1

LECTURE NOTES

ON

STRATEGIC MANAGEMENT

2018-2019
II year MBA II Semester (Autonomous)
Dr.M.Neeraja, Professor

CHADALAWADA RAMANAMMA ENGINEERING COLLEGE

(AUTONOMOUS)
Chadalawada Nagar, Renigunta Road, Tirupati – 517 506
Department of Management Studies
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Overview
The greatest challenge for a successful organization is change. This
threatening change may either be internal or external to the enterprise.

The concept of strategy

The concept of strategy in business has been borrowed from military science
and sports where it implies out- maneuvering the opponent. The term
strategy began to be used in business with increase in competition and
complexity of business operations.
A strategy is an administrative course of action designed to achieve success
in the face of difficulties. It is a plan for meeting challenges posed by the
activities of competitors and environmental forces. Strategy is the complex
plan for bringing the organization from a given state to a desired position in
a future period of time. For example, if management anticipates price-cut by
competitors, it may decide upon a strategy of launching an advertising
campaign to educate the customers and to convince them of the superiority
of its products.

Nature of strategy
 Strategy is a contingent plan as it is designed to meet the demands of a
difficult situation.
 Strategy provides direction in which human and physical resources will be
deployed for achieving organizational goals in the face of environmental
pressure and constraints.
 Strategy relates an organization to its external environment. Strategic
decisions are primarily concerned with expected trends in the market,
changes in government policy, technological developments etc.
 Strategy is an interpretative plan formulated to give meaning to other
plans in the light of specific situations.
 Strategy determines the direction in which the organization is going in
relation to its environment. It is the process of defining intentions and
allocating or matching resources to opportunities and needs, thus achieving
a strategic fit between them. Business strategy is concerned with achieving
competitive advantage.
 The effective development and implementation of strategy depends on the
strategic capability of the organization, which will include the ability not only
to formulate strategic goals but also to develop and implement strategic
plans through the process of strategic management.
 A strategy gives direction to diverse activities, even though the conditions
under which the activities are carried out are rapidly changing.
 The strategy describes the way that the organization will pursue its goals,
given the changing environment and the resource capabilities of the
organization.
 It provides an understanding of how the organization plans to compete.
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 It is the determination and evaluation of alternatives available to an

organization in achieving its objectives and mission and the selection of
appropriate alternatives to be pursued.
 It is the fundamental pattern of present and planned objectives, resource
deployments, and interactions of a firm with markets, competitors and other
environmental factors.

A good strategy should specify;

 What is to be accomplished
 Where, i.e., which product/markets it will focus on
 How i.e., which resources and activities will be allocated to each
product/market to meet environmental opportunities and threats and to gain
a competitive advantage

Components of strategy
1. Scope; refers to the breadth of a firm’s strategic domain i.e., the number
and types of industries, product lines, and markets it competes in competes
in or plans to enter.
2. Goals and objectives; these specify desires such as volume growth, profit
contribution or return on investment over a specified period.
3. Resource deployment; strategy should specify how resources are to be
obtained and allocated across businesses, product/markets, financial
departments, and activities..
4. Identification of a sustainable competitive advantage; it refers to
examining the market opportunities in each business and product-market
and the firm’s distinctive competencies or strengths relative to competitors.
5. Synergy; this exists when the firm’s businesses, products, markets,
resource deployments and competencies complement one another i.e., the
whole becomes greater than the sum of its parts( 2+2=5)

Strategies can be classified into corporate, business-unit and functional

strategies.

Definition; Strategic management is the process by which top management

determines the long-term direction of the organization by ensuring that
careful formulation, implementation and continuous evaluation of strategy
take place.

The strategic management process

The process can be broken down into three phases;
 Strategy formulation
 Strategy implementation
 Strategy control

Strategy formulation involves;

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 Defining the organization’s guiding philosophy & purpose or mission.

 Establishing long-term objectives in order to achieve the mission.
 Selecting the strategy to achieve the objectives.

Strategy implementation involves;

 Establishing short-range objectives, budgets and functional strategies to
achieve the strategy.

Strategy control involves the following;

 Establishing standards of performance.
 Monitoring progress in executing the strategy.
 Initiating corrective actions to ensure commitment to the implementation
of the strategy.

Defining an organization’s purpose/mission

 The mission defines the fundamental reason for the organization’s
existence. It provides a framework for decision-making that gives direction
for the entire organization.
 It is an overall goal of the organization that provides a sense of direction
and a guide to decision-making for all levels of management i.e.
organizational objectives and strategies at lower levels are developed from
the mission.
 The mission describes the organization’s line of business, its products and
specifies the markets it serves within a time frame of 3 to 5 years.
 The mission defines the boundaries or domain within which the
organization will operate. The boundaries may be defined as industries or
types of industries.
 The mission should not prevent change but provides direction for seeking
new opportunities.
 It should be broad enough to allow exploitation of new opportunities but
specific enough to provide direction.
 A mission should be achievable, in writing and should have a time frame
for achievement.

Mission statements should include the following

components;
 Targets customers and markets
 Principal products
 Geographic domain
 Core technologies used
 Concern for survival, growth and profitability
 Organizational self concept
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 Desired public image.

 The organization’s guiding philosophy

The organization’s philosophy establishes the values and beliefs of the

organization about how the business should be done and the organization’s
role in the society.
It establishes the relationship between the organization and its stakeholders
i.e. its responsibilities towards customers, employees, shareholders and
general public.
Establishing organizational objectives
An objective is a statement of what is to be achievable, measurable and
stated with specific time frames.
They can be classified as either short-range, medium or long range.
They may also be corporate, business unit or functional/ departmental
objectives.
Organizational objectives may be in the following areas;
1. Profitability 2. Service to customers 3. Employee wellbeing and
welfare 4. Social responsibility.

Strategic business units (SBUs)

A large organization’s activities can be segmented as business units.
A business unit is an operating unit in an organization that sells a distinct set
of products to a distinct market in competition with a well defined set of
competitors. It is normally referred to as an SBU.
An organizational SBU often has the following characteristics;
 It has its own set of customers.
 It should have a clear set of competitors, which it is trying to surpass.
 It should have its own strategic planning manager responsible for its
success.
 Its performance must be measurable in terms of profit and loss, i.e. it must
be a true profit centre.

e.g. K.B.C.’s SBUs include; K.B.C Kiswahili, K.B.C. English, Metro FM, K.B.C.
T.V, Metro TV etc.
Benefits of strategic management
 It provides the organization with consistency of action i.e. helps ensure
that all organizational units are working toward the same objectives
(direction).
 The process forces managers to be more proactive and conscious of their
environments i.e. to be future oriented.
 It provides opportunity to involve different levels of management,
encourage the commitment of participating managers and reducing
resistance to proposed change.
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ANALYZING THE EXTERNAL

ENVIRONMENT
In deciding an organization’s future direction, managers must answer three
questions;
 What is the organization’s present position?
 Where does the management want the organization to be in future?
(objectives)
 How does the organization move from its present position to the future
desired position?

The first question is answered through the analysis of the firm’s external and
internal environment.
The environment is a major source of change. Some firms become victims of
this change while others use it to their advantage.

The purpose of environmental analysis is to enable the firm to turn change to

its advantage by being proactive.

Characteristics of the environment are;

 It is unique to every organization.
 It is constantly changing.
 One level is controllable while the other (remote-PESTEL) is uncontrollable.
 It is a source of Opportunities, Threats, Strengths & Weaknesses.

Environmental analysis can be divided into two major steps;

a. Defining; determining the relevant environmental forces.
b. Scanning & forecasting; collecting information concerning the defined
environment.

Defining the external environment

External forces form the basis of the opportunities and threats that a firm
faces. These are;
1. Political /legal factors; They define the legal and regulatory framework
within which firms must operate. Constraints are placed on firms through fair
trade practices, minimum wage legislation, pollution and pricing policies
aimed at protecting the employees, consumers, the general public and the
environment. Such actions reduce the profit potential of the firms. However,
others such as patent laws and government subsidies are designed for the
benefit and protection of firms.
2. Economic factors; They affect consumer spending power and
consumption patterns.

Managers must consider the general availability of finance, the level of

disposable income and people’s consumption patterns. Other factors are; the
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level of interest rates, inflation rates, trend of growth in GDP, the emergency
of trading blocs (EAC,ECOWAS) and levels of employment.
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3. Social factors; These include the values, beliefs, attitudes and lifestyles
of people. As people’s attitudes change, so does the demand for various
types of products. Other examples of social change include;
 Entry of large numbers of women in the labour market
 Shifts in age distribution
 Geographic shifts in population
 Increased levels of education and sophistication
4. Technological factors; Technology refers to the means used to do
useful work. To avoid product obsolescence and promote innovation, a firm
must be aware of technological changes that influence its industry.
Innovative technologies can lead to possibilities of a new product, product
improvements or improvement in production and marketing techniques.

Environmental forecasting techniques

Environmental variables are dynamic and forecasting enables a firm to
assess the future and make plans for it.
Forecasting techniques can be classified as either qualitative or quantitative.
Qualitative techniques are based primarily on opinions and judgements, on
data that cannot be statistically analyzed.
Quantitative techniques are based on the analysis of data by use of
statistical techniques.

Qualitative forecasting techniques

1. Delphi method; This is a method of developing a consensus of expert
opinion. A panel of experts is chosen to study a particular problem. Panel
members do not meet as a group. They are asked to give an opinion about
certain future events. After the first round of opinions has been collected, the
co-coordinator summarizes the opinions and sends the information to panel
members. Based on this information, the panel members rethink their earlier
responses and make a second forecast. The same procedure continues until
a consensus is reached.
2. Executive judgment; This is a method of forecasting based on the
intuition of one or more executives. The approach may work well where the
forecaster has past market experience. A major demerit is that the
forecaster may be too pessimistic or optimistic.
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3. Customer surveys; In this case customers are asked what types and
quantities of products they intend to buy during a specified period of time.
But this may only be possible where the business has few customers who
may be able to make accurate estimates of future product requirements. The
disadvantage is that a customer survey may only reflect customers’
purchase intentions and not actual purchases.
4. Sales force forecasting survey; Sales people are asked to estimate the
anticipated sales in their territories for a specified period.
Merits;
 Sales people are closer to customers and are better placed to know the
customers’ future product needs.

Demerits;
 The sales people can be too pessimistic or optimistic.
 They tend to underestimate the sales potential in their territories.

Quantitative techniques
1. Time series analysis; This technique forecasts future demand based on
what has happened in the past. The idea is to fit a trend line to historical
data and then extrapolate this line into the future. The method assumes that
historical data will form a similar pattern into the future.
2. Regression modelling; This is a forecasting technique in which an
equation with one or more variables is used to predict another variable. The
one being predicted is called the dependent variable and the other variables
used to predict it are the independent variables. The technique determines
how changes in the independent variables affect the dependent variable.
Once a relationship is established, future values for the dependent variable
can be forecast based on predicted values of the independent variables.

Industry and competitive analysis

This involves examining a firm’s industry and competitive environment.
Factors considered are;
 Industry structure
 Factors that determine competition
 The key factors for success in an industry.

Competitive analysis helps to define the company’s distinctive competence

and competitive advantage.
A distinctive competence is an activity or resource where the firm’s
position is superior to its rivals.
A competitive advantage refers to a firm’s superior competitive position
that allows it to achieve higher profitability than the industry’s average.
Purpose of industry and competitive analysis
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 Defining a firm’s industry and served market. An industry is a group of

companies that offer products that satisfy similar customer needs. A served
market is the portion of the industry that the company targets.
 Identifying business opportunities- i.e. new market trends and niches a
firm can serve.
 Providing a benchmark for evaluating the company relative to
competitors.
 Shortening the company’s response time to competitors’ moves or pre-
empting such moves.
 Helping a firm to gain a competitive advantage.
 Aiding in the development of strategy and its successful implementation.

Understanding the industry’s life cycle

Industries come into existence and change over time due to technological,
social and economic changes and managers need to understand these
changes because they affect the intensity and basis for competition. The
stages of the industry’s life cycle are as follows;
1. Emerging (embryonic) stage

At this stage companies offer products that have little standardization

because the technology is not well developed. Channels of distribution are
not well established. Potential customers and their buying habits are not
known or are unclear. As some companies succeed, they attract new
entrants as the industry’s sales rises.
Strategies at this stage will be characterized by the following;
 Ability to rapidly improve product quality and performance features.
 Building advantageous relationships with key suppliers and distribution
channels.
 Acquisition of a core group of loyal customers and the expansion of the
customer base through model additions and advertising.
 The ability to forecast future competitors and the strategies they are likely
to take.
2. Growth stage

Companies start to build their market share and profitability as industry sales
expand. They are now able to standardize their products and achieve
economies of scale. Strategies are similar to those of stage one.
3. Shake out stage

Industries often experience a shakeout which usually leads to the collapse

and exit of a large percentage of companies in the industry. They rid the
industry of small and unstable competitors leaving the larger firms.
Shakeouts occur due to the following;
 The saturation of the industry because of a large number of competitors
and brands.
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 A decline in the industry’s growth rate, reducing the industry’s ability to

support all existing competitors.
4. Maturity stage

At this stage the industry product becomes more standardized and success
of the company mainly depends on aggressive marketing activities. Firms
will have achieved economies of scale in their operations and are likely to
use low prices as their competitive tool. Because market growth is non-
existent firms are motivated to acquire market share by taking it away from
competitors. Strategies at this stage will include;
 Pruning the product line- by dropping unprofitable product models and
sizes.
 Emphasis on process innovation that permits low cost production.
 Emphasis on cost reduction through putting pressure on suppliers for lower
prices and using cheaper components.
 Horizontal integration -acquiring or merging with other firms in similar
business.
 International expansion- to markets where attractive growth and limited
competition still exists.
5. Decline stage
The stage is marked by declining industry sales. Such decline compels
managers to reconsider the company’s objectives and determine whether it
remains in the industry or exits.

Characteristics of industry lifecycle

 The stages vary in duration.
 Different stages require different skills, capabilities and strategies.
 Industry lifecycle is not always linear i.e. does not move sequentially from
emerging to decline. An industry in maturity may experience revival because
of new technology or changes in competitive strategies.

Analyzing the structure of the industry

Industry structure refers to the competitive profile/ analysis of the industry.
Some are more competitive than others and the degree of competitiveness
depends on the following factors;
 Barriers to entry and exit
 Level of product differentiation
 Level of concentration
 Economies of scale
a. Barriers to entry and exit
They make it difficult for new firms to enter the industry and existing ones to
quit. When barriers to entry are high, competition declines over time. These
entry barriers may be tangible or intangible.
Tangible barriers include;
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 Capital requirements e.g. aircraft manufacturing

 Access to technological knowhow
 Access to distribution channels
 Extent of government control of the industry.

Intangible barriers are;

 Reputation of existing firms and brands
 Customer loyalty to current brands
 Customer switching costs

Exit barriers may include the company’s physical assets which may lack a
buyer and the effect of the departure from an industry on the company’s
reputation.
b. Product differentiation

This refers to the extent to which customers perceive products or services

offered by the companies in the industry as different from others.
Differentiation can be achieved through technological leadership, persuasive
advertising, sales promotions and after-sales service.
c. Concentration

It is the extent to which industry sales are dominated by only a few firms.
The intensity of competition declines over time if just a few firms are
dominant. The firms that hold larger market shares are able to achieve
economies of scale and use them to set lower prices that act as a barrier to
new entrants or drive out smaller companies from the industry.
d. Economies of scale

It refers to the savings that companies achieve from producing large

quantities.

Understanding competitive dynamics

Michael Porter’s five forces of competition can be used to gain an insight
into an industry’s competitiveness. These are;
 Threat of entry
 Bargaining power of buyers
 Bargaining power of suppliers
 Threat of substitute products
 Rivalry among existing companies.
1. Threat of entry

This is mainly dependent on barriers to entry aforementioned.

2. Bargaining power of buyers
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In some industries, buyers can exert power to producers by forcing down

prices, demanding higher quality or more after-sales service. This is
dependent on the following;
 The buyers are few and they buy in large volumes
 The product is not differentiated, is substitutable and there are other
alternative suppliers.
 The buyer has little switching costs
 The buyer can integrate backward to make the industry’s product.
3. Bargaining power of suppliers

Suppliers can exert their bargaining power by raising prices or reducing the
quality or quantity of their supplies. A supplier group is powerful if;
 It is made up of a few firms
 There are few or no substitute products
 The product is unique or differentiated
 There exists supplier switching costs
 It can integrate forward to produce the industry’s product.
4. Threat of substitutes

Substitutes are products that fulfil the same customer needs e.g. cars, trains
and airplanes are substitute means of transportation. The threat is greater
where there is little or no product differentiation and brand loyalty.
5. Rivalry among existing firms

This is often based on tactics like price competition, new product

introductions and heavy advertising. This rivalry is dependent on the
following factors;
 Competitors are many
 They are roughly equal in size
 Industry growth is slow, leading to fights for market share
 The product lacks differentiation or switching costs
 Fixed costs are high and the product is perishable
 Exit barriers are high.

Understanding the key success factors (KSFs)

Key success factors determine the requirements for successful participation
in an industry. The KSFs vary from one industry to another and vary from one
phase of industry lifecycle to another.
Identifying KSFs requires an analysis of customers and (analysis of) the
factors that lead to survival in the industry i.e. competitive factors. Customer
analysis involves the following;
 Who are the customers?
 What are their met and unmet needs (what do they want)?
 How do customers choose between competing products?
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Performing strategic group analysis

A strategic group is a set of companies within an industry that follow similar
competitive strategies.
Importance
 Providing an overview of the major strategies used by companies in the
industry and determining which strategies are most effective.
 Helping the company to examine its direct competitors
 Helping the company to examine its potential competitors
 Evaluating the company to explore different strategic options
 Forcing the firm to reassess its market position.
 Competitive benchmarking

The process of competitor analysis

A company can succeed only by designing offers/ products that satisfy target
consumer needs better than competitors. This calls for competitor analysis.
The process consists of the following steps;
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 Identifying key competitors

 Assessing their objectives
 Assessing their strengths and weaknesses
 Assessing their strategies
 Assessing their reaction patterns
 Selecting which competitors to attack or avoid.
1. Identifying competitors

A company can define its competitors as other companies offering a similar

product/service to the same customer group at similar prices. There are two
ways of identifying competitors;
(a) Industry basis

Many companies identify their competitors from the industry point of view.
An industry is a group of firms which offer a product or class of products that
are close substitutes for each other, e.g. the banking industry,
pharmaceutical industry etc.
(b) Market basis

In this case competitors are companies that are trying to satisfy the same
customer need or serve the same customer group. The market definition of
competition opens the company’s focus to a broader set of actual and
potential competitors e.g. from an industry point of view coca cola might see
its competitors as Pepsi and other soft drink manufacturers. But from a
market perspective the customer actually wants to quench his thirst. This
need can be satisfied by fruit juice, bottled water, beer etc.
2. Determining competitors’ objectives

Companies differ on the weights they put on short term and long term
profitability and other objectives.
Some competitors might be oriented toward satisfying profits (breaking
even) than maximizing the profits.
The company should be able to know the relative importance that a
competitor places on current profitability, market share,
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share growth, cash flow, technological leadership etc. E.g. a company

pursuing low cost leadership will react more strongly to a competitor’s cost-
reducing manoeuvres than to the same competitor’s advertising increase.
3. Identifying competitors’ strategies

In most industries, competitors can be sorted out into groups pursuing

different strategies. A strategic group is a group of firms in an industry
pursuing similar strategy. The company needs to examine each competitor
on the following;
 Product quality
 Features and product mix
 Customer service
 Pricing policy
 Distribution coverage
 Promotion strategy
 R & D effectiveness
4. Assessing competitors’ strengths/weaknesses

The company needs to identify competitors’ resources and capabilities.

Knowledge of such resources can be obtained through conducting primary
research with customers, suppliers and dealers. The company can carry out
a customer analysis process as follows;
 Assess the company’s and competitor’s performance on different customer
values against their ranked importance.
 Examine how customers in a specific segment rank the company’s
performance against a specific major competitor on important attributes.
 Monitor changes in customer value over time.
5. Estimating competitor’s reaction patterns

Each competitor reacts differently. Some react to certain types of attacks but
not to others i.e. they may respond strongly to price decreases but may not
respond at all to advertising increases. This depends on their profit and
marketing objectives.
6. Selecting competitors to attack or avoid

A company may benefit from some competitors. This may be in the following
ways;
 Competitors may help increase total demand
 They share the costs of product and market development
 They help to legitimize a new product/ technology
 They may serve less attractive segments which may accuse the company
of ignoring the segments

Therefore some companies compete “constructively” while others may

compete “destructively”. Companies will often attack competitors who are
destructive, small, or weak.
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ANALYZING THE INTERNAL

ENVIRONMENT
The internal environmental analysis process evaluates all relevant factors
within an organization in order to determine its strengths and weaknesses.
It starts with the identification of the organization’s resource allocations, an
enumeration of its strengths and their strategic significance.
Such analysis may be done by people from the planning department or an
external consulting firm. Some of the areas most organizations should
analyze include;
 Financial position
 Product/service position
 Marketing capability
 R & D capability
 Organizational structure
 Human resources
 State of facilities and equipment
 Past and current objectives, strategies and their effectiveness.

Strengths have strategic significance when;

 They result in a distinctive competency. A distinctive competency occurs
when an organization’s cannot be easily matched by a competitor.
 They provide a competitive advantage. A competitive advantage is the
ability to do something that competitors cannot do or cannot do as well.
 A weakness becomes a major vulnerability when it is a capability that is
held by most competitors and is necessary for success in the industry.

Value chain analysis

It is a way of looking at a business as a chain of activities that transform
inputs to outputs that customers value.
It attempts to understand how a business creates customer value by
examining the contributions of different activities within the business to that
value;
Inputs (raw materials, machinery) conversion outputs (products, services)
Customer value is derived from the following;
 Activities that differentiate the product(quality)
 Those that lower costs(affordability)
 Activities that meet customers need quickly(speedy delivery)

The analysis divides the activities of the firm into two groups;
a) Primary activities: are those involved in the physical creation of the
product, marketing and transfer of the product to the buyer and after sales
service.
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b) Support activities: such as human resource, R & D, management etc.

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The value chain analysis process

a) Identify activities

A firm often performs a number of activities that may represent a strength or

weakness. These activities are such as;
 Installation
 Distribution
 Promotion

Any of these could be a source of competitive advantage.

b) Allocate costs

Each activity incurs costs and managers should assign costs to each of the
activities and assess it on the basis of the customer value that it creates.
c) Compare with competitors(competitor bench marking)

To evaluate a value activity as a strength or weakness, comparisons are

made between it and key competitor’s activities. Each element in the chain
delivers a part of the total value to the customer and contributes part of the
total profits.
The purpose is to measure the value delivered and the profit contributed by
each element to the chain. Strategy would be to focus attention and
resources onto the parts of the chain from which the majority of the value
comes.
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IDENTIFYING STRATEGIC ALTERNATIVES

Strategy outlines the steps an organization will take in order to achieve a set
of objectives.
Strategy is developed by evaluating available alternatives and choosing one
or more of the alternatives.
Strategies exist at different levels of the organization and are classified
according to the scope of their coverage.

(a)Corporate strategies; they evaluate what business an

organization will be in and how company resources will be allocated
among those businesses. They are established at the highest levels of
the organization and involve a long-range time horizon.
(b) Business unit strategies; they focus on how a specific SBU will
compete in a given industry.
(c) Functional strategies; are concerned with the activities of
different functional areas such as production, finance, marketing, etc.
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Corporate strategy alternatives These can be classified

as follows; A. Growth strategy
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1. Concentration strategy (intensive growth strategies)

(a) Market development
(b) Product development
(c) Horizontal integration
2. Vertical integration
3. Diversification growth
(a) Concentric diversification
(b) Conglomerate diversification

B. Harvesting strategies
C. Defensive strategies
(a) Turnaround
(b) Divestment
(c) Liquidation
(d) Bankruptcy
D. Combination strategies

A. Growth strategies
A firm pursuing a growth strategy regularly develops new products, enters
new markets, finds new uses for its existing products and develops new
production processes.
Several generic strategies can be used for growth;
1. Concentration strategy; It is the strategy where the firm directs its
resources to the profitable growth of a single product in a single market. The
firm thoroughly develops its expertise in a limited area and grows by building
its competencies and achieves a competitive edge. Actions available to the
company include the following;
 Stretching the product line (new sizes, styles, tastes, colours)
 Expanding distribution into new geographic areas
 Encouraging non-users to use the product
 Encouraging more usage
 Penetrating competitor’s positions through pricing strategies, product
differentiation and advertising.

There are three approaches to pursue a concentration strategy;

a) Market development;
This involves marketing present products to customers in related market
segments by adding on channels of distribution. This is achieved through the
following;
 Opening additional geographic markets through regional or international
expansion
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 Attracting other market segments by developing product versions that

appeal to other segments or by entering other channels of distribution.

b) Product development
This involves the modification of existing products or the creation of new but
related products that can be marketed to current customers. Such a strategy
is adopted to prolong the life-cycle of current products. The firm achieves
this through developing additional models and sizes or changing the
products’ colour, shape, taste etc.
c) Horizontal integration
This involves growth through the acquisition of one or more firms producing
a similar product or operating at the same stage of the production-marketing
chain. The strategy is aimed at eliminating competition and providing the
acquiring firm access to new markets and resources.
2. Vertical integration; It is where a firm acquires another firm that
supplies it with inputs (such as raw materials) or one that is a customer for
its output. E.g. EABL ltd acquired Central Glass Industries in a case of
backward vertical integration.

Forward integration moves an organization into distributing its own products

or services and gives the organization control over sales and distribution
channels.
3. Diversification; This is when an organization moves into areas that are
clearly different from its current business to spread risk so that the
organization is not subject to the whims of just one product or industry.
Diversification can either be concentric or conglomerate.
 Concentric diversification

This involves the acquisition of businesses that are related to the acquiring
firm in terms of technology, markets or products. In this way the firm is able
to build expertise in a related area and diversify risks.
 Conglomerate diversification

It is where a large firm acquires a business because it represents the most

promising investment opportunity and not because of similarity or synergy.
Growth strategies are achieved through acquisitions, mergers, or joint
ventures

An acquisition occurs when one company purchases the assets of another

and absorbs them into its own operations.
A merger occurs when two or more companies combine into one. Neither
party acquires the other but both companies merge together combining
operations to form a new entity.
A joint venture occurs when two or more organizations pool their resources
for a given project. The two or more firms lack a necessary component for
success in a particular competitive environment and by pooling resources
 24

together, they may be capable of doing something they could not do

separately and are able to share risks and profits involved.

B. Harvesting strategies
Most products eventually reach a decline stage. This may be because of new
competition, changes in consumer preferences or new technology. When this
happens a firm ‘harvests’ as much as it can from the product, i.e. milking the
cow dry. The approach is to limit additional investment and expenses and to
maximize short-term profits and cash flow. Such a strategy should be
considered under the following conditions;
 The product is in the decline stage
 The current market share of the product is small
 The firm has other better uses for its resources
 The product is not a major contributor of the sales or profitability of the
firm.

C. Defensive / turnaround strategies

These are used when the company needs to reduce its operations, to reverse
a negative trend or to overcome a crisis or problem.
The firm may be having financial problems or it forecasts hard times ahead
in terms of new competitors entering the market, new products or changes
in government regulations. The strategies include retrenchment, divestment,
liquidation and bankruptcy
1. Retrenchment/ restructuring/ downsizing

A firm can find itself with declining profits because of recessions, production
inefficiencies or innovative breakthroughs by competitors. Such a firm can
survive if it fortifies its distinctive competencies. This is often achieved in two
ways;
-Cost reduction; e.g. laying off employees, leasing rather than purchasing
new heavy equipment, eliminating elaborate promotional activities and
dropping unprofitable items from the product line.
-Asset reduction; e.g. the sale of land, buildings and equipment not
essential to the basic activity of the firm.
2. Divestiture

Is the sale of a firm or a major component of a firm because the company

has financial needs where its cash flow can be greatly improved if business
with high market value are sacrificed or because of government action when
a firm is perceived to monopolize or unfairly dominate a particular industry.
3. Liquidation
 25

It is where a firm is sold in parts for its tangible asset value. As a strategy, it
minimizes the losses of all the firm’s shareholders. The proceeds of the sale
are then distributed to creditors, the remainder of which can then be
distributed to shareholders.
4. Bankruptcy

A company can go to the courts to ask for a reorganization bankruptcy. It

persuades its creditors to temporarily freeze their claim while it undertakes
to reorganize and build the company’s operations back to profitability. The
company may close down unprofitable business divisions, reduce its
workforce or negotiate employee contracts to affordable salary levels.

D.Combination Strategies:
(i) Joint ventures, (ii) Strategic alliances and (iii) Consortia
1. Joint venture

This is where two or more firms lack a necessary component for success in a
particular competitive environment and decide to enter a co-operative
arrangement where they contribute in providing the resources required for a
business venture.
2. Strategic alliances

These are partnerships that exist for a definite period during which partners
contribute their skills and expertise to a co-operative project. One partner
may contribute manufacturing expertise while the other provides marketing
skills. Often such alliances are undertaken because partners want to learn
from one another with the intention of building own capabilities to replace
the partner when the contractual arrangement between them ends.
3. Consortia

These are large, interlocking relationships between businesses of an

industry. Firms in one industry e.g. pharmaceutical or electronic may gang
together to fund a research program. It often results in cost-sharing and
increased economies of scale for the companies involved.

Business unit strategy alternatives

Strategies at this level can be categorized into three major types;
 Overall cost leadership
 Differentiation
 Focus
1. Overall cost leadership; This involves producing and delivering the
product or service at a lower cost than the competition. Low cost producers
maximize economies of scale and implement cost cutting technologies. They
are then able to charge lower prices or to enjoy higher profit margins. They
 26

depend on some unique capabilities to achieve and sustain their low cost
position e.g.
a) Having secured suppliers of scarce raw materials
b) Having a dominant market share position
c) Having secured technology that cannot be copied.
2. Differentiation strategy; This requires that a company creates a
product that is recognized as being unique, thus permitting the firm to
charge higher than average prices. Differentiation can come in the form of a
unique product attribute, better customer service or an elaborate dealer
network. It is aimed at building customer brand loyalty and a resulting lower
sensitivity to price.
3. Focus; It involves targeting a particular buyer group and serving the well
defined but narrow market niche better than competitors who serve a
broader market. The idea is to achieve a least cost position or differentiation
or both within a narrow market. The product is tailored to the unique
demands of the smaller segment.

Global strategy
Globalization refers to the strategy of approaching worldwide markets with
standardized products. Multinational companies (MNCs) are firms that
compete in more than one national market.
Reasons why firms internationalize/ globalize
1. Additional resources; Various inputs including natural resources,
technologies, skilled personnel and materials may be obtained more readily
outside the home country.
2. Lower costs; Costs including labour, materials etc. may be lower outside
the home country.
3. Incentives; These may be available from the host country or home
government to encourage foreign investment.
4. Taxes; Different corporate tax rates in different countries provide
opportunities for firms to maximize their after-tax, worldwide profits.
5. Economies of scale; National markets may be too small to support
efficient production.
6. Synergy; operations in more than one national environment provide
opportunities to combine benefits from one location with another.
7. Protecting home market; through offense in the competitors’ home i.e.
a strong offense in a competitors market can put pressure on the competitor
that results in a pull back from foreign activities to protect itself at home.
8. Trade barriers e.g. tariffs, quotas and other restrictive trade practices
can make exports to foreign markets less attractive hence local operations in
foreign markets become attractive.
9. International competition; If a company’s competitors become
international and the company wants to remain competitive, foreign
operations become necessary.
 27

10. Restrictions and regulations imposed by the home government may

increase the cost of operating at home and it may be possible to avoid these
by establishing foreign operations.

Characteristics of global industries

 Barriers to entry decline and it becomes easier for foreign companies to
penetrate national markets.
 Industry concentration declines as a result of entry by foreign producers.
Concentration refers to the amount of market share controlled by the top 1-4
producers in the industry. A low concentration ratio indicates a highly
competitive industry.
 Competition rises with internationalization and the diversity of competitors
also increases.
 Consumer buying power rises with increased internationalization because
they have many new options from which to choose.

International strategic choices

Deciding whether to go abroad and engage in international operations
requires a company to develop an international strategy that involves three
steps;
a. Determining the company’s preparedness for international operations
b. Deciding on the company’s mode of entry into different markets
c. Developing the organizational structure that supports the chosen strategy.

A firm should not decide to go international because every competitor is

doing so but should first analyze the suitability of its structure, culture,
people and resources for international operations.
Before making a decision to go international the company must weigh
several risks;
1. The firm might not understand foreign customer preferences and fail to
offer a competitively attractive product. 2. The firm might not understand
the foreign country’s business culture. 3. The firm might realize that it lacks
managers with foreign experience. 4. The foreign country might change its
laws or undergo a political revolution and expropriate foreign property.
28
 29

Foreign market entry methods These are;  exporting  licensing 

franchising  joint ventures  foreign direct investments (FDI)

Exporting; Most firms start with this so as to gain a foothold and necessary
experience in the international market. It has the following advantages;
 It offers the firm opportunity to learn and develop appropriate experience
with international markets.
 The firm is able to expand its market and diversify its risks against
unfavourable domestic markets
 Enables the firm to achieve economies of scale because of increased
production volume
 It does not require major initial capital investments.

Licensing; Licensing is an arrangement where the licensor gives something

of value to the licensee in exchange for certain performance and payments
from the licensee. The licensor may give the licensee one or more of the
following;
 Patent rights e.g. rights to produce or sell a new invention for a certain
number of years.
 Copyrights, the exclusive legal right to reproduce, publish and sell a form
of literary, musical or artistic work.
 Technical know-how.
 30

The royalties/ fees generated from licensing are a major source of revenue
for the licensor. Licensing offers a company three major advantages:
 It helps the company to overcome trade barriers without much cost or
investment.
 It allows the company to overcome limits or investments imposed by
foreign governments.
 No risks of expropriation.

Disadvantages
 The foreign partner may gain experience and evolve into a major
competitor after the contract expires.
 The licensor forfeits control on production and marketing of its products
and this may lead to low quality products and poor service.

Franchising; It is a special form of licensing which allows the franchisee to

sell a product using the parent’s brand name or trade mark, carefully
developed production procedures and marketing strategies. The franchisee
pays a fee to the parent company (franchisor) and must strictly adhere to
the policies of the parent.
It offers a quick way of entering foreign markets.
Joint ventures; This is entering foreign markets by joining with foreign
companies to produce or market a product. The process begins with a
mutually agreeable pooling of capital, production or marketing expertise,
patents or trademarks.
Advantages
 Potentially greater returns from equity participation as opposed to royalties
e.g. the company may control 50% of share capital thus be entitled to 50%
of the profits.
 Greater control over production and marketing.
 The firm gets greater experience in international business.

Disadvantages
 Need for greater capital outlay.
 Interest of one partner may conflict with the other.

Foreign Direct Manufacturing (FDI)

This refers to direct ownership of foreign- based manufacturing facilities. This
is appropriate under the following conditions;
 The host country market is large
 The host country market is geographically close
 The company has good international experience
 The company has significant competitive technological advantage.

Advantages
 Increased control over the firm’s foreign operations
 Allows the company to exploit its competitive advantages in new markets
 31

 Enables the company to achieve economies of scale

 It gives the company an opportunity to manufacture its products locally
and to include local needs and preferences

Disadvantages
 It requires greater commitment of resources to international operations
 The company exposes a large investment to risks such as expropriation
 It creates problems for a firm that desires to divest from foreign operations

Factors determining the mode of entry into international markets

Two major factors should be considered. These are;
a. Environmental variables
b. Strategic variables
A. Environmental factors

These are; country risk, location familiarity, demand conditions and

competitive conditions,
1. Country risk. They include;  Political risks such as political instability 
Ownership and control risks such as expropriation  Operational risks e.g.
local price controls  Profit transfer risks which relate to exchange rate
issues. 2. Location
familiarity; a firm should understand the economic, social, technological and
cultural values of their potential markets.
3. Demand conditions; if the market is uncertain because of declining
demand or is in a recession, the firm should use a mode of entry with less
commitment e.g. exporting 4. Competitive conditions; when
competition is high the firm should use a mode of entry that requires limited
source commitment.

B. Strategic variables
1. Extent of economies of scale i.e. the potential for savings from increased
volume of operations. FDI is better suited.
 32

2. Concentration; it means that a few firms control most industry sales. As

concentration rises, the industry moves toward monopoly and success is
achieved in such a scenario through FDI.

Generic international strategies

1. The multi domestic strategy

It is premised on the belief that national markets differ in their structure,

demographics, key success factors etc. this calls for differentiation in the
competitive strategies used in different countries i.e. each country or
regional market is treated differently because there is need to customize
products to meet the tastes of local consumers, establish distribution
channels unique to every country, etc.
Most global service companies tend to be multi-domestic e.g. insurance,
banking, retailing etc.
2. Global strategy

In this case the firm focuses on exploiting similarities among countries in

order to create a competitive advantage. Competition crosses national
borders and occurs on a worldwide basis. The firm offers a standardized
product to all its markets and engages in mass production and mass
marketing.
 33

STRATEGY EVALUATION AND SELECTION

To determine whether to make adjustments to the current strategy or
change the strategy, it is necessary to project the results that will be
achieved if no changes are made in the current strategy.
When the current strategy is unlikely to achieve the objectives set for the
planning period, a performance gap exists.

Gap analysis
A technique that identifies a firm’s current objectives and determines
whether the current strategy would achieve the objectives. The firm may
have the objective of e.g. increasing sales by 10% over the next two years. It
needs to undertake a projection or forecast that will indicate whether the
objective is realistic under the current strategy and prevailing conditions.
A resulting gap between target objectives and forecast actual performance
indicates that the current strategy may not achieve target objectives.
The process of environmental analysis and internal analysis provide the
information for determining whether a gap may occur.
The performance gap may be closed by careful implementation of the
current strategy or more efficient use of resources or by improving
competitive position for improved effectiveness.

Portfolio analysis
A technique that has been developed to assist in strategy evaluation and
selection process is known as portfolio analysis. The Boston Consulting
Group’s (BCG) Growth-Share Matrix and the Planning Grid are commonly
used approaches in portfolio analysis.

The BCG Matrix

The Growth share matrix postulates that all organizations are composed of
more than one business. These businesses, also called strategic business
units (SBUs) are called its corporate portfolio. The approach proposes that
separate strategies be developed for each of these independent businesses.
The BCG approach is a classification of a company’s businesses based on
two variables; the business’ relative market share in its industry and the
annual market growth rate of the industry in which the business operates.
The relative market share refers to the SBU’s market share relative to that of
its largest competitor in that industry. A relative market share(RMS) of 0.1
means that the company’s sales volume is only 10% of the leader’s and an
RMS of 10 means the company’s SBU is the leader and is 10 times that of the
next strongest competitor.
The following steps are followed in using the growth-share matrix in strategy
evaluation and selection;
 34

 Divide the company into its business units (SBUs)

 Determine the market growth rate for each business unit
 Determine the relative market share of each business unit
 Develop a graphical picture of the company’s overall portfolio of business.

The matrix is divided into four cells, each indicating a different type of
business.
1. Question marks;

Are businesses that operate in high growth markets but have low relative
market share. They require a lot of cash because the company has to spend
to keep up with the fast growing market because it wants to keep up with or
overtake the market leader. Such a business is described as a question mark
because the company has to think hard about whether to continue putting
money into this business. The SBU may also be known as a problem child.
2. Stars;

Are the market leaders in a high growth market. A star does not necessarily
produce positive cash flow because the company must spend to keep up
with the high market growth and to fight off the competitors’ attacks. They
are stars because they are promising future cash cows.
3. Cash cows;

They are businesses operating in a market with falling market growth rate,
have the largest relative market share and produce a lot of cash for the
company. The firm does not have to finance expansion because the market’s
growth rate has slowed down. Due to the large market share, the business
enjoys economies of scale and a higher profit margin. The company uses
cash-flows from the cash-cows to support other businesses.
4. Dogs;

These are businesses with weak market shares in low growth markets. The
company should consider harvesting these businesses or holding them in the
hope that conditions may improve e.g. a turnaround in market growth rate.
Relative market share (RMS) and market growth rate are important
parameters that influence strategy.
RMS determines the rate at which the business generates cash i.e. a
business with high market share should have higher profit margins and cash
flows.
On the other hand the market growth rate influences the ease of gaining
market share and also determines the level of opportunity for investment.
 35

After a portfolio analysis, a firm should decide whether its portfolio is healthy
or not. An unbalanced portfolio would be one having too many dogs and
question marks and too few cash cows and stars. The company should
decide whether to build, hold, harvest or divest its SBUs.
a. Build;

Appropriate for question marks whose market shares must grow if they are
to become stars and for stars if they are to become cash cows.
b. Hold;

It is appropriate for cash cows if they are to continue yielding large cash
flows.
c. Harvest;

It is a strategy to increase short-term cash flow regardless of long term

effect. It involves milking the business dry and entails eliminating
unnecessary R&D expenditures, not replacing worn out equipment, reducing
advertising expenditure, reducing the sales force etc. the strategy is
appropriate for weak cash cows, dogs and question marks.
d. Divest;

Refers to liquidating or selling weak businesses and is appropriate for dogs

and question marks.

The planning grid (the GE model)

The planning grid was developed by General Electric (GE). It plots each
business unit on a nine cell grid. The horizontal axis is a qualitative analysis
of the business unit’s strengths, while the vertical axis is a qualitative
analysis of the industry attractiveness. It is based on the fact that a firm is
successful in so far as it enters attractive markets and possesses the
business strength to succeed in those markets. Market attractiveness is
rated as high, medium or low and business strength is rated as being strong,
medium or weak.

Business strength (SBU)

The following factors are considered to determine business strengths;
 Market share held
 Profitability
 Competitive position
 Growth rate of the business unit
 Quality of management and employees
 Product quality
 Distribution and promotion effectiveness
 R&D performance, etc.
36
 37

Market/industry attractiveness
Market/industry attractiveness is judged on a number of factors i.e.
 Market size
 Market growth rate
 Competitive intensity
 Industry profitability

The nine cells of the GE matrix fall into three zones. The three zones in the
upper left corner (1, 2, & 4) indicate strong SBUs in which the firm should
invest heavily and pursue growth strategies. The diagonal cells (3, 5, &7)
indicate SBUs that are medium in attractiveness. The firm should pursue
growth or harvesting strategies in these SBUs. Cells 6, 8, & 9 indicate SBUs
that are low in attractiveness in which the company should divest or pursue
defensive strategies (turnaround, divestiture, and liquidation).

Shortcomings/ demerits/ critique of the portfolio

models
The portfolio techniques help managers to think more strategically,
understand the viability of their business better, improve quality of their
plans, eliminate weaker businesses and strengthen their investment in more
profitable businesses. But they both have the following limitations;
1. They may lead a firm to place too much emphasis on market share growth
and entry into high growth businesses and neglect the current businesses.
2. The weights and ratings of a given business can be manipulated by
management to produce a desired location in the matrix.
3. Many businesses may end up in the middle of the matrix as a result of
averaging the ratings and this makes it hard to know which appropriate
strategy to take for a specific SBU.
4. The models fail to show the synergies (shared experience or
complementary effect) between the two or more businesses i.e. there is a
danger of terminating a losing business unit that actually provides an
essential core competence or added value to other business units (SBUs).
5. Two or more businesses can end up in the same cell while they differ
greatly in ratings on different factors e.g.

Business A business B
Market share 50% 30%
Product quality 60% 90%
Promotion effectiveness 40% 30%
Total 150 150
Average 50% 50%
 38

SWOT analysis/ SWOT matrix

It is an organization’s appraisal of its internal strengths and weaknesses and
its external opportunities and threats.
SWOT analysis is based on the assumption that an effective strategy results
from a sound “fit” between a firm’s internal resources and its external
situation.
An opportunity is a favourable situation in a firm’s environment e.g.
identification of a previously overlooked market segment, favourable
changes in regulatory circumstances, improved buyer purchasing power,
technological changes .
A threat is a major impediment to a firm’s current or desired position e.g.
entrance of a new competitor, slow market growth, new unfavourable
regulations.
A strength is a unique resource (distinctive competence) that gives a firm a
competitive advantage in the market.
A weakness is a limitation or deficiency in resources relative to competitors
that impedes the firm’s effective performance.
A SWOT analysis presents a company in four possible scenarios;

S,O S,O
1 1

W, T W, T
3 3

Cell 1 is the most favourable situation where the firm faces several
opportunities and has numerous strengths to pursue those opportunities.
In cell 2 the firm has identified key strengths but faces an unfavourable
environment. In this situation, strategy would be to redeploy the strong
resources to build long term opportunities.
A firm in cell 3 faces opportunities but is constrained by weak internal
resources. The strategy would be to focus on eliminating the weaknesses so
as to pursue the opportunities.
Cell 4 is the least favourable and calls for strategies that reduce or redirect
involvement in products or markets (product elimination, market
withdrawal).
 39

PIMS (profit impact of market strategy)

The PIMs database maintained by the strategic planning institute consists of
strategic data that includes financial data, information on customers,
competitors, etc. The database is collected across industries offering
different products and services in regional, national and international
markets. The database offers client companies customized capabilities
regarding strategy evaluation and selection depending on their industry.

Internal factors affecting strategy evaluation

and selection
1. Role of the current strategy;

Current strategies are often built on past strategies. If management has

invested time and resources in the current strategy they would be more
comfortable with a choice that is closely related to and only involves a slight
alteration of the current strategy.
2. Degree of a firm’s external dependence;

A firm may be dependent on one customer or one supplier and this may
mean the firm faces a strategic threat and may employ the strategies of
vertical or horizontal integration.
3. Attitude towards risk;

Where attitudes favour risk, the range of strategic choices expands and high
risk strategies become acceptable. But where management is risk-averse the
range of strategic choices is limited and risky alternatives are eliminated
before strategic choices are made.
4. Managerial priorities different from shareholder’s interest
Managers are required to make decisions that are in shareholders’ best
interests but they frequently place their own interests above others e.g.
where shareholders’ value may be maximized by selling a company,
managers in the acquired firm may not select such a strategy for fear of
losing their jobs.
5. Internal/ political considerations
 40

The use of power to pursue individual or group interests is common in

organizations e.g. when the CEO who is a dominant force and source of
power, begins to favour a particular choice, it is often selected.
6. Competitive reaction

In evaluating strategic choices, management has to weigh the likely

competitor reactions e.g. the competitor may launch an aggressive counter-
strategy and management must consider the impact of such reactions on the
success of the chosen strategy.
 41

STRATEGY IMPLEMENTATION
Strategy implementation involves translating formulated strategies into
action. It entails moving from “planning your work” to “working your plan”.
Successful implementation of strategy requires the following;
 Strategies must be communicated and clearly defined for all affected
employees.
 All affected employees must receive management support through having
an appropriate organizational structure, empowering policies, sound
leadership and effective reward systems.
 Corporate and business-unit strategies must be translated into short-term
objectives and functional strategies.
1. Communicating strategy

A strategy has to be clearly understood before it can be implemented.

This gives purpose to the activities of each employee and allows the
employee to link whatever task is at hand to the overall organizational goal.
It also provides the employee with general guidance for making decisions
and enables him/her to direct efforts towards activities that are important.
2. Strategy and structure

Structure is the sum total of the ways in which the organization divides its
labour into distinct tasks and then achieves coordination between them.
The structure breaks up the company’s work into well defined jobs, assigns
these jobs to departments and people and coordinates these jobs by defining
formal lines of authority and communication.

Types of organizational structures

1. Functional organizational structure
2. Geographic
3. Divisional
4. Strategic business unit
5. Matrix/Complex

1. Functional organizational structure

It is where the organization units are defined by the nature of the work. Most
organizations have four basic functions; production, sales, finance and
human resources.
Each of the functions may be broken down where necessary e.g. the
production department may be split into maintenance, quality control,
engineering, manufacturing etc. Employees are grouped by function and
report to managers in the same area of functional expertise, who report to
 42

the CEO. Such structure is often used in organizations with a similar or

narrow product line.
Advantages
 Develops functional expertise
 Enhances efficient use of resources through specialization
 Centralized control of strategic decisions.
Disadvantages
 Encourages narrow specialization when members of a functional group
develop more loyalty to the functional group’s goals.
 Conflict may develop among different departments striving for different
goals
 Limits the development of general managers
 Decreases response time as the organization grows.

2. Geographic organizational structure

It is found in organizations that maintain physically dispersed and
autonomous operations or offices. It is commonly used by international
organizations and those in the service industry e.g. banks, insurance
companies, retailers, restaurant and hotel chains.
Advantages
 Allows tailoring of strategy to the needs of each geographic market.
 Permits the use of local employees which creates customer goodwill and an
awareness of local feelings and tastes.
 Improves response time to the customer.
 Provides excellent training experience for general managers.

Disadvantages
 Makes it difficult to maintain consistency of service/ image from area to
area.
 Can result in duplication of staff services at headquarters and regional
levels.
 Adds another layer of management.
 Creates the dilemma of deciding how much autonomy to give to regional
offices.

3. Divisional organizational structures(customer or

product-based structures)
They are the structures adopted by organizations characterized by
diversified products and unrelated customer groups.
 43

The different businesses (divisions) are broken down first, then followed by a
traditional functional or geographic breakdown.
Each division operates as an autonomous profit centre headed by a division
manager. Organizations that have largely diversified products and customers
use such a structure.
Advantages
 Authority is placed at the appropriate level for rapid response.
 Frees CEOs (top managers) to deal with corporate strategic issues.
 Provides a good training experience for strategic managers.

Disadvantages
 Can result in costly duplication of staff functions at corporate and divisional
levels.
 Can enhance negative divisional rivalry for corporate resources.
 Creates the problem of deciding how much authority to delegate to
divisional managers.
 Creates the problem of how to equitably distribute corporate resources and
overhead costs.

4. Strategic business units

As the number, size and diversity of divisions or businesses grow, some
organizations find it advantageous to group the related businesses under
senior managers, who then report directly to the CEO. The groups created
are called strategic business units (SBUs).
Advantages
 Provides coordination among divisions with similar strategic concerns and
product markets.
 Directs accountability to distinct business units

Disadvantages

Adds another layer of management

 Can increase dysfunctional (negative) competition for corporate resources.
 Can present difficulties in defining the roles and authority of the CEO, the
SBU managers and divisional managers.

5. Matrix structure
Also called “project” structure is a way of forming project teams within the
traditional organization. A project is a combination of human, finance, raw
material and machinery resources pooled together in a temporary
 44

organization to achieve a specified purpose. The development of a new

product would be an example of a project.
Employees working on a project are officially assigned to the project and to
their original department. A project manager is given the authority for
meeting the project objectives in terms of cost, quality, quantity and
completion time. When the project work is done, the project team is
dissolved and the functional personnel return to their departments.
It may also be in the form of a combination of a functional and a product or
market structure where employees are responsible both to functional
managers and to product or market managers.
Advantages
 Simultaneously accommodates several project- oriented business activities
 Facilitates co-operation and coordination of related activities.
 Provides for training experience for strategic managers.

Disadvantages
 Can result in confusion and contradicting policies.
 Requires a lot of vertical and horizontal coordination.
 May result in slow decisions.

Hard to maintain a balance between functional and project loyalty.

Restructuring-- matching structure to

strategy
This should be done by way of emphasizing on strategically critical activities.
Such activities include distribution, R&D, new product development etc.
which should be made the central building blocks for designing the
organizational structure. This should be done with consideration on the
results to be delivered e.g. customer satisfaction, product differentiation,
lower costs, speed of delivery etc. Restructuring is achieved through;
a. Downsizing; it means laying off large numbers of managerial staff and
other employees. This is aimed at reducing levels of management and
widening the span of control to cut costs.
b. Outsourcing; means obtaining work previously done by employees inside
the company. During restructuring certain activities may be seen as not
being strategically critical and may even be done more competently by other
outside businesses specializing in them.

Guidelines for designing effective organizational

structures
1. A single product organization or one with a single dominant business
should use a functional structure.
 45

2. An organization with regional, national or international locations should

use a geographic structure.
3. An organization with a small number of related lines of business should
normally use a divisional structure.
4. The one with several unrelated lines of business should be organized into
strategic business units.

Organizational Policies
A policy is a broad guide to thinking and action of organization members.
Policies are directives designed to guide the thinking, decisions and actions
of managers and subordinates in implementing a firm’s strategy.
Whenever strategic changes are made, it is necessary to review current
policies and determine whether they need to be modified.

Importance of policies
 They establish indirect control over independent action by clearly stating
how things are to be done i.e. they control decisions yet permit and
empower employees to conduct activities without direct intervention by top
management.
 They ensure quicker decisions in routine activities by standardizing
answers to routine, recurring questions.
 They counteract resistance to chosen strategies by clarifying what is
expected and facilitate acceptance especially when operating managers
participate in policy formulation.
 They provide communication channels between organizational units,
thereby providing a necessary foundation for coordinated, efficient efforts.
E.g. of a policy; to accept customers’ return of goods submitted within one
month of purchase.

Procedures and rules

These differ from policies in degree of specificity. All seek to limit
opportunities for individuals to make bad decisions or take undesired
actions.
A procedure is a series of related steps or tasks expressed in chronological
order to achieve a specific purpose. They specify in step-by-step fashion the
manner in which a recurring activity must be accomplished.
Rules require that specific and definite actions be taken or not taken with
respect to a given situation. They permit no flexibility and no deviation.
Example of a procedure is staff recruitment procedure .g. of a rule; ‘no
smoking in the factory premises’.
 46

Organizational leadership Leadership is the ability to

influence the attitudes and opinions of others in order to achieve a
coordinated effort from a diverse group of employees.
Without a linkage between manager selection and strategy, an organization
risks either sacrificing a well planned strategy to a manager who is ill suited
to implement it or hiring a key manager without a clear rationale for that
particular choice. The assumption is that the style of managers influences
their effectiveness in carrying out particular strategies. Certain
organizational cultures and strategies are better suited for certain styles of
leadership.
Therefore the organization should be provided with management skills
required to cope with the consequences of constant change i.e. operating
managers to provide the operational leadership and vision.

Matching culture to strategy

Organizational culture refers to the collective assumption and beliefs that
pervade the organization about how business should be conducted and how
employees should behave and should be treated.
A strong culture makes activities predictable i.e. management knows how
employees will react in certain situations.
Strategic change that requires activities different from those suggested by
the culture may fail unless attention is given to matching the strategy and
culture.
Three basic considerations should be emphasized by firms seeking to
manage a strategy-culture relationship;
 Key changes should be linked to the basic company mission.

Emphasis should be placed on the use of existing personnel where

possible to fill positions created to implement the new strategy because
existing personnel possess the shared values and norms that help ensure
cultural compatibility as major changes are made.
 Attention should be made to the changes that are least compatible with
the current culture so that current norms are not disrupted.

Strategy and reward/ motivational

systems
 47

Highly motivated employees can increase the likelihood that organizational

strategies will be successfully implemented.
The organizational reward system is one of the most effective motivational
tools.
The organizational rewards include all types of rewards both intrinsic and
extrinsic, which are received as a result of employment. Intrinsic rewards are
such as recognition, responsibility status, attention, advancement etc.
Extrinsic rewards are external and are provided by the organization and are
such as adequate pay, allowances, insurance etc.
Incentive pay plans attempt to tie pay to performance and can be used to
motivate employees to work towards organizational objectives. Such plans
will often include commissions, bonuses and pay rises.

Tactical Issues in Strategy

Implementation
For successful implementation of strategy, firstly short-range objectives must
be established for the entire organization. The short-range objectives
translate long-range objectives into short-range targets for each unit.
Secondly, financial resources must be allocated to each organizational unit.
Thirdly strategies must be developed for each of the functional areas
(marketing, finance, production etc).

Short-range objectives
Long-range objectives do not provide the detail necessary to guide daily
operations.
Short-range objectives are more specific, usually focus on a time frame of
one year or less and are often quantifiable.
One way to ensure that short-range objectives are derived from long-range
objectives is to use the cascade approach to setting objectives which
consists the following steps;
1. The objective setting process begins at the top of the organization with a
statement of purpose and mission.
2. Long-range objectives are established to achieve this purpose and
mission.
3. Long-range objectives lead to the setting of short-range objectives and
performance targets for the overall organization.
4. Long-range and short-range objectives are established for each SBU,
major divisions or units in the organization
5. Short-range objectives are established for the functional areas in each
SBU or division.
 48

Benefits of short-term objectives

 They give operating personnel a better understanding of their role in the
firm’s mission.
 They provide a basis for strategic control i.e. they provide a clear,
measurable basis for developing budgets and schedules for controlling the
implementation of strategy.
 They can be powerful motivators of performance if they are linked to the
firm’s reward system.

Budgeting
It is a process by which management specifies the resources to be employed
to achieve the organization’s objectives.
It also provides the means of measuring the successful accomplishment of
the stated objectives within a specified period. The following conditions must
exist to ensure that the budgeting process helps in strategy implementation;
 Senior management must have a strong commitment to the budgeting
process.
 Budgeting must be based on the objectives and strategies of the business.
 Regular reviews of the operating results in comparison to the budget must
be conducted.
 All levels of management must be required to explain variances in the
budget.

Functional strategies/tactics
They describe the means to be used by each functional area in carrying out
top level strategy. They indicate the key routine activities that must be
undertaken and translate the corporate/ business unit strategy into action.
They differ from business or corporate strategies in three ways;
1. Time horizon They identify activities to be undertaken “now” or in the
near future, usually one year or less. Their short-term horizon helps
managers to adjust to changing conditions.
2. Specificity

Where business strategies provide general direction, functional tactics

identify specific activities to be undertaken e.g. where a generic strategy is
 49

market development, the specific functional strategy would be what pricing

strategy to use.
3. Participants

Business strategy is the responsibility of the general manager of the

business. Operational managers must then establish the functional tactics
that contribute to business level goals.
The role of functional strategies
Functional strategies can be developed for any unit within an organization.
The functional areas within an organization would normally include the
following;
 Marketing
 Finance
 Production
 Human resources
 Research and development

Marketing strategies
The basic role of marketing is to have the right products or services in the
right quantity at the right place and time.
The 4Ps of the marketing mix are the basis for marketing activities. The
activities are based on careful identification of consumer needs and
designing strategies to meet the needs.
It is concerned with matching existing or potential products with the needs of
customers, informing customers that products exist, having the products at
the right time and place to facilitate exchange and assigning a price to the
products or services.
The marketing strategy selected is dependent on whether the organization is
attempting to reach new or existing customers and whether its products or
services are new or already exist.
Marketing strategy by customer and products
(Ansoff’s product/market expansion grid)
Markets

Existing New

market
Existing market
development
penetration
New product
development
 50

Products

diversification
With a market penetration strategy the organization attempts to gain greater
control in a market in which it already has a product. A firm can take the
following actions;
 Increasing present customer’s usage rate
 Attracting competitors’ customers and non-users to buy the product
 Promoting new uses of current products

Product development involves the modification of existing products or the

creation of new but related products that can be marketed to current
customers. The strategy is adopted to prolong the life cycle of current
products.
Market development involves marketing present products to customers in
related market segments. This is achieved through;
 Opening additional geographic markets e.g. regional or international
expansion
 Developing product versions to appeal to other customer segments.
 With a diversification strategy, an organization offers a new product or
service to new customers.

After the basic marketing strategy is determined, more specific strategies

are required. These are called marketing mix strategies which include;
 Determining the exact type of product that is to be offered (product
strategy)

Deciding how the product or service is to be communicated to customers

(promotion strategy)
 Selecting the method for distributing the product to the customer (channel
strategy)
 Establish a price for the product or service (price strategy)

Financial strategy
This is concerned with;
 Determining the magnitude and characteristics of funds necessary to
conduct business operations.
 Allocating resources in the most efficient manner.
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 Providing financial data to top management in determining the feasibility

of various strategic activities.

Production strategies
This is concerned with selecting, designing and up-dating the systems that
produce the organization’s products. Production/operating systems consist of
the activities and processes necessary to transform in-puts into products.

Human resource strategies

Human resource management includes those activities concerned with
determining the human resources, in quantity and quality that the
organization needs to achieve its objectives. These include;

 Recruiting
 Hiring
 Training
 Developing
 Compensating
 Developing disciplinary systems

An organization can only be successful if it can obtain the necessary talent.

The cost of acquiring, retaining, developing, and motivating the needed
talent should be economically feasible.
In developing an effective human resource strategy an organization should;
 Identify what human resources are needed and how they should be
allocated.
 Develop and implement human resource practices that select, reward and
develop employees who best contribute to accomplishment of objectives.
 Use resources to compete for or retain employees who are needed to reach
its objectives.
 Develop mechanisms that match employees’ competencies to the
organization’s present and future needs.

R&D strategies
Products and services become obsolete more rapidly today than ever before.
The need to develop or improve products and production processes is met by
the research and development function.
 52

Cross-functional implications of strategy

implementation
Cross functional implications of strategy refer to the impacts that the
different functional strategies have on other functional areas. E.g. operations
personnel usually fight for narrow (few) product lines with little variation,
while marketing personnel are likely to argue for wider product lines with few
variations. Such implications of strategy can be identified by considering the
following;
 Formulation; careful consideration of the strengths and weaknesses of
the organization include a review of the functional areas that should alert
managers to potential conflicts.

Communication; communication of the strategy is a way of giving

functional areas the same information.
 Trade-offs; the strategy should spell out major trade-offs.
 Participation; functional managers who have a part in strategy
formulation and implementation are in a better position to understand what
is required of them and are likely to be more committed to the
implementation.
 Multi-functional experience; managers should spend part of their
tenure in functions other than their own specialty. This gives them a lot of
insight into the practices and problems of others.

Commitment to strategy implementation

Employee input is essential to successful strategy implementation because
all decisions made by strategic managers must ultimately be interpreted and
implemented by individual employees. The best way to achieve
understanding and acceptance of strategic decisions is to involve as many
affected employees as possible in the strategic management process.
 53

STRATEGIC CONTROL
This is concerned with tracking strategy as it is being implemented,
detecting problems or changes and making necessary adjustments.
Managers responsible to the success of strategy want to know whether the
organization is moving in the right direction and whether performance
standards are being met.

The purpose for control

 To ensure the validity of the premises on which the strategy has been
formulated
 Determine that the company’s chosen strategy is being implemented
effectively, on time, and within the constraints of resources available to the
company.
 Determine that the company is performing according to plans and
expectations.

Provide feedback to managers on their unit’s performance.

 Generate data for evaluating executive performance and making
compensation decisions.

Components of the strategic control system

1. Strategic surveillance

This is designed to quickly detect environmental changes or shifts that are

likely to impact the company’s strategy.
2. Special alert control

This serves as an early warning system/ signal of pending crises and which
may affect the company or the implementation of its strategy.
3. Premise control

Strategy is based on certain planning premises/ assumptions. Premise

control is designed to check systematically and continuously whether the
premises on which the strategy is based are still valid. Planning premises are
influenced heavily by industry and environmental factors which are often
changing. It requires monitoring the actions undertaken by management to
implement strategy and determine the effect of these actions.
4. Implementation control

Strategy implementation takes place as a series of steps, programs and

investments that occur over an extended time. It is designed to assess
whether the overall strategy should be changed in light of the results
associated with the actions that implement the overall strategy.
 54

It is designed to review the progress being made in implementing strategy,

highlighting deviations from expectations and goals.
It is a post action control system using tools like budgets, schedules and
programs. It provides evaluation and control over short periods- usually one
month to a year. Such control system often takes four common steps;
i. Set standards of performance
ii. Measure actual performance
iii. Identify deviations from standards set
iv. Take corrective actions

Qualities of an effective (strategic) control system

1. It should be future oriented. It should help managers to visualize every
aspect of the strategy formulation and implementation and plan accordingly.
2. It should be closely linked to strategy evaluation requiring managers to
examine the appropriateness of their strategy.
3. It should emphasize both content and process issues. It should focus on
the activities and functions and the process of performing the activities.
4. It should balance short term and long term demands on the company i.e.
should recognize that short term successes do not always mean long term
competitive superiority.
5. It should establish formality without undue bureaucracy i.e. should
establish a structure that creates legitimacy and instils a sense of
accountability and help to accomplish goals efficiently and economically.
6. Suitability; it must be tailored to suit the nature and requirements of the
organization. Techniques of control will vary according to the size and type of
the organization.
7. Promptness; the system should be able to detect deviations and problems
before they occur.
8. Objectivity; standards of measurements should be objective and specific
i.e. based on facts so that control is acceptable and useful.

9. Flexibility; the system should be flexible enough to ensure adjustment to

changes in circumstances.

Reasons for failure of control systems

1. Poorly stated goals.
2. Obsession with procedures and systems-even if they make sense or not.
3. Insufficient information processing capabilities. This may be because of
faulty design of the system or failure of the company to upgrade the system
as information needs change.
 55

4. Mismatch between the capabilities of the system and managers’ abilities

i.e. the system may generate more information than managers can
reasonably process. They are thus overwhelmed by detailed data or
sometimes the system may not generate the required data.
5. Breakdown in authority-responsibility centres; as the organization
becomes bigger, people responsible for control become far removed from
the operating units. Additionally a long time may elapse between data
collecting and reporting making it to lose relevance and timeliness which
may cause the company to miss opportunities.
6. Dysfunctional organization politics; Organizational political manoeuvring is
involved in the entire control process i.e. the type of information to be
collected, who collects them, who has access to the data, who interprets it,
etc. Managers have a lot at stake when it comes to control systems e.g. their
reputations and those of their units are greatly affected by the system’s
results. Resource allocation and compensation decisions are affected by the
results of strategic controls. In trying to gain and maintain power, managers
may render the control system ineffective by;

Withholding information they consider damaging to their careers.

 Manipulating the data to make the results look more positive to their
seniors.
 Offering multiple interpretations of the results to create uncertainty about
the meaning of the findings.
 Using the results to implicate other units or executives for their units’ poor
results.

The role of senior executives in strategic control

To ensure effective strategic controls, senior executives should;
 Clarify and communicate the goals of the control system. They should
outline expected results and their potential uses.
 Establish information flow between different units of the control units.
 Clarify the responsibilities associated with different units of the control
system. They should decide who will carry out the control system’s
managerial responsibilities.
 Provide political and financial support i.e. making available the right
personnel and equipment for the system.

TQM and continuous improvement

TQM (Total Quality Management) is a system for integrating continuous
quality improvement efforts of people at all levels of the organization to
deliver products/services which ensure customer satisfaction.
 56

TQM is built around customer satisfaction. It is based on accurate

measurement of every critical variable in a business, on continuous
improvement of products, processes and work relationships. There are nine
essential elements of implementing total quality management;
1. Define quality and customer value;
The firm should have a clear definition of quality which should be developed
from a customer’s perspective and communicated to all individuals as a
written policy. Quality to the customer means that the product is priced
competitively performs well and that the firm provides it quickly i.e.
customer value depends on quality, price and speed.
2. Develop a customer orientation.
3. Focus on the company’s product delivery process i.e. breakdown every
activity/step in the process of providing the company’s product and look at
ways to improve it because each process contributes value and this value
should be enhanced.
4. Develop customer and supplier relationships.
5. Take a preventive approach i.e. being proactive rather than reactive.
6. Adopt a “zero-defect” attitude i.e. instil the attitude that “good enough” is
not good enough anymore and the zero-defect objective should be each
individual’s performance standard.
7. Make decisions based on facts and accurate measurements and using
these facts to trace problems and eliminating their causes.
8. Encourage every manager and employee to take a participative approach.
9. Strive for continuous improvement i.e. continually improving quality,
efficiency and responsiveness in a firm’s processes, products and services
which is necessary for long-term survival.