channels, roles to be performed by
various members of an organisation.

Organisational structure performs four major functions:

1. It reduces external uncertainty.
2. It reduces internal uncertainty due to variable, unpredictable
and random human behaviour.
3. It provides a wide variety of devices like departm-
entalization, specialization, division oflabour, delegation
of authority etc.
4. It helps in coordinating various activities of the organisation
and focus on its objectives.

Organisational structure must be designed in accordance with the

needs of the strategy. According to Chandler, structure must follow
strategy. In other words, changes in strategy must be followed by
changes in organisational structure. According to McKinsey, the
relationship between strategy and structure, though important,
rarely provides unique structural solutions. Quite often the main
problem in strategy relates to its execution.

Systems: “Systems” mean the procedures that make the

organisation work. They include the rules, regulations and
procedures, both formal and informal, that complement the
organisational structure. Systems include production planning and
control systems, cost accounting procedures, capital budgeting
systems, performance evaluation systems etc. Often, changes in
Strategic Management : 202 strategy require changes in systems.
Style: “Style” means the way the company conducts its business. Strategy
Implementation
Top managers in organisations can use style to bring about
change. Organisations differ from each other in their “styles” of
working. The style of an organisation, according to the NOTES
McKinsey framework, becomes evident through the patterns
of actions taken by the top management team over a period of
time. Thus, an important part of managing change is establishing
and nurturing a good ‘fit’ between culture and strategy.

Staff: “Staff” refers to the pool of people who need to be

developed, challenged and encouraged. It should be ensured
that the staff has the potential to contribute to the achievement
of goals.

Three important aspects about staff are:

1. Selecting meritorious people for specific organisational
positions.
2. Developing abilities and skills in them, to take up
challenging assignments.
3. Motivating them to give their best to achieve strategic
goals.

Skills: “Skills” are the most crucial attributes or capabilities of

an organisation. Skills in the 7-S framework can be considered
as an equivalent of “distinctive competencies”.

For example : Hindustan Lever is known for its marketing skills,

TELCO for its engineering skills, IBM for its customer service,
Du Pont for its research and development skills and Sony for its
new product development skills. Skills are developed over a
period of time and are a result of a number offactors. Hence, to
implement a new strategy, it is necessary to build new skills. Strategic Management : 203
Strategy Strategy: “Strategy” is the long-term direction and scope of an
Implementation
organisation. It is the route that the company has chosen to
achieve competitive success.

NOTES
Alignment of the Framework
Successful implementation of strategy requires the right
alignment of different elements within the organisation. The Mc
Kinsey consultants call strategy, structure, and systems as the
“hard elements” of the organisation and the other 4 Ss i.e. style,
skills, staff and super-ordinate goals as the “soft elements” of
the organisation. The hard elements are more tangible and
definite, and so they are often the ones that gain the greater
attention, however, the soft elements are equally important, even
if they are less easy to measure, assess and plan.

10.6 Resource Allocation

Most strategies need resources to be allocated to them if they
are to be implemented successfully. Let us examine some special
circumstances that may affect the allocation of resources. Resource
allocation deals with the procurement and commitment of financial,
physical and human resources to strategic tasks for achievement of
organisational objectives. This involves the process of providing
resources to particular business units, divisions, functions etc for the
purpose of implementing strategies. All organisations have at least five
types of resources:

1. Physical Resources
2. Financial Resources
3. Human Resources
4. Technological Resources
Strategic Management : 204 5. Intellectual Resources
 These resources may already exist in the organisation or may Strategy
Implementation
have to be acquired. Resource allocation decisions are very critical in
that they set the operative strategy for the firm. Resource allocation
decisions about how much to invest in which areas of business reinforce NOTES
the strategy and commit the organisation to the chosen strategy.

10.6.1 Importance of Resource Allocation

A company’s ability to acquire sufficient resources needed to
support new strategic initiatives and steer them to the appropriate
organisational units has a major impact on the strategy implementation
process. Too little funding arising from constrained financial resources
or from sluggish management action slows progress and impedes the
efforts of organisational units to execute their part of the strategic
plan effectively. At the same time, too much funding wastes
organisational resources and reduces financialperformance. Both these
extremes emphasize the need for managers to be careful about resource
allocation. Resource allocation becomes a critically important exercise
when there are majorshifts from the past strategies in terms of product/
market scope. For example, if the firm’sstrategy is expansion in one
line, withdrawal from another and stability in the rest of theproducts,
then greater resources will have to flow to the first and lesser to the
Check Your Progress
second and thethird. Similarly, if the strategy is to develop competitive
Why is it said that using
edge through product development, greater resources will have to be
a formula approach in
committed to R&D. Resource allocation is a powerful means of resource allocation may
be counterproductive.
communicating the strategy in the organisation as itgives the signals
Discuss with reasons
to all concerned. It will demonstrate what strategy is really in accompanied with
examples?
operation.Resource allocation decisions should be taken judiciously
because using a formula approach (i.e. allocating funds as a percentage
of sales or profits), may be inappropriate and counterproductive.Care
should be taken to see that the resources are not allocated or withdrawn
because of easy availability or paucity. Strategic Management : 205
Strategy
Implementation 10.6.2 Managing Resource Conflict
The common approach to resource allocation is through
budgetary system. There are however, many other tools, which can be
NOTES used for this purpose. Some of the important tools used for resource
allocation are discussed below:

BCG Matrix
The BCG matrix, which is generally used for portfolio analysis, can
also be used as a guideline for resource allocation. The surplus
resources from “cash cows” can be reallocated to “stars” or “question
marks”. In so far as businesses categorized as “dogs” are concerned,
with low growth and low market share, they may not need any thrust,
and resources can be gradually withdrawnfrom such businesses and
invested in other promising businesses. The BCG matrix is a useful
tool because it impresses upon a portfolio approach to
resourceallocation. It helps in averting over-investment in any particular
type of business and underinvestmentin promising businesses from
the long-term perspective. Despite the utility of theBCG matrix,
however, it should be used with care and only as a guideline. It does
not provide aconcrete measure for making a finer choice, particularly
among the businesses of the samenature.

PLC-based Budgeting
Resource allocation can also be linked to different stages of a Product
Life Cycle (PLC). A product in introductory and growth stages may
require more resources than a product in mature and decline stages.

Zero-based Budgeting (ZBB)

The key differences between ZBB and traditional budgeting is that
ZBB requires managers to justify their budget requests in detail from
the scratch, without relying on the previous budget allocations.
Strategic Management : 206
Therefore, instead of taking the last year’s budget as the base for Strategy
Implementation
projecting the future allocations, ZBB forces the managers to review
the objectives and operations afresh and justify the budget requests.
ZBB is, therefore, a type of budget that requires managers to rejustify NOTES
the past objectives, projects and budgets and set priorities for the
future. It amounts to recalculationof all organisational activities to
see which should be eliminated or funded at a reduced orincreased
level.

Capital Budgeting
Capital Budgeting techniques can be used for long-term commitment
of resources, such as capital investments in mergers, acquisitions, joint
ventures, and setting up of new plants etc. Various techniques like
payback period, net present value, internal rate of return, etc. can be
used to find which investments would earn maximum returns.

Operating Budgets
Operating budgets are necessary for more routine resource allocation
for conducting operations. There are two types of systems:

1. Fixed budgeting system: This system commits resources

based on activity levels. In this type of budgeting, there
may be a tendency to retain the committed resources even
if the activity levels are not being achieved, thus depriving
other divisions of the resources, which have a better
potential.
2. Flexible budgeting system: This system provides for
transfer of funds from one unit to another if a fall is expected
in actual activity level in a particular unit, thus ensuring
better resource utilization. But this system has the
disadvantage of encouraging non-seriousness about
budgetary allocations. Strategic Management : 207
Strategy
Implementation 10.6.3 Criteria for Resource Allocation
Process
NOTES In large, diversified companies, the corporate office plays a
major role in allocating resources among various strategies proposed
by its operating units or divisions. In many cases, product groups,
business units or functional areas may bid for funds to support their
strategic proposals.

There are three criteria which can be used when allocating resources.
1. Contribution towards fulfillment of organisational
objectives: At the centre of the organisation, the resource
allocation task is to steer resources away from areas that
are poor at delivering the organisation’s objectives and
towards those that are good at delivering the organisation’s
objectives.

2. Support of key strategies : In many cases, the problem

with resource allocation is that the requests for funds
usually exceed the funds normally available. Thus, there
needs to be some further selection mechanism beyond the
delivery of the organisation’s mission and objectives. This
second criterion relates to two aspects of resource analysis:
(a) Support of core competencies : Resources should
develop and enhance core competencieswhich, in turn,
help achieve competitive advantage.
(b) Enhancement of value chain activities : Resources
should assist particularly those activities of the value
chain which help the organisation to achieve low cost
or differentiation and thereby enhance and sustain

Strategic Management : 208 competitive advantage of the firm.

 (c) Risk-acceptance level of the organisation: Clearly, if Strategy
Implementation
the risk is higher, there is a lower likelihood that the
strategy will be successful. Some organisations will be
more comfortable with accepting higher levels of risk NOTES
than others. So, the criterion in this case needs to be
considered in relation to the risk-acceptance level of
the organisation.

10.6.4 Factors affecting Resource Allocation

Resource allocation may not necessarily be a purely ‘rational’
decision-making process. It is also a behavioural and political process
involving people who may be motivated by different objectives. Some
of the major factors affecting resource allocation are discussed below:

1. Objectives of the organisation: People motivated by

different objectives exercise theirinfluence over the funding

of projects. There are two types of objectives. Official

(explicit) objectives and operative (implicit) objectives.

Allocations of resources are more guided by implicit

objectives than explicit objectives. The formal and informal

organisations also influence the perception of which projects

should be chosen for funding.

2. Powerful units: Sometimes, powerful SBU heads secure

larger allocation of funds than their ‘fair share’.

3. Dominant strategists: The preferences of dominant

strategists like the CEO, Directors, SBU heads, etc. are

reflected in the way resources are allocated. The divisional

and departmental heads know that such preferences matter

and try to present their demands in line with them. Strategic Management : 209
Strategy 4. Internal politics: Resources are often construed as power,
Implementation
and those units, which manage to secure substantial
resources, are perceived as more powerful than others.
NOTES Internal politics within the organisation to secure more and
more resources, affect the process of resource allocation.
5. External influences: Apart from internal politics, external
influences like government policy, demands of shareholders,
financial institutions, community and others, also affect
resource allocation. For example, legal requirements may
require additional finances in labour welfare and social
security, pollution control, safety equipments and energy
conservation. The shareholders may expect higher
dividends, and resources have to be directed to them.
Financial institutions may impose restrictions or require
companies to invest in technology up-gradation and R&D.
Similarly, the discharge of social responsibilities by the firm
requires allocation of sufficient funds. Thus, external
influence affect the process of resource allocation.

10.6.5 Difficulties in Resource Allocation

The resource allocation process can sometimes become fairly
complex, and may even create several difficulties to the strategists.
Some of the difficulties that can create problems are:

1. Scarcity of Resources: Resources are hard to find. Even if

finance is available, the cost ofcapital could be a constraint.
Non-availability of highly skilled people could be another
problem.

2. Restrictions on Generating Resources: Within

Strategic Management : 210 organisations, the new units which have greater potential
 for growth in the future, may not be able to generate Strategy
Implementation
resources in the short run. Allocation of resources on par
with existing SBUs, divisions and departments through the
usual budgeting process, will put them at a disadvantage. NOTES

3. Bloated Demands: Unit managers may sometimes submit

inflated or overstated demands for funds to guard against
any budget-cuts. This subverts the decision process.

4. Negative Attitude: Units, which do not get the desired

allocations, may develop a negative attitude towards the
corporate managers. They may work at cross purposes,
which may obstruct the implementation of the intended
strategy.

5. Budget Battles: The actual allocation of funds to any unit

has a major effect on the work environment of the unit and
the career of the manager concerned. If a manager loses
the ‘budget battle’, his subordinates feel that the manager
has failed them, and may not cooperate with him.

6. Budgetary Process: The budgetary process itself can lead

to problems if it is not tied to the strategic plans of the
firm. If top management fails to communicate the shifts in
the strategic plans and the lower levels are unaware of the
shifts, any intended strategy is unlikely to succeed.

7. New SBUs: The budgetary process is tied to the way units

and divisions are arranged organisationally. New SBUs can
be at a disadvantage if they are unaware of the intricacies
of the budget procedures used in their organisations.

To avoid the above difficulties, strategists should pay maximum

attention to resource allocation, and ‘prioritize’ budgeting allocations
in the initial stages taking overall objectives into account. Strategic Management : 211
Strategy
Implementation 10.7 Summary
• Most strategies need resources to be allocated to them if they are
to be implemented successfully.
NOTES
• A successful strategy formulation does not guarantee successful
strategy implementation.
• It affects an organisation from top to bottom; it affects all divisional
and functional areas of business.
• Implementation of strategy involves a number of interrelated
decisions, choices, and a broad range of activities. It requires an
integration of people, structures, processes etc.
• Mc Kinsey’s 7-S model is good at capturing the importance of all
these elements in the implementation of strategy.
• A company’s ability to acquire sufficient resources needed to support
new strategic initiatives and steer them to the appropriate
organisational units has a major impact on the strategy
implementation process.

10.8 Key Terms

Bottom-up Approach: In this approach, resources are distributed
through a process of aggregation from the operating level. The
operating levels work out the requirements of each subunit and the
resources are allocated accordingly.
Capital Budgeting: used for long-term commitment of resources, such
as capital investments in mergers, acquisitions, joint ventures etc.
McKinsey 7-S Model: A model of organisational effectiveness that
postulates that there areseven internal factors of an organisation that
needs to be aligned and reinforced in order for it to be successful.
Operating Budget: Necessary for more routine resource allocation

Strategic Management : 212

for conducting operations.
Top-down Approach: In this approach, resources are allocated through Strategy
Implementation
a process of segregation down to the operating levels. The Board of
Directors, the Managing Director or members of top management
typically decide the requirements of each subunit and distribute NOTES

resources accordingly,.
Zero Based Budgeting: Budget requests in detail from the scratch,
without relying on the previous budget allocations.

10.9 Questions and Exercises

1. Does a successful strategy formulation guarantee a successful

implementation? Why/ why not?

2. “Strategic decisions to be communicated and understood

throughout the organisation”. Elucidate.

3. Why is it said that using a formula approach in resource

allocation may be counterproductive. Discuss with reasons

accompanied with examples.

4. “There has to be a “fit” between the strategy and the

organisation.” Substantiate

5. “Formulation and implementation are inextricably linked”.

Discuss

6. Bring out the differences between formulation and

implementation of strategy.

7. Discuss the relevance of McKinsey’s 7-S model in modern

business organisations.

8. Critically evaluate the McKinsey’s 7-S Model.

9. “Resource allocation is a powerful tool to communicate the

strategies of the organisation”. Justify. Strategic Management : 213

Strategy Check your progress
Implementation
Fill in the blanks:
1. ..............................are the core values of the company that are
NOTES evidenced in the corporate culture and the general work ethic.
2. ...................represents the competencies of the employees
working for the company.
3. Resource allocation deals with the ......................and
...................... of financial, physical and human resources to
strategic tasks.
4. ...................... budget specifies materials, labour, overheads
and other costs.
5. ..................... and ‘political’ considerations are inevitable in a
typical organisation.
6. The common approach to resource allocation is through
...................... system.
7. In BCG Matrix, the ...................... represent low growth and
low market share.
8. ...................... budgeting system provides for transfer of funds
from one unit to another if a fall is expected in actual activity
level in a particular unit.
9. ...................... budgeting techniques can be used for long-term
commitment of resources.
10. The problem with resource allocation is that the requests for
funds usually ...................... the funds normally available.

Answers:
1. Super ordinate goals 2. Skills 3. Procurement, commitment
4. Operating 5. ‘Behavioural’ 6. Budgetary 7. “Dogs” 8. Flexible
9. Capital 10. Exceed
Strategic Management : 214
 Strategy
10.10 Further Reading and References Implementation

Books
• Fred R. David, Strategic Management – Concepts and Cases,
NOTES
Pearson Education Inc., 2005.
• Hamel F and Prahalad CK, “Competing for the Future”, Harvard
Business School Press, Boston 1994.
• Richard Lynch, Corporate Strategy, Essex, Pearson Education
Ltd, 2006.

Online links
• ww.businessplanning.ws/.../business-plan-strategy-implementation
• www.investorwords.com/4218/resource_allocation
• www.themanager.org/Knowledgebase/Strategy/Implementation

Strategic Management : 215

Strategic Management : 216
 Structural
Implementation
UNIT 11: STRUCTURAL
IMPLEMENTATION NOTES

11.0 Unit Objectives

11.1 Introduction

11.2 Basic Principles of Organisational Structure

11.3 Relation between Strategy and Structure

11.4 Improving Effectiveness of Traditional Organisational Structures

11.5 Types of Organisational Structures

11.6 Modular Organisation

11.7 Towards Boundary less Structures

11.8 Structures for Strategies

11.9 Summary

11.10 Key Terms

11.11 Questions and Exercises

11.12 Further Reading and References

11.0 Unit Objectives

After studying this unit, you should be able to:
• Describe the types of organisational structures
• Define organisational design and change
• Explain the structures for strategies
Strategic Management : 217
Structural
Implementation 11.1 Introduction
To implement its strategy successfully a firm must have an
appropriate organisational structure. An organisational structure is a
NOTES
set of formal tasks and reporting relationships which provide a
framework for control and coordination within the organisation. The
visual representation of an organisational structure is called
organisational chart. The purpose of an organisational structure is to
coordinate and integrate the efforts of employees at all levels – corporate,
business and functional levels – so that they work together to achieve
the specific set of strategies. Organisational structure is a tool that
managers use to harness resources for getting things done.It is defined
as:
1. The set of formal tasks assigned to individuals and
departments.
2. Formal reporting relationships, including lines of authority,
responsibility, number of hierarchical levels and span of
manager’s control.
3. The design of systems to ensure effective coordination of
employees across departments. The set of formal tasks and
formal relationships provides a framework for vertical
control of the organisation.

There are two different aspects of the organisational structure:

1. Superstructure : This is the highly visible part of the organis-

ational structure. This depicts how people are grouped into
different divisions, departments and sections and how they are
related to each other. The superstructure also indicates the
principal ways in which the organisational operations are
integrated and coordinated. By showing their levels, it indicates
Strategic Management : 218 which groups have relatively more strategic importance.
 2. Infrastructure: This is comparatively less visible part of the Structural
Implementation
organisational structure. It is concerned with issues like
delegation of authority, specialization, communication,
information systems and procedures. The infrastructure enables NOTES
the organisation to engagein a number ofdisparate activities
and still keep them coordinated. The design of organisational
structure is a critical task of the top management of an
organisation. It is the skeleton of the whole organisation. It
provides relatively more durable organisational arrangements
and relationships.

Thus, an organisational structure fulfils two fundamental and

opposing requirements:
1. Division of labour into various tasks
2. Coordination of these tasks to accomplish effective
control of an organisation.
However, as an organisation grows and becomes more complex,
it needs appropriate changes in its design.

11.2 Basic Principles of Organisational

Structure
Check Your Progress
There are several important principles of organisation, which
Do you agree with the
need to be understood before building an organisation’s structure. They statement that work
are: can be performed more
efficiently if employees
are allowed to
1. Hierarchy: Hierarchy defines who reports to whom and the specialize? Why/why
span of control. Span of control is the number of people not?

reporting to a supervisor. It determines how closely a supervisor

can monitor subordinates. Tall structures have many levels in
the hierarchyand a narrow span. Communication up and down
the hierarchy becomes difficult. Flatstructures are horizontally Strategic Management : 219
Structural dispersed having fewer levels in the hierarchy. The trend inrecent
Implementation
years has been towards flat structures allowing for wider spans
of control as a wayto facilitate better communication and co-
ordination.
NOTES
2. Chain of Command: The chain of command is an unbroken
line of authority that links all persons in an organisation and shows
who reports to whom. It has two underlying principles. Unity of
command means that each employee is held accountable to only
onesupervisor. The scalar principle means a clearly defined line
of authority in the organisation.Authority and responsibility for
different tasks should be distinct. All persons in the organisation
should know to whom they report as well as the successive
management levels all the way to the top.
3. Specialization : Specialization, sometimes called division of
labour, is the degree to which organisational tasks are subdivided
into separate jobs. Work can be performed more efficiently if
employees are allowed to specialize. This is because an employee
in each department performs only the tasks relevant to his
specialized function. Despite the apparent advantages of
specialization, many organisations are moving away from this
principle. With too much specialization, employees are isolated
performing only a single, boring job. Many companies are,
therefore, enlarging jobs to provide greater challenges or
assigning tasks to teams so that employees can rotate among
several jobs performed by the team.
4. Authority, Responsibility and Delegation: Authority is the formal
and legitimate right of a manager to make decisions, issue orders,
allocate resources and command obedience. Responsibility is the
duty to perform the task or activity an employee has been
assigned. Accountability means that the people with authority
and responsibility are subject to reporting and justifying task
Strategic Management : 220 outcomes to those above them in the chain of command.
 Delegation is the process managers use to transfer authority Structural
Implementation
and responsibility to positions below them in the hierarchy.
The principle is that there must be parity between authority
and responsibility. It means managers can be made accountable NOTES
for results only when they are delegated with sufficient
authority commensurate with the responsibility. Most
organisations today encourage managers to delegate authority
to the lowest possible level to provide maximum flexibility to
meet customer needs and adapt to the environment. Managers
are encouraged to delegate authority, although they often find
it difficult.
5. Centralization and Decentralization: Centralization and
decentralization refer to the level at which decisions are made.
Centralization means that decision-making is done atthe top
levels of the organisation. Decentralization means that decision
making is pushed down to the lower levels in the organisation.
Centralization helps in better coordination, but too much
centralization results in slow response and demotivates people
at lower levels. Decentralization relieves the burden on top
managers, makes greater use of worker’s skills, ensures
decision making by well-informed people and permits rapid
response to external changes. But it does not mean that every
organisation should decentralize. Managers should diagnose
the organisational situation and select the decision-making
level.
6. Formalization: Formalization is the extent to which written
documentation is used to direct and control employees. Written
documentation includes rules, regulations, policies, procedures,
job descriptions etc. They are inexpensive ways to coordinate
activities. These documents complement the organisational
structure by providing descriptions of tasks, responsibilities Strategic Management : 221
Structural and authority. The use of rules and regulations is a part of
Implementation
bureaucratic model of organisation.
7. Departmentalization: Another fundamental characteristic of

NOTES organisational structure is departmentalization, which means

grouping positions into departments and departments into the
total organisation.

11.3 Relation between Strategy and Structure

Strategic management posits that the strategy and the
organisation structure of the firm must match. In a classic study of
large U.S. corporations such as DuPont, General Motors, Sears, and
Standard Oil, Alfred Chandler concluded that structure follows strategy.
This means that changes in corporate strategy lead to changes in
organisational structure. He also concluded that organisations follow
a pattern of development from one kind of structural arrangement to
another as they expand. According to Chandler, these structural changes
occur because the old structure was not suitable. Chandler therefore
proposed the following as the sequence of what occurs:

1. New strategy is created

2. New administrative problems emerge
3. Economic performance declines
4. New appropriate structure is invented
5. Profit returns to its previous level

Chandler found that in their early years, corporations such as

DuPont and General Motors had a centralized functional structure,
which was suitable for a limited range of products. As they added new
product lines and created their own distribution networks, the old
structure became too complex. Therefore, they shifted to a decentralized
Strategic Management : 222 structure with several autonomous divisions.
11.4 Improving Effectiveness of Traditional Structural
Implementation
Organisational Structures
In the changed times and situations, traditional organisational
NOTES
structure is crumbling under the weight of ever-increasing regulations
that drive greater accountability and transparency. Smart companies are
on the forefront of building new and improved structures that support
and enhance this new compliance environment, and best practices are
emerging. The best structure for an organisation is determined by many
aspects of its situation – the technology, size, environment and strategy.
Frequently, structures evolve as the organisation moves from one stage
of growth to the next. The external and internal environments
affectstructural design in different ways.

Rate of Change : When the organisation operates in a more

dynamic environment, it needs to be able to respond quickly to
the rapid changes that occur. In static environments, change is
slow and predictable and does not require great sensitivity on
the part of the organisation. In dynamic environments, the
organisation structure and its people need to be flexible, well
co-ordinated and able to respond quickly to outside influences.
The dynamic environment implies a more flexible, organic
structure.
Degree of Complexity : Some environments can be easily
monitored from a few key data movements. Others are highly
complex, with many influences that interact in complex ways.
One method of simplifying the complexity is to decentralize
decisions in that particular area. The complex environment will
usually benefit from a decentralized structure.
Market Complexity : Some organisations sell a single product
or variations on one product. Others sell ranges of products that
are essentially diverse. As markets become more diverse, there Strategic Management : 223
Structural is usually a need to divisional the organisation as long as synergy
Implementation
or economies of scale are unaffected.
Competitive Situations : With friendly rivals, there is no great
need to seek the protection of the centre. In deeply hostile
NOTES
environments, however, extra resources and even legal protection
may be needed; these are usually more readily provided by central
headquarters. As markets become more hostile, the organisation
usually needs to be more centralized.

11.5 Types of Organisational Structures

There are seven basic types of organisational structures:
1. Simple structure
2. Functional structure
3. Divisional structure
4. SBU structure
5. Matrix structure
6. Network structure
7. Virtual structure

Let us understand each of them briefly.

1. Simple Structure: In this structure, the owner-manager controls
all activities and makes all the decisions. This structure may
be appropriate for small and young organisations. Coordination
of tasks is done through direct supervision. There is little
specialization of tasks, few rules and regulations and
communication is informal.
2. Functional Structure: Functional structures are grouped based
on major functions performed. Each function is led by a
functional specialist. Functional structures are formed in
organisations in which there is a single or closely related
Strategic Management : 224 products or services.
3. Divisional Structure : Divisional structures are used by Structural
Implementation
diversified organisations. In a divisional structure, divisions
are created as self-contained units with separate functional
departments for each division. A division may be organised NOTES
around geographic area, products, customers etc. The head
office determines corporate strategy, allocates resources
among divisions and appoints and rewards the heads of these
divisions. Each division is responsible for product, market
and financial objectives for the division as well as their
division’s contribution to overall corporate performance.
4. Matrix Structure : The matrix structure is, in effect, a
combination of functional and divisional structures. In this
structure, there are functional managers and product or
project managers. Employees report to one functional
manager and to one or more project managers. For example,
a product group wants to develop a new product. For this
project it obtains personnel from functional departments like
Finance, Production, Marketing, HR, Engineering etc. These
personnel work under the product manager for the duration
of the project. Thus, they are responsible for two managers
– the product manager and the manager of their functional
area. While functional heads have vertical control over the
functional managers, the product or project heads have
horizontal control over them. Thus, matrix structure
provides a dual reporting. The dual lines of authority makes
the matrix structure unique. The matrix structure has been
used successfully by companies such as IBM, Unilever, Ford
Motor Company etc.
5. Network Structure: A network organisation outsources or
subcontracts many of its major functions to separate
companies and coordinates their activities from a small
headquarters. Rather than being housed under one roof, Strategic Management : 225
Structural activities like design, manufacturing, marketing, distribution
Implementation
etc. are outsourced to separate organisations that are
connected electronically to the central office.

NOTES 6. Virtual Organisation: This is an extension of the network

structure. In this approach, independent organisations form
temporary alliances to exploit specific opportunities, then
disband when their objectives are met. The term virtual
means “being in effect but not actually so”. The virtual
organisations consist of a network of independent
companies – suppliers, customers or even competitors –
linked together to share skills, costs, markets and rewards.
The members of a virtual organisation pool and share the
knowledge and expertise of each other.

11.6 Modular Organisation

The organisational capabilities to interact with others have been
greatly improved as a result of modern information and communications
technologies: Nowadays a company can maintain more relationships
with more companies at much lower costs than before. The increased
business networks require modularization of the products, the processes
and the firm in order to be effective. Modular products tend to favour
a modular organisation form, as the various units involved in the design
process of products with interchangeable components are loosely
coupled,operate autonomously, and can be easily reconfigured. The
concept of modularity can be applied not only to complex product
system design, but also to business system interpretation and design. A
modular organisation is one in which different functional components
are separated from one another, a technique adopted from software
engineering. A modular organisation is in contrast to a composite
organisation in which there is no separation between functions. Modular
Strategic Management : 226 organisation is also distinct from hierarchical organisation. Modular
organisation is chiefly concerned with the horizontal design of a Structural
Implementation
system. Modularity allows components to be produced separately
and used interchangeably in different configurations without
compromising system integrity. In modular organisations, coordination NOTES
tasks are delegated to individual modules (functions, teams, etc.) and
coherence is achieved easily through fully specified interfaces. In
addition to the reduction of managerial complexity, this structural,
hierarchical function-based decomposition results in the localization
of the impacts of environmental disturbances within specific modules,
increasing the immunity and adaptability of the overall organisation
in a turbulent environment.

11.7 Towards Boundary less Structures

Traditional companies with boundaries, rules, and extensive
plans are at a supreme disadvantage in today’ globalized world, where
technology changes daily and the value chain commands changes of
its own. In a traditional company where people are categorized into
neatly defined positions with their job descriptions filed in triplicate
in the Human Resources department, the way a company plans its
business can cause it to sink despite planning because the boundaries
can mean lost opportunities, being overtaken by the competition, loss
of revenues, or watching its niche slip away because of a new
technology, an alteration in the global marketplace, or simply a failure
to market its product effectively. When changes occur, they happen
too quickly for its organisational processes to meet them; as a result,
opportunities are quickly lost, problem situations take over rapidly,
and before the company can respond appropriately, it has lost
customers, opportunities, and market share. Although that company
likely has more than enough talent within its walls to offset all of
those disasters, the talent is never put to use, because employees are
constrained to operate within the confines of their job descriptions, Strategic Management : 227
Structural where only the prescribed talents can be put to good use. The answer
Implementation
to this dilemma lies in boundary less organisations. A boundary less
organisation is a contemporary approach to organisational design. It is

NOTES an organisation that is not defined by, or limited to, the horizontal,
vertical, or external boundaries imposed by a predefined structure.
This term was coined by former GE chairman Jack Welch because he
wanted to eliminate vertical and horizontal boundaries within GE and
break down external barriers between the company and its customers
and suppliers.

11.8 Structures for Strategies

To understand the logic behind this approach to the development
of organisational structures, it is helpful to look at the historical
background. As already mentioned, prior to the early 1960s, the US
strategist Alfred Chandler studied how some leading US corporations
had developed their strategies in the first half of the twentieth century.
He then drew some major conclusions from this empirical evidence,
the foremost one being that the organisation first needed to develop its
strategy and, after this, to devise the organisation structure that delivered
that strategy. Chandler drew a clear distinction between devising a
Check Your Progress
strategy and implementing it. He defined strategy as: “The determination
In your opinion, which
aspects of an of the basic long-term goals and objective of an enterprise, and the
organisation determine adoption of courses of action and the allocation of resources necessary
the best design for it?
for carrying out these goals”. The task of developing the strategy took
place at the corporate and business levels of the organisation. The job
of implementing it then fell to the various functional areas. Chandler’s
research suggested that, once a strategy had been developed, it was
necessary to consider the structure needed to carry it out. A new strategy
might require extra resources, or new personnel or equipment which
would alter the work of the enterprise.
Strategic Management : 228
Strategy and Structure are Interlinked Structural
Implementation
According to modern strategists, strategy and structure are
interlinked. It may not be optimal for an organisation to develop its
structure after it has developed its strategy. The relationship is more NOTES
complex in two respects:

1. Strategy and the structure associated with it may need to

develop at the same time in an experimental way : As the
strategy develops, so does the structure. The organisation
learns to adapt to itschanging environment and to its changing
resources, especially if such change is radical.
2. If the strategy process is emergent, then learning and
experimentation involved may need a more open and less
formal organisation structure.

Managing the Complexity of Strategic Change

Quinn suggests that strategic change may need to proceed
incrementally, i.e. in small stages. Hecalled the process “logical
incrementalism”. The clear implication is that it may not be possible
to define the final organisation structure, which may also need to
evolve as the strategy moves forward incrementally. He recognizes
the importance of informal organisation structures in achieving
agreement to strategy shifts. If the argument is correct, it will be
evident that any idea of a single, final organisation structure – after
deciding on a defined strategy – is dubious.

Criticism of the Strategy – First, Structure- Afterwards Process

1. Structures may be too rigid, hierarchical and bureaucratic to
cope with the newer social values and rapidly changing
environment.
2. The type of structure is just as important as the business area Strategic Management : 229
Structural in developing the organisation’s strategy. It is the structure
Implementation
that will restrict, guide and form the strategy.
3. Value chain configurations that favour cost cutting or,

NOTES alternatively, new market opportunities may also alter the

organisation required.
4. The complexity of strategic change needs to be managed,
implying that more complex organisational considerations will
be involved. Simple configurations such as a move from a
functional to a divisional structure are only a starting point in
the process.
5. The role of top and middle management in the formulation of
strategy may also need to be reassessed: Chandler’s view that
strategy is decided by the top leadership alone has been
challenged. Particularly for new, innovative strategies, middle
management and the organisation’s culture and structure may
be important. The work of the leader in empowering middle
management may require a new approach – the organic style
of leadership.

The Concept of ‘Strategic Fit’

Although it may not be possible to define which comes first,
there is a need to ensure that strategy and structure are consistent
with each other. For example, Pepsi Co reorganised its North American
business to ensure that its strengths in the growing non-carbonated
drinks market could be exploited across its full range of drinks. For
an organisation to be economically effective, there needs to be a
matching process between the organisation’s strategy and its structure.
This is the concept of strategic fit. In essence, organisations need to
adopt an internally consistent set of practices in order to undertake
the proposed strategy effectively. It should be said that such practices
will involve more than the organisation’s structure. They will also
Strategic Management : 230 cover such areas as reward systems, information systems and
processes, culture, leadership styles, etc. There is strong empirical Structural
Implementation
evidence, both from Chandler and Senge, that there does need to be a
degree of strategic fit between the strategy and the organisation
structure. Although the environment is changing all the time, NOTES
organisations may only change slowly and not keep pace with external
change, which can often be much faster – for example, the introduction
of digital technology. It follows that it is unlikely that there will be a
perfect fit between the organisation’s strategy and its structure. There
is some evidence that a minimal degree of fit is needed for an
organisation to survive. It has also been suggested that, if the fit is
ensured early during the strategic development process, then higher
economic performance may result. However, as the environment
changes, the strategic fit will also need to change.

11.9 Summary
Organisations are structured in a variety of ways, dependant
on their objectives and culture. The structure of an organisation will
determine the manner in which it operates and it’s performance.
Structure allows the responsibilities for different functions and
processes to be clearly allocated to different departments and
employees. The wrong organisation structure will hinder the success
of the business. Organisational structures should aim to maximize the
efficiency and success of theorganisation.An effective organisational
structure will facilitate working relationships between various sections
of the organisation. It will retain order and command whilst promoting
flexibility and creativity. Internal factors such as size, product and skills
of the workforce influence the organisational structure. As a business
expands the chain of command will lengthen and the spans of control
will widen. The higher the level of skill each employee has the more
the business will make use of the matrix structure to maximize these
skills across the organisation. Strategic Management : 231
Structural
Implementation 11.10 Key Terms
Agile Organisation: A firm that identifies a set of business capabilities

NOTES central to high profitability operations and then build a virtual

organisation around those capabilities.
Chain of Command: an unbroken line of authority that links all persons
in an organisation and shows who reports to whom
Formalization: extent to which written documentation is used to direct
and control employees.
Hierarchy: defines who reports to whom and the span of control
Infrastructure: concerned with issues like delegation of authority,
specialization, communication, information systems and procedures
Modular Organisation: An organisation in which different functional
components are separated from one another.
Outsourcing: subcontracting a service with another company or person
to do a particular function.
Span of Control: The number of employees that each manager/
supervisor is responsible for. Superstructure: depicts how people are
grouped into different divisions, departments and sections and how
they are related to each other.
Virtual Organisations: consist of a network of independent companies
- suppliers, customers or even competitors linked together to share
skills, costs, markets and rewards.

11.11 Questions and Exercises

1. In your opinion, what fundamental requirements does an
organisational structure fulfill?
2. Do you agree with the statement that work can be performed
more efficiently if employees are allowed to specialize? Why/
Strategic Management : 232 why not?
3. What do you see as the reason behind the recent trend of most Structural
Implementation
organisations encouraging managers to delegate authority to
the lowest possible level?
4. In your opinion, which aspects of an organisation determine NOTES
the best design for it?
5. Compare and contrast the functional and divisional structures?
6. Give example of an organisation that has successfully employed
the matrix structure. Analyse its success mantra.
7. Prove that network structure can weaken the employee loyalty.
8. Illustrate the advantages due to which some organisations sell
a single product or variations on one product.
9. “Being boundary-less can be the disadvantages for an
organisation”. Explain
10. Suggest any three advantages of modular organisations.

Check your progress

Fill in the blanks:
1. The ..................... indicates the principal ways in which the
organisational operations are integrated and coordinated.
2. The ..................... enables the organisation to engage in a number
of disparate activities.
3. ..................... means that each employee is held accountable to
only one supervisor.
4. ..................... means that decision-making is done at the top
levels of the organisation.
5. The ..................... principle means a clearly defined line of
authority in the organisation.
6. .................... is the process managers use to transfer authority
and responsibility to positions below them in the hierarchy.
7. The process of designing an organisation’s structure to match
with its situation is called ..................... Strategic Management : 233
Structural
8. Divisional structures are used by ..................... organisations.
Implementation
9. The ..................... structure is, in effect, a combination of
functional and divisional structures.
NOTES 10. A ..................... organisation outsources or subcontracts many
of its major functions to separate companies.
11. The complex environment will usually benefit from a
..................... structure.
12. As markets become more hostile, the organisation usually needs
to be ..................... centralized.
13. A ..................... organisation is an organisation that is not
defined by, or limited to, the horizontal, vertical, or external
boundaries imposed by a predefined structure.

14. The biggest advantage of an agile virtual organisation is it can

draw on ..................... worldwide.
15. A modular organisation is in contrast to a .....................
organisation.

Answers:
1. superstructure 2. Infrastructure 3. Unity of command
4. Centralization 5. scalar 6. Delegation 7. organisational design
8. Diversified 9. matrix 10. Network 11. decentralized 12. More
13. boundaryless 14. Expertise 15. Composite

11.12 Further Reading and References

Books
• Burt R.S., Structural Holes : The Social Structure of
Competition, Harvard University Press: Cambridge,
• Garud R., Kumaraswamy A., Technological and Organisational
Designs for Realizing Economies of Substitution, Strategic
Strategic Management : 234 Management, Journal.
Online
• www. indiastudychannel.com/.../70029-Types-organisational-
structure
• www.marcbowles.com/courses/adv.../amc3_ch6two1 NOTES

Strategic Management : 235

Strategic Management : 236
 Behavioural
UNIT 12: BEHAVIOURAL Implementation

IMPLEMENTATION
NOTES
12.0 Unit Objectives

12.1 Introduction

12.2 Stakeholders and Strategy

12.3 Strategic Leadership

12.3.1 Leadership Approaches

12.4 Corporate Culture and Strategic Management

12.4.1 Influence of Culture on Behaviour

12.4.2 Creating Strategy Supportive Culture

12.5 Personal Values and Ethics

12.5.1 Importance of Ethics

12.5.2 Approaches to Ethics

12.5.3 Building an Ethical Organisation

12.6 Social Responsibility and Strategic Management

12.6.1 Responsibilities of Business

12.6.2 Need for CSR: The Strategy

12.7 Summary

12.8 Key Terms

12.9 Questions and Exercises

12.10 Further Reading and References

Strategic Management : 237

Behavioural
Implementation 12.0 Unit Objectives
After studying this unit, you should be able to:
• Explain the concept of stakeholder management
NOTES
• Describe the concept of strategic leadership
• Discuss the corporate culture and strategic management
• Identify the role of personal values and ethics
• Realise the concept between social responsibility and strategic
management

12.1 Introduction
Successful strategy formulation does not at all guarantee
successful strategy implementation. It is always more difficult to actually
carry out something than to say you are going to do it. Strategy
implementation requires support, discipline, motivation and hard work
from all managers and employees. Managers should pay careful attention
to a number of key issues while executing the strategies. Chief among
them are how the organisation should be structured to put its strategy
into effect and how such variables as leadership, power and organisational
culture should be managed to enable employees to work together while
implementing the firm’s strategic plans. Organisations in stable,
predictable environments often become relatively tall, with many
hierarchical levels and narrow spans of control. On the other hand,
companies in dynamic, rapidly changing environments usually adopt flat
structures with few hierarchical levels and wide spans of control.

12.2 Stakeholders and Strategy

A firm’s stakeholders are the individuals, groups, or other
organisations that are affected by and affect the firm’s decisions and
actions. Depending on the specific firm, stakeholders mayinclude
Strategic Management : 238
government, employees, shareholders, suppliers, distributors, the media Behavioural
Implementation
and even the community in which the firm is located among many others.
1. When it comes to corporate mission values stakeholders will
maximise the value for allstakeholders, as opposed to NOTES
shareholders who only maximise the value for themselves.
2. Stakeholders also play a role in the decision making process in
a business. Although since employees and customers are
included in being stakeholders they too are considered when it
comes to decision making.
3. When it comes to accountability it does not just come down to
being accountable to themselves. Accountability lies with the
customer, suppliers, government, community and employee
stakeholders.

Stakeholder Management
An organisation needs to have an effective stakeholder
management system in place, which provides a great support in
achieving its strategic objectives. It interprets and influences both the
external and internal environments and creates positive relationships
with stakeholders through the appropriate management of their
expectations and agreed objectives. Stakeholder Management is a
process and control that must be planned and guided by underlying Check Your Progress
principles. Stakeholder Management, within business or projects, Assess the value of
stakeholders in an
prepares a strategy that utilises informationor intelligence collected
organsiation. Why is it
during the following common processes: important to manage the
stakeholders well?

1. Stakeholder Identification: identify the parties, either

internal or external to organisation, that are affected by the
business. For this purpose, a stakeholder map can be used.
2. Stakeholder Analysis: identify and acknowledge
stakeholder’s needs, concerns, wants, authority, common
relationships, interfaces, and put this information in line Strategic Management : 239
Behavioural within the Stakeholder Matrix.
Implementation
3. Stakeholder Matrix: position the stakeholders on a matrix
based on their level of influence, impact or enhancement they
may provide to the business or its projects.
NOTES
4. Stakeholder engagement: engaging stakeholders does not
seek to develop the project/ business requirements, solution
or problem creation, or establishing roles and responsibilities.
The process focuses on knowing and understanding each other,
at the Executive level. It gives an opportunity to discuss and
agree expectations of communication and, primarily, agree a
set of Values and Principles that all stakeholders will abide by.
5. Communicating Information: expectations are established
and agreed for the manner in which communications are
managed between stakeholders - who receives
communications, when, how and to what level of detail.
Protocols may be established including security and
confidentiality classifications.

12.3 Strategic Leadership

Leadership is the art and process of influencing people so that
they will strive willingly and enthusiastically towards achievement of the
organisation’s purpose. Specific styles of leadership are often associated
with specific approaches to the crafting and execution of strategies. The
organisation’s purpose and strategy do not just drop out of a process of
discussion, but are actively directed by an individual with strategic vision,
whom we call “strategic leader”. Strategic leadership establishes the firm’s
direction by developing and communicating a vision of the future and
inspiring organisation members to move in that direction. Unlike
managerial leadership which is generally concerned with the short-term
day-to-day activities, strategic leadership is concerned with determining
Strategic Management : 240 the firm’s strategy, direction, aligning the firm’smstrategy with its culture,
modeling and communicating high ethical standards, and Behavioural
Implementation
initiatingmchanges in the firm’s strategy when necessary. The most
successful leadership is not just tom define the vision and mission of
an organisation in a cold, abstract manner but to communicate trust,
NOTES
enthusiasm and commitment to strategy.

Leaders play a central role in performing six critical and

interdependent activities in implementation of strategies:
1. Clarifying strategic intent: Leaders motivate employees
to embrace change by setting forth a clear vision of where
the business’s strategy needs to take the organisation.
2. Setting the Direction: Leaders set the direction and scope
of the organisation through formulating appropriate
corporate and business strategies.
3. Building the organisation: Since leaders are attempting
to embrace change, they are often required to rebuild their
organisation to align it with the ever – changing
environment and needs of the strategy. And such an effort
often involves overcoming resistance to change and
addressing problems like the following:
(a) Ensuring a common understanding about organisational
priorities
(b) Clarifying responsibilities among managers and
organisational units
(c) Empowering managers and pushing authority lower in
the organisation
(d) Uncovering and remedying problems in coordination
and communication across the organisation
(e) Gaining personal commitment from managers to a
shared vision
(f) Keeping closely connected with “what’s going on in
the organisation”. Strategic Management : 241
Behavioural 4. Shaping organisational culture: Leaders play a key role
Implementation
in developing and sustaining a strategy supportive culture.
Leaders know well that the values and beliefs shared

NOTES throughout their organisation will shape how the work of

the organisation is done. And when attempting to embrace
accelerated change, reshaping their organisation’s culture
is an activity that occupies considerable time for most
leaders.
5. Creating a learning organisation: Leaders must also play
a central role in creating a learning organisation. Learning
organisation is one that quickly adapts to change. The five
elements central to a learning organisation are:
(a) Inspiring and motivating people with a mission or
purpose
(b) Empowering people at all levels throughout the
organisation
(c) Accumulating and sharing internal knowledge
(d) Gathering external information
(e) Challenging the status quo to stimulate creativity
6. Instilling ethical behaviour: Ethics may be defined as a
system of right and wrong. Business ethics is the application
of general ethical standards to commercial enterprises. A
leader plays a central role in instilling ethical behaviour in
the organisation. The ethical orientation of a leader is
generally considered to be a key factor in promoting
methical behaviour among employees. Leaders who exhibit
high ethical standards become role models for others in the
organisation and raise its overall level of ethical behaviour.
In essence, ethical behaviour must start with the leader
before the employees can be expected to perform

Strategic Management : 242

accordingly.
 Behavioural
12.3.1 Leadership Approaches Implementation
Research has found that some leadership approaches are more
effective than others for bringing about change in organisation. Three
NOTES
types of leadership that can have a substantial impact are transactional,
transformational and charismatic leadership. These types of leadership
are briefly explained below:

1. Transactional Leadership: Transactional leaders clarify the

role and task requirements ofsubordinates, initiate structure,
provide appropriate rewards, and try to be considerate to
and meet the social needs of subordinates. The transactional
leader’s ability to satisfy subordinates may improve
productivity. Transactional leaders excel at management
functions. They are hardworking, tolerant, and fair minded.
They take pride in keeping things running smoothly and
efficiently. Transactional leaders often stress the impersonal
aspects of performance, such as plans, schedules and budgets.
They have a sense of commitment to the organisation and
conform to organisational norms and values. In short,
transactional leaders use the authority of their office to
exchange rewards such as pay and status for employees and
generally seek to enhance an organisation’s performance
steadily, but not dramatically. In other words, transactional
leadership is important to all organisations, but leading change
requires a different approach, viz. transformational leadership.
2. Transformational Leadership: Transformational leaders have
a special ability to bring about innovation and change. They
encourage the followers to question the status quo. They
have the ability to lead change in the organisation’s mission,
strategy, structure and culture as well as promote innovation
in products and technologies. Transformational leaders do Strategic Management : 243
Behavioural not rely solely on tangible rules and incentives to control specific
Implementation
transactions with followers. They focus on intangible qualities
such as vision, shared values, and ideas to build relationships

NOTES and find common ground to enlist in the change process.

3. Charismatic and Visionary Leadership: Charismatic leader-
ship goes beyond transactional and transformational leadership.
Charisma is a “fire that ignites followers’ energy and
commitment, producing results above and beyond the call of
duty”. The charismatic leader has the ability to inspire and
motivate people to do more than what they would normally
do, despite obstacles and personal sacrifice. Followers
transcend their own self interestsfor the sake of the leader.
Charismatic leaders are often skilled in the art of visionary
leadership. A vision is an attractive, ideal future that is credible
yet not readily attainable. Visionary leaders see beyond current
realities and help followers believe in a brighter future. They
speak to the hearts of their followers, letting them be part of
something bigger than themselves. Thus, visionary leaders have
a strong vision for the future and can motivate others to help
realise it. They have an emotional impact on subordinates
because they strongly believe in the vision and can communicate
it to others in a way that makes the vision real, personal and
meaningful to others.
When charismatic and visionary leaders respond to organisational
problems, they can have a powerful, positive influence on organisational
performance.

12.4 Corporate Culture and Strategic

Management
A company’s culture is manifested in the values and business
Strategic Management : 244 principles that management preaches and practices.
Example: Culture is manifested in: Behavioural
Implementation
1. Corporate stories
2. Attitudes and behaviours of employees
3. Core values NOTES
4. Organisation’s politics
5. Approaches to people management and problem solving
6. Relationships with stakeholders; and
7. Atmosphere that permeates its work environment

An organisation’s culture is similar to an individual’s personality.

Just as an individual’s personality influences the behaviour of an
individual, the shared assumptions (beliefs and values) among a firm’s
members influence the opinions and actions within that firm. Quite often,
the elements of company culture originate with a founder or other early
influential leader who articulates the values, beliefs and principles to
which the company should adhere.These elements then get incorporated
into company policies, a creed or value statement, strategies and
operating practices. Over time, these values and practices become shared
by company employees and managers. Culture is thus perpetuated as:

1. New leaders act to reinforce them

2. New employees are encouraged to adopt and follow them
3. Stories of people and events told and retold
4. Organisation members are honoured and rewarded for
displaying cultural norms.

12.4.1 Influence of Culture on Behaviour

An organisation’s culture can exert a powerful influence on the
behaviour of all employees. It can, therefore, strongly affect a company’s
ability to adopt new strategies. A problem for a strong culture is that a
change in mission, objectives, strategies or policies is not likely to be Strategic Management : 245
Behavioural successful if it is in opposition to the culture of the company. Corporate
Implementation
culture has a strong tendency to resist change because its very existence
often rests on preserving stable relationships and patterns of behaviour.

NOTES
12.4.2 Creating Strategy Supportive Culture
Once a strategy is established, it is difficult to change. It is the
strategy-maker’s responsibility to select a strategy compatible with the
organisation’s prevailing corporate culture. If it is not possible, once a
strategy is chosen, it is the strategy implementer’s responsibility to change
the corporate culture that hinders effective execution of a chosen
strategy.

Changing a Problem Culture

Changing a company’s culture to align it with strategy is one of
the toughest management tasks. This is because the deeply held values
and habits are heavily anchored, and people cling emotionally to the old
and familiar. It takes concerted management action over a period of
time to root out certain unwanted behaviours and instill behaviours that
are more strategy-supportive. Changing culture requires competent
leadership at the top. Great power is needed to force major cultural
change, to overcome the spring back resistance of entrenched cultures,
and great power normally resides only at the top. Changing a problem
culture involves the following four steps:

Step 1: Identify facts of present culture that are strategy –

supportive and those that are not.
Step 2: Clearly define desired new behaviours and specify key
features of “new” culture.
Step 3: Talk openly about problems of present culture, and how
new behaviours will improve performance.
Step 4: Follow with visible, aggressive actions to modify culture.
Strategic Management : 246
Managing Culture Change Behavioural
Implementation
As already explained in earlier sections, the culture that an
organisation wishes to develop is conveyed through rites, rituals,
myths, legends, actions etc. Only with bold leadership and concerted NOTES
action on many fronts can a company succeed in tackling a major
cultural change. Top leadership should play a key role in
communicating the need for a cultural change and personally launching
actions to prod the culture into better alignment with strategy.
Changing culture requires both (a) Symbolic actions and (b)
Substantive actions. They require serious commitment on the part of
the top management. The following measures are helpful in building
a strategy supportive culture:

1. Emphasise key themes or dominant values: Leaders

must emphasise dominant values through internal company
communications. They must repeat at every opportunity
the messages of why cultural change is good for the
company.
2. Stories and legends: Leaders must tell stories, anecdotes
and legends in support of basic beliefs. Organisational
members must identify with them, and share those beliefs
and values.
3. Rewards: Visibly praising and generously rewarding people
who display new culturalnorms will slowly change the
culture.
4. Recruiting and hiring : New managers and employees
are to be recruited who have the desired cultural values.
5. Revising policies and procedures in ways that will help
the new culture.
6. Leading by example: If the organisation’s strategy involves
low-cost leadership, senior management must display in
their own actions and decisions, inexpensive decorations
in the executive suites, conservative expense accounts and Strategic Management : 247
Behavioural entertainment allowances, lean corporate allowances, few
Implementation
executive perks, and so on.
7. Ceremonial events: In ceremonial functions, companies
must honour individuals and groups who exhibit cultural
NOTES
norms and reward those who achieve strategic milestones.
8. Group gatherings: Top management must participate in
employee training programmes etc. to stress strategic
priorities, values, ethical principles and cultural norms.
Every group gathering must be seen as an opportunity to
repeat and ingrain values, praise good deeds, reinforce
cultural norms and promote changes that assist strategy
implementation. Thus, best companies and best executives
expertly use symbols, role models, and ceremonial occasions
to achieve the strategy-culture fit.

Managing Culture Clash

When merging or acquiring another company, top management
must give some consideration to a potential clash of corporate cultures.
Integrating cultures is a top challenge to a majority ofcompanies. It is
dangerous to assume that the firms can simply be integrated into the
same reporting structures. The greater the gap between the cultures of
the two firms, the faster executives in the acquired firm quit their jobs,
and valuable talent is lost.

Value Preservation of Their Own Culture

There are four general methods of managing two different
cultures. They are:-

1. Integration involves merging the two cultures in such a

way that separate cultures of both firms are preserved in
the resulting culture.
Strategic Management : 248 2. Assimilation: Here, the acquired firm willingly surrenders
 its culture and adopts the culture of the acquiring company. Behavioural
Implementation
3. Separation : Here there is a separation of the two comp-
anies’ cultures. They are structurally separated, without
cultural exchange. NOTES
4. Deculturation: This involves imposition of the acquiring
firm’s culture forcefully on the acquired firm. This often
results in much confusion, conflict, resentment and stress.

12.5 Personal Values and Ethics

Values, personal values, and core values all refer to the same
thing. They are desirable qualities, standards, or principles. Values are
a person’s driving force and influence their actions and reactions. Ethics
is defined as “the discipline dealing with what is good and bad, and
right and wrong, or with moral duty and obligation.” Ethics refers to
the moral principles and values that govern the behaviour of a person
or group. Ethics helps us in deciding what is good or bad, moral or
immoral, fair or unfair in conduct and decision-making. In other words,
ethics serve as a “moral compass” to guide our actions. There are
many sources for an individual’s ethics. These include family
background, religious beliefs, community standards and expectations
etc.

12.5.1 Importance of Ethics

There has been a growing interest in corporate ethics over the
past several years. This is perhaps because of a spate of recent corporate
scandals at such firms as Enron, Tyco, Texaco etc. Withouta strong
ethical culture, the chances of ethical crises occurring in companies
cannot be ruled out.Due to this, companies face enormous costs in
terms of financial and reputational loss as well as erosion of human
capital and relationships with suppliers, customers, society at large
and governmental agencies. An ethical organisation is driven by ethical Strategic Management : 249
Behavioural values and integrity. Such values shape the search for opportunities,
Implementation
the design of systems and the decision-making processes of the
organisation. They provide a common frame of reference that serves

NOTES as a unifying force across different functions and employee groups.

Organisational ethics define what a company is and what it stands for.
The potential benefits of an ethical organisation are many. A strong
ethical orientation can have a positive effect on employee commitment
and motivation to excel. This is particularly important in today’s
knowledge-intensive organisations, where human capital is critical in
creating value and competitive advantage. An ethically sound
organisation can also strengthen its bonds among its suppliers,
customers and governmental agencies. The ethical orientation of a
leader is generally considered to be a key factor in promoting ethical
behaviour among employees. Leaders who exhibit high ethical
standards become role models for others in the organisation and raise
its overall ethical behaviour. In essence, ethical behaviour must start
with the leader, who plays a central role in instilling ethical behaviour
in the organisation.

12.5.2 Approaches to Ethics

When an ethical dilemma arises, there are four approaches to
Check Your Progress
guide our action. These four approaches are: -
Critically analyse the role
of strategic leader vis-à-
vis managerial leaders. Utilitarian Approach
According to this approach, moral behaviour is one that
produces the greatest good for the greatest number.

Individualism Approach
According to this approach, acts are moral when they promote
the individual’s best long-term interests, which ultimately lead to the
greater good.
Strategic Management : 250
Moral – Rights Approach Behavioural
Implementation
According to this approach, the fundamental rights and liberties
should be respected in all decisions. Thus, an ethically correct decision
is one that best maintains the rights of those people affected by it. Six NOTES
moral rights should be considered during decision-making:

1. Right of free consent

2. Right of privacy
3. Right of freedom of conscience
4. Right of free speech
5. Right to due process
6. Right to life and safety
To make ethical decisions, managers need to avoid interfering
with the rights of others.

Justice Approach
According to this approach, moral decisions must be based on equity,
fairness and impartiality.
Four types of justices are of concern to managers:

1. Distributive justice requires that individuals should not be

treated differently on the basis of race, sex, religion or
national origin. Individuals who are similar should be treated
similarly. Thus, men and women should not receive different
salaries if they are performing the same job.
2. Procedural justice requires that rules be administered fairly.
Rules should be clearly stated and be consistently and
impartially administered.
3. Compensatory justice requires that individuals should be
compensated for the cost of their injuries by the party
responsible. Moreover, individuals should not be held
responsible for matters over which they have no control. Strategic Management : 251
Behavioural 4. Natural duty principle: This principle reflects a duty to
Implementation
help others who are in need or danger; duty not to cause
unnecessary suffering; and the duty to comply with the

NOTES just rules of an institution.

12.5.3 Building an Ethical Organisation

A firm must have several key elements before it can become a
highly ethical organisation. These elements must be constantly
reinforced in order for the firm to be successful:

Role Models
For good or bad, leaders are role models in their organisation.
The values as well as the character of leaders become transparent to
an organisation’s employees through their behaviour. Leaders must
take responsibility for ethical lapses within the organisation, which
enhances the loyalty and commitment of employees through the
organisation.

Code of Ethics
They are another important element of an ethical organisation.
Such mechanisms provide a statement and guidelines for norms and
beliefs as well as decision–making. They provide employees with a
clear understanding of the ethical standards of the organisation. Many
large companies have developed such codes code of conduct.

1. Reward and Evaluation Systems : An appropriate reward

and evaluation system should consider both the outcomes
and the means adopted to achieve the organisational goals
and objectives. Inappropriate reward systems may cause
individuals to commit unethical acts.
2. Policies and Procedures : Most of the unethical behaviours
Strategic Management : 252 in organisations could be traced to the absence of policies
 and procedures to guide behaviour. It is important to Behavioural
Implementation
carefully develop policies and procedures to guide
behaviour so that all employees are encouraged to behave
in an ethical manner. However, it is not enough merely to NOTES
have policies “on the books”. Rather, they must be
effectively communicated, enforced and monitored. The
company should also follow sound corporate governance
practices.

Ethics Training
The purpose of ethic training is to encourage ethical behaviour.
Companies should provide appropriate training in ethical standards.
It enables managers to align ethical behaviour with organisational
goals.

Ethics Audit
Companies should undertake periodic audits to ensure that
proper ethical standards are being followed by all deportments of the
organisation.

Chief Ethics Officer

Some large corporations appoint a senior officer with the
exclusive responsibility of overseeing the ethical conduct of employees.
He functions like a watchdog on ethics.

Ethics Committee : An ethics committee establishes polices

regarding ethical conduct and resolves major ethical dilemmas
faced by the employees of an organisation. Ethics committee
performs such functions as organisation of regular meetings
to discuss ethical issues, identifying possible violations of the
code, enforcing the code, rewarding ethical behaviour etc.
Ethics Hotline : This is a special telephone line that enables
Strategic Management : 253
Behavioural employees to bypass the proper channel for reportingtheir
Implementation
ethical dilemmas and problems. The line is usually handled by
an executive also investigatesthe matter and helps resolve the
problems of the concerned employees.
NOTES

12.6 Social Responsibility and Strategic

Management
Corporate social responsibility (CSR) consists of “actions that
appear to further some social good, beyond the interests of the firm”
It includes such topics as environmental ‘green’ issues, treatment of
employees and suppliers, charitable work and other matters related to
the community. It is important to note that CSR requires firms to go
beyond what the law requires – just doingthe minimum required by
the law is not sufficient. “Corporate social responsibility is
concernedwith the ways in which an organisation exceeds the minimum
obligations to the stakeholders”(Johnson and Sholes, 2002).Corporate
Social Responsibility is therefore a company’s duty to operate its
business by meansthat avoid harm to other stakeholders and the
environment, and also to consider overall betterment ofsociety in its
decisions and actions. The essence of socially responsible behaviour is
that a companyshould strive to balance its actions to benefit its
shareholders without any adverse impact onother stakeholders like
employees, suppliers, customers, local communities and society at
large,and, further, to proactively mitigate any harmful effects on the
environment its actions andbusiness may have.

12.6.1 Responsibilities of Business

A business organisation has four responsibilities:

1. Economic responsibilities: are the most basic responsi-

bilities of a business firm. This involves the essential
Strategic Management : 254
 responsibility of business to provide goods and services to Behavioural
Implementation
society at a reasonable cost. In discharging that economic
responsibility, the company provides productive jobs to its
workforce, pays taxes to central, state and local NOTES
governments.
2. Legal responsibilities : reflect the firm’s obligation to
comply with the laws that regulate business activities,
especially in the areas of consumer safety and pollution
control.
3. Ethical responsibilities: reflect the company’s notion of
right or proper business behaviour. Ethical responsibilities
go beyond legal requirements. Firms are expected, though
not legally bound, to behave ethically.
4. Discretionary responsibilities: are those that are voluntarily
assumed by business organisations that adopt the citizenship
approach. They support ongoing charities, publicservice
advertisement campaigns, donations, medical camps, public
welfare activities etc. A commitment to full corporate
responsibility requires strategic managers to attack social
problems with the same zeal in which they tackle business
problems. Business managers should keep in mind that
economic and legal responsibilities are mandatory, ethical
responsibilities are expected, and discretionary
responsibilities are desirable. The above four responsibilities
are listed in order of priority. A business firm must first
make a profit to satisfy its economic responsibilities. A firm
must also follow the laws as a good corporate citizen.
Carrol, however, argues that business firms have obligations
beyond the economic and legal responsibilities; that firms
must also fulfil its social responsibilities. Social
responsibility includes both ethical and discretionary
responsibilities, but not economic and legal responsibilities. Strategic Management : 255
Behavioural
Implementation 12.6.2 Need for CSR: The Strategy
After considering the arguments for and against CSR, it
becomes evident that it is in the enlightened self-interest of companies
NOTES to be good corporate citizens and devote some of their resources and
energies to employees, the communities in which they operate, and
society in general. There are five important reasons why companies
should undertake social responsibilities.

Self-interest of the Organisation : Every organisation obtains

critical inputs from the environment and converts them into
goods and services to be used by society at large. In this process
they help shareholders to get appropriate returns on their
investment. It is expected that organisations acknowledge and
act upon theinterests and demands of other stakeholders such
as citizens and society in general that are beyond its immediate
constituencies – owners, customers, suppliers and employees.
That is, they must consider the needs of the broader community
at large, and act in a socially responsible way.

It generates Internal Benefits : CSR generates internal benefits

like employee recruitment, workforce retention and training.
Companies with good CSR reputation are better able to attract
and retain employees compared to companies with tarnished
reputations. Some employees just feel better about working
for a company committed to improving society. This can
contribute to lower turnover and better worker productivity.
This also benefits the firm by way of lower costs for staff
recruitment and training. Provision of good working conditions
results in greater employee commitment.

It Reduces Risks : CSR reduces the risk of damage to

Strategic Management : 256 reputation and increases buyer patronage. Consumer,

environmental and human rights activist groups are quick to Behavioural
Implementation
criticise businesses that are not socially responsive. Pressure
groups can generate adverse publicity, organise boycotts, and
influence buyers to avoid an offender’s products. Research NOTES
has shown that adverse publicity is likely to cause a decline in
a company’s stock price.

In the Best Interest of Shareholders : CSR is in the best

interest of shareholders. Well-conceived social responsibility
strategies work to the advantage of shareholders in several
ways. Socially responsible behaviour can help avoid or prevent
legal and regulatory actions that could prove costly or
burdensome. A study of leading companies found that
environmental compliance and developing eco-friendly
products an enhance earnings per share, profitability, and the
likelihood of winning contracts.

It gives Competitive Advantage : Being known as a socially

responsible firm may provide a firm a competitive advantage.
Example: Firms that are eco-friendly enhance their corporate
image. In western countries, many consumers boycott products
that are not “green”. Companies that take the lead in being
environmentally friendly, such as by using recycled materials,
producing ‘green’ products, and helping social welfare
programmes, enhance their corporate image. In sum,
companies that take social responsibility seriously can improve
their business reputation and operational efficiency while
reducing their risk of exposure and encouraging loyalty and
innovation. Overall, companies that take special pains to
protect the environment (beyond what is required by law),
are active in community affairs, and are generous supporters
of charitable causes are more likely to be seen as good Strategic Management : 257
Behavioural companies to work for or do business with. It will also benefit
Implementation
the shareholders.

NOTES 12.7 Summary

• A firm’s stakeholders are the individuals, groups, or other
organisations that are affectedby and also affect the firm’s
decisions and actions.
• An organisation needs to have an effective stakeholder
management system in place,which provides a great support
in achieving its strategic objectives.
• Strategic leadership establishes the firm’s direction by
developing and communicating avision of the future and
inspiring organisation members to move in that direction.
• A company’s culture is manifested in the values and business
principles that managementpreaches and practices. An
organisation’s culture can exert a powerful influence on
thebehaviour of all employees.
• Ethics refers to the moral principles and values that govern
the behaviour of a person orgroup. Ethics helps us in deciding
what is good or bad, moral or immoral, fair or unfair inconduct
and decision-making.
• Corporate social responsibility (CSR) consists of “actions that
appear to further somesocial good, beyond the interests of the
firm” It includes such topics as environmental‘green’ issues,
treatment of employees and suppliers, charitable work and other
mattersrelated to the community.
• Corporate Social Responsibility is a company’s duty to operate
its business by means thatavoid harm to other stakeholders
and the environment, and also to consider overall betterment

Strategic Management : 258 ofsociety in its decisions and actions.

 Behavioural
12.8 Key Terms Implementation

Culture: The beliefs and behaviors that determine how a company’s

employees and management interact and handle outside business NOTES
transactions.
Corporate Social Responsibility: A company’s sense of responsibility
towards the community and environment (both ecological and social)
in which it operates.
Deculturation: The removing or abandoning of one’s own culture
and replaces it with another.
Ethics: Motivation based on ideas of right and wrong.
Stakeholders: A person, group, or organisation that has direct or
indirect stake in an organisation.
Strategic leadership: A manger’s potential to express a strategic vision
for the organisation, or a part of the organisation, and to motivate and
persuade others to acquire that vision.

12.9 Questions and Exercises

1. Assess the value of stakeholders in an organsiation. Why is it

important to manage the stakeholders well?

2. Critically analyse the role of strategic leader vis-à-vis managerial

leaders.

3. “Visionary leadership inspires the impossible: fiction becomes

truth”. Substantiate

4. Discuss the three approaches to leadership. Assess the

importance of each of them.

5. “An organisation’s culture is similar to an individual’s

personality.” Comment

6. “There is no best or worst culture”. Elucidate Strategic Management : 259

Behavioural 7. Suppose you are the manager of a firm that has just acquired
Implementation
another firm. How will you ensure that there is good ‘fit’ between
the culture and startegy of the new firm?

NOTES 8. What do you mean by problem culture? How will deal with such
a culture?
9. Is it necessary for an organisation to be ethical? Give your
viewpoint and justify.
10. CSR is not an obligation, then why most of the successful
companies engage in it?

Check your progress

Fill in the blanks:
1. The company must place its stakeholders on a
……………………..based on their level of influence or impact.
2. A manager is concerned with short term activities of the
organisation, while a ………………..is concerned with the long
term aspects.
3. Strategic leaders must also play a central role in creating a
………………. organisation.
4. In general, …………………may be defined as a system of right
and wrong.
5. …………………leaders have a special ability to bring about
innovation and change.
6. Charismatic leaders are often skilled in the art of ……………….
leadership.
7. An organisation’s culture is similar to an individual’s
…………………..
8. When the acquired firm willingly surrenders its culture and adopts
the culture of the acquiring company, it is
called…………………of culture.
9. An ethical organisation is driven by ethical ……………….and
Strategic Management : 260 …………………...
 10. It is a…………………responsibility of a business to adopt Behavioural
Implementation
the citizenship approach.

Answers: NOTES
1. stakeholder matrix 2. strategic leader 3. learning 4. Ethics
5. Transformational 6. Visionary 7. personality 8. Assimilation 9. values,
integrity 10. discretionary

12.10 Further Reading and References

Books
• Carter McNamara, Organisational Culture, Authenticity Consulting,
LLC, 2000.
• Collins, James C. and Jerry I. Porras, Built to Last: Successful
Habits of Visionary Companies, New York: Harper Business, 1994.

• Edgar Schein, Jay Shafritz and J. Steven Ott, eds. 2001,

Organisational Culture and Leadership in Classics of Organisation
Theory, Fort Worth: Harcourt College Publishers, 1993.

Strategie Management : 261

Strategic Management : 262
 Functional and
Operational Implementation
UNIT 13: FUNCTIONAL AND
OPERATIONAL
NOTES
IMPLEMENTATION
13.0 Unit Objectives

13.1 Introduction

13.2 Functional Strategies

13.2.1 Nature of Functional Strategies

13.2.2 Need for Functional Strategies

13.3 Functional Plans and Policies

13.4 Operational Plans and Policies

13.4.1 Importance of Operational Strategy

13.4.2 Components of Operational Plan and Policies

13.5 Personnel (HR) Plans and Strategies

13.5.1 HR Planning

13.5.2 Staffing

13.5.3 Training and Development

13.5.4 Performance Management

13.5.5 Compensation and Rewards

13.5.6 Industrial Relations

13.6 Summary

13.7 Key Terms

13.8 Questions and Exercises

13.9 Further Reading and References Strategic Management : 263

Functional and
Operational Implementation 13.0 Unit Objectives
After studying this unit, you should be able to:
• Describe functional strategies
NOTES
• Explain the functional plans and policies
• State the operational plans and policies
• Discuss personnel plans and policies

13.1 Introduction
Once corporate level and business level strategies are developed,
management must turn itsattention to formulating strategies for each
functional area of the business unit. For effectiveimplementation of
strategies, functional strategies provide direction to functional
managersregarding the plans and policies to be adopted in each functional
area.

13.2 Functional Strategies

Functional Strategy is the approach taken by a functional area
to achieve corporate and business unit objectives and strategies by
maximising resource productivity. It is concerned withdeveloping and
nurturing a distinctive competence to provide a company or business
unit with a competitive advantage.

Just as a multi-divisional corporation has several business units,

each with its own business strategy, each business unit has its own set
of departments, each with its own functional strategy.

13.2.1 Nature of Functional Strategies

Functional strategies are essential to implement business strategy.
Strategic Management : 264 In fact, the effectiveness of acorporate or business strategy execution
depends critically on the manner in which strategies are implemented Functional and
Operational Implementation
at the functional level. The corporate strategy provides the long-term
direction and scope of a firm. The business strategy outlines the
competitive posture of its operations in an industry. The functional NOTES
strategy clarifies the business strategy, giving specific short-term
guidance to operating managers in the areas of operations, marketing,
finance, HR, R&D etc., and increases the likelihood of their success.

13.2.2 Need for Functional Strategies

Functional managers need guidance from the corporate and
business strategies in order to make decisions. In simple terms,
functional strategies tell the functional manager what to do in hisarea
to achieve business objectives. Glueck and Jauch have suggested five
reasons to show why functional strategies are needed. Functional
strategies are developed to ensure that :

1. The strategic decisions are implemented by all the parts of

an organisation.
2. There is a basis available for controlling activities in different
functional areas of a business.
3. The time spent by functional managers on decision-making
may be reduced. Check Your Progress
4. Similar situations occurring in different functional areas are Analyse the importance
of functional strategies.
handled by the functional managers in a consistent manner.
Are they more important
5. Coordination across different functions takes place where than businessstrategy?
necessary.

13.3 Functional Plans and Policies

The process of developing functional plans and policies is quite
similar to that of strategyformulation, with the difference that functional
heads are responsible for their formulation and implementation. Strategic Management : 265
Functional and Environmental factors relevant to each functional area will have an impact
Operational Implementation
on the choice of strategies. Finally, the actual process of choice involves
a negotiation betweenfunctional managers and business unit managers.

NOTES Thus, functional strategies are generallyformulated in all key functional

areas.For each of the functional strategies, a set of policies will have to
establish for appropriate areasof the business. The policies will ensure
that the strategies are carried out as intended and thatthe different
functional areas are working towards the same ends. Companies have
plans andpolicies that cover nearly every major aspect of the firm. The
firm should have strategies inevery major aspect of business, at least in
key functional areas. We will highlight some of themore important issues
for each functional area that need to be addressed in their
respectivefunctional strategies.

The functional strategies required in key functional areas are

outlined below:

Financial Strategy : In the financial management area, the major

concern of the strategy relates to the acquisition and utilisation
of funds. Major issues involved are the sources from where the
funds will come, from equity or by borrowing. How much of the
borrowing will be short-term and how muchlong-term. In terms
of usage of funds, the policy decisions would relate to whether
and to what extent funds have to be deployed in fixed assets and
current assets. The long-term or capitalinvestment decisions
relate to buying or leasing the fixed assets. A retrenchment
strategy orpaucity of funds may compel the organisation to lease
rather than buy. In case of an organisationwhere capital
investment decisions are decentralised, a “hurdle rate” may be
fixed so as to avoid investment in weaker projects by one division
Strategic Management : 266 and non-investment by another division.
Cash Flow : Apart from capital budgeting, another Functional and
Operational Implementation
consideration in financial strategy which influencesother
functional areas is the cash flow. A company may frame bonus
and dividend policiesbased on availability of cash. In case a
NOTES
company proposes expansion through internally
generatedfunds, it may reduce bonus and dividend. This is
particularly so when it has formulated ambitiousgrowth
strategies which require large cash. Similarly, if the firm has
high risk business, itshould have a conservative debt/equity ratio
to guard against heavy interest burden.The funds position and
optimisation orientation of top management also determines
the accountsreceivable and payable policies. Financial strategies
and policies may even determine theaccounting policies as these
affect the profitability, balance-sheet and hence cash flow
throughtaxes, dividend, bonus etc.

Marketing Strategy : Functional strategies in marketing area

are required for marketing – mix decisions, i.e. the four Ps of
marketing, viz. Product design, Product distribution, Pricing
and Promotion aspects ofmarketing. In terms of specifics, the
product decisions relate to such issues as the variety ofproduct
(shape, size, model etc.), quality requirements, introduction/
withdrawal of products, nature of customers etc. Specific
policies are also required regarding distribution channels i.e.
through retailers or direct selling? What would be the spread
of distribution network? Whether new dealers will be established
or old ones developed? The promotion strategies will relate to
mode of promotion, coverage and nature (corporate, product
or brand promotion). Again, very clear and specific strategies
will have to be made about pricing, etc., full cost or standard
cost based pricing. Offensive vs. defensive postures also
influence pricing policies. Strategic Management : 267
Functional and HR Strategy : HR strategy deals with matters like HR planning,
Operational Implementation
recruitment and selection, training anddevelopment,
compensation management, performance management, rewards

NOTES and incentivesetc. What compensation/reward system will be

able to attract people of the desired type to join the organisation
so as to meet the task requirements demanded by the strategy?
What strategies are necessary to groom internal people for new
positions? The problem becomes acute in thecontext of
turnaround strategies. On the one hand, the most competent
people leave and the firmfinds it difficult to attract suitable
replacements. On the other hand, it faces the problem ofsurplus
staff. HR strategies for retrenchment, though painful, are quite
necessary but difficult todevelop.

Production Strategy : The functions relating to production

need strategies relating to quality assurance, machineutilisation,
location of facilities, balancing the line, scheduling of
production, and materialsmanagement. The strategy for entering
into export market will dictate a different policy regardingquality
of products and maintenance. Location of facilities may be
determined by closeness tomarket or input supply points.
Decisions must be made to determine whether and how much
tomake or buy, on the basis of cost differential, availability,
criticality of the item, capacity ifexpansion becomes necessary.
In case of bought out items, policies regarding number of
suppliersand the criteria for selecting them are necessary.

R&D Strategy : In the area of research and development,

functional strategies regarding the nature of research are
necessary. In case of expansion through new product
development, heavy emphasis has to be laid on basic and applied
Strategic Management : 268 research.
 Functional and
13.4 Operational Plans and Policies Operational Implementation

Operations management is the core function of any organisation.

This function converts inputs (raw materials, supplies, machines and NOTES
people) into value added outputs. Operations managementcovers all
manufacturing processes in an organisation and includes raw material
sourcing,purchasing, production, distribution and logistics. This function
contributes to the organisation’sability to add value to the goods and
services.

13.4.1 Importance of Operational Strategy

The key to successful survival of an enterprise is how efficiently
the production activity is managed. The two major factors that contribute
to business failures are: obsolescence of theproduct line and excessive
production costs. These factors themselves have been the outcome
ofineffective production Planning.Operations strategy plays a crucial
role in shaping the ultimate success of a firm. It enables anorganisation
to make optimal decisions regarding product, production capacity, plant
location,choice of machinery and equipment, maintenance of existing
facilities and host of other aspectsof production. Constant review of
production plan aids in maintaining proper balance of capitalinvestment
in plant, equipment and inventory; efficient operation of the production
system,product mix, Quality control; and ensures effective material
handling and Planning of facilities.Within the broad framework of
corporate and business strategies, production strategy helps in
maintaining full co-ordination with marketing and engineering functions
to formulate plans toimprove products and services. It calls upon
management to keep in constant touch with financeand personnel to
achieve the optimal use of assets, cost control, recruitment of suitable
personneland management of labour disputes and negotiations.
Strategic Management : 269
Functional and
Operational Implementation
13.4.2 Components of Operational Plan and
Policies
The different components of a production strategy should ideally
NOTES
consist of the following:

Product Mix : A firm should decide about the product mix (how
many and what kind of products to beproduced) keeping in view
Objectives such as productivity, cost efficiency, Quality, reliability,
flexibility etc.

Capacity Planning : Capacity Planning is the process of forecasting

demand and deciding what Resources will berequired to meet that
demand. Meclain and Thomas suggested that capacity Planning
involves the following five sequential steps.

1. Predict future demand and competitive reactions: The firm

should forecast the demand for various products/services as
also estimate customer reaction to the products offeredby it.
It should also take care of potential countermoves by
competitors.
2. Translate above estimates into capacity needs: Based on
forecasts, the firm must decidethe quantity that can be
manufactured keeping input limitations, such as plant
equipment,manpower etc in mind.
3. Create alternative capacity plans: Depending on what the
market might absorb and whatthe organisation can produce,
management should create alternative capacity plans
forvarious products/services that are offered to customers.
4. Evaluate each alternative: The firm should identify the
opportunities and Threats associated with each alternative,

Strategic Management : 270 and carefully evaluate in terms of additional costs involved,
 payoffsetc. Functional and
Operational Implementation
5. Select and implement a particular capacity plan : The
capacity plan that best servesorganisational Objectives
should be selected and implemented. NOTES

Technology and Facilities Planning

1. Choosing Machines and Equipments : A strategic decision
to be made by a production manager is what type of
equipments the organisation will require for production
purposes, how much it will cost, what will be itsoperating
cost and what services it will render to the organisation
and for how long.Choice of equipment for making a
particular product essentially depends on the
basicmanufacturing process. The decision-maker must,
therefore, familiarise himself with theproduction process
to be adopted.Another consideration in the choice of new
equipment for a plant is the type and degree ofoperating
skill required and presently available skills within the
organisation. Other factorsworth consideration are the ease
with which the equipment can be operated and the
safetyfeatures of the equipment.
2. Equipment Investment : Acquisition of equipment involves
capital expenditure which will have long-term effects on
thefinancial position of the company. Hence, before taking
a final decision regarding investment ina machine, detailed
analysis of such investment in terms of cost-benefits must
be made and itsdesirability and worthwhileness should be
evaluated with the help of internal rate of return ornet
present value method.The decision to replace the existing
machine is equally important to the enterprise. In thisregard
the management has to decide when the replacement should
be made and the bestreplacement policy that must be Strategic Management : 271
Functional and considered while making comparisons between an existingunit
Operational Implementation
of equipment and its possible replacement. In order to make
a sound economic comparison,all the factors must be

NOTES converted into cost considerations. The rate of return so

obtained iscompared with the cut-off rate to ascertain whether
the replacement is economically viable.
3. Physical Facilities Decision : Facilities strategy covers plans
for location analysis and selection, design and
specificationsincluding layout of equipment, plant, warehouses
and related services. Facilities Planning deals with the separate
but interrelated costs of material, supplies, manpower, services
and facilities. Its Mission is to find ways to minimise the
aggregate of such costs in making and distributing the products
at the proper time.
4. Plant Location : Plant location is essentially an investment
decision having long-term significance. Once a plant is
acquired, it is a permanent asset that cannot readily be sold.
The management may alsocontemplate relocation of the plant
when business expansion and advanced technology require
additional facilities to serve new market areas, to produce
new products, or simply to replacethe old, obsolete plants to
increase the company’s production capacity.The selection of
an appropriate plant site calls for location study of the region
in which thefactory is to be situated, the community in which
it should be placed and finally, the exact site inthe city or
countryside.
5. Plant Building : Once the company has chosen the plant site,
due consideration must be given to providingphysical facilities.
A company requiring extensive space will always construct
new buildings.On planning a building for the manufacturing
facilities, a number of factors will have to be keptin mind such
Strategic Management : 272 as nature of the manufacturing process, plant layout and space
 requirements, lighting, ventilating, air-conditioning, service Functional and
Operational Implementation
facilities and future expansion.
6. Plant Layout : Plant layout involves the arrangement and
location of production machinery, work centres and NOTES
auxiliary facilities and activities (inspection, handling of
material storage and shipping) for the purpose of achieving
efficiency in manufacturing products or supplying consumer
services.

Maintenance of Equipment
Maintenance of equipment is an important component of
planning consideration. It is intimatelylinked with replacement policies.
Every manufacturing enterprise follows some maintenanceroutine in
order to avoid unexpected breakdowns and thus minimise costs
associated withmachine down time, possible loss of potential sales,
idle direct and indirect labour delays,customer dissatisfaction from
possible delays in deliveries and the actual cost of repairing themachine.
1. Excess Capacity : In carrying excess capacity method an
organisation carries stand-by capacity, which is used if
trouble occurs. This excess capacity can be whole machines
or it can be major parts or componentswhich ordinarily
take time to obtain. Carrying excess capacity involves cost Check Your Progress
which must becompared with costs arising out of a slow-
Discuss the functional
down or a shut-down of a whole series of strategies required in key
dependentoperations. Therefore, the decision in this regard functional areas of
business?
is cost trade-offs.
2. Preventive Maintenance : Preventive maintenance is based
on the premise that good maintenance prevents
breakdowns. Preventive maintenance means preventing
breakdowns by replacing worn-out machines ortheir parts
before their breakdown. It anticipates likely difficulties and
does the expected neededrepairs at a convenient time before Strategic Management : 273
Functional and the repairs are actually needed. Preventive
Operational Implementation
maintenancedepends upon the past knowledge that certain
wearing parts will need replacement after anormal interval
of use.
NOTES

Inventory Management
This is concerned with management of inventory consisting of
raw materials, work-in-process, goods in transit, finished goods etc.
Inventory management is a critical function becausesubstantial money
can be locked up in inventory, which can be put to productive use.
There arevarious techniques that can be used for effective inventory
management.
1. Economic Order Quantity
2. ABC analysis
3. Just-in-time (JIT) Inventory systems etc.

Quality Management
Quality is a major consideration in Production/Operations
strategy. By using techniques likeTotal quality management (TQM),
Six Sigma etc, organisations strive to produce ‘Zero defectproducts’
Operations strategy should consist of appropriate Quality improvement
programmes to achieve total Quality in products and services of the
organisation.Task Find out about the quality management practices at
McDonalds.

13.5 Personnel (HR) Plans and Strategies

Personnel policies are guides to action. Brewster and Ricbell
defined HR policies as “a set ofproposals and actions that act as a
reference point for managers in their dealings with
employees”.Management should pay attention to the following aspects
Strategic Management : 274 of HR policies:
 1. HR policies must be related to the strategic objectives of the Functional and
Operational Implementation
firm.
2. They should be stated in definite, clear and understandable
language. NOTES
3. They should be sufficiently comprehensive and provide
yardsticks for future action.
4. They should be stable enough to assure people that there will
not be drastic overnight changes.
5. They should be built on the basis of facts and sound judgment.
6. They should be just, fair and equitable.
7. They must be reasonable and capable of being accomplished.
8. Periodic review of HR policies is essential to keep in tune
with changing circumstances.

13.5.1 HR Planning
HR planning is the first key component for developing a human
resource strategy. It involvestranslating corporate – wide strategic
objectives into a workable plan and serves as a blue-print for all specific
HR programmes and policies. It is the process of analysing and
identifying theneed for and availability of human resources so that the
organisation can meet its objectives. It helps determine the manpower
needs of firms and develop strategies for meting those needs. According
to Jeffrey Mello, key objectives of HR planning are:

1. Prevents overstaffing and understaffing.

2. Ensures the organisation has the right number of employees
with the right skills in the right places and at the right time.
3. Ensures the organisation is responsive to changes in its
environment.
4. Provides direction and coherence to all HR activities and
systems. Strategic Management : 275
Functional and 5. Unites the perspectives of line and staff managers.
Operational Implementation
6. Facilitates leadership continuity through succession planning.

NOTES Although HR planning follows from the strategic plan, the

information collected in the HRplanning process contributes to the
assessment of internal organisation’s environment done in strategic
planning.

13.5.2 Staffing
Staffing, the process of recruiting applicants and selecting
prospective employees, remains akey strategic area for human resource
strategy. Given that an organisation’s performance is adirect result of
the individuals it employs, the specific strategies used and decisions
made in thestaffing process will directly impact the success of the
strategic plan.

Recruitment : Recruitment means attracting people to apply

for jobs in the organisation. The strategic issues inrecruitment
are:
1. Temporary versus permanent employees
2. Internal versus external recruiting
3. When and how extensively to recruit
4. Methods of recruiting

Selection : Once a sufficient pool of applicants has been

received, critical decisions need to be made regardingapplicant
screening, methods of selection and placement. The selection
methods should bereliable and valid.

Placement : After selecting a candidate, he should be placed

on a suitable job. Placement is an importanthuman resource
Strategic Management : 276
 activity. If neglected, it may create employee adjustment Functional and
Operational Implementation
problems. An employeeplaced in a wrong job may quit the
organisation in frustration.
NOTES
13.5.3 Training and Development
Training and development of employees is a key strategic issue
for organisations. It is themeans by which organisations determine the
extent to which their human assets are viableinvestments. Training
involves employees acquiring knowledge and skills that they will beable
to use on the job. There are two key factors to develop successful
training programmes in organisations.

The first is planning and strategising the training. This involves

four distinct steps:
1. Needs assessment
2. The establishment of objectives and measures
3. Delivery of the training
4. Evaluation

The second key factor is to ensure that desired results are

achieved or accomplished. Training needs are to be integrated with
performance management systems and compensation.

13.5.4 Performance Management

An organisation’s long-term success in meeting its strategic
objectives rests on managingemployee performance and ensuring that
performance measures are consistent with the strategicneeds. One
purpose of performance management systems is to facilitate employee
development.A second purpose is to determine appropriate rewards
and compensation, which must be clearlylinked to achievement of
strategic goals. Strategic Management : 277
Functional and
Operational Implementation 13.5.5 Compensation and Rewards
Organisations face a number of key strategic issues in setting
their compensation and reward policies and programmes. These
NOTES include:
1. Compensation relative to the market
2. Balance between fixed and variable compensation
3. Appropriate mix of financial and non financial compensation
4. Developing an overall cost-effective compensation programme
that results in high performance.

In addition to these strategic issues, the fast pace of change

and the need for organisations torespond in order to remain competitive
create challenges for all HR programmes, but particularlyfor
compensation. Organisations should revaluate their compensation
programmes within thecontext of their corporate strategy and specific
HR strategy to ensure that they are consistentwith the necessary
performance measures required by the organisation. Overly rigid
compensation systems inhibit the flexibility needed by the company’s
competitive strategies.HR strategy must encourage creativity to meet
strategic objectives. Therefore, compensationsystems must ensure that
behaviours that help achieve strategic objectives are
appropriatelyrewarded.

13.5.6 Industrial Relations

Industrial relations is a key strategic issue for organisations
because the nature of the relationshipbetween employees can have a
significant impact on morale, motivation and
productivity.Consequently, how organisations manage the day- to-
day aspects of the employment relationshipcan be a key variable
affecting their ability to achieve strategic objectives.Through
Strategic Management : 278 appropriate collective bargaining and participative management
practices, industrialrelations can be managed effectively. HR strategy Functional and
Operational Implementation
must incorporate long-term plans andprogrammes to maintain industrial
peace for effective implementation of the business strategy.
NOTES
13.6 Summary
• Functional Strategy is concerned with developing and nurturing
a distinctive competenceto provides a company or business
unit with a competitive advantage.
• Functional strategies are essential to implement business
strategy.
• Functional policies will ensure that the strategies are carried
out as intended and that thedifferent functional areas are
working towards the same ends. Companies have plans
andpolicies that cover nearly every major aspect of the firm.
• Operations strategy plays a crucial role in shaping the ultimate
success of a firm. It enablesan organisation to make optimal
decisions regarding product, production capacity, plantlocation,
choice of machinery and equipment, maintenance of existing
facilities and hostof other aspects of production.
• Personnel policies are guides to action. Brewster and Ricbell
defined HR policies as “a setof proposals and actions that act
as a reference point for managers in their dealings
withEmployees.”

13.7 Key Terms

Capacity Planning: Process of forecasting demand and deciding what
Resources will be requiredto meet that demand.
Cash flow: The excess of cash revenues over cash outlays in a given
period of time (not includingnon-cash expenses)
Functional Strategy: Approach taken by a functional area to achieve Strategic Management : 279
Functional and corporate and businessunit objectives and strategies by maximising
Operational Implementation
resource productivity.
Human Resource Planning: The ongoing process of systematic
planning to achieve optimum use of an organisation’s most valuable
NOTES
asset - its human resources.
Industrial Relations: Interaction between employers, employees, and
the government; and the institutions and associations through which
such interactions are mediated.
Inventory Management: Management of inventory consisting of raw
materials, work-in-process,goods in transit, finished goods etc.
Operations Management: Design, execution, and control of a firm’s
operations that convert its resources into desired goods and services,
and implement its business strategy.

13.8 Questions and Exercises

1. Analyse the importance of functional strategies. Are they more
important than businessstrategy?
2. Suppose you are the manager of a newly established garments
company. You have abusiness strategy ready for you that
stresses on competitive positioning and properstakeholder
management. Draft out a proper functional strategy for your
company, if theobjective is to establish a brand name in the
long run.
3. Discuss the functional strategies required in key functional areas
of business.
4. “Operations management is the core function of any
organisation”. Justify
5. Why is choice of equipments to be used in business a major
strategic decision?
6. “It is necessary to have personnel strategies in place in order
Strategic Management : 280 to make other strategiessuccessful.” Comment
7. Critically analyse staffing and training as strategies decisions. Functional and
Operational Implementation
8. Evaluate the importance of effective marketing and R&D
strategies.
9. “The key to successful survival of an enterprise is how NOTES
efficiently the production activity is managed.” Discuss
10. How does obsolescence of the product line affect the
organisation?

Check your progress

Fill in the blanks:
1. ……………….. strategy outlines the competitive posture of its
operations in an industry.
2. ………………….. will ensure that the strategies are carried
out as intended.
3. A company often frames bonus and dividend policies based on
availability of ……………………….
4. Marketing strategy includes the decision regarding the four Ps
referred to as the…………………….
5. Decision related to logistics comes under the purview
of……………………..strategy.
6. Some organisations that prefer to build smaller capacity to take
care of normal requirements, meet peak demand by way of
imports or …………………………
7. Plant location is essentially ……………………….. decision
that has a long-term significance.
8. ABC Analysis is a technique used for…………………….
9. ……………….is the process of recruiting applicants and
selecting prospective employees.
10. The main purpose of performance management systems is to
facilitate …………………….
Strategic Management : 281
Functional and Answers:
Operational Implementation
1. Business 2. Policies 3. cash 4. marketing mix 5. operation
6. Subcontracting 7. investment 8. inventory management 9. Staffing

NOTES 10. employee development

13.9 Further Reading and References

Books
• Azhar Kazmi, Strategic Management and Business Policy, 3rd
Edition, Tata McGraw Hill.
• C Appa Rao, B Parvathiswara Rao and K Sivaramakrishna,
Strategic Management and Business Policy, Excel Books
• Hill and Jones, Strategic Management: An Integrated Approach,
6th Edition, Biztanatra/ Cengage

Strategic Management : 282

 Strategic Evaluation
and Control
UNIT 14: STRATEGIC EVALUATION
AND CONTROL
NOTES
14.0 Unit Objectives

14.1 Introduction

14.2 Nature of Strategic Evaluation and Control

14.2.1 Types of General Control Systems

14.2.2 Basic Characteristics of Effective Evaluation and

Control System

14.3 Strategic Control

14.3.1 Types of Strategic Control

14.3.2 Approaches to Strategic Control

14.4 Operational Control

14.4.1 Setting of Standards

14.4.2 Measurement of Performance

14.4.3 Identifying Deviations

14.4.4 Taking Corrective Action

14.5 Techniques of Strategic Control

14.6 Summary

14.7 Key Terms

14.8 Questions and Exercises

14.9 Further Reading and References

Strategic Management : 283
Strategic Evaluation
and Control 14.0 Unit Objectives
After studying this unit, you should be able to:
• State the nature of strategic evaluation and control
NOTES
• Discuss the concept of strategic control and operational control
• Explain the techniques for strategic control
• Identify the role of organisational systems in evaluation

14.1 Introduction
Strategic evaluation and control is the final phase in the process
of strategic management. Its basic purpose is to ensure that the strategy
is achieving the goals and objectives set for thestrategy. It compares
performance with the desired results and provides the feedback
necessaryfor management to take corrective action.According to Fred
R. David, strategy evaluation includes three basic activities :
1) Examining theunderlying bases of a firm’s strategy
2) Comparing expected results with actual results
3) Taking corrective action to ensure that performance conforms
to plans.
Sometime, the bestformulated strategies become obsolete as a
firm’s external and internal environments change.Managers should,
therefore, identify important milestones and set strategic thresholds to
assistthem in knowing the changes in the underlying assumptions of a
strategy and, if necessary alterthe basic strategic direction. The evaluation
process thus works as an early warning system forthe
organisation.Strategic evaluation generally operates at two levels –
strategic and operational level. At thestrategic level, managers try to
examine the consistency of strategy with environment. At theoperational
level, the focus is on finding how a given strategy is effectively pursued
by theorganisation. For this purpose, different control systems are used
Strategic Management : 284 both at strategic and operationallevels.
 Strategic Evaluation
14.2 Nature of Strategic Evaluation and and Control
Control
Strategic evaluation and control is defined as the process of
NOTES
determining the effectiveness of a given strategy in achieving the
organisational objectives and taking corrective actions wherever
required. According to Pearce and Robinson, strategic control is
concerned with tracking a strategyas it is being implemented,
detecting problems or changes in its underlying premises, and making
necessaryadjustments. In contrast to post-action control, strategic
control seeks to guide action on behalf ofthe strategies,. as they are
taking place and when the end result is still several years off .Strategic
control in an organisation is similar to what the “steering control” is in
a ship. Steeringkeeps a ship, for instance, stable on its course. Similarly,
strategic control systems sense to whatextent the strategies are
successful in attaining goals and objectives, and this information is fedto
the decision-makers for taking corrective action in time. Strategic
managers can steer theorganisation by instituting minor modifications
or resort to more drastic changes such as alteringthe strategic direction
altogether. Strategic control systems thus offer a framework for
tracking,evaluating or reorienting the functioning of the firm’s strategy.

Check Your Progress

14.2.1 Types of General Control Systems Comment on the nature
Basically, there are three types of general control systems: of strategic control and
evaluation?
1. Output control (i.e. control on actual performance results)
2. Behaviour control (i.e. control on activities that generate
the performance)
3. Input control (i.e. control on resources that are used in
performance)

Output Control : Output controls specify what is to be

accomplished by focusing on the end result. This control isdone Strategic Management : 285
Strategic Evaluation through setting objectives, targets or milestones for each division,
and Control
department, section and executives, and measuring actual
performance. These controls are appropriate when specificoutput
measures haven’t been agreed on. Often rewards and incentives
NOTES
are linked to performancegoals.
Behaviour Control : Behaviour controls specify how something
is to be done. This control is done through policies, rules, standard
operating practices and orders from superiors. These controls
are the mostappropriate when performance results are hard to
measure. Rules standardise the behaviourand make outcomes
predictable. If employees follow rules, then actions are performed
anddecisions handled the same way time and again. The result is
predictability and accuracy, which is the aim of all control systems.
The main mechanisms of behaviour control are:
1. Operating budgets
2. Standard operating practices
3. Rules and procedures

Input Control : Input controls specify the amount of resources,

such as knowledge, skills, abilities, of employeesto be used in
performance. These controls are most appropriate when output
is difficult tomeasures.

14.2.2 Basic Characteristics of Effective

Evaluation and Control System
Effective strategy evaluation systems must meet several basic
requirements. They must be :

1. Simple: Strategy evaluation must be simple, not too

comprehensive and not too restrictive.Complex systems often
confuse people and accomplish little. The test of an
Strategic Management : 286 effectiveevaluation system is its simplicity not its complexity.
2. Economical: Strategy evaluation activities must be Strategic Evaluation
and Control
economical. Too many controls can domore harm than
good.
3. Meaningful: Strategy evaluation activities should be
NOTES
meaningful. They should specificallyrelate to a firm’s
objectives. They should provide managers with useful
information abouttasks over which they have control and
influence.
4. Timely: Strategy evaluation activities should provide timely
information. For example,when a firm has diversified into
a new business by acquiring another firm,
evaluativeinformation may be needed at frequent intervals.
Time dimension of control must coincidewith the time span
of the event being measured.
5. Truthful: Strategy evaluation should be designed to provide
a true picture of what ishappening. Information should
facilitate action and should be directed to those
individualswho need to take action based on it.
6. Selective: The control systems should focus on selective
criteria like key important factorswhich are critical to
performance. Insignificant deviations need not be focused.
7. Flexible: They must be flexible to take care of changing
circumstances.
8. Suitable: Control systems should be suitable to the needs
of the organisation. They mustconform to the nature and
needs of the job and area to be controlled.
9. Reasonable: Control standards must be reasonable.
Frequent measurement and rapidreporting may frustrate
control.
10. Objective: A control system would be effective only if it is
unbiased and impersonal. Itshould not be subjective and
arbitrary. Otherwise, people may resent them. Strategic Management : 287
Strategic Evaluation 11. Acceptable: Controls will not work unless they are
and Control
acceptable to those who apply them.
12. Foster Understanding and Trust: Control systems should

NOTES not dominate decisions. Ratherthey should foster mutual

understanding, trust and common sense. No department
shouldfail to cooperate with another in evaluating and
control of strategies.
13. Fix Responsibility for Failure: An effective control system
must fix responsibility forfailure. Detecting deviations
would be meaningless unless one knows where they
areoccurring and who is responsible for them. Control
system should also pinpoint whatcorrective actions are
needed.There is no ideal strategy evaluation and control
system. The final design depends on the
uniquecharacteristics of an organisation’s size, management
style, purpose, problems and strengths.

14.3 Strategic Control

Strategic control is a type of “steering control”. We have to
track the strategy as it is beingimplemented, detect any problems or
changes in the predictions made, and make necessaryadjustments. This
is especially important because the implementation process itself takes
a long time before we can achieve the results. Strategic controls are,
therefore, necessary to steer the firm through these events.

14.3.1 Types of Strategic Control

There are four types of strategic controls:
1. Premise control
2. Strategic surveillance
3. Special alert control
Strategic Management : 288 4. Implementation control
Premise Control : Strategy is built around several assumptions Strategic Evaluation
and Control
or predictions, which are called planning premises. Premise
control checks systematically and continuously whether the
assumptions on which the strategy is based are still valid. If a NOTES
vital premise is no longer valid, the strategy may have to
bechanged. The sooner these invalid assumptions are detected
and rejected, the better are the chances of changing the strategy.

Strategic Surveillance : Strategic surveillance is a broad-based

vigilance activity in all daily operations both inside and outside
the organisation. With such vigilance, the events that are likely
to threaten the course ofa firm’s strategy can be tracked. Business
journals, trade conferences, conversations, observationsetc. are
some of the information sources for strategic surveillance.

Special Alert Control : Sudden, unexpected events can

drastically alter the course of the firm’s strategy. Such events
trigger an immediate and intense reconsideration of the firm’s
strategy.

Implementation Control : Strategy implementation takes place

as a series of steps, programmes, investments and moves that
occur over an extended period of time. Resources are allocated,
essential people are put in place, special programmes are
undertaken and functional areas initiate strategy related
activities.Implementation control is aimed at assessing whether
the plans, programmes and policies areactually guiding the
organisation towards the predetermined objectives or not.
Implementationcontrol assesses whether the overall strategy
should be changed in the light of the results ofspecific units and
individuals involved in implementation of the strategy. Two
important methodsto achieve implementation control are: Strategic Management : 289
Strategic Evaluation A. Monitoring Strategic Thrusts: Strategic thrusts are small
and Control
critical projects that need to bedone if the overall strategy
is to be accomplished. They are critical factors in the

NOTES success ofstrategy.One approach is to agree early in the

planning process on which thrusts are critical factorsin the
success of the strategy. Managers responsible for these -
implementation controls will single them out from other
activities and observe them frequently. Another approachis
to use stop/go assessments that are- linked to a series of
these thresholds (time, costs,success etc.) associated with
a particular thrust.
B. Milestone Reviews: Milestones are critical events that
should be reached during strategyimplementation. These
milestones may be fixed on the basis of.
(a) Critical events
(b) Major resource allocations
(c) Time frames etc.

14.3.2 Approaches to Strategic Control Notes

According to Dess, Lumpkin and Taylor, there are two approaches
to strategic control.

Traditional Approach : Traditional approach to strategic control

is sequential:
1. Strategies are formulated and top management sets goals
2. Strategies are implemented
3. Performance is measured against goals
4. Corrective measures are taken, if there are deviations.
Control is based on a feedback loop from performance
measurement to strategy formulation.This process typically
Strategic Management : 290 involves lengthy time lags and often tied to a firm’s annual
 planningcycle. This reactive measure is not sufficient to control Strategic Evaluation
and Control
a strategy. As already explained, this isbecause a strategy takes
a long period for implementation and to produce results. The
uncertainfuture requires continuous evaluation of the planning NOTES
premises and strategy implementation.There is a better
contemporary approach for strategic control.

Contemporary Approach : Under this approach, adapting to

and anticipating both internal and external environmentchange
is an integral part of strategic control.This approach addresses
the assumptions and premises that provide the foundation for
thestrategy. The key question addressed here is: do the
organisation’s goals and strategies still fitwithin the context of
the current environment? This involves two key actions:
1. Managers must continuously scan and monitor the
external and internal environment
2. Managers must continuously update and challenge the
assumptions underlying the strategy. This may even need
changes in the strategic direction of the firm.
While strategic control requires the contemporary approach,
operational control is generallydone through traditional approach.

14.4 Operational Control

Operational control provides post-action evaluation and control
over short periods.They involve systematic evaluation of performance
against predetermined objectives.

14.4.1 Setting of Standards

The first step in the control process is setting of standards.
Standards are the targets againstwhich the actual performance will be
measured. They are broadly classified into quantitativestandards and Strategic Management : 291
Strategic Evaluation qualitative standards.
and Control

Quantitative

NOTES These are expressed in physical or monetary terms in respect of

production, marketing, finance etc. They may relate to:
1. Time standards
2. Cost standards
3. Productivity standards
4. Revenue standards

Qualitative
Qualitative criteria are also important in setting standards.
Human factors such as highabsenteeism and turnover rates, poor
production quality or low employee satisfaction can bethe underlying
causes of declining performance. So, qualitative standards also need to
beestablished to measure performance.

14.4.2 Measurement of Performance

The second step in operational control is the measurement of
actual performance. Here, theactual performance is measured against
the standards fixed. Standards of performance act as thebenchmark
Check Your Progress
against which the actual performance is to be compared. It is important,
“Strategic control is a
type of steering control”. however, tounderstand how the measurement of performance actually
Discuss
takes place. Operationally measuringis done through accounting,
reporting and communication systems. A variety of evaluationtechniques
are used for this purpose, which are explained in the next section. The
other importantaspects of measurement relates to:

Difficulties in Measurement : There are several activities for

which it is difficult to set standards and measure performance.

Strategic Management : 292 Example : Performance of a worker in terms of units produced

 in a day, week or monthcan easily be measured. On the other Strategic Evaluation
and Control
hand, it is not easy to measure the contribution of amanager
or to assess departmental performance. The solution lays in
developing verifiableobjectives, stated in quantitative and NOTES
qualitative terms, against which performance can bemeasured.

Timing of Measurement : Timing refers to the point of time

at which measurement should take place. Delay in
measurementor measuring before time can defeat the very
purpose of measurement. So measurement shouldtake place
at critical points in a task schedule, which could be at the end
of a definable activity orthe conclusion of a task.
Example: In a project implementation schedule, there could
be several critical points at which measurement would take
place.

Periodicity in Measurement : Another important issue in

measurement is “how often to measure”, Generally,
financialstatements like budgets, balance-sheets, and profit and
loss accounts are prepared every year.But there are certain
reports like production reports, sales reports etc. which are
done on a daily, weekly, monthly basis.

14.4.3 Identifying Deviations

The third step in the control process is identifying
deviations.The measurement of actual performance and its comparison
with standards of performancedetermines the degree of deviation or
variation between actual performance and the standard.

Broadly, the following three situations may arise:

• The actual performance matches the standards Strategic Management : 293
Strategic Evaluation • The actual performance exceeds the standards
and Control
• The actual performance falls short of the standards

The first situation is ideal, but sometimes may not be realistic.

NOTES
Generally, a range of tolerancelimits within which the results may be
accepted satisfactorily, are fixed and deviations from it are considered
as variance. The second situation is an indication of superior
performance. If exceeding the standards isconsidered unusual, a check
needs to be made to test the validity of tests and the measurement
system. The third type of situation, which indicates shortfall in
performance, should be taken seriously and strategists need to pinpoint
the areas where the performance is below standard and go into the
causes of deviation. The analysis of variance is generally presented in
a format called ‘variance chart’ and submitted to the top management
for their evaluation. After noting the deviations, it is necessary to find
the causes of deviation, which can be ascertained through the following
questions: (Thomas)

1. Is the cause of deviation internal or external?

2. Is the cause random or expected?
3. Is the deviation temporary or permanent?
Analysis of variance leads to a plan for corrective action.

14.4.4 Taking Corrective Action

The last and final step in the operational control process is
taking corrective action. Corrective action is initiated by the
management to rectify the shortfall in performance. If the performance
is consistently low, the strategists have to do an in depth analysis and
diagnosis to isolate the factors responsible for such low performance
and take appropriate corrective actions.
There are three courses for corrective action:
Strategic Management : 294
 1. Checking performance Strategic Evaluation
and Control
2. Checking standards
3. Reformulating strategies, plans and objectives.

NOTES
14.5 Techniques of Strategic Control
Organisations use many techniques or mechanisms for strategic
control. Some of the important mechanisms are:

1. Management Information systems: Appropriate

information systems act as an effective control system.
Management will come to know the latest performance in
key areas and take appropriate corrective measures.

2. Benchmarking: It is a comparative method where a firm

finds the best practices in an area and then attempts to
bring its own performance in that area in line with the best
practice. Best practices are the benchmarks that should
be adopted by a firm as the standards to exercise
operational control. Through this method, performance
can be evaluated continually till it reaches the best practice
level. In order to excel, a firm shall have to exceed the
benchmarks. In this manner, benchmarking offers firms a
tangible method toevaluate performance.

3. Balanced scorecard: It is a method based on the

identification of four key performance measures i.e.
customer perspective, internal business perspective,
innovation and learning perspective, and the financial
perspective. This method is a balanced approach to
performance measurement as a range of financial and non-
financial parameters are taken into account for evaluation.
Strategic Management : 295
Strategic Evaluation
and Control 14.6 Summary
• Strategic evaluation generally operates at two levels – strategic
and operational level. Atthe strategic level, managers try to
NOTES
examine the consistency of strategy with environment.At the
operational level, the focus is on finding how a given strategy
is effectively pursuedby the organisation.
• Strategic control is a type of “steering control”. We have to
track the strategy as it is beingimplemented, detect any
problems or changes in the predictions made, and make
necessaryadjustments.
• Operational control provides post-action evaluation and control
over short periods.
• They involve systematic evaluation of performance against
predetermined objectives.
• Organisations use many techniques or mechanisms for strategic
control. Some of theimportant mechanisms are management
Information systems, bench marking, balanced scorecard, key
factor rating, responsibility centres, network technique,
Management by Objectives (MBO), Memorandum of
Understanding.

14.7 Key Terms

Balanced Scorecard: Strategic performance management tool - a semi-
standard structured report supported by proven design methods and
automation tools.
Benchmarking: Comparative method where a firm finds the best
practices in an area and then attempts to bring its own performance in
that area in line with the best practice.
Management by Objectives: Process of agreeing upon objectives

Strategic Management : 296 within an organisation so that management and employees agree to
the objectives and understand what they are in the organisation. Strategic Evaluation
and Control
Operational control: ensures that day-to-day actions are consistent
with established plans and objectives.
Responsibility centre: A segment of a business or other organisation, NOTES
in which costs can be segregated, with the head of that segment being
held accountable for expenses.
Strategic evaluation and control: Process of determining the
effectiveness of a given strategy in achieving the organisational
objectives and taking corrective actions wherever required.
Strategic surveillance: Broad-based vigilance activity in all daily
operations both inside and outside the organisation.

14.8 Questions and Exercises

1. Comment on the nature of strategic control and evaluation.
2. According to you, what should be the criteria for an effective
evaluation system?
3. In evaluating a strategy, it is important to examine whether an
organisation has the abilities, competencies, skills and talents
needed to carry out a given strategy. Why?
4. If you were a strategist making evaluation, what would you do
if you find something wrong though nothing is wrong with the
performance?
5. Suggest some corrective actions that you would undertake if
the performance is being affected adversely by inadequate
resource allocation and ineffective systems.
6. How would you check whether a strategy can be implemented
within the resources of an enterprise?
7. “Strategic control is a type of steering control”. Discuss
8. Discuss the general approaches to strategic control. Strategic Management : 297
Strategic Evaluation 9. Discuss the steps in implementing effective operational control
and Control
system.
10. Analyse the role of organisational systems in evaluation.
NOTES
Check your progress
Fill in the blanks:
1. ……………………control focuses on finding how a given
strategy is effectively pursued by the organisation.
2. ………………………..control is concerned with tracking a
strategy as it is being implemented.
3. …………………….control is done through policies, rules,
standard operating practices and orders from superiors.
4. Assumptions or predictions around which a strategy is built is
referred to as…………………………
5. PERT and CPM are techniques of .............................control.
6. Control is based on a ……………………..from performance
measurement to strategy formulation.
7. The analysis of variance in performance is generally presented
in a format called ……………………
8. Best practices serve as……………………..against which
actual performance is evaluated. Notes
9. ……………………………… are used to isolate a unit so
that it can be evaluated separately from the rest of the
corporation.
10. Management by Objectives method was proposed
by…………………….

Answers:
1. Operational 2. Strategic 3. Behaviour 4. planning premises
5. network 6. feedback loop 7. variance chart 8. Benchmarks

Strategic Management : 298

9. Responsibility centres 10. Peter F Drucker.
 Strategic Evaluation
14.9 Further Reading and References and Control

Books
• Fed R David, Strategic Management, New Jersey, Prentice Hall,
NOTES
1997.
• Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic
Management – Creating Competitive Advantage, McGraw-Hill,
Irwin, NY, 2003.
• Pearce JA and Robinson RB, Strategic Management, McGraw
Hill, NY, 2000.
• Vipin Gupta, Kamala Gollakota and R. Srinivasan, Business Policy
and Strategic Management, Prentice-Hall of India, New Delhi,
2005.
• Wheelen Thomas L, David Hunger J, KrishRangaraja, Concepts in
Strategic Management and Business Policy, New Delhi, Pearson
Education, 2006.

Strategic Management : 299